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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 2, 1998
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
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FILETEK, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
7372
(PRIMARY STANDARD INDUSTRIAL
CLASSIFICATION CODE NUMBER)
52-1343762
(IRS EMPLOYER
IDENTIFICATION NUMBER)
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9400 KEY WEST AVENUE
ROCKVILLE, MARYLAND 20850
(301) 251-0600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
PRINCIPAL EXECUTIVE OFFICES)
WILLIAM THOMPSON
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
FILETEK, INC.
9400 KEY WEST AVENUE
ROCKVILLE, MARYLAND 20850
(301) 251-0600
(NAME, ADDRESS, INCLUDING ZIP CODE, TELEPHONE NUMBER, INCLUDING AREA CODE, OF
AGENT FOR SERVICE)
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Copies to:
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EDWIN M. MARTIN, JR., ESQUIRE ELLIOT H. COLE, ESQUIRE DAVID J. SORIN, ESQUIRE
NANCY A. SPANGLER, ESQUIRE JOHN H. VOGEL, ESQUIRE ANDREW P. GILBERT, ESQUIRE
PIPER & MARBURY L.L.P. PATTON BOGGS LLP BUCHANAN INGERSOLL PROFESSIONAL CORPORATION
1200 19TH STREET, N.W. 2550 M STREET, N.W. 500 COLLEGE ROAD EAST
WASHINGTON, D.C. 20036 WASHINGTON, D.C. 20037 PRINCETON, N.J. 08540
(202) 861-3900 (202) 457-6000 (609) 987-6800
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act") 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, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
---------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
---------
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
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If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED
TITLE OF EACH CLASS OF SECURITIES TO MAXIMUM AGGREGATE AMOUNT OF
BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
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Shares of Common Stock, par value $.01............. $50,000,000 $14,750
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(1) Estimated solely for the purpose of determining the registration fee
pursuant to Rule 457(o) under the Securities Act.
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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, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY
DETERMINE.
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<PAGE> 2
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there
be any sale of these securities in any State in which such offer, solicitation
or sale would be unlawful prior to registration or qualification under the
securities laws of any such State.
SUBJECT TO COMPLETION, DATED JULY 2, 1998
SHARES
[FILETEK, INC. LOGO TO COME]
COMMON STOCK
Of the shares of Common Stock offered hereby (the "Offering"),
shares are being sold by FileTek, Inc. (the "Company") and
shares are being sold by certain stockholders of the Company
(the "Selling Stockholders"). The Company will not receive any proceeds from the
sale of shares of Common Stock by the Selling Stockholders.
Prior to this Offering, there has been no public market for the Common
Stock of the Company. It is currently estimated that the initial public offering
price of the Common Stock will be between $ and $ per share. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price. Upon completion of the Offering, the
Company's Chairman and Chief Executive Officer will beneficially own or have the
right to control approximately % of the Company's outstanding shares of
Common Stock. The Company has applied for quotation of the Common Stock on the
Nasdaq National Market under the symbol "FLTK."
SEE "RISK FACTORS" COMMENCING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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Proceeds to
Price to Underwriting Proceeds to Selling
Public Discount(1) Company(2) Stockholders(2)
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Per Share.............................. $ $ $ $
Total(3)............................... $ $ $ $
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(1) See "Underwriting" for information concerning indemnification of the
Underwriters.
(2) Before deducting expenses payable by the Company, estimated at $ .
(3) The Company and certain Selling Stockholders have granted to the
Underwriters a 30-day option to purchase up to an additional
and shares of Common Stock, respectively, solely to cover
over-allotments, if any. If the Underwriters exercise this option in full,
the Price to Public will total $ , the Underwriting Discount will
total $ , the Proceeds to Company will total $ and the
Proceeds to Selling Stockholders will total $ . See "Underwriting."
The shares of Common Stock are offered by the several Underwriters named
herein, subject to receipt and acceptance by them and subject to their right to
reject any orders in whole or in part. It is expected that delivery of the
certificates representing such shares will be made against payment therefor at
the offices of NationsBanc Montgomery Securities LLC on or about ,
1998.
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NationsBanc Montgomery Securities LLC
BancAmerica Robertson Stephens
FAC/Equities
, 1998
<PAGE> 3
[DESCRIPTION OF PHOTOS AND TEXT TO COME]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SUCH
TRANSACTIONS MAY INCLUDE STABILIZING, THE PURCHASE OF COMMON STOCK TO COVER
SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION
OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information including "Risk Factors" and the Consolidated Financial Statements
and Notes thereto, appearing elsewhere in this Prospectus.
THE COMPANY
FileTek, Inc. ("FileTek" or the "Company") develops, markets and supports
integrated data storage and access management solutions that allow organizations
to meet their business intelligence needs through efficient collection, storage
and management of, and timely, shared access to, massive amounts of data at
their most granular level ("atomic data"). The Company's recently released
StorHouse products are capable of supporting volumes of relational and
non-relational atomic data that are substantially larger than those which can be
supported by conventional database technologies and at a significantly lower
cost per unit of managed storage. Using StorHouse, organizations can optimize
their data access requirements across a variety of low-cost media, such as tape
and optical disk. StorHouse provides enterprise-wide access to data for an
organization's business intelligence applications, while simultaneously managing
storage resources efficiently. The Company is targeting the largest
organizations within the Fortune 500, which generally have the most pressing
need to store and access massive amounts of data, with a particular focus on the
telecommunications, financial services and retail industries.
The amount of data generated by IT systems is growing at an exponential
rate. Business intelligence, which is critical to an organization's
competitiveness, requires timely access to this data. Conventional data
warehouses fail to meet organizations' business need to access atomic data for
enterprise-wide business intelligence. Relational databases underlying
conventional data warehouses cannot scale with the large and growing volumes of
atomic data that organizations generate and need to store, manage and access.
According to International Data Corporation ("IDC"), the data warehouse market
was $8 billion in 1996 and is expected to grow to $24 billion by 2001. FileTek
targets the atomic data store ("ADS") segment of the data warehouse market,
which the Company believes will reach $1 billion by 2001.
The Company believes that its StorHouse solution has no practical limit to
the amount of data it can manage. The solution enables organizations to convert
transactional data generated by disparate operational systems into valuable
business information. Organizations can use this information for business
intelligence applications, enabling more informed business decision making.
Unlike conventional relational databases that rely solely on the use of
expensive magnetic disk, StorHouse employs its own relational database
management system that accesses and manages data on multiple layers in the
storage hierarchy, including high-capacity, low-cost, removable media, such as
tape or optical disk. FileTek's technology leverages the investments that
organizations have in their existing IT infrastructure by complementing rather
than replacing current data storage, access and analysis solutions, running on a
variety of platforms.
The Company's objective is to be a leading provider of enterprise-wide
integrated storage and access management solutions for massive volumes of atomic
data in both relational and non-relational formats. To achieve this objective,
the Company plans to maintain and extend its technological leadership, focus on
customers with large ADS requirements, leverage its installed customer base,
maintain its vertical focus, increase penetration of international markets and
leverage its sales and marketing resources with strategic partnerships. The
Company has a strategic relationship with Storage Technology Corporation ("STK")
to jointly market and sell FileTek's ADS solution integrated with STK's disk and
tape products.
The Company has licensed current or previous generations of its products to
more than fifty companies, including leading organizations such as Bear Stearns
and Co., Inc. ("Bear Stearns"), Citibank, N.A. ("Citibank"), Morgan Stanley Dean
Witter Trust F.S.B. ("Morgan Stanley"), Pacific Bell ("PacBell", now SBC
Communications, Inc.), NationsBanc Services, Inc. ("NationsBank"), United
Airlines, Inc. ("United Airlines") and U S West Communications, Inc. ("U S
West"). Four of the Company's customers have already purchased the StorHouse
solution. The Company sells its products primarily through its direct sales
force based in the U.S.
The Company was incorporated in Delaware in May 1984. Unless the context
otherwise requires, references in this Prospectus to the "Company" and "FileTek"
refer to FileTek, Inc. and its consolidated subsidiary, FileTek UK Limited
("FileTek UK"). The Company's principal executive offices are located at 9400
Key West Avenue, Rockville, Maryland 20850. The Company's telephone number at
that address is (301) 251-0600.
3
<PAGE> 5
THE OFFERING
Common Stock offered by the
Company........................... shares
Common Stock offered by the Selling
Stockholders...................... shares
Common Stock to be outstanding after
the Offering...................... shares (1)
Use of proceeds..................... For working capital and other general
corporate purposes including the
expansion of sales and marketing,
customer support and product
development activities, international
expansion, capital expenditures and
possible acquisitions. See "Use of
Proceeds."
Proposed Nasdaq National Market
symbol............................ FLTK
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(1) Based on the number of shares of Common Stock outstanding on May 31, 1998,
plus shares of Common Stock issuable upon exercise of stock options to
be exercised immediately prior to the closing of the Offering. Excludes (i)
1,093,833 shares of Common Stock subject to outstanding options under the
1990 Stock Option Incentive Plan as of May 31, 1998, at a weighted average
exercise price of $1.70 per share, of which options for 540,869 shares were
exercisable, and 256,470 shares available for issuance pursuant to future
options; (ii) 529,352 shares of Common Stock subject to outstanding options
as of May 31, 1998 under the 1990 Non-qualified Stock Option Plan, at a
weighted average exercise price of $1.02, all of which were exercisable, and
3,898 shares available for issuance pursuant to future options; (iii)
1,500,000 shares of Common Stock reserved for issuance under the 1998
Omnibus Stock Plan, none of which are outstanding; (iv) shares
of Common Stock reserved for issuance under the 1998 Directors' Stock Option
Plan, none of which are outstanding (collectively, the "Stock Plans"); and
(v) 508,557 shares of Common Stock reserved for issuance for outstanding
options not granted under the Stock Plans as of May 31, 1998, at an average
exercise price of $1.68 per share, of which options for 474,807 shares were
exercisable. See "Risk Factors -- Shares Eligible for Future Sale" and
"Management -- Employee Benefit Plans."
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
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1993 1994 1995 1996 1997(1) 1997 1998
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(UNAUDITED)
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CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues.................... $ 19,720 $13,856 $ 22,387 $ 17,789 $ 23,699 $ 6,096 $ 8,553
Gross profit................ 10,877 6,161 11,455 3,666 12,022 2,832 4,615
Net income (loss) before
taxes..................... 933 (3,911) 2,715 (6,661) 1,824 385 2,019
Net income (loss)........... 886 (3,922) 2,697 (6,708) 1,509 334 2,019
Basic net income per
share(2).................. $ 187.00 $ 42.79 $ 23.67
Basic weighted average
shares outstanding(2)..... 8,070 7,797 85,285
Diluted net income per
share(2).................. $ 0.17 $ 0.04 $ 0.21
Diluted weighted average
shares outstanding(2)..... 8,777,740 8,838,108 9,813,822
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MARCH 31, 1998
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ACTUAL AS ADJUSTED(3)
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CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $10,552
Working capital............................................. 683
Total assets................................................ 24,789
Capital lease obligations, net of current portion........... 354
Stockholders' equity........................................ 4,313
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(1) See Note 2 of Notes to Consolidated Financial Statements, which addresses
the comparability of financial results for the periods presented.
(2) For a description of the basic and diluted earnings per share ("EPS")
calculations and the basic and diluted weighted average shares outstanding,
see Notes 2 and 12 of Notes to Consolidated Financial Statements.
(3) Adjusted to give effect to (i) the sale by the Company of shares
of Common Stock offered hereby and the application of the estimated net
proceeds therefrom and (ii) the exercise of stock options to purchase
shares of Common Stock at an exercise price of approximately
$ per share, which exercise will occur immediately prior to the
closing of the Offering. See "Use of Proceeds" and "Capitalization."
4
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FORWARD-LOOKING STATEMENTS
Information contained in this Prospectus includes "forward-looking
statements" that are based largely on the Company's current expectations and are
subject to a number of risks and uncertainties. The Company faces many risks and
uncertainties, including those described in this Prospectus under the caption
"Risk Factors." Because of these many risks and uncertainties, the Company's
actual results may differ materially from any results presented in or implied by
the forward-looking statements included in this Prospectus.
------------------------
Except as otherwise indicated, all information in this Prospectus: (i)
assumes no exercise of the Underwriters' over-allotment option; (ii) reflects a
three-for-two split of the Company's Common Stock, effected in the form of a
stock dividend in June 1998; and (iii) assumes the conversion of the Company's
convertible preferred stock (the "Convertible Preferred Stock") into 8,719,440
shares of Common Stock upon the closing of the Offering. See "Description of
Capital Stock" and "Underwriting." A glossary of terms used herein appears at
page 58.
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FileTek, StorHouse, Storage Machine and AMMO-II are registered trademarks
of FileTek, Inc. Web-AMMO, VROM, LAN-AMMO and StorHouse/SM, are trademarks that
are used by FileTek, Inc. All other trademarks used in this Prospectus are the
property of their respective owners.
5
<PAGE> 7
RISK FACTORS
In addition to the other information in this Prospectus, prospective
investors should consider carefully the following risk factors in evaluating the
Company and its business before purchasing the shares of Common Stock offered
hereby.
VARIABILITY IN QUARTERLY RESULTS
The Company has experienced, and expects to continue to experience,
significant fluctuations in quarterly operating results caused by a number of
factors, many of which are outside the Company's control. Such factors include,
but are not limited to: (i) the volume, timing and mix of orders received during
the quarter, which are difficult to forecast; (ii) the timing and customer
acceptance of new products or product enhancements introduced by the Company or
its competitors; (iii) changes in pricing policies by the Company or its
competitors; (iv) market acceptance of and changes in demand for the Company's
products; (v) the length and unpredictability of the sales cycle associated with
the Company's systems; (vi) the amount of deferred revenue at the beginning of
the quarter to be amortized to revenue during the quarter and deferrals, if any,
established for transactions consummated in the quarter; (vii) customer
budgetary constraints and spending patterns; (viii) the Company's ability to
attract and retain key personnel, including sales personnel; (ix) personnel
changes and changes in the timing and level of operating expenses; (x)
fluctuations in foreign exchange rates; and (xi) changes in general economic
conditions.
Products are generally shipped as orders are received, and accordingly, the
Company has operated with relatively small backlog. A single order can represent
a significant percentage of the Company's revenue for any quarter. In addition,
a substantial portion of the Company's shipments has occurred and may continue
to occur near the end of a quarter. Delivering a product or closing a sale after
the close of a quarter can cause revenues and operating results to fall
significantly short of anticipated levels for such quarter. Accordingly, the
Company's quarterly operating results are difficult to predict. Further, the
Company incurs significant fixed costs based upon its expectations as to future
revenue that may never be achieved. Such expenditures include continued
investment in research and development, the establishment of a worldwide
customer support capability, the building of a sales and sales support staff,
and the hiring of administrative staff and the investment in related capital
equipment. The timing of expansion and the rate and extent to which new sales
personnel become productive could also cause material fluctuations in the
Company's quarterly operating results. To the extent that such expenses are not
subsequently followed by appropriate levels of increased revenues, the Company's
business, financial condition and results of operations may be materially
adversely affected.
Due to these factors, the Company believes that period-to-period
comparisons of its operating results may not be necessarily meaningful and
should not be relied upon as indications of future performance. There can be no
assurance that the Company will be profitable on a quarter-to-quarter basis in
the future. In the future the Company's operating results may at times fall
below expectations of analysts and investors and, in such event, the price of
the Company's Common Stock will likely be materially adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Company derives its revenue primarily from the sale of large systems
and recognizes revenue in accordance with Statement of Position 97-2 ("SOP
97-2"), Software Revenue Recognition, issued by the Accounting Standards
Executive Committee ("AcSEC") of the American Institute of Certified Public
Accountants in October 1997. In general terms, SOP 97-2 requires revenue earned
on software arrangements involving multiple elements, such as additional
software products, upgrades and enhancements, rights to exchange or return
software, postcontract customer support ("PCS"), or services, including elements
deliverable only on a when-and-if-available basis, to be allocated to the
various elements of such sale based on vendor-specific objective evidence
("VSOE") of fair values allocable to each such element. If sufficient VSOE of
fair values does not exist, all revenue from the sale could be deferred until
such sufficient evidence exists, or until all elements have satisfied the
requirements for revenue recognition. SOP 97-2 is newly issued and has not yet
been subject to interpretation in practice or in applicable accounting
guidelines. There can be no assurance that the future application of, or
subsequent interpretations or amendment of, SOP 97-2 will not require the
Company to defer the recognition of certain elements of revenue or result in
revenue patterns that
6
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are materially different from historical periods. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and Note 2 of
Notes to Consolidated Financial Statements.
LIMITED PROFITABILITY; ACCUMULATED DEFICIT; UNCERTAIN FUTURE OPERATING RESULTS
The Company has incurred substantial net losses from time to time,
including net losses of $6.7 million in 1996. As of March 31, 1998, the Company
had an accumulated deficit of approximately $16.6 million. Although the Company
has had five consecutive quarters of profitability beginning with the first
quarter of 1997, there can be no assurance that the Company will remain
profitable on a quarterly or annual basis. While the Company achieved
significant revenue growth in 1997 and the first quarter of 1998, the Company
does not expect to sustain the same rate of revenue growth in future periods. In
addition, the Company intends to increase its operating expenses significantly
in the remainder of 1998 and thereafter. Therefore, the Company's operating
results will be adversely affected if revenue does not increase at corresponding
levels. The Company's financial prospects must be considered in light of the
risks, expenses and difficulties frequently encountered by emerging companies,
particularly companies leading product development in evolving markets. To
address these risks, the Company must, among other things, successfully increase
the scope of its operations, respond to competitive developments and changes in
general economic conditions, continue to attract, retain and motivate qualified
personnel and continue to commercialize products incorporating advanced
technologies. There can be no assurance that the Company will be successful in
addressing such risks, and the failure to do so would have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
LONG AND UNPREDICTABLE SALES CYCLE
The Company believes that the purchase or license of its products is
discretionary and represents a strategic decision involving significant capital
investments by its customers, requiring executive-level approval of investment
and system architecture. The time between initial customer contact and execution
of a sales or license agreement associated with the initial purchase of the
Company's products is typically no less than six months and can be 18 months or
longer. Such purchasing and licensing decisions are subject to a number of
significant risks and delays over which the Company has little or no control,
such as the customer's budgetary constraints and changes in purchasing
priorities. Further, to the extent that potential customers divert resources and
attention to issues associated with the Year 2000 issue, such sales cycle could
be extended. During the course of the sales cycle, the competitive environment
in which the Company operates may change significantly due to the introduction
of new products in the marketplace or changes in pricing policies of
competitors. Customers' budgetary constraints and purchasing priorities may also
change significantly prior to the completion of a sales cycle, such as when a
prospective customer is acquired or merges with another entity. As a result, the
Company may expend significant resources pursuing potential sales that do not
become consummated and its business, financial condition and results of
operations could be in the future, as they have been in the past, materially
adversely affected if customers or prospective customers delay, reduce or cancel
orders. See "-- Variability in Quarterly Results" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
PRODUCT CONCENTRATION; MARKET ACCEPTANCE; NEW PRODUCT
The Company derives substantially all of its revenues from the license of
its StorHouse and Storage Machine software products, the sale of related
third-party hardware and the provision of maintenance and other services. The
Company is concentrating its future marketing on its StorHouse products that
were first released in 1997. The Company expects that revenues from StorHouse
products will become the primary source of its product revenues in the future.
As of May 31, 1998, the Company had sold to four customers a total of eight
StorHouse systems, five of which were for ADS uses and two of which included
StorHouse/RM. The Company's future operating results are dependent upon
establishing a sustained market for these new products. In addition, a reduction
in demand for these products due to increased competition, a general decline in
the market, product obsolescence or otherwise would have a material adverse
effect on the Company's business, financial condition and results of operations.
There can be no assurance that such sustained market acceptance can be
established and the failure to accomplish this goal would have a material
adverse effect on
7
<PAGE> 9
the Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Products and Technology."
CUSTOMER CONCENTRATION
The Company is dependent on a small number of customers for a substantial
portion of its revenues. In 1995, AT&T Corp. ("AT&T"), U S West and PacBell
accounted for 11.7%, 12.0% and 13.8%, respectively, of the Company's revenues.
In 1996, AT&T and Bank of America National Trust and Savings Association ("Bank
of America"), accounted for 12.5% and 10.1%, respectively, of the Company's
revenues. In 1997, AT&T and U S West accounted for 19.7% and 10.8%,
respectively, of the Company's revenues. For the three months ended March 31,
1998, the Company's five largest customers accounted for a total of 69.3% of
revenues. The Company expects that it will continue to be dependent upon a
limited number of new and existing customers for a significant portion of its
revenues, although such customers are expected to vary. As a result, the failure
by the Company to successfully sell its products or services to one or more
targeted new or existing customers in any particular period, the deferral or
cancellation of orders by one or more of these customers, or the loss of a major
customer, could have a material adverse effect on the Company's business,
financial condition and results of operations. None of the Company's customers
have entered into an agreement requiring ongoing minimum purchases from the
Company. There can be no assurance that these customers will be a source of
revenues in the future. See "Business -- Customers."
DEPENDENCE ON GROWTH OF KEY MARKETS
The markets for atomic data stores, data warehouses and business
intelligence solutions continue to emerge. The Company's future financial
performance will depend to a large extent on the increasing number of
organizations that adopt data warehouses for atomic data storage to improve
business intelligence. There can be no assurance that these markets will grow or
that the Company will be successful. If these markets fail to grow, or grow more
slowly than the Company currently anticipates, the Company's business, financial
condition and results of operations will be materially adversely affected.
Historically, the software industry has experienced significant periodic
downturns, often in connection with, or in anticipation of, major releases of
new technology and products, which can affect the timing and size of orders from
customers. The Company's business, financial condition and results of operations
may in the future reflect substantial fluctuations from period to period as a
consequence of periodic downturns in the software industry, as well as general
economic conditions. See "Business -- Industry Background."
COMPETITION
The market for the Company's products is intensely competitive and subject
to rapid change. The Company's products compete with other storage, storage
management and database products offered by a number of vendors, including EMC
Corporation ("EMC"), International Business Machines Corporation ("IBM"),
Microsoft Corporation ("Microsoft"), NCR Corporation ("NCR") and Oracle
Corporation ("Oracle"). These vendors have substantially greater resources and
market influence than FileTek. There are relatively low barriers to entry in the
software market, and thus the Company expects additional competition from other
established and emerging companies if the ADS market develops. The development
of new technologies or products by others could have a material adverse impact
on the Company's business. There is also a substantial risk that announcement of
competing products by large competitors could result in the cancellation or
delay of customer orders in anticipation of the introduction of such new
products. Many of the Company's competitors have well-established relationships
with current and potential customers of the Company, have extensive knowledge of
the relational database industry and are capable of offering a single vendor
solution. As a result, the Company's competitors may be able to respond more
quickly to new or emerging technologies and changes in products than can the
Company. In addition, current and potential competitors have established or may
establish cooperative relationships among themselves or with third parties to
increase the ability of their products to address customer needs. Accordingly,
it is possible that new competitors or alliances among competitors may emerge
and rapidly acquire significant market share. Furthermore, increased price
competition, particularly with respect to hardware resales, may result in
downward pressure on the Company's gross margins and could have a material
adverse effect on the Company's gross margins and operating results. New product
introductions by the Company's competitors or
8
<PAGE> 10
by the Company itself could cause a decline in sales and intensified price-based
competition, particularly at the end of a product life cycle, resulting in lower
prices and adversely affecting the Company's business, financial condition and
results of operations. There can be no assurance that the Company will be able
to compete successfully against current and future competitors or that
competitive pressures faced by the Company will not materially adversely affect
its business, financial condition and results of operations. See
"Business -- Competition" and "-- Proprietary Rights."
RAPID TECHNOLOGICAL CHANGE AND DEPENDENCE ON NEW PRODUCTS
The market for mass data storage and access management products is
characterized by a high degree of technological change, frequent product
introductions, evolving industry standards and changes in end-user requirements.
The introduction of competitive products embodying new technologies or the
emergence of new industry standards could render the Company's existing products
obsolete and unmarketable. A significant benefit of the Company's StorHouse
products is their ability to optimize the use of optical and tape storage
devices that are less costly than magnetic disk devices. There can be no
assurance that such benefit will remain or that some other storage technology
will not render obsolete the benefits of the FileTek technology. The Company's
financial prospects will depend in part on its ability to enhance existing
products and to develop and introduce new products to meet diverse and evolving
customer requirements and keep pace with technological developments and emerging
industry standards such as new operating systems, hardware platforms, user
interfaces and storage media. The development of new products or enhanced
versions of existing products and services entails significant technical
complexities. There can be no assurance that the Company will be successful in
developing and marketing product enhancements or new products that respond to
technological changes or evolving industry standards, that the Company will not
experience difficulties that could delay or prevent the successful development
and marketing of these products and enhancements, or that any new products and
product enhancements it may introduce will achieve market acceptance. See
"-- Risk of Product Defects; Product Liability" and "Business -- Industry
Background."
The Company makes substantial investments in product research and new
product development. The Company intends to continually enhance StorHouse and
related products. Any significant delay in the introduction of future
enhancements could adversely affect the Company's competitive position. Further,
the announcement of new products by the Company can result in a diminished rate
of sale for the Company's existing products as customers anticipate new product
introductions. From time to time, the Company may temporarily suspend or delay
shipments or divert development resources from other projects to correct such
product deficiencies detected after shipping. The effort to identify and correct
bugs and make design changes typically is expensive and time consuming. Failure
to correct product deficiencies in a timely manner in the future could result in
a material adverse effect on the Company's business, financial condition and
results of operations. There can be no assurance that the Company will succeed
in developing and introducing new products and product improvements that respond
to technological change in a timely fashion or that its products will achieve
substantial widespread market acceptance. See "Business -- Research and
Development."
MANAGEMENT OF GROWTH
The Company intends to increase the size of its sales and marketing force
and to otherwise increase its workforce to address anticipated growth in sales.
The Company's operating results will be adversely affected if revenues do not
increase sufficiently to compensate for the increase in operating expenses
caused by further expansion. In addition, the Company's planned expansion of
operations may cause significant strain on its management, technical,
administrative, financial and operational resources, and result in increased
demands on its internal systems, procedures and controls. To manage its growth
effectively, the Company must continue to improve and expand its existing
resources and management information systems and attract, train and motivate
qualified employees. If the Company is unable to manage future growth
effectively, its business, financial condition and results of operations will be
adversely affected.
9
<PAGE> 11
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant degree upon the continued
contributions and performance of its key management, software development,
engineering, customer support and sales and marketing personnel, many of whom
would be difficult to replace and all of whom are employees at will. The loss of
services of such key personnel could adversely affect the Company's business,
financial condition and results of operations.
The Company's success also is highly dependent on its continuing ability to
identify, hire, train, motivate and retain highly qualified management,
technical and sales and marketing personnel. Competition for such personnel is
intense, and the Company believes that there is a shortage of qualified
personnel with the skills required to manage, develop, sell and market its
solutions and enhancements in today's highly competitive environment. In
particular, the Company intends to significantly increase its sales and
marketing personnel. The competition for quality sales personnel is intense. The
Company believes that it may have difficulty recruiting such personnel given the
high level of technical expertise required and the Company's lengthy sales
cycle. There can be no assurance that the Company will be able to attract,
assimilate or retain highly qualified personnel in the future. The inability to
attract and retain the necessary personnel would have a material adverse effect
on the Company's business, results of operations and financial condition. See
"Business -- Employees" and "Management."
YEAR 2000 COMPLIANCE
Many currently installed operating systems and software products are coded
to accept only two digit entries in the date code field. These date code fields
need additional digits to distinguish 21st century dates from 20th century
dates. As a result, computer systems and/or software used by many companies may
need to be upgraded to comply with such "Year 2000" requirements. Significant
uncertainty exists in the software industry concerning the potential effects
associated with such compliance. A limited number of the Company's older
products, to the best of the Company's knowledge, are not Year 2000 compliant,
and customers that have licensed such products have been advised of this fact.
The Company has provided certain warranties on such older products and has
committed to consult with its customers to ensure Year 2000 compliance for such
products. The Company believes, based upon initial testing and the use of a
proper method of date storage in the development process, that its StorHouse
software products licensed to its customers are Year 2000 compliant and has so
warranted to its customers. However, the Company has not completed a
comprehensive test of its StorHouse software products to determine whether they
are Year 2000 compliant. The Solaris operating system in the Sun Microsystems,
Inc. ("Sun") servers resold by the Company is not Year 2000 compliant, but Sun
has announced that it will provide its licensees with revised versions that are
Year 2000 compliant which the Company will then provide to its customers. There
can be no assurance that software incorporated within the Company's products,
whether developed by the Company or third parties, will not experience Year 2000
compliance difficulties, or that such difficulties will not have a material
adverse effect on the operation of the Company's products and the Company's
resulting business, financial condition and results of operations. The Company
has established no reserves for expenses associated with correcting Year 2000
issues or for any liabilities associated with such non-compliance.
The Company believes that the purchasing patterns of customers and
potential customers may be significantly affected by Year 2000 issues. Many
companies are expending significant resources to correct or patch their current
software systems for Year 2000 compliance. These expenditures may result in
reduced funds available to purchase software products such as those offered by
the Company.
RISKS ASSOCIATED WITH EXPANSION OF INDIRECT SALES CHANNELS
To date, the Company has sold its products principally through its direct
sales channel. An integral part of the Company's strategy is to develop a
channel of international distributors and strategic partners. The Company's
indirect channels have accounted for limited revenues to date. The Company
intends to continue investing resources to develop such channels, which could
adversely affect the Company's operating results if the Company's efforts do not
generate significant increases in sales and license revenues. There can be no
assurance that the Company will be able to attract distributors and strategic
partners that will be able to market the Company's products effectively and will
be qualified to provide timely and cost-effective customer
10
<PAGE> 12
support and service. The inability to recruit distributors and strategic
partners could adversely affect the Company's business, financial condition and
results of operations. See "Business -- Sales and Marketing."
DEPENDENCE ON SUPPLIERS
The Company's StorHouse software products currently run only on servers
manufactured and supplied by Sun. The Company is an authorized reseller of such
Sun products. In the event that Sun withdraws this authorization, or if the Sun
products lose their market acceptance due to obsolescence or other factors, the
Company's business, financial condition and results of operations would be
adversely affected. Further, the time and cost associated with porting the
StorHouse software products to another platform will likely have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, the Company's products currently interface with storage
devices manufactured by a limited number of vendors. In the event the Company is
required to develop interfaces with other vendors' storage devices, the time and
cost associated with such development could have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Business -- Products and Technology."
RISKS OF PRODUCT DEFECTS; PRODUCT LIABILITY
The Company offers third-party hardware and software and its own software
as part of its integrated solution. The software incorporated in the Company's
products is complex and may contain errors, failures or defects, especially when
first introduced or when new versions or enhancements are released. The Company
has in the past discovered software errors and hardware defects in certain of
its products and has experienced delays in shipments of products during the
period required to correct these errors. Despite testing by the Company and by
current and potential customers, there can be no assurance that defects and
errors will not be found in new versions or enhancements of existing products or
in new products, after commencement of commercial shipments. Any such defects
and errors could result in adverse customer reactions, delays in market
acceptance, expensive product changes, diversion of development resources,
increases in service or warranty costs or loss of revenues, any of which could
have a material adverse effect upon the Company's business, financial condition
and results of operations. The Company's agreements with its customers typically
contain provisions designed to limit the Company's exposure to potential product
liability and other warranty claims. It is possible, however, that the
limitation of liability provisions and efforts to exclude certain warranties
contained in the agreements may not be effective under the laws of certain
jurisdictions. Although the Company has not experienced any product liability
claims to date, there can be no assurance that the sale and support of products
by the Company may not subject the Company to such claims in the future. The
Company maintains general liability and excess liability (umbrella form)
insurance, but does not maintain product liability insurance. A successful
product liability claim brought against the Company could have a material
adverse effect on the Company's business, financial condition and results of
operations.
LIMITED PROTECTION OF PROPRIETARY TECHNOLOGY; RISKS OF INFRINGEMENT
The Company relies on a combination of copyright, patent, trademark and
trade secret laws together with confidentiality procedures and contractual
provisions to protect its proprietary technology. For example, the Company
licenses rather than sells its software and requires licensees to enter into
license agreements, which impose restrictions on licensees' ability to use the
software. In addition, the Company seeks to avoid disclosure of its trade
secrets by various means, including but not limited to, requiring those persons
with access to the Company's proprietary information to execute confidentiality
agreements with the Company. The Company has entered into source code escrow
agreements with a number of its customers requiring release of source code under
certain conditions. Such agreements provide that such parties will have a
limited, non-exclusive right to use such code in the event that the Company
fails to meet its maintenance and certain other obligations. The provision of
source code in escrow may increase the possibility of misappropriation by third
parties. The Company currently has three U.S. patents protecting certain methods
and techniques used in the software incorporated in the Company's products.
There can be no assurances, however, that the Company's patents will not be
invalidated, circumvented or challenged, or that the rights granted thereunder
will provide competitive advantages to the Company or that any of the Company's
future patent applications, if any, will be issued with the scope of the claims
sought by the Company, if at all. Furthermore, there can be no assurance that
others will not develop technologies that are similar or superior to the
Company's technology or design
11
<PAGE> 13
around any patent that is owned or may come to be owned by the Company. Despite
the Company's efforts to protect its proprietary rights, unauthorized parties
may attempt to copy aspects of the Company's products or to obtain and use
information that the Company regards as proprietary. Policing unauthorized use
of the Company's proprietary technology and patents is difficult. In addition,
the laws of some foreign countries do not protect the Company's proprietary
rights as fully as do the laws of the United States. There can be no assurance
that the Company's means of protecting its proprietary rights in the United
States or abroad will be adequate or that competitors will not independently
develop and exploit similar technology. The Company has not been notified that
its products infringe the proprietary rights of others. There can be no
assurance, however, that third parties will not claim infringement by the
Company with respect to current or future products. The Company expects that
software product developers will increasingly be subject to infringement claims
as the number of products and competitors in the Company's industry segment
grows and the functionality of products in different industry segments overlaps.
Any such claims, with or without merit, could be time-consuming, result in
costly litigation, cause product shipment delays or require the Company to enter
into royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to the Company, if at all,
which, in either event, could have a material adverse effect upon the Company's
business, financial condition and results of operations. See
"Business -- Proprietary Rights."
INTERNATIONAL OPERATIONS
International sales accounted for 5.9% of the Company's revenue in 1997.
The Company maintains a sales office in London, England. The Company intends to
continue to expand its international operations and enter additional
international markets, which will require significant management attention and
financial resources and could adversely affect the Company's business, financial
condition and results of operations. In order to expand international sales
successfully, the Company must hire additional personnel and/or recruit
additional international distributors. Additional risks inherent in the
Company's international business activities generally include unexpected changes
in currency exchange rates, regulatory requirements, tariffs and other trade
barriers, costs of localizing products for foreign countries, lack of acceptance
of localized products in foreign countries, longer accounts receivable payment
cycles, difficulties in managing international operations, potentially adverse
tax consequences including restrictions on the repatriation of earnings, weaker
intellectual property protection and the burdens of complying with a wide
variety of foreign and U.S. laws. There can be no assurance that such factors
will not have a material adverse effect on the Company's business, financial
condition and results of operations. See "Management's Discussions and Analysis
of Financial Condition and Results of Operations" and "Business -- Sales and
Marketing."
FUTURE ACQUISITIONS
The Company may in the future pursue acquisitions of complementary product
lines or businesses. Future acquisitions by the Company may result in
potentially dilutive issuances of equity securities, the incurrence of
additional debt or amortization expenses related to goodwill and other
intangible assets, which could adversely affect the Company's profitability or
earnings per share. In addition, acquisitions involve numerous risks, including
difficulties in the assimilation of the operations and products of the acquired
companies, the diversion of management's attention from other business concerns,
risks of entering markets in which the Company has no or limited direct prior
experience, and the potential loss of key employees of the acquired company.
There are currently no negotiations, commitments or agreements with respect to
any acquisition. In the event that such an acquisition does occur, however, no
assurance can be given as to the effect thereof on the Company's business,
financial condition and results of operations.
CONTROL BY EXISTING STOCKHOLDERS; FACTORS INHIBITING TAKEOVER
Following this Offering, Mr. Thompson will beneficially own or have the
right to control approximately % of the Company's outstanding shares of
Common Stock. Accordingly, Mr. Thompson will continue to control the outcome of
all corporate stockholder actions, including the election of directors and the
approval of transactions involving a change in control of the Company. See
"Principal and Selling Stockholders."
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<PAGE> 14
The Company's Amended and Restated Certificate of Incorporation provides
that shares of the Company's Preferred Stock may be issued in the future without
further stockholder approval and upon such terms and conditions, at a price and
having such rights, privileges and preferences, as the Board of Directors may
determine. The rights of the holders of Common Stock will be subject to, and may
be adversely affected by, the rights of the holders of any Preferred Stock that
may be issued. The issuance of shares of Preferred Stock, while potentially
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire a majority of the outstanding voting stock of the
Company. The Company has no present intent to issue any shares of Preferred
Stock. The Company is also subject to the anti-takeover provisions of Section
203 of the Delaware General Corporation Law, which could have the effect of
delaying or preventing a change of control of the Company. The foregoing
provisions may have the effect of deterring hostile takeovers or delaying or
preventing changes in control or management of the Company, including
transactions in which stockholders might otherwise receive a premium for their
shares over then current market prices. In addition, these provisions may limit
the ability of stockholders to approve transactions that they may deem to be in
their best interest. See "Description of Capital Stock -- Delaware Law and
Certain Provisions of the Company's Amended and Restated Certificate of
Incorporation and Bylaws."
BENEFITS OF THE OFFERING TO CURRENT STOCKHOLDERS
The completion of this Offering will provide significant benefits to the
current stockholders of the Company, including certain of its directors and
officers. The Company will not receive any of the net proceeds from the sale of
shares by the Selling Stockholders, which will be approximately $
million in the aggregate. The completion of this Offering will also create a
public market for the Common Stock and thereby is likely to substantially
increase the market value of the Common Stock held by current stockholders. Upon
the closing of this Offering, the difference between the aggregate purchase
price paid by all of the Company's current stockholders for their shares and the
aggregate market value of such shares will be approximately $ million.
NO PRIOR PUBLIC MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this Offering, there has been no public market for the Common
Stock and there can be no assurance that an active trading market will develop
or be sustained after this Offering. The initial offering price for Common Stock
to be sold by the Company and the Selling Stockholders will be determined by
agreement among the Company, the Selling Stockholders and the Underwriters and
will not necessarily be indicative of the market price at which the Company's
Common Stock will trade after this Offering. See "Underwriting." Factors such as
announcements of new products or technological innovations by the Company or its
competitors, as well as quarterly variations in the Company's operating results,
or failure by the Company to meet expectations of securities analysts may cause
the market price of the Company's stock to fluctuate significantly. In addition,
the stock market in recent years has experienced extreme price and volume
fluctuations which have particularly affected the market prices of many high
technology stock issues and which have often been unrelated or disproportionate
to the operating performance of such companies. These broad market fluctuations,
as well as general economic conditions, may adversely affect the market price of
the Company's Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of shares of Common Stock in the public market
following this Offering could adversely affect the market price of the Common
Stock. Upon completion of this Offering, the Company will have outstanding
shares of Common Stock. The shares offered hereby
will be freely tradable in the public market. The remaining
shares outstanding are restricted securities which may be traded in accordance
with an exemption from registration. As of the date of this Prospectus, except
for the shares offered hereby, substantially all of the
outstanding shares of Common Stock and substantially all of the shares of Common
Stock underlying options, are subject to lock-up agreements (the "Lock-up
Agreements") with the Representatives of the Underwriters. Stockholders and
optionees executing Lock-up Agreement may not sell, offer, contract or grant any
option to sell, pledge, transfer, establish an open put equivalent position or
otherwise dispose of their securities subject to the
13
<PAGE> 15
respective Lock-up Agreements for 180 days after the date of this Prospectus.
NationsBanc Montgomery Securities LLC may release any or all securities subject
to Lock-up Agreements at any time or from time to time without notice. Upon
expiration of the Lock-up Agreements 180 days after the date of this Prospectus,
approximately additional shares of Common Stock (including
shares of Common Stock which may be acquired upon the exercise of
outstanding options) will be available for sale in the public market, subject to
the provisions of Rule 144 or Rule 701 of the Securities Act of 1933, as
amended. The Company intends to register the sale of approximately
shares of Common Stock issuable under its Stock Option Plans
following the 90th day after the date of this Prospectus. The Company is unable
to predict the effect that sales made under Rule 144, Rule 701 or other
exemptions from registration may have on the then-prevailing market price of the
Common Stock. Sales pursuant to Rule 144, Rule 701 or other exemptions from
registration may have an adverse effect on the market price for the Common Stock
and could impair the Company's ability to raise additional capital through
subsequent offerings of its equity securities. See "Description of Capital
Stock," "Shares Eligible for Future Sale" and "Underwriting."
IMMEDIATE AND SUBSTANTIAL DILUTION
The assumed initial offering price is substantially higher than the book
value per share of the Common Stock. Investors purchasing shares of Common Stock
in this Offering will therefore incur immediate and substantial dilution in the
net tangible book value per share of Common Stock (after deducting the
underwriting discount and estimated offering expenses payable by the Company).
To the extent outstanding options to purchase Common Stock are exercised, there
will be further dilution. See "Dilution" and "Shares Eligible for Future Sale."
DISCRETIONARY USE OF PROCEEDS
The primary purposes of this Offering are to increase the Company's working
and equity capital, create a public market for the Company's Common Stock,
facilitate future access to public markets, and to increase the Company's
visibility and credibility in its marketplace. As of the date of this
Prospectus, the Company has no specific plans to use substantially all of the
proceeds of this Offering. As a consequence, the Company will have the
discretion to allocate a large percentage of such proceeds to uses that the
stockholders may not deem desirable, and there can be no assurance that the
proceeds can or will be invested to yield a significant return. See "Use of
Proceeds."
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<PAGE> 16
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares
of Common Stock offered by the Company are estimated to be approximately
$ million ($ million if the Underwriters' over-allotment
option is exercised in full), assuming an initial public offering price of
$ per share and after deducting the estimated underwriting discounts and
estimated expenses payable by the Company in connection with the Offering. The
Company will not receive any proceeds from the sale of shares of Common Stock
offered by the Selling Stockholders. See "Principal and Selling Stockholders."
The Company expects to use the net proceeds from the Offering for working
capital and other general corporate purposes, including expansion of the
Company's sales and marketing, customer support and product development
activities, international expansion, capital expenditures and possible
acquisitions.
From time to time in the ordinary course of business, the Company expects
to evaluate the acquisition of businesses, products and technologies that
complement the Company's business for which portion of the net proceeds may be
used. Currently, however, the Company does not have any understandings,
commitments or agreements with respect to any such acquisitions. Pending
application of the net proceeds for the purposes described above, the Company
intends to invest such funds in short-term, investment-grade, interest bearing
securities.
DIVIDEND POLICY
The Company currently anticipates that it will retain all future earnings
for use in its business and does not anticipate that it will pay any cash
dividends in the foreseeable future. The payment of any future dividends will be
at the discretion of the Company's Board of Directors and will depend upon,
among other things, the Company's results of operations, capital requirements,
general business conditions, contractual restrictions on payment of dividends,
if any, legal and regulatory restrictions on payment of dividends, and other
factors the Company's Board of Directors may deem relevant. In addition, the
Company's existing bank line of credit prohibits the payment of cash dividends
without prior approval. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
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<PAGE> 17
CAPITALIZATION
The following table sets forth, as of March 31, 1998, (i) the actual
capitalization of the Company, and (ii) the capitalization of the Company on a
pro forma basis reflecting the conversion of all outstanding shares of
convertible preferred stock into 8,719,440 shares of Common Stock upon the
closing of the Offering as adjusted to give effect to the sale of
shares of Common Stock offered by the Company hereby (at an
assumed initial public offering price of $ per share) and the application of
the estimated net proceeds therefrom. See "Use of Proceeds." This table should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's Consolidated Financial
Statements and notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1998
----------------------
PRO FORMA
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS EXCEPT
SHARE DATA)
<S> <C> <C>
Capital lease obligations, net of current portion........... $ 354 $
Stockholders' equity (deficit):
Preferred stock, Series A: $.01 par value, 4,500,000
shares authorized, 3,669,986 shares issued and
outstanding, actual; 4,500,000 shares authorized, no
shares issued or outstanding, pro forma, as adjusted... 37
Preferred stock, Series B: $.01 par value, 2,400,000
shares authorized, 2,142,973 shares issued and
outstanding, actual; 2,400,000 shares authorized, no
shares issued or outstanding, pro forma, as adjusted... 21
Common stock: $.01 par value, shares authorized,
86,247 shares issued and outstanding, actual;
shares authorized,
issued and outstanding, pro forma, as
adjusted (1).......................................... 1
Additional capital........................................ 21,153
Accumulated deficit....................................... (16,609)
Unearned compensatory stock options....................... (287)
Cumulative foreign currency translations.................. (3)
-------- --------
Total stockholders' equity........................ 4,313
-------- --------
Total capitalization.............................. $ 4,667 $
======== ========
</TABLE>
- ---------------
(1) Includes shares of Common Stock issuable upon exercise of stock
options to be exercised immediately prior to the closing of the Offering.
Excludes (i) 966,858 shares of Common Stock subject to outstanding options
as of March 31, 1998, under the 1990 Stock Option Incentive Plan, at a
weighted average exercise price of $0.96 per share, of which options for
441,079 shares were exercisable, and shares available for issuance
pursuant to future options; (ii) 503,102 shares of Common Stock subject to
outstanding options as of March 31, 1998, under the 1990 Non-qualified Stock
Option Plan at a weighted average exercise price of $0.69, all of which were
exercisable, and 30,148 shares available for issuance pursuant to future
options; (iii) 1,500,000 shares of Common Stock reserved for issuance under
the 1998 Omnibus Stock Plan, none of which are outstanding; (iv)
shares of Common Stock reserved for issuance under the 1998 Directors'
Stock Option Plan, none of which are outstanding; and (v) 486,057 shares of
Common Stock reserved for issuance for outstanding options not granted under
the Stock Plans, at an average exercise price of $1.42 per share, of which
options for 470,307 shares were exercisable. See "Risk Factors -- Shares
Eligible for Future Sale" and "Management -- Employee Benefit Plans."
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<PAGE> 18
DILUTION
The pro forma net tangible book value of the Company's Common Stock as of
March 31, 1998, giving effect to the conversion of all outstanding Preferred
Stock into Common Stock upon the closing of this Offering, was approximately
$3.5 million or $0.40 per share. "Pro forma net tangible book value" per share
represents the amount of total tangible assets (total assets less intangible
assets) less total liabilities, divided by the 8,805,687 shares of Common Stock
outstanding. Dilution per share represents the difference between the amount per
share paid by purchasers of shares of Common Stock in this Offering at an
assumed initial public offering price of $ per share and the application of
the estimated net proceeds therefrom. After giving effect to the sale of
shares of Common Stock in this Offering at the initial public
offering price of $ per share and the application of the estimated net
proceeds therefrom, the pro forma net tangible book value of the Company as of
March 31, 1998 would have been $ , or $ per share. This represents
an immediate increase in net tangible book value of $ per share to existing
stockholders and an immediate dilution of $ per share to purchasers of
Common Stock in the Offering. The following table illustrates the per share
dilution in net tangible book value to new purchasers:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
Pro forma net tangible book value per share as of March
31, 1998............................................... $0.40
Pro forma increase per share attributable to new
investors..............................................
-----
Pro forma net tangible book value after the Offering........
-------
Pro forma dilution per share to new investors............... $
=======
</TABLE>
The following table summarizes on a pro forma basis as of March 31, 1998,
the total number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company and the average price per share paid by
existing stockholders and the new investors (at an assumed initial public
offering price of $ per share and without giving effect to the underwriting
discount and estimated offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------- --------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)(2)............... 8,805,687 % $20,924,783 % $2.38
New stockholders..........................
--------- ----- ----------- -----
Totals............................... 100.0% $ 100.0%
========= ===== =========== =====
</TABLE>
- ---------------
(1) Sales by the Selling Stockholders in this Offering will reduce the number of
shares of Common Stock held by existing stockholders to
shares, or % of the total number of shares of Common Stock to be
outstanding after this Offering ( % if the Underwriters' over-allotment
option is exercised in full), and will increase the number of shares of
Common Stock held by new investors to , or % of the
total number of shares to be outstanding ( shares or % if
the Underwriters' over-allotment option is exercised in full). See
"Principal and Selling Stockholders."
(2) Includes shares of Common Stock issuable upon exercise of
stock options to be exercised immediately prior to the closing of this
Offering at an exercise price of approximately $ per share.
The foregoing tables exclude 1,956,017 shares reserved for issuance upon
the exercise of stock options outstanding at March 31, 1998 under the Company's
Stock Plans at a weighted average exercise price of $1.00 per share. To the
extent such options are exercised, there will be further dilution to new
investors. See "Management -- Employee Benefit Plans" and Note 8 of Notes to
Consolidated Financial Statements.
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<PAGE> 19
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data of the Company set forth below
should be read in conjunction with the Consolidated Financial Statements of the
Company, including the Notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations." The statement of operations
data for the years ended December 31, 1995, 1996 and 1997 and the balance sheet
data as of December 31, 1996 and 1997, have been derived from, and are qualified
by reference in the Company's consolidated financial statements audited by Ernst
& Young LLP, independent auditors. The statement of operations data for the
years ended December 31, 1993 and 1994 and the balance sheet data as of December
31, 1993, 1994 and 1995 are derived from audited financial statements not
included herein. The interim consolidated financial data set forth below for the
three-month periods ended March 31, 1997 and 1998 has been derived from the
unaudited consolidated financial statements included elsewhere in this
Prospectus. The unaudited consolidated financial statements include all
adjustments, consisting only of normal recurring adjustments, that the Company
considers necessary for a fair presentation of the financial position and
results of operations for the period. Operating results for the three months
ended March 31, 1998 are not necessarily indicative of the results that may be
expected for the entire year ending December 31, 1998.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------------------------------- -----------------------
1993 1994 1995 1996 1997(1) 1997 1998
------- ------- ------- ------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues....................................... $19,720 $13,856 $22,387 $17,789 $ 23,699 $ 6,096 $ 8,553
Cost of revenues............................... 8,843 7,695 10,932 14,123 11,677 3,264 3,938
------- ------- ------- ------- ---------- ---------- ----------
Gross profit................................... 10,877 6,161 11,455 3,666 12,022 2,832 4,615
------- ------- ------- ------- ---------- ---------- ----------
Operating expenses:
Sales and marketing.......................... 6,062 6,246 5,763 5,044 3,891 953 1,134
Research and development..................... 2,546 2,064 1,068 3,180 3,646 917 929
General and administrative................... 1,194 1,520 1,805 1,746 2,148 435 691
------- ------- ------- ------- ---------- ---------- ----------
Total operating expenses................... 9,802 9,830 8,636 9,970 9,685 2,305 2,754
------- ------- ------- ------- ---------- ---------- ----------
Income (loss) from operations.................. 1,075 (3,669) 2,819 (6,304) 2,337 527 1,861
Interest and other, net........................ (142) (242) (104) (357) (513) (142) 158
------- ------- ------- ------- ---------- ---------- ----------
Income (loss) before provision for income
taxes........................................ 933 (3,911) 2,715 (6,661) 1,824 385 2,019
Provision for income taxes..................... 47 11 18 47 315 51 --
------- ------- ------- ------- ---------- ---------- ----------
Net income (loss).............................. $ 886 $(3,922) $ 2,697 $(6,708) $ 1,509 $ 334 $ 2,019
======= ======= ======= ======= ========== ========== ==========
Basic net income per share(2).................. $ 187.00 $ 42.79 $ 23.67
========== ========== ==========
Basic weighted average shares outstanding(2)... 8,070 7,797 85,285
========== ========== ==========
Diluted net income per share(2)................ $ 0.17 $ 0.04 $ 0.21
========== ========== ==========
Diluted weighted average shares
outstanding(2)............................... 8,777,740 8,838,108 9,813,822
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------- MARCH 31,
1993 1994 1995 1996 1997 1998
------- ------- ------- ------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents...................... $ 72 $ 18 $ 21 $ 31 $ 7,163 $ 10,552
Working capital (deficit)...................... 531 (1,226) (1,190) (4,411) (1,653) 683
Total assets................................... 9,265 12,439 16,453 11,668 22,131 24,789
Notes payable -- related parties............... -- -- 956 2,100 -- --
Capital lease obligations, net of current
portion...................................... 495 427 230 294 480 354
Stockholders' equity........................... 3,249 4,739 7,436 733 2,291 4,313
</TABLE>
- ---------------
(1) See Note 2 of Notes to Consolidated Financial Statements, which addresses
the comparability of financial results for the periods presented.
(2) For a description of the basic and diluted EPS calculations and the basic
and diluted weighted average shares outstanding, see Notes 2 and 12 of Notes
to Consolidated Financial Statements.
18
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with FileTek's
audited Consolidated Financial Statements and the notes thereto. Certain
statements in the discussion are forward-looking statements. In evaluating such
statements, prospective investors should specifically consider the various
factors identified in this Prospectus that could cause actual results to differ
materially from those expressed in such forward-looking statements including the
matters set forth in "Risk Factors."
BACKGROUND
FileTek develops, markets and supports integrated data storage and access
management solutions that allow organizations to meet their business
intelligence needs through efficient collection, storage and management of, and
timely, shared access to, massive amounts of atomic data. The Company's recently
released StorHouse products are capable of supporting volumes of relational and
non-relational data that are substantially larger than those which can be
supported by conventional database technologies and at a significantly lower
cost per unit of managed storage. StorHouse provides enterprise-wide access to
data for an organization's business intelligence applications, while
simultaneously managing storage resources efficiently. The Company sells its
products primarily through its direct sales force based in the U.S.
The Company introduced its first product, Storage Machine, in 1987 and
introduced a second generation Storage Machine in 1992, which, as further
enhanced, is now known as StorHouse/SM. Until late 1996, the Company focused
exclusively on the computer output to laser disk ("COLD") market. The Company
experienced rapid growth from 1991 through 1993 as FileTek became a market
leader in the high-end, mainframe-attached, COLD market. Increased price
competition from other storage solutions resulted in uneven revenues from 1994
through 1996. The Company continues to sell into the COLD market, but does not
expect significant revenue growth therefrom.
In 1994, FileTek began developing its relational manager ("RM") software,
StorHouse/RM, which is designed for customers with the need to access large
volumes of relational data, as its primary future growth strategy. In 1996, the
Company further refined its strategy to focus on the need for the storage and
management over time of large volumes of the most granular form of data
collected by an organization in its business transactions (the "ADS market").
The Company made its first sale in the ADS market with its StorHouse/SM and
StorHouse/RM products in 1997. As of May 31, 1998, the Company had sold to four
customers a total of eight StorHouse systems, five of which were for ADS uses
and two of which included StorHouse/RM. See "Risk Factors -- Product
Concentration; Market Acceptance; New Product." The Company is growing its sales
force to increase sales of StorHouse and to expand its penetration of the ADS
market.
The Company's revenues are derived primarily from software licenses,
hardware resales (including storage media) and maintenance services. Most of
these revenues are derived from transactions that involve systems comprised of
both hardware and software and are the result of a sales cycle that is typically
no less than six months and can be 18 months or longer. Software license
revenues are derived from one-time licenses of the right to use one or more of
the Company's software products in perpetuity at prices generally based on a
combination of the capacity of storage being managed, the type and size of
server platform, enabled connectivity and, in some cases, the number of client
seats. Hardware resales consist primarily of servers and storage devices
manufactured by third parties. Maintenance is provided for both hardware and
software. The Company believes that software license revenues will continue to
increase as a percentage of revenues, in part as a result of marketing
partnerships with hardware vendors similar to the agreement signed in June 1998
with STK.
Effective January 1, 1997, the Company elected early adoption of SOP 97-2,
which results in deferrals of sales and license revenues from certain StorHouse
product transactions. See "-- Recent Accounting Pronouncements." For
arrangements where the Company has established VSOE for hardware, software
licenses and PCS revenues, the Company recognizes hardware and software
revenues, assuming collectibility is probable, at the later of product shipment
to the customer or when significant obligations, if any, have been fulfilled.
Revenues on follow-on sales to existing customers are generally recognized,
assuming collectibility is
19
<PAGE> 21
probable, upon shipment. For arrangements for which VSOE has not been
established and the only undelivered element is PCS, the Company recognizes
revenues for the entire arrangement ratably over the PCS period, generally three
to 12 months. The Company believes that VSOE will not be established until at
least several additional sales and deliveries of StorHouse/RM product have
occurred. As such, it is likely, at least in the near term, that the majority of
StorHouse/RM product sales and license revenues, as well as certain other sales
and license revenues, will be deferred and amortized over the respective PCS
periods. Revenues for maintenance of hardware and software and other service
revenues are recognized ratably over the periods during which the services are
performed.
While the Company has experienced significant percentage growth in revenues
in recent periods and currently expects substantial, although potentially lower,
percentage growth in revenues throughout 1998, prior percentage revenue growth
rates should not be considered as necessarily indicative of future growth rates
or operating results, and there are a number of factors that could materially
affect expected revenue and operating results for fiscal 1998 and subsequent
periods. See "Risk Factors -- Variability in Quarterly Results," "-- Limited
Profitability; Accumulated Deficit; Uncertain Future Operating Results,"
"-- Long and Unpredictable Sales Cycle," "-- Product Concentration; Market
Acceptance; New Product," "--Customer Concentration," "-- Competition,"
"-- Rapid Technological Change and Dependence on New Products," "-- Management
of Growth," "-- Dependence on Key Personnel," "-- Year 2000 Compliance" and
"-- Dependence on Suppliers."
Cost of software license revenues includes direct labor, other direct
costs, amortization of capitalized software development costs and overhead.
Costs of hardware sales includes hardware and storage media products purchased
for resale, direct labor, other direct costs and overhead. Cost of maintenance
revenue includes personnel expenses, parts, amortization of spare parts, travel
and subcontracting services.
Sales and marketing expense consists primarily of salaries, commissions,
bonuses and benefits to sales, systems engineering and marketing personnel,
travel, tradeshow participation, public relations, sales collateral and other
promotional expenses. The Company expects that sales and marketing expense will
increase in absolute dollars and, for the near term, as a percentage of revenues
as the Company increases the size of its sales force and enhances its marketing
capabilities.
Research and development expense consists primarily of salaries, bonuses
and benefits, depreciation of equipment and contract programmer fees. The
Company expects research and development expense to increase as the Company
continues to develop and enhance its products.
Certain software development costs have been capitalized in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 86, Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed. In 1995,
1996 and 1997, approximately $2.9 million, $504,000 and $6,000, respectively,
were capitalized. There was no additional capitalization in the three-month
period ended March 31, 1998, and the balance of capitalized software development
costs at March 31, 1998 was $771,000.
General and administrative expense consists primarily of salaries, bonuses,
benefits and travel for senior management, financial, legal, human resources,
administrative, and management information systems personnel, professional
services and other administrative costs. The Company expects that general and
administrative expense will increase to support expanding operations and
operating as a public company.
The Company has recorded deferred compensation expense of $287,000 for the
difference between the exercise price and the deemed fair market value of
certain shares of the Company's Common Stock underlying options granted during
the three months ended March 31, 1998. Of such deferred expense, approximately
$124,000 will be recognized as compensation expense during the year ended
December 31, 1998. The remainder will be amortized over the ensuing three-year
period. See Note 8 of Notes to Consolidated Financial Statements.
The Company incurred significant operating losses from inception through
1996 that significantly reduced the Company's provision for income taxes through
1997. No operating loss carryforwards are available to the Company subsequent to
1997. The Company expects to provide for income taxes at rates that approximate
statutory rates for future reporting periods; provided, however, to the extent
an unrecorded asset exists through the valuation allowance for net deferred tax
assets, the tax provision may be affected by management's consideration for the
need of a valuation allowance with respect to the net deferred tax assets.
20
<PAGE> 22
RESULTS OF OPERATIONS
The following table sets forth details of the components of revenues for
the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------ -------------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues:
Software licenses................. $ 5,055 $ 2,835 $ 5,437 $ 1,338 $ 2,800
Hardware.......................... 10,527 5,911 7,486 2,364 2,725
Maintenance and other services.... 6,805 9,043 10,776 2,394 3,028
------- ------- ------- ------- -------
$22,387 $17,789 $23,699 $ 6,096 $ 8,553
======= ======= ======= ======= =======
</TABLE>
The following table sets forth certain statement of operations data as a
percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------ -------------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues:
Software licenses................. 22.6% 15.9% 22.9% 21.9% 32.7%
Hardware.......................... 47.0 33.2 31.6 38.8 31.9
Maintenance and other services.... 30.4 50.9 45.5 39.3 35.4
------- ------- ------- ------- -------
100.0 100.0 100.0 100.0 100.0
------- ------- ------- ------- -------
Cost of revenues....................... 48.8 79.4 49.3 53.6 46.0
------- ------- ------- ------- -------
Gross profit........................... 51.2 20.6 50.7 46.4 54.0
------- ------- ------- ------- -------
Operating expenses:
Sales and marketing............... 25.7 28.3 16.3 15.6 13.3
Research and development.......... 4.8 17.9 15.4 15.1 10.9
General and administrative........ 8.1 9.8 9.1 7.1 8.0
------- ------- ------- ------- -------
38.6 56.0 40.8 37.8 32.2
------- ------- ------- ------- -------
Operating income (loss)................ 12.6 (35.4) 9.9 8.6 21.8
Interest and other, net................ (0.5) (2.0) (2.2) (2.3) 1.8
------- ------- ------- ------- -------
Income (loss) before provision for
income taxes......................... 12.1 (37.4) 7.7 6.3 23.6
Provision for income taxes............. 0.1 0.3 1.3 0.8 --
------- ------- ------- ------- -------
Net income (loss)...................... 12.0% (37.7)% 6.4% 5.5% 23.6%
======= ======= ======= ======= =======
</TABLE>
The following table sets forth the cost of revenues as a percentage of the
related revenues for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------ -------------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Cost of software licenses(1)........... 17.7% 29.3% 11.5% 9.3% 5.8%
Cost of hardware....................... 51.4 66.9 73.4 85.0 73.6
Cost of maintenance and other
services............................. 68.0 64.6 51.6 47.2 58.4
</TABLE>
- ---------------
(1) The percentage for 1996 does not include the write-off of capitalized
software development costs. See Note 2 of Notes to Consolidated Financial
Statements.
21
<PAGE> 23
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
REVENUES
Total revenues. Total revenues increased 40.3% to $8.6 million in the first
three months of 1998 from $6.1 million in the first three months of 1997. The
increase resulted primarily from increases in software license revenues and, to
a lesser extent, from increases in maintenance and other services revenues and
hardware revenues.
Software license revenues. Software license revenues increased 109.3% to
$2.8 million in the first three months of 1998 from $1.3 million in the first
three months of 1997. This increase resulted from licensing of software in the
ADS market where revenues were first recognized in the second quarter of 1997,
while such revenues from the COLD market declined for the first three months of
1998 relative to the same period in the prior year. The decrease in COLD
revenues reflected a decline in the licensing of software upgrades and add-ons
to existing customers.
Hardware revenues. Hardware revenues increased 15.2% to $2.7 million in the
first three months of 1998 from $2.4 million in the first three months of 1997.
This increase was attributable to increased hardware resales in the ADS market
in the first three months of 1998, offset in part by a decline in sales from the
COLD market during the same period. The decrease in COLD revenues reflected a
decline in the sales of upgrades and add-ons to existing customers.
Maintenance and other services revenues. Maintenance and other services
revenues increased 26.5% to $3.0 million in the first three months of 1998 from
$2.4 million in the first three months of 1997. The increase was attributable to
an increase in the installed customer base.
COST OF REVENUES
Total cost of revenues. The total cost of revenues increased 20.6% to $3.9
million in the first three months of 1998 from $3.3 million in the first three
months of 1997. The total cost of revenues as a percentage of total revenues
decreased to 46.0% in the first three months of 1998 from 53.6% in the first
three months of 1997. The decrease was attributable to increased levels of
software licenses, which carry higher margins than sales of hardware and
maintenance and other services. Software license revenues as a percentage of
total revenues increased to 32.7% of revenues in the first three months of 1998
from 21.9% of revenues in the first three months of 1997.
Cost of software license revenues. The cost of software license revenues
increased 29.4% to $162,000 in the first three months of 1998 from $125,000 in
the first three months of 1997. The cost of software licenses as a percentage of
software license revenues decreased to 5.8% in the first three months of 1998
from 9.3% in the first three months of 1997. The decrease was attributable to
the amortization of capitalized software development costs over a larger base of
software license revenues.
Cost of hardware revenues. The cost of hardware revenues was $2.0 million
in the first three months of both 1998 and 1997. The cost of hardware revenues
as a percentage of hardware revenues decreased to 73.6% in the first three
months of 1998 from 85.0% in the first three months of 1997. The decrease was
attributable to changes in the mix of hardware products sold and to benefits
achieved from the allocation of fixed hardware integration costs over a larger
hardware revenue base.
Cost of maintenance and other services revenues. The cost of maintenance
and other services revenues increased 56.6% to $1.8 million in the first three
months of 1998 from $1.1 million in the first three months of 1997. The cost of
maintenance and other services revenues as a percentage of maintenance and other
services revenues increased to 58.5% in the first three months of 1998 from
47.2% in the first three months of 1997. The increase was primarily attributable
to unusually small expenses in 1997 because of the reversal of accruals as a
result of the termination of a maintenance subcontract.
SALES AND MARKETING
Sales and marketing expense increased 19.0% to $1.1 million in the first
three months of 1998 from $1.0 million in the first three months of 1997. Sales
and marketing expenses as a percentage of total revenues declined to 13.3% in
the first three months of 1998 from 15.6% in the first three months of 1997.
This decrease
22
<PAGE> 24
resulted from an increase in the Company's revenues as well as greater revenue
productivity associated with the sales and licenses of the Company's products in
the ADS market, offset, in part, by an increase associated with new hires.
RESEARCH AND DEVELOPMENT
Research and development expense was $929,000 and $917,000 in the first
three months of 1998 and 1997, respectively. Research and development expense as
a percentage of revenues declined to 10.9% in the first three months of 1998
from 15.0% in the first three months of 1997. This decrease resulted from growth
in the Company's revenues.
GENERAL AND ADMINISTRATIVE
General and administrative expense increased 58.8% to $691,000 in the first
three months of 1998 from $435,000 in the first three months of 1997. General
and administrative expense as a percentage of revenues increased to 8.1% in the
first three months of 1998 from 7.1% in the first three months of 1997. The
increase was primarily attributable to an increase in personnel in anticipation
of planned company growth and increases in amounts accrued for incentive
compensation plans for members of the Company's executive management.
OTHER INCOME AND EXPENSES
Net other income was $158,000 in the first three months of 1998 while net
other expenses were $142,000 in the first three months of 1997. This change was
attributable to elimination of interest on notes payable repaid during 1997. In
addition, short-term investment of excess cash balances earned $137,000 in
interest income in the first three months of 1998 while interest income earned
in the first three months of 1997 was insignificant.
INCOME TAXES
There was no provision for income taxes in the first three months of 1998
as compared to $51,000 in the first three months of 1997. The provision for
income taxes for the three months ended March 31, 1998 was offset by a reduction
in the valuation allowance with respect to the net deferred tax assets. The
provision for income taxes as a percentage of net income before tax was 13.25%
in the first three months of 1997, due to the utilization of net operating loss
carryforwards.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
REVENUES
Total revenues. Total revenues increased 33.2% to $23.7 million in 1997
from $17.8 million in 1996. The increase resulted from increases in software
license revenues and, to a lesser extent, from increases in maintenance and
other services revenues and hardware revenues.
Software license revenues. Software license revenues increased 91.7% to
$5.4 million in 1997 from $2.8 million in 1996. This increase was primarily
attributable to the increase in licensing of software in the ADS market and, to
a lesser extent, in the COLD market.
Hardware revenues. Hardware revenues increased 26.7% to $7.5 million in
1997 from $5.9 million in 1996. The increase was attributable to hardware
resales in the ADS market in 1997, which were offset by a decline in hardware
resales in the COLD market in 1997. The decrease in COLD revenues reflected a
decline in the sale of hardware upgrades and add-ons to existing customers.
Maintenance and other services revenues. Maintenance and other services
revenues increased 19.2% to $10.8 million in 1997 from $9.0 million in 1996. The
increase was attributable to an increase in the installed customer base.
COST OF REVENUES
Total cost of revenues. The total cost of revenues declined 17.3% to $11.7
million in 1997 from $14.1 million in 1996. The total cost of revenues as a
percentage of total revenues decreased to 49.3% in 1997 from 79.4% in 1996. The
decrease was attributable to increased revenues from higher margin software
23
<PAGE> 25
licenses, which increased to 22.9% of revenues in 1997 from 15.9% of revenues in
1996 and to a decrease in cost of software license revenues due to the write-off
of capitalized software development costs in 1996.
Cost of software license revenues. The cost of software license revenues
decreased 24.8% to $624,000 in 1997 from $830,000 in 1996. The cost of software
license revenues as a percentage of software license revenues decreased to 11.5%
in 1997 from 29.3% in 1996. This decrease was primarily attributable to a
decrease in the amortization of capitalized software development costs that
resulted from the write-off of such capitalized costs in 1996. See Note 2 of
Notes to Consolidated Financial Statements.
Cost of hardware revenues. The cost of hardware revenues increased 39.0% to
$5.5 million in 1997 from $4.0 million in 1996. The cost of hardware revenues as
a percentage of hardware revenues increased to 73.4% in 1997 from 66.9% in 1996.
This increase was attributable to changes in the mix of hardware products sold.
Cost of maintenance and other services revenues. The cost of maintenance
and other services revenues decreased 5.0% to $5.6 million in 1997 from $5.8
million in 1996. The cost of maintenance and other services revenues as a
percentage of maintenance and other services revenues decreased to 51.6% in 1997
from 64.6% in 1996. This decrease was primarily attributable to improvements in
economies of scale derived from the growing customer base as well as cost
reductions achieved by changes in the Company's maintenance subcontractor
arrangements.
Write-off of capitalized software development costs. The Company incurred a
write-off of capitalized software development costs of $3.5 million in 1996 as a
result of a reassessment of the recoverability of these costs.
SALES AND MARKETING
Sales and marketing expense decreased 22.9% to $3.9 million in 1997 from
$5.0 million in 1996. Sales and marketing expense as a percentage of revenues
declined to 16.4% in 1997 from 28.4% in 1996. These decreases were a direct
result of restructuring activities implemented in October 1996. Combined
personnel in sales and marketing were reduced from 30 to 20 persons during the
last quarter of 1996.
RESEARCH AND DEVELOPMENT
Research and development expense increased 14.6% to $3.6 million in 1997
from $3.2 million in 1996. Research and development expense as a percentage of
revenues declined to 15.4% in 1997 from 17.9% in 1996. This decrease resulted
from growth in the Company's revenues.
GENERAL AND ADMINISTRATIVE
General and administrative expense increased 23.0% to $2.1 million in 1997
from $1.7 million in 1996. This increase was primarily attributable to the
payment of incentive compensation to members of the Company's executive
management. General and administrative expense as a percentage of revenues
declined to 9.1% in 1997 from 9.8% in 1996. The decrease as a percentage of
revenue was attributable to the increase in revenues.
In October 1996, the Company took several measures to reduce the level of
operating expenses, refocus operations and achieve profitability in operations.
The restructuring took the form of a reduction in force along with a hiring
freeze and restrictions on discretionary operating and capital expenditures, as
well as voluntary temporary reductions in salary for certain members of the
executive management team.
OTHER INCOME AND EXPENSES
Other expenses increased 44.0% to $513,000 in 1997 from $357,000 in 1996.
This increase was attributable to an increase in borrowings during the first
half of 1997.
INCOME TAXES
The provision for income taxes increased to $315,000 in 1997 from $47,000
in 1996. The provision for income taxes in 1997 represented amounts accrued for
Federal, state and local income taxes, net of utilization of net operating loss
carryforwards generated in prior periods. The provision for income taxes in 1996
primarily represented amounts accrued for the Federal alternative minimum tax.
24
<PAGE> 26
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
REVENUES
Total revenues. Total revenues decreased 20.5% to $17.8 million in 1996
from $22.4 million in 1995. The decrease resulted primarily from a decrease in
hardware resales and, to a lesser extent, from a decrease in software license
revenues, offset in part by an increase in maintenance and other services
revenues.
Software license revenues. Software license revenues decreased 43.9% to
$2.8 million in 1996 from $5.1 million in 1995. During 1996, the Company faced
increased competition from alternative storage solutions, which resulted in
lower sales to the COLD market.
Hardware revenues. Hardware revenues decreased 43.9% to $5.9 million in
1996 from $10.5 million in 1995. This decrease was attributable to the same
competitive factor noted for software license revenues.
Maintenance and other services revenues. Maintenance and other services
revenues increased 32.9% to $9.0 million in 1996 from $6.8 million in 1995. The
increase was primarily attributable to the expanded customer base.
COST OF REVENUES
Total cost of revenues. The total cost of revenues increased 29.2% to $14.1
million in 1996 from $10.9 million in 1995. The total cost of revenues as a
percentage of revenues increased to 79.4% in 1996 from 48.8% in 1995, primarily
as a result of the write-off of capitalized software development costs to cost
of sales in late 1996, as well as discounting on hardware sales.
Cost of software license revenues. The cost of software license revenues
decreased 7.4% to $830,000 in 1996 from $896,000 in 1995. The cost of software
licenses as a percentage of software license revenues increased to 29.3% in 1996
from 17.7% in 1995. This increase was attributable to the write-off of
capitalized software development costs to cost of sales in late 1996 as well as
the decline in software licenses in 1996 from 1995.
Cost of hardware revenues. The cost of hardware revenues decreased 26.9% to
$4.0 million in 1996 from $5.4 million in 1995. The cost of hardware revenues as
a percentage of hardware revenues increased to 66.9% in 1996 from 51.4% in 1995.
The increase was primarily attributable to higher discounting levels required to
remain competitive in light of overall decreasing prices in the storage
industry.
Cost of maintenance and other services revenues. The cost of maintenance
and other services revenues increased 26.4% to $5.8 million in 1996 from $4.6
million in 1995. The cost of maintenance and other services revenues as a
percentage of maintenance and other services revenues decreased to 64.6% in 1996
from 68.0% in 1995. This decrease was attributable to increasing economies of
scale as a result of providing maintenance services to a growing customer base.
Write-off of capitalized software development costs. The Company incurred a
write-off of capitalized software development costs of $3.5 million in 1996 as a
result of a reassessment of the recoverability of these costs.
SALES AND MARKETING
Sales and marketing expense decreased 12.5% to $5.0 million in 1996 from
$5.8 million in 1995. Sales and marketing expense as a percentage of revenues
increased to 28.4% in 1996 from 25.7% in 1995. This decrease in expense
paralleled the decrease in revenues which led to lower commission, travel and
similar expenses. The increase was attributable to lower revenues in 1996 as
compared to 1995.
RESEARCH AND DEVELOPMENT
Research and development expense increased 197.7% to $3.2 million in 1996
from $1.1 million in 1995. Research and development expense as a percentage of
revenues increased to 17.9% in 1996 from 4.8% in 1995. This increase was
primarily attributable to development of the StorHouse products.
25
<PAGE> 27
GENERAL AND ADMINISTRATIVE
General and administrative expense decreased 3.3% to $1.7 million in 1996
from $1.8 million in 1995. General and administrative expense as a percentage of
revenues increased to 9.8% in 1996 from 8.1% in 1995. This increase was
attributable to lower revenues in 1996.
OTHER INCOME AND EXPENSES
Other expenses increased to $357,000 in 1996 from $104,000 in 1995. The
increase was primarily attributable to a decrease in capitalized interest on
software and development costs to $44,000 in 1996 from $256,000 in 1995.
INCOME TAXES
The provision for income taxes was $47,000 and $18,000 in 1996 and 1995,
respectively.
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<PAGE> 28
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth certain unaudited quarterly statement of
operations data for each of the eight quarters ended March 31, 1998. The
information for each of these quarters is derived from unaudited consolidated
financial statements and, in the opinion of management, includes all adjustments
consisting of only normal and recurring adjustments necessary for a fair
presentation of the information. The results of operations for any quarter and
any quarter-to-quarter trends are not necessarily indicative of the results to
be expected for any future period.
<TABLE>
<CAPTION>
1996 1997 1998
---------------------------- -------------------------------------- -------
JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31
------- -------- ------- ------- ------- -------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Software licenses......................... $1,039 $ 483 $ 636 $1,338 $1,341 $1,269 $1,489 $2,800
Hardware.................................. 1,588 1,084 1,182 2,364 1,357 1,276 2,489 2,725
Maintenance and other services............ 2,222 2,295 2,312 2,394 2,504 2,803 3,075 3,028
------ ------- ------- ------ ------ ------ ------ ------
4,849 3,862 4,130 6,096 5,202 5,348 7,053 8,553
------ ------- ------- ------ ------ ------ ------ ------
Cost of revenues:
Software licenses......................... 270 272 125 125 162 176 161 162
Hardware.................................. 1,135 662 958 2,009 945 861 1,682 2,006
Maintenance and other services............ 1,487 1,549 1,435 1,130 1,339 1,411 1,676 1,770
Write-off of capitalized software
development............................. -- 631 2,861 -- -- -- -- --
------ ------- ------- ------ ------ ------ ------ ------
2,892 3,114 5,379 3,264 2,446 2,448 3,519 3,938
------ ------- ------- ------ ------ ------ ------ ------
Gross profit................................ 1,957 748 (1,249) 2,832 2,756 2,900 3,534 4,615
------ ------- ------- ------ ------ ------ ------ ------
Operating expenses:
Sales and marketing....................... 1,513 1,124 998 953 917 952 1,069 1,134
Research and development.................. 801 746 863 917 873 866 990 929
General and administrative................ 470 536 301 435 423 455 835 691
------ ------- ------- ------ ------ ------ ------ ------
2,784 2,406 2,162 2,305 2,213 2,273 2,894 2,754
------ ------- ------- ------ ------ ------ ------ ------
Operating income (loss)..................... (827) (1,658) (3,411) 527 543 627 640 1,861
Interest and other, net..................... (78) (146) (132) (142) (185) (127) (59) 158
------ ------- ------- ------ ------ ------ ------ ------
Income (loss) before provision for income
taxes..................................... (905) (1,804) (3,543) 385 358 500 581 2,019
Provision for income taxes.................. 2 1 29 51 36 102 126 --
------ ------- ------- ------ ------ ------ ------ ------
Net income (loss)........................... $ (907) $(1,805) $(3,572) $ 334 $ 322 $ 398 $ 455 $2,019
====== ======= ======= ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
1996 1997 1998
---------------------------- -------------------------------------- -------
JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31
------- -------- ------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Software licenses......................... 21.4% 12.5% 15.4% 21.9% 25.8% 23.7% 21.1% 32.7%
Hardware.................................. 32.8 28.1 28.6 38.8 26.1 23.9 35.3 31.9
Maintenance and other services............ 45.8 59.4 56.0 39.3 48.1 52.4 43.6 35.4
------ ------- ------- ------ ------ ------ ------ ------
100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
------ ------- ------- ------ ------ ------ ------ ------
Cost of revenues............................ 59.6 80.6 130.2 53.6 47.0 45.8 49.9 46.0
------ ------- ------- ------ ------ ------ ------ ------
Gross profit................................ 40.4 19.4 (30.2) 46.4 53.0 54.2 50.1 54.0
------ ------- ------- ------ ------ ------ ------ ------
Operating expenses:
Sales and marketing....................... 31.2 29.1 24.2 15.6 17.6 17.8 15.2 13.3
Research and development.................. 16.5 19.3 20.9 15.1 16.8 16.2 14.0 10.9
General and administrative................ 9.7 13.9 7.3 7.1 8.1 8.5 11.8 8.0
------ ------- ------- ------ ------ ------ ------ ------
57.4 62.3 52.4 37.8 42.5 42.5 41.0 32.2
------ ------- ------- ------ ------ ------ ------ ------
Operating income (loss)..................... (17.0) (42.9) (82.6) 8.6 10.5 11.7 9.1 21.8
Interest and other, net..................... (1.6) (3.8) (3.2) (2.3) (3.6) (2.4) (0.8) 1.8
------ ------- ------- ------ ------ ------ ------ ------
Income (loss) before provision for income
taxes..................................... (18.6) (46.7) (85.8) 6.3 6.9 9.3 8.3 23.6
Provision for income taxes.................. 0.1 0.0 0.7 0.8 0.7 1.9 1.8 0.0
------ ------- ------- ------ ------ ------ ------ ------
Net income (loss)........................... (18.7)% (46.7)% (86.5)% 5.5% 6.2% 7.4% 6.5% 23.6%
====== ======= ======= ====== ====== ====== ====== ======
</TABLE>
27
<PAGE> 29
The following table sets forth the cost of revenues as a percentage of the
related revenues for the periods indicated:
<TABLE>
<CAPTION>
1996 1997 1998
---------------------------- -------------------------------------- -------
JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31
------- -------- ------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cost of software licenses(1)................ 26.0% 56.3% 19.8% 9.3% 12.1% 13.9% 10.9% 5.8%
Cost of hardware............................ 71.5 61.0 81.1 85.0 69.6 67.5 67.6 73.6
Cost of maintenance and other services...... 66.9 67.5 62.0 47.2 53.5 50.3 54.5 58.4
</TABLE>
- ---------------
(1) The percentages for the quarters ended September 30, 1996 and December 31,
1996 do not include the write-off of capitalized software development costs.
See Note 2 of Notes to Consolidated Financial Statements.
The Company's quarterly operating results have been and are expected to
continue to be subject to variations as a result of a number of factors,
including size and timing of orders and the product mix in any particular
quarter. Products are generally shipped as orders are received, and accordingly,
the Company has operated with relatively small backlog. A single order can
represent a significant percentage of the Company's revenue for any quarter. In
addition, a substantial portion of the Company's shipments has occurred and may
continue to occur near the end of a quarter. Accordingly, the Company's
quarterly operating results are difficult to predict until the end of a quarter
and delays in product delivery or closing a sale can cause revenues and
operating results to fall significantly short of anticipated levels. Further,
the Company incurs significant fixed costs based upon its expectations as to
future revenue that may never be achieved due to the Company's long sales cycle.
Such expenditures include continued investment in research and development, the
establishment of a worldwide customer support capability and the building of a
sales and sales support staff, the hiring of administrative staff and related
capital equipment requirements. See "Risk Factors -- Variability in Quarterly
Results" and "-- Customer Concentration."
Inflation has not had a significant impact on the Company's results of
operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its working capital requirements and capital
expenditures primarily from loans and privately placed equity investments. The
primary source of equity funds has been from the Company's Chief Executive
Officer, William C. Thompson. In 1995, Mr. Thompson loaned the Company $1.3
million. The outstanding balance of $955,894 as of December 31, 1995 was repaid
in full in February 1996. During 1996, the Company borrowed an aggregate of $2.1
million from Mr. Thompson and in February 1997 an additional $640,000 was
borrowed. All outstanding loans and accrued interest were repaid to Mr. Thompson
in full during 1997 and there was no outstanding balance at December 31, 1997.
In addition, Centennial Computer Corporation ("Centennial"), of which Mr.
Thompson is President and principal stockholder, made loans to the Company
during the years ended December 31, 1995, 1996 and 1997 totalling $7.4 million,
$4.2 million and $3.9 million, respectively. All of such loans had been repaid
as of December 31, 1997. The Company maintains a $6.0 million line of credit
(the "Line of Credit"), for purposes of financing accounts receivable and
inventory and to issue letters of credit. There were no borrowings under the
Line of Credit as of March 31, 1998. The Line of Credit expires on May 31, 1999.
The Company had a working capital deficit of $1.2 million, $4.4 million and $1.7
million at December 31, 1995, 1996 and 1997, respectively, and a surplus of
$683,000 as of March 31, 1998. These amounts include deferred revenue of $3.1
million, $2.7 million, $14.8 million and $15.8 million at December 31, 1995,
1996 and 1997 and March 31, 1998, respectively.
Net cash provided by operations in 1995 was $4.9 million. Net cash used by
operations in 1996 was $49,000. Net cash provided by operations in 1997 was
$13.2 million. This was used to repay all borrowings and accrued interest under
note agreements discussed above, finance property and equipment acquisitions,
and increase cash reserves. Net cash provided by operations in the first three
months of 1998 was $3.7 million. The Company expects receivables and inventory
to continue to be a significant use of cash in operating activities.
Net cash used in investing activities was $4.2 million, $1.9 million,
$723,000 and $116,000 in 1995, 1996, 1997, and the first three months of 1998,
respectively. In 1995 and 1996, approximately $3.1 million and $534,000,
respectively, was used to finance capitalized software development costs, with
the balance used to procure property and equipment. In 1997 and the first three
months of 1998, the principal use of funds was for the procurement of property
and equipment. The Company expects this factor to continue to require cash in
the future.
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<PAGE> 30
Net cash used by financing activities was $738,000 in 1995. Net cash
provided by financing activities was $2.0 million in 1996, while net cash used
by financing activities was $5.4 million and $196,000 in 1997 and in the first
three months of 1998, respectively. The principal source of financing was
borrowings. The principal use of financing has been the repayment of borrowings
and capital lease obligations.
The Company has not paid any dividends on its capital stock since inception
and currently anticipates that it will retain all available funds for use in its
business. The Company does not, therefore, anticipate paying any cash dividend
in the foreseeable future. Furthermore, the Company is prohibited from declaring
or paying cash dividends on its capital stock under the terms of the Line of
Credit.
The Company believes that the net proceeds from this Offering, together
with its current cash balances, cash provided by future operations and available
borrowings under the Line of Credit, will be sufficient to meet its working
capital and anticipated capital expenditure requirements for at least the next
12 months. Although operating activities may provide cash in certain periods, to
the extent the Company experiences growth in the future its operating and
investing activities may require significant cash. Consequently, any such future
growth may require the Company to obtain additional equity or debt financing.
YEAR 2000 INTERNAL COMPLIANCE
Significant uncertainty exists concerning the potential effects associated
with Year 2000 compliance. However, based on the business risk associated with
the Company's information systems, management does not anticipate that the Year
2000 will have a significant impact on its information systems or result in a
significant commitment of resources to resolve potential problems with its
systems associated with this event. See "Risk Factors -- Year 2000 Compliance."
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Comprehensive Income, which is required to be adopted in the year ended December
31, 1998 consolidated financial statements. SFAS No. 130 requires that an
enterprise (a) classify items of comprehensive income by their nature in the
financial statements and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the Statement of Stockholders' Equity. The Company does not expect
the adoption of SFAS No. 130 to be material to its financial condition and
results of operations.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information, which is
required to be adopted in the year ended December 31, 1998 consolidated
financial statements. SFAS No. 131 changes the way public companies report
segment information in annual financial statements and also requires those
companies to report selected segment information in interim financial reports to
stockholders. The disclosures for segment information in the consolidated
financial statements is not expected to be material to its financial condition
and results of operations.
In October 1997, the AcSEC issued SOP 97-2, Software Revenue Recognition,
which supersedes SOP 91-1. SOP 97-2 generally requires revenue earned on
software arrangements involving multiple elements, such as additional software
products, upgrades or enhancements, rights to exchange or return-software, post-
contract customer support, or services, including elements deliverable only on a
when-and-if-available basis, to be allocated to the various elements of such
sale based on VSOE allocable to each such element. If sufficient VSOE of fair
market values does not exist, revenue from the sale will be deferred until such
sufficient evidence exists, or until all elements have satisfied the
requirements for revenue recognition. The Company has adopted SOP 97-2 effective
January 1, 1997. The adoption of SOP 97-2 for any years prior to the year ended
December 31, 1997 would have no material impact on the Company's financial
results for such years. See Note 2 of Notes to Consolidated Financial
Statements.
In March 1998, AcSEC issued Statement of Position 98-1 ("SOP 98-1"),
Accounting for the Costs of Computer Software Developed For or Obtained for
Internal Use. SOP 98-1 is effective for the Company beginning January 1, 1998.
SOP 98-1 will require the capitalization of certain costs incurred after the
date of adoption in connection with developing or obtaining software for
internal-use. The Company currently expenses such costs as incurred. The Company
has not yet assessed what the impact on SOP 98-1 will be on the Company's future
earnings or financial position.
29
<PAGE> 31
BUSINESS
COMPANY OVERVIEW
FileTek develops, markets and supports integrated data storage and access
management solutions that allow organizations to meet their business
intelligence needs through efficient collection, storage and management of, and
timely, shared access to, massive amounts of atomic data. The Company's recently
released StorHouse products are capable of supporting volumes of relational and
non-relational atomic data that are substantially larger than those which can be
supported by conventional database technologies and at a significantly lower
cost per unit of managed storage. Using StorHouse, organizations can optimize
their data access requirements across a variety of low-cost storage media, such
as tape and optical disk. StorHouse provides enterprise-wide access to data for
an organization's business intelligence applications, while simultaneously
managing storage resources efficiently.
The Company is targeting the largest organizations within the Fortune 500,
which generally have the most pressing need to store and access massive amounts
of data, with a particular focus on the telecommunications, financial services
and retail industries. The Company has licensed its current or previous
generations of products to more than fifty companies, including leading
organizations, such as Bear Stearns, Citibank, Morgan Stanley, NationsBank,
PacBell, United Airlines and U S West. The Company sells its products primarily
through its direct sales force based in the U.S.
INDUSTRY BACKGROUND
Organizations are increasingly implementing IT systems to automate business
processes, enhance productivity and improve customer service. These IT systems
generate valuable data, the amount of which is growing at an exponential rate.
Business intelligence is critical to the competitiveness of organizations.
Decision makers need an integrated view of the enterprise and timely access to
data spanning multiple operational systems and extending several months or even
years into the organization's history. Too frequently, however, decision makers'
requests for information needed to support business intelligence go unfulfilled
because operational systems do not possess the structure and architecture
necessary to support efficient access to the underlying data.
Data warehouse technology emerged in the late 1980s to address
organizations' ever-growing demand for more complete and timely information.
Conventional data warehouses generally comprise a collection of large,
integrated relational databases with associated end-user access and analysis
tools. Data warehouses are designed to capture data from transaction-based
operational systems in an effort to store it in a data structure more suited to
analysis. According to industry sources, by 1996, 90% of the largest companies
in the U.S. had built a data warehouse or were in the process of constructing
one. According to IDC, the data warehouse market was $8 billion in 1996 and is
expected to grow to $24 billion by 2001.
Conventional data warehouses fail to meet organizations' business needs to
access data at its most granular level ("atomic data") for enterprise-wide
business intelligence. Storing and accessing atomic data in a timely and
cost-effective manner is critical to informed business decision making,
particularly for large organizations that generate large volumes of atomic data.
Examples of atomic data include call detail records from a telephone switch,
detail data generated by financial transactions and specific point of sale data
from sales receipts. Storing, managing, sharing and accessing atomic data is
complex, time consuming and expensive.
Relational databases underlying data warehouses cannot scale with the large
and growing volumes of atomic data organizations generate and need to store,
manage and access. Further, these relational databases are very expensive and
time consuming to deploy and maintain. Organizations attempt to overcome these
limitations by deploying multiple smaller data warehouses or data marts. The
data mart approach in turn creates interface management challenges, data
movement and coordination problems and additional expense.
Because conventional database technologies are not designed to support
massive volumes of data, organizations are often compelled to summarize atomic
data and otherwise limit the amount of atomic data history available to decision
makers. This compromise approach severely limits the effectiveness of data
warehouses to provide access to the broadest range of atomic data and drill down
to relevant data in a timely
30
<PAGE> 32
manner, if at all. For example, telecommunications companies that archive
individual call-detail data and store only summaries of customers' monthly phone
bills online lose the ability to dynamically access and analyze data to
understand customers' calling patterns. Dynamic access to such atomic data could
yield valuable business insights for customizing marketing and pricing programs
and optimizing network utilization.
Decision makers are increasingly seeking solutions to dynamically access
atomic data across the enterprise. The volume of data that must be stored and
made accessible often greatly exceeds the scale of conventional relational
database technologies. The complex data storage management environments created
by conventional data warehouses also fail to meet user demand for access to
enterprise-wide atomic data in an easy, efficient and cost-effective manner.
Finally, organizations need data storage management systems that integrate with
existing operational systems and business intelligence platforms, thus
preserving their IT infrastructure investments.
THE FILETEK SOLUTION
FileTek provides integrated data storage and access management solutions
that allow organizations to meet their business intelligence needs through
efficient collection, storage and management of, and timely, shared access to,
massive amounts of atomic data. The Company's StorHouse products are capable of
supporting volumes of relational and non-relational atomic data that are
substantially larger than can be supported by conventional database technologies
and at a significantly lower cost per unit of managed storage. FileTek's
solution offers the following advantages:
Management of and Access to Enterprise-Level Atomic Data. StorHouse uses a
centralized, hub and spoke architecture for collecting, moving, managing and
accessing massive amounts of atomic data. StorHouse (the hub) serves as a
central repository for all information generated by an organization's
operational systems. Spokes branching off StorHouse consist of, on the back-end,
the disparate operational systems upon which the hub draws its data and, on the
front-end, the business intelligence platforms such as data marts that typically
serve as the engines used to analyze data. The hub and spoke architecture
rapidly and selectively moves data throughout the organization, providing the
appropriate level of consistent, integrated, enterprise-level data to decision
makers when required.
Data Scalability. Unlike conventional data warehouse technologies,
StorHouse has no practical limit to the amount of data it can manage. StorHouse
employs a relational database management system that can address and manage data
on high-capacity removable media, such as tape and optical disk. Organizations
can build and manage a StorHouse atomic data store ("ADS") that exceeds hundreds
of terabytes (or even petabytes) and stores billions of transactions. An
organization's specific performance and capacity requirements determine the
appropriate storage devices and processors for a given StorHouse implementation.
Timely, Cost-Effective Solution. Using StorHouse, organizations can
optimize their data access requirements across a variety of low-cost storage
media, such as tape and optical disk. Organizations can retrieve row-level data
from any data layer in the storage hierarchy, including optical and tape, for
analysis and reporting, eliminating time spent restoring off-line archived data
to disk. StorHouse enables users to directly access selected data using industry
standard Structured Query Language ("SQL") rather than costly and complex
customized programs. StorHouse also provides automatic data back-up and recovery
and total media management, thereby reducing the level of required IT support.
Easy Integration with Existing IT Infrastructure. StorHouse leverages the
investments that organizations have in their existing IT infrastructure by
complementing rather than replacing current data storage, access and analysis
solutions, running on a variety of platforms. StorHouse's open architecture
design eases integration with an organization's existing systems, minimizing
disruption to these systems.
STRATEGY
The Company's objective is to be a leading provider of enterprise-wide,
integrated storage and access management solutions for massive volumes of atomic
data in both relational and non-relational formats. To achieve this goal, the
Company is pursuing the following strategies:
Extend Technology Leadership. The Company believes that maintaining and
extending its technology leadership will continue to provide the Company with a
competitive advantage. The Company has developed
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<PAGE> 33
innovative data management technologies that provide a substantial advantage in
offering record-level shared access to a virtually unlimited amount of data
throughout the storage hierarchy. The Company will continue to invest in
research and development to improve performance, integrate new storage
technologies and support additional data types and industry-standard interfaces.
Focus on Large Atomic Data Store Requirements. The Company believes that
its StorHouse solution is uniquely suited for large organizations that have a
need to store and access extremely large volumes of atomic data. As a result,
the Company is targeting specific vertical industries, such as
telecommunications, financial services and retail, which have the most pressing
need for high-end data storage management that delivers timely access to atomic
data. These industries are highly competitive and, the Company believes, can
benefit the most from a scalable data storage solution that can meet their
overall business intelligence requirements.
Leverage Installed Customer Base. The Company believes that its success in
meeting the business intelligence needs of its sophisticated installed customer
base should enable it to leverage its success with existing customers to market
and sell StorHouse solutions. More than 50 customers have licensed the Company's
Storage Machine products for COLD applications. The Company plans to leverage
its installed customer base by selling additional products to customers while
also using its strong customer relationships as references to gain new
customers. The Company's core software in use by all of its existing customers
has been considerably enhanced during the development of StorHouse. The Company
plans to offer current COLD customers an attractive upgrade path that can lead
to an integrated COLD and ADS solution.
Expand Distribution Channels and Markets. The Company believes that it
needs to expand its distribution channels to increase penetration in its
targeted vertical markets. The Company sells its products primarily through its
direct sales force in the U.S. The Company plans to expand its direct sales
force with experienced, senior-level sales and systems engineering professionals
in major geographic areas of the country. The Company recently hired a director
of international operations to focus on global expansion. The Company's
international sales channel initiatives may include direct sales and indirect
channels such as joint venture, joint marketing, value-added resale and master
distribution arrangements.
Continue to Develop Strategic Relationships. The Company believes it can
accelerate industry adoption of StorHouse and gain additional visibility through
the development of strategic relationships. The Company recently entered into a
strategic relationship with STK to jointly market and sell FileTek's ADS
solution integrated with STK's disk and tape products. The Company seeks to
extend its strategic relationships by pursuing closer marketing ties with
additional vendors of complementary hardware and storage components.
PRODUCTS AND TECHNOLOGY
Technology
The Company's key technology efforts are based on providing solutions that
address advanced storage management, rapid access to data and data availability.
Accordingly, the Company has developed an ADS technology that serves as the
engine for storing and efficiently accessing large amounts of data. Using a
variety of applications, users can access relational or non-relational data
stored in StorHouse through industry standard gateways or custom developed
interfaces. The Company's StorHouse technology has the following key attributes:
- Row-level and Record-level Access from Removable Media. Unlike
conventional storage management technologies that access data at the
file level, FileTek's patented technology provides direct access to
row-level relational data and record- or object-level access to
non-relational data, even when the data is stored on high-capacity
and low-cost removable storage media such as tape and optical disk.
StorHouse eliminates the need to load and restore data from tapes to
a database to provide shared access. StorHouse's ability to manage
relational data stored on high-capacity storage devices sets it
apart from other database systems that are restricted to accessing
data from more expensive disk storage devices.
- Relational and Non-relational Access. StorHouse managed data can be
stored in a relational format and accessed by SQL and database
gateways such as open database connectivity ("ODBC") and distributed
relational database architecture ("DRDA"). StorHouse/RM, an
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<PAGE> 34
optional product, enables users to access directly relational data
stored on fixed or removable media storage devices. StorHouse also
offers an Application Programming Interface ("SM/ API"), using patented
technology, that provides open application access to data stored in
non-relational formats (or objects) such as textual reports and audio
data.
- Intelligent Data Management. The Company's Volume Storage
Allocation and Control ("VSAC") software manages data and storage
allocation across multiple storage media. VSAC manages both the
logical and physical placement of data automatically according to
user-specified attributes. StorHouse management software has several
performance features designed to optimize the performance of storage
devices, most significantly media that employ robotics such as tape
and optical storage systems. StorHouse manages a performance buffer
on magnetic disk where most frequently accessed data is stored to
provide significantly faster overall data access performance.
StorHouse manages duplicate copies of data for back-up and recovery
if a device fails. System security, performance monitoring and
maintenance features are standard StorHouse functions.
- Data Load and Unload Performance. ADS applications frequently
require the loading of massive data volumes each day. StorHouse is
capable of loading data at very high rates (two megabytes per second
per stream) across multiple data input streams. StorHouse is also
capable of creating hundreds of thousands of index entries per
second across multiple input streams. The Company's patented data
segmentation method partitions data by time period (day, month,
etc.), thus avoiding the need to update a massive number of indices
each time data is loaded. Unloading data at high rates is also
essential to robust ADS applications. StorHouse is capable of
unloading up to multiple terabytes of data to other databases and
applications on a daily basis.
- Support of Industry Standard Hardware Technology. StorHouse
software runs on a standard Sun Ultra Enterprise server, a highly
scalable, high performance server platform. StorHouse also supports
widely used, industry standard mass storage systems from vendors
such as FileNET Corporation ("FileNET"), Hitachi, Ltd. ("Hitachi"),
STK, Sun and Symbios, Inc. ("Symbios"). Each storage device can be
used by StorHouse interchangeably. StorHouse is designed to
integrate with existing and future mass storage systems.
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<PAGE> 35
Products
The following chart describes the Company's primary products and highlights
the key features of each:
<TABLE>
<CAPTION>
YEAR OF PRODUCT CUSTOMER
PRODUCT FIRST SHIPMENT FEATURES BENEFITS
<S> <C> <C> <C>
Core Products:
StorHouse/SM 1997 - Advanced HSM facility for - Concurrent access by multiple
storing, managing and applications
accessing record-level data - Reduces data storage
- Runs on Solaris 2.x operating administration costs
system - Capable of using new
- Supports a variety of devices technology when introduced
including tape, optical and - High data availability
RAID
- Access through SM/API
StorHouse/RM 1997 - Relational, row-level access - Supplies consistent atomic
to removable media, such as tape data to decision makers
- Supports SQL, ODBC and DRDA - Complements current business
gateways intelligence systems
- Manages terabytes to petabytes - Transcends data scalability
of relational data limitations of other
- Utilizes all of the features technologies
of StorHouse/SM - Combines multiple technologies
- Very high volume data loader into one integrated product
and extractor performance
- Patented indexing and data
segmentation technology
Other Products:
AMMO-II 1992 - Used to view on-line reports - Menu-driven access to archived
and customer statements data
- Advanced computer output to - Robust logging to facilitate
microfiche replacement product auditing, security and
set chargebacks
- Browse, display and print
character and mixed mode AFP
reports
LAN-AMMO 1995 - Enables distribution of - Provides easy-to-use GUI
document data to servers on - Network-based users get AMMO
local area networks functionality
Web-AMMO 1996 - An Internet/Intranet report - Provides easy-to-use World
retrieval and viewing Wide Web browser access to
application information archived to
AMMO-II
VROM 1994 - Stores and retrieves data on - Eliminates the need to produce
StorHouse in CD-ROM format duplicate copies of CDs
- Transparently accesses data - Reduces distribution costs of
from network applications non-electronic data
</TABLE>
StorHouse/SM. StorHouse/SM is the specialized hierarchical storage
management ("HSM") sub-system of the StorHouse solution, responsible for
automating critical system management tasks, such as data migration, backup and
recovery. It controls a hierarchy of storage devices comprised of redundant
arrays of independent disks ("RAID"), erasable and write-once-read-many ("WORM")
optical disk jukeboxes and automated tape libraries. Regardless of storage
hierarchy (size and media), StorHouse transparently migrates data through the
hierarchy to provide high performance access to the most active data and
low-cost storage for the less active data. StorHouse accesses data records
directly, rather than accessing only files. In addition, active indices and data
may be stored on a magnetic disk performance buffer. This configuration enables
timely access to data within very large files, even though most of the data may
be stored on relatively slow storage devices.
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<PAGE> 36
StorHouse/SM automatically indexes, stores and manages the migration and
archiving of long-term retention data. It is designed to assure data integrity
and control, providing facilities for backup, off-site storage and archive
duplexing. As a result, StorHouse/SM maintains the integrity of documents and
transactions as originals, while significantly reducing the costs and enhancing
the service levels associated with older technologies such as microfiche. In
addition, duplex data can be stored in separate libraries to avoid single points
of failure.
StorHouse/RM. StorHouse/RM works in conjunction with StorHouse/SM to
administer the storage, access and movement of relational data. StorHouse/RM
provides row-level SQL access to atomic data on any layer, including tape, in
the StorHouse storage hierarchy. StorHouse/RM provides a relational database
management system ("RDBMS") capable of storing and retrieving massive amounts of
data, allowing users to store and manage all of their atomic data efficiently.
StorHouse/RM stores the segments of relational tables and their indices in
StorHouse/SM, through which the relational data can be automatically migrated to
the least expensive storage media. StorHouse/RM, using StorHouse/SM, can
directly access the rows needed for massive tables either to respond to a direct
SQL query or to unload the data needed to populate a data mart.
StorHouse/RM segmentation partitions enable rapid query response as only
the data volumes covering each query's date range need to be mounted. This
feature separates the indices from data so the indices can be stored at a higher
layer in the hierarchy than the data thereby enabling faster access. As an
example, the indices could reside for months on magnetic disks, then migrate to
optical disks where they would reside for years before finally migrating to
tape, while the data might reside on magnetic disks only for a few days before
migrating to tape. Segments within the relational tables can be migrated
individually because of the table segmentation features of StorHouse/RM.
StorHouse/RM enables the segment migration plan to be customized for each
application and to be managed with little human effort.
Other Products. FileTek's desktop end-user products provide tools used to
access and view through the SM/API interface the data stored on StorHouse. In
turn, StorHouse systems, with StorHouse/RM, access atomic data via SQL and other
industry standard database-to-database gateways and interfaces.
AMMO-II (Alternative to Microfiche/Microfilm On-line). AMMO-II is an
MVS-based software product that gives StorHouse users access to terabytes
of on-line information through existing terminals. AMMO-II provides
multi-feature viewing capabilities, flexible key accessibility, print
support, and ease of implementation with minimal impact on the users'
current operations. AMMO-II provides both flexible retrieval and
hierarchical storage design.
LAN-AMMO. LAN-AMMO is a work group computing software product that
allows data to be stored and manipulated locally. LAN-AMMO runs on leading
workstations and servers and manages currently-active work group data. It
accesses the AMMO server for enterprise data. LAN-AMMO allows viewing under
a graphical user interface ("GUI") as well as printing and faxing.
Web-AMMO. Web-AMMO is an Internet/Intranet report retrieval and
viewing software product that provides World Wide Web access to information
archived to a StorHouse system with AMMO-II. With Web-AMMO, customer
service representatives and business customers can access and view months
to years of corporate and customer data stored on a mainframe, a StorHouse
system, or on a distributed document LAN server with any web browser that
supports Frames and Java. Web-AMMO provides secure Internet/Intranet access
to terabytes of report data across an enterprise.
VROM (Virtual CD-ROM Archive). VROM is a virtual data repository that
allows data to be stored as a virtual CD-ROM (in standard CD-ROM format)
and read from StorHouse using Windows family Input/Output. The tool allows
organizations to provide a shared use facility for access to the data and
reduce the management, distribution and production costs associated with
creating multiple copies of CD-ROMs for data access and viewing.
CUSTOMERS
As of March 31, 1998, more than 50 customers in a wide range of industries
had licensed the Company's products. The following is a list of selected
customers of the Company, segmented by industry concentration,
35
<PAGE> 37
which purchased an aggregate of at least $100,000 or more in products or
services from the Company during the two-year period ended December 31, 1997.
FINANCIAL SERVICES
Banco Popular De Puerto Rico
Bear Stearns and Co., Inc.
Citibank, N.A.
Citicorp Global Technology, Inc.
Edward D. Jones & Co.
First Commercial Corporation
First Security Information Technology,
Inc.
Fleet Services Corporation
Glendale Federal Bank, F.S.B.
Household International, Inc.
Keystone Financial, Inc.
MasterCard International Incorporated
Mellon Bank, N.A.
Morgan Stanley Dean Witter Trust
F.S.B.
NationsBanc Services, Inc.
TELECOMMUNICATIONS
Pacific Bell
U S West Communications, Inc.
OTHER
Defense Logistics Agency
Northern Indiana Public Service
Company
South African Mutual Life Assurance
Society
Spiegel, Inc.
United Air Lines, Inc.
United Services Automobile Association
The Company is dependent on a small number of customers for a substantial
portion of its revenue. In 1995, AT&T, U S West and PacBell accounted for 11.7%,
12.0% and 13.8%, respectively, of the Company's revenues, with the five largest
customers accounting for an aggregate of 51.2% of revenues for the period. In
1996, AT&T and Bank of America accounted for 12.5% and 10.1%, respectively, of
the Company's revenue, with the five largest customers accounting for an
aggregate of 39.9% of revenue for the period. In 1997, AT&T and U S West
accounted for 19.7% and 10.8%, respectively, of the Company's revenues, with the
five largest customers accounting for an aggregate of 48.2% of revenue for the
period. For the three months ended March 31, 1998, the Company's five largest
customers accounted for an aggregate of 69.3% of the Company's revenues. See
"Risk Factors -- Customer Concentration."
SALES AND MARKETING
The Company sells and markets its products primarily through its direct
sales force based in Rockville, Maryland and additional sales offices in Boca
Raton, Chicago, Dallas, New York, Orlando, Phoenix, San Francisco and London,
England. As of May 31, 1998, the Company's sales and marketing organization
consisted of 22 employees, of which 13 were direct sales representatives.
The Company's direct sales team includes both sales personnel and systems
engineers who conduct multiple presentations and demonstrations of the Company's
products at customer sites as part of the direct sales effort. Systems engineers
provide comprehensive on-site training and pre-sale customer support services.
The Company's sales cycle is typically no less than six months and can be 18
months or longer depending on the product and the market segment. To support its
direct sales efforts, the Company conducts a number of marketing programs,
including public relations, seminars, trade shows, product education and user
group conferences, speaking engagements and publications.
The Company recently entered into a strategic relationship with STK, which
the Company believes will enhance its sales, marketing and support activities.
The Company believes that this relationship will provide joint marketing and
sales opportunities for the Company's direct sales teams, expand the
distribution of its products and broaden its product offerings through product
bundling. The Company is actively seeking other strategic partners with products
that are complementary to those of the Company.
SERVICE AND SUPPORT
FileTek's customer support organization provides 24-hour-a-day,
seven-day-a-week support services for the Company's products throughout the U.S.
Customer support provides pre-installation and installation services,
maintenance and repair, post-sales support, relocation services and system
software and applications support services. Remote diagnostic and support
capabilities are available for the systems serviced. The
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<PAGE> 38
national response support center, which is staffed with both hardware and
software support specialists, provides initial telephone consulting, problem
determination, recovery and problem resolution, and dispatches field personnel
to customer sites as needed. The Company subcontracts with various third-party
support companies for field hardware support local to the customer sites. In
order to provide high system availability and responsive service, FileTek
provides field support personnel with required spare parts in various locations
and at select parts depots strategically located near customer sites. The
Company plans to continue to expand its customer support organization as its
customer base grows. As of May 31, 1998, the Company had 26 employees in its
customer support organization.
The Company also assembles, integrates and tests all components of its
products. FileTek has implemented a comprehensive quality control program
whereby the fully-assembled system is loaded with system software and subjected
to product testing prior to shipment. As of May 31, 1998, the Company had four
employees providing integration services.
RESEARCH AND DEVELOPMENT
The Company believes that its future success will depend upon its ability
to continue to enhance its product offerings, which requires a continued
investment in research and development. As of May 31, 1998, the Company's
research and development organization consisted of 26 full-time employees and
one part-time employee. The Company spent $4.0 million, $3.7 million, $3.7
million and $900,000 on research and development and capitalized software
development for the years ended December 31, 1995, 1996 and 1997 and the quarter
ended March 31, 1998, respectively. Of such amounts for such periods, $1.1
million, $3.2 million, $3.6 million and $900,000, respectively, were
attributable to research and development expense.
The Company's development efforts include providing enabling software and
drivers to extend the StorHouse system by introducing new types of storage
devices into the storage hierarchy, designing and developing new client server
interfaces and adding additional functionality. Although most development
activities are performed in-house, the Company occasionally enters into
development and licensing arrangements with third parties and technology
partners for certain development and/or technology licensing activities.
FileTek generally releases new versions of its software products every six
to twelve months depending on business opportunities and market requirements for
added functionality. New hardware components are integrated when they provide
significant performance or cost benefits and when required to meet market
requirements. Software to access new storage devices can be added independent of
releases.
The Company's product development initiatives are focused on the
development of new releases of StorHouse solutions and on complementary
applications. The Company plans to begin beta testing version 5.1 of
StorHouse/SM in the second half of 1998. This version is slated to interface to
the STK library control software, enabling StorHouse to use STK's entire line of
libraries. In addition, it will enable shared use, so that an MVS attached
library with available capacity can be used. Control Center ("CC") is a new GUI
system management tool for both StorHouse/SM and StorHouse/RM. CC provides a
framework under which certain StorHouse modules can execute and provide an
easy-to-learn and easy-to-use administrative interface. The Company began the
development of CC in 1997 and expects to begin beta testing in the second half
of 1998.
COMPETITION
The market for the Company's products is intensely competitive and subject
to rapid change. The Company's products compete with other storage, storage
management and database products offered by a number of vendors, including
Compaq Computer Corporation, EMC, IBM, Information Builders, Inc., Microsoft,
NCR and Oracle. These vendors have substantially greater resources and market
influence than FileTek. There are relatively low barriers of entry in the
software market, and thus the Company expects additional competition from other
established and emerging companies if the atomic data store market continues to
develop and expand. The development of new technologies or products by others
could have a material adverse impact on the Company's business. There is also a
substantial risk that the announcement of competing products by large
competitors could result in the cancellation or delay of customer orders in
37
<PAGE> 39
anticipation of the introduction of such new products. Many of the Company's
competitors have well-established relationships with current and potential
customers of the Company, have extensive knowledge of the relational database
industry and are capable of offering a single vendor solution. As a result, the
Company's competitors may be able to respond more quickly to new or emerging
technologies and changes in products than can the Company. In addition, current
and potential competitors have established or may establish cooperative
relationships among themselves or with third parties to increase the ability of
their products to address customer needs. Accordingly, it is possible that new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share. See "Risk Factors -- Competition."
The Company believes that the principal competitive factors affecting its
market include product features such as record-level access from removable
media, data movement performance and efficiency, data scalability, data storage
price performance, breadth of supported operating systems and storage devices,
integration with industry standards, functionality, product reputation, quality,
performance, price, sales and marketing effort and customer support. Although
the Company believes that it currently competes favorably with respect to such
factors, there can be no assurance that the Company can maintain its competitive
position against current and potential competitors, especially those with
greater financial, marketing, service, support, technical and other resources
than the Company.
PROPRIETARY RIGHTS
The Company relies on a combination of copyright, patent, trademark and
trade secret laws together with confidentiality procedures and contractual
provisions to protect its proprietary technology. For example, the Company
licenses rather than sells its software and requires licensees to enter into
license agreements, which impose restrictions on licensees' ability to use the
software. In addition, the Company seeks to avoid disclosure of its trade
secrets by various means, including but not limited to requiring those persons
with access to the Company's proprietary information to execute confidentiality
agreements with the Company. The Company has entered into source code escrow
agreements with a number of its customers requiring release of source code under
certain conditions. Such agreements provide that such parties will have a
limited, non-exclusive right to use such code in the event that the Company
fails to meet its maintenance or certain other obligations. The provision of
source code in escrow may increase the likelihood of misappropriation by third
parties. The Company owns three U.S. patents. One patent relates to data
integrity, transportability and direct access of unformatted bitstreams. A
second patent covers a method of virtual memory storage allocation with dynamic
adjustment to manage the allocation of removable storage media (VSAC). A third
patent covers a number of StorHouse features associated with accessing very
large tables and using HSM to store RDBMS data. There can be no assurance that
the patent rights will be sufficient to protect the Company's technology.
Although the Company intends to protect its rights vigorously, there can be no
assurance that these measures will be successful. In addition, the laws of
certain foreign countries may not protect the Company's proprietary rights to
the same extent as do the laws of the United States. However, while the
Company's ability to compete could be affected by its ability to protect its
proprietary product and technology rights, the Company believes that such
protection is less significant to its success than experienced management,
technical expertise, marketing skills, new product introductions and frequent
product enhancements. See "Risk Factors -- Limited Protection of Proprietary
Technology; Risks of Infringement."
The Company licenses certain software from third parties and incorporates
it in the Company's software products for sublicense to its end users.
EMPLOYEES
As of May 31, 1998, the Company had 98 employees (including three part-time
employees), consisting of 97 in the U.S. and one in the U.K. Of this total, 27
were employed in research, product development, engineering, and publications;
22 (one in the U.K.) were employed in sales and marketing; four were employed in
integration services; 26 were employed in customer support; and 19 were employed
in finance, operations and administrative positions. Competition for employees
in the Company's industry is intense. None of the Company's employees are
represented by labor unions. The Company has not experienced any labor stoppages
and considers its relations with its employees to be good.
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<PAGE> 40
FACILITIES
The Company's principal administrative, marketing, research and development
and integration facilities are located in approximately 42,000 square feet of
leased space in Rockville, Maryland. The lease on this facility will expire in
April 2001 and the Company has an option to extend the lease for an additional
three-year period thereafter. In addition, the Company leases sales and service
space in eight other locations within the U.S. and one location in the U.K. The
Company believes that these facilities are adequate for its current needs and
that suitable additional or substitute space will be available as needed to
accommodate expansion of the Company's operations.
LEGAL PROCEEDINGS
From time to time, the Company may be involved in litigation relating to
claims arising out of its operations in the normal course of business. The
Company is not a party to any legal proceedings.
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<PAGE> 41
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
William C. Thompson................... 65 Chief Executive Officer and Chairman of the Board
David L. Beamer....................... 56 President, Chief Operating Officer and Director
John G. Burgess....................... 60 Vice President and Chief Technical Officer
William P. Loomis..................... 44 Vice President, Finance and Administration, Chief
Financial Officer, Treasurer and Secretary
Greg A. Sheard........................ 55 Vice President, Customer Support
Robert W. Simonds..................... 39 Vice President, Marketing
Gary G. Szukalski..................... 35 Vice President, North American Sales Operations
Elliot H. Cole(1)..................... 66 Director
Lewis S. Frauenfelder(1).............. 58 Director
Kenneth W. Simonds(1)................. 63 Director
</TABLE>
- ---------------
(1) Member of the Compensation and Audit Committees.
WILLIAM C. THOMPSON, a co-founder of the Company, has served as Chief
Executive Officer and Chairman of the Board since the Company's inception in May
1984. Mr. Thompson was also President of the Company from April 1984 until March
1989 and from July 1990 until October 1993. Mr. Thompson is also the founder,
President and director of Centennial Computer Corporation ("Centennial"), a
specialized financial services and leasing company.
DAVID L. BEAMER has been President, Chief Operating Officer and a member of
the Board of Directors of the Company since October 1993. From September 1992
until April 1993, Mr. Beamer was Vice President and General Manager, Huron
Operations, of Amdahl Corporation, a mainframe computer systems company. From
January 1992 until August 1992, Mr. Beamer was Vice President and General
Manager, European Operations of Amdahl. From January 1991 until January 1992,
Mr. Beamer was Vice President Corporate Marketing, and from January 1986 until
December 1990, was Vice President and General Manager, U.S. Operations of
Amdahl.
JOHN G. BURGESS, a co-founder of the Company, has been Vice President and
Chief Technical Officer since the Company's inception in May 1984. From January
1980 until April 1984, Mr. Burgess was Vice President of Development for
Centennial. From December 1967 until January 1980, Mr. Burgess was Vice
President of Development for Tesdata Systems Corporation, a performance
management company.
WILLIAM P. LOOMIS has been Vice President of Finance and Administration,
Chief Financial Officer, Treasurer and Secretary of the Company since July 1990.
From July 1989 until July 1990, Mr. Loomis was Director of Corporate Operations
of the Company. From January 1987 until July 1989, Mr. Loomis was Controller of
the Company. Mr. Loomis also serves as the Vice President of Finance of
Centennial.
GREG A. SHEARD has been Vice President, Customer Support of the Company
since April 1993. From January 1991 until April 1993, Mr. Sheard provided
consulting in the area of customer support strategies and operations for a
number of high technology companies. From June 1988 until December 1990, Mr.
Sheard was Vice President, Customer Service for Stratus Computer, Inc., a
computer systems company.
ROBERT W. SIMONDS has been Vice President, Marketing since August 1997.
From January 1996 until August 1997, Mr. Simonds was founding partner of Simonds
Associates, a management consulting firm specializing in the data warehouse
marketplace that provided consulting services to the Company. From August 1995
until January 1996, Mr. Simonds was Senior Manager with Coopers & Lybrand
Consulting. From December 1991 until August 1995, Mr. Simonds was a Senior
Director, Industry Consulting, with NCR Corporation, a data warehouse solutions
and computer systems company.
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<PAGE> 42
GARY G. SZUKALSKI has been Vice President of North American Sales
Operations of the Company since April 1995 and has been with the Company since
January 1986. Mr. Szukalski's previous positions with the Company included
District Sales Manager and Director, Systems Engineering
ELLIOT H. COLE has been a director of the Company since its inception in
1984. He is a senior partner in the law firm of Patton Boggs LLP, Washington,
D.C., the Company's general counsel, and serves as a director of, and acts as
general counsel for, a number of technology-based companies. Mr. Cole is
currently a director of First Medical Group, Inc.
LEWIS S. FRAUENFELDER has been a director of the Company since March 1993.
Mr. Frauenfelder has been the President and Chief Operating Officer of Benchmark
Tape Systems Corporation, a magnetic tape storage systems company, since April
1998. Since May 1996, Mr. Frauenfelder has been a data storage industry
consultant. From March 1995 until May 1996, Mr. Frauenfelder was President and
Chief Executive Officer of DataSonix Incorporated, a mobile data storage
products company. From October 1990 until March 1995, Mr. Frauenfelder was
President and Chief Executive Officer of Fujitsu Computer Products of America,
Inc., a data storage and image products company.
KENNETH W. SIMONDS has been a director of the Company since May 1992 and
previously served as a director from January 1989 through February 1990. From
1985 until April 1992, Mr. Simonds was President and Chief Executive Officer of
Teradata Corporation, a database computer company, and was elected Chairman of
Teradata in October 1988. Prior thereto, he served in various executive
capacities with Amdahl Corporation. Mr. Simonds is a director of Printrak
International Inc.
All directors hold office until the next annual meeting of stockholders and
the election and qualification of their successors. Executive officers of the
Company are elected by the Board of Directors and serve until their successors
are duly elected and qualified. Other than Kenneth W. Simonds and Robert W.
Simonds, who are father and son, there are no other family relationships among
any of the directors and executive officers of the Company.
COMMITTEES OF THE BOARD OF DIRECTORS
The Audit Committee consists of Messrs. Cole, Frauenfelder and K. Simonds.
The Audit Committee reviews, with the Company's independent auditors, the scope,
timing and results of audit and other services that the independent auditors are
asked to perform. In addition, the Audit Committee will make annual
recommendations to the Board of Directors for the appointment of independent
auditors for the ensuing year.
The Compensation Committee consists of Messrs. Cole, Frauenfelder and K.
Simonds. The Compensation Committee will review and evaluate the compensation
and benefits of the executive officers, review general policy matters relating
to compensation and benefits of employees of the Company and make
recommendations concerning these matters to the Board of Directors. The
Compensation Committee also will administer the Company's stock option plan.
DIRECTORS' COMPENSATION
Directors who are not employees of the Company currently include Messrs.
Cole, Frauenfelder and Simonds (the "Outside Directors"). No directors receive
an annual retainer or fees for attending regular meetings of the Board of
Directors. All directors are reimbursed for reasonable expenses incurred by them
in attending such meetings. Outside Directors will automatically receive annual
stock option grants of shares pursuant to the 1998 Directors'
Stock Option Plan. See "-- Employee Benefit Plans."
The Company granted to each of the Outside Directors options to purchase
7,500 shares of Common Stock at an exercise price of $0.67 per share and 7,500
shares of Common Stock at an exercise price of $7.33 per share in April 1997 and
April 1998, respectively. Such options vest quarterly over two years. In
addition, in September 1997, the Company granted to Mr. Frauenfelder an option
to purchase 30,000 shares of Common Stock at an exercise price of $0.67 per
share. Such options were replacements for options that were originally granted
in 1993 at $1.33 per share. Mr. Frauenfelder has purchased 15,000 of such
shares.
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<PAGE> 43
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation
earned by William C. Thompson the Company's Chief Executive Officer and for each
of the other four most highly compensated executive officers of the Company
whose total compensation for services in all capacities to the Company exceeded
$100,000 during the year ended December 31, 1997 (the "Named Executive
Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
NUMBER OF
ANNUAL COMPENSATION(2) SECURITIES
----------------------- UNDERLYING
NAME AND PRINCIPAL POSITIONS(1) SALARY BONUS(3) OPTIONS
------------------------------- -------- -------- ------------
<S> <C> <C> <C>
William C. Thompson(4)................................... $ -- $331,432 --
Chairman of the Board and Chief Executive Officer
David L. Beamer(5)....................................... 150,000 152,280 90,000
President and Chief Operating Officer
William P. Loomis........................................ 119,000 89,576 60,000
Vice President, Finance and Administration, Chief
Financial Officer, Treasurer and Secretary
John G. Burgess.......................................... 103,000 89,576 30,000
Vice President and Chief Technical Officer
Gary G. Szukalski........................................ 100,000 120,326 60,600
Vice President, North American Sales Operations
</TABLE>
- ---------------
(1) Robert W. Simonds became the Company's Vice President, Marketing, effective
August 18, 1997. His annual base salary is $140,000 plus a bonus of not less
than $65,000. Mr. Simonds received a grant of options to purchase 150,000
shares of Common Stock effective September 12, 1997.
(2) In accordance with the rules of the Securities and Exchange Commission, the
compensation set forth in the table does not include medical, group life
insurance or other benefits which are available to all salaried employees of
the Company, and certain perquisites and other benefits, securities or
property that do not exceed the lesser of $50,000 or 10% of the person's
salary and bonus shown in the table.
(3) Includes amounts accrued in 1997 and paid or to be paid in 1998 in the
amounts of $243,804 to Mr. Thompson; $112,018 to Mr. Beamer; $65,893 to Mr.
Loomis; $65,893 to Mr. Burgess; and $53,805 to Mr. Szukalski. Bonus amount
for Mr. Szukalski represents accruals for commission overrides.
(4) Mr. Thompson elected to forego his salary in 1997. He did not receive any
stock, stock-based or other forms of non-cash consideration in lieu thereof.
His salary of $134,000 was reinstated effective January 1, 1998, and
increased to $200,000 as of April 1, 1998.
(5) Mr. Beamer's salary increased to $200,000 as of April 1, 1998.
42
<PAGE> 44
The following table sets forth all individual grants of stock options
during 1997 to each of the Named Executive Officers:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
----------------------------------------------------------- ANNUAL RATES OF
NUMBER OF PERCENTAGE OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM (5)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION ---------------------
NAME(1) GRANTED(2) FISCAL YEAR(3) PER SHARE(4) DATE 5% 10%
------- ---------- -------------- ------------ ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
William C. Thompson........ -- -- -- -- -- --
David L. Beamer(6)......... 90,000 16.7% $0.67 4/16/07 $37,734 $95,625
William P. Loomis(6)....... 60,000 11.1 0.67 4/16/07 25,156 63,750
John G. Burgess(6)......... 30,000 5.6 0.67 4/16/07 12,578 31,875
Gary G. Szukalski(7)....... 60,600 11.3 0.67 4/16/07 25,407 64,387
</TABLE>
- ---------------
(1) Robert W. Simonds was granted options to purchase 150,000 shares of Common
Stock effective September 12, 1997 at an exercise price of $0.67.
(2) Options were "non-qualified" stock options and were granted under the Stock
Plans at an exercise price not less than the market value on the date of
grant as determined by the Board of Directors of the Company. See
"-- Employee Benefit Plans."
(3) Based on options to purchase an aggregate of 538,407 shares granted to
employees in 1997, including options granted to the Named Executive
Officers.
(4) All options were granted at exercise prices equal to the fair market value
of the Common Stock, as determined by the Board of Directors, on the date of
grant.
(5) Potential realizable values are net of exercise price, but before taxes
associated with exercise. Amounts represent hypothetical gains that could be
achieved for the respective options if exercised at the end of the option
term. The assumed 5% and 10% rates of stock price appreciation are provided
in accordance with rules of the United States Securities and Exchange
Commission and do not represent the Company's estimate or projection of the
future Common Stock price. Actual gains, if any, on stock option exercises
are dependent on the future performance of the Common Stock, overall market
conditions and the option holders' continued employment through the vesting
period.
(6) Options are immediately exercisable at the date of grant, with shares
purchased upon exercise of such options subject to repurchase by the Company
and certain employee stockholders at the original exercise price upon the
occurrence of certain events until such shares are vested ("Repurchase
Rights"). The shares vest with respect to such repurchase to the extent of
25% on April 1, 1998 and an additional approximately 2% every month
thereafter.
(7) Options vest over a four year period at a rate of 25% annually, beginning
April 1, 1997, so long as the individual is employed by the Company. Shares
underlying such options are subject to the Repurchase Rights.
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<PAGE> 45
The following table sets forth information regarding option exercises
during 1997 and exercisable and unexercisable stock options held as of December
31, 1997 by each of the Named Executive Officers:
AGGREGATED OPTION EXERCISES IN LAST YEAR AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
SHARES UNEXERCISED OPTIONS AT OPTIONS AT
ACQUIRED DECEMBER 31, 1997 DECEMBER 31, 1997 (1)
ON VALUE ------------------------------- ---------------------------
EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
-------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
William C. Thompson......... -- $-- 88,950 -- $ $
David L. Beamer(2).......... 15,000 -- 420,150 52,500
William P. Loomis(2)........ 15,000 -- 295,948 --
John G. Burgess(2).......... -- -- 134,250 --
Gary G. Szukalski........... -- -- 59,400 90,000
</TABLE>
- ---------------
(1) There was no public market for the Common Stock as of December 31, 1997.
Accordingly, these values have been calculated on the basis of an assumed
initial offering price of $ per share, less the applicable exercise
price, multiplied by the number of shares underlying such options.
(2) Certain options are immediately exercisable at the date of grant, but any
such shares purchased are subject to the Repurchase Rights. Of the
exercisable options, 330,150, 210,948 and 83,625 options held by Messrs.
Beamer, Loomis and Burgess, respectively, are vested with respect to the
Repurchase Rights as of December 31, 1997. See "Employee Benefit
Plans -- 1990 Non-qualified Stock Option Plan."
No compensation intended to serve as incentive for performance to occur
over a period longer than one year was paid pursuant to a long-term incentive
plan during the last year to any of the Named Executive Officers.
EMPLOYEE BENEFIT PLANS
1990 Stock Option Incentive Plan. The Company's 1990 Stock Option
Incentive Plan (the "SOIP") was adopted by the Board of Directors and approved
by the stockholders in June 1990. As of March 31, 1998, an aggregate of
1,374,000 shares of Common Stock had been reserved for issuance upon the
exercise of options under the SOIP. As of March 31, 1998, options to purchase
966,858 shares of Common Stock were outstanding at a weighted average exercise
price of approximately $0.96 per share; and 383,445 shares remained available
for future grant under the SOIP. All shares issued pursuant to the SOIP were
granted at the fair market value of the Company's Common Stock as of the time of
grant, as determined by the Board of Directors. The SOIP is currently
administered by the Compensation Committee. Subject to the provisions of the
SOIP, the Compensation Committee has the discretion to determine the optionees,
the type of option to be granted the terms of the grants and such other related
provisions as are consistent with the SOIP.
The SOIP provides for the grant of options to employees and directors who
are also employees of FileTek either as options qualifying for treatment under
the Internal Revenue Service Code of 1986, as incentive stock options ("ISOs"),
or as non-qualified stock options ("NSOs"). To date, all options granted have
been NSOs. The exercise price of options granted under the SOIP may not be less
than 100% of the fair market value of the Common Stock on the date of grant. No
option may be granted with a term exceeding ten years or result in, upon
exercise, an optionee holding over 10% of the outstanding stock. In the case of
ISOs, the aggregate fair market value of stock with respect to ISOs exercisable
for the first time by an employee may not exceed $100,000. The exercise price of
an ISO grant to an optionee who beneficially owns 10% or more of the outstanding
capital stock of the Company may not be less than 110% of the fair market value
per share on the date of grant.
Generally, options granted under the plan become exercisable at the rate of
25% per year beginning one year after the date of grant. Of the 966,858 options
outstanding pursuant to the SOIP as of March 31, 1998, approximately 441,079
were immediately exercisable. The options terminate not more than ten years from
the date of grant, subject to earlier termination of the optionee's death,
disability or termination of employment with the Company, but provided that the
term of any options granted to a holder of more than 10% of the
44
<PAGE> 46
outstanding shares of capital stock may be no longer than five years. The SOIP
terminates in June 2000, unless sooner terminated by the Board of Directors.
Options are not assignable or otherwise transferable except by will or the
laws of descent and distribution. In the event of a reorganization, merger or
consolidation in which the Company is not the surviving corporation, or upon the
sale of all or substantially all of the Company's assets to another corporation,
the successor corporation shall assume all of the Company's outstanding options
or substitute new options therefor. The Board of Directors has the discretion in
any such event to determine and to make effective provisions for the
acceleration of time during which an option may be exercised, in which case the
option shall terminate within thirty days from the date of notification.
Notwithstanding the foregoing, the Board of Directors, in its sole discretion,
may determine that in connection with any such reorganization, merger, or
consolidation in which the Company is not the surviving corporation, optionees
shall receive cash equal to the excess of the fair market value of such shares
immediately prior to the effective date of such reorganization, merger or
consolidation over the exercise price.
The Company has a right of first refusal to purchase any shares of stock
that may be purchased upon the exercise of options granted under the SOIP that
an optionee may propose to transfer to a third party. In addition, the Company
has the right to repurchase at fair market value all shares held by an optionee
upon the optionee's termination of employment or service with the Company, for
any reason, within a specified period. The Company must repurchase the shares at
a price not less than the original exercise price per share of the optionee,
unless otherwise mutually agreed.
1990 Non-qualified Stock Option Plan. The Company's 1990 Non-qualified
Stock Option Plan (the "NSOP") was adopted by the Board of Directors and
approved by the stockholders in June 1990. As of March 31, 1998, an aggregate of
549,750 shares of Common Stock have been reserved for issuance under the NSOP.
As of March 31, 1998, options to purchase 503,102 shares of Common Stock were
outstanding at a weighted average exercise price of approximately $0.69 per
share and 30,148 shares remained available for future grant under the NSOP. All
shares issued pursuant to the NSOP were granted at the fair market value of the
Company's Common Stock as of the time of grant, as determined by the Board of
Directors. The NSOP is currently administered by the Board of Directors,
although the Board of Directors may delegate administration to a committee of at
least three directors.
Options granted under the NSOP are immediately exercisable, whether vested
or not. However, shares purchased under the NSOP which are not vested are
generally subject to repurchase by the Company at the original exercise price if
the purchaser ceases to be an employee of the Company. The repurchase option
typically lapses as to 25% of the shares granted following the first year after
the vesting commencement date and approximately 2% of the shares following each
additional month. As of March 31, 1998, 219,531 of the shares of Common Stock to
be purchased pursuant to options granted under the NSOP would be subject to the
Company's repurchase option if the underlying options were exercised. The
exercise price of options granted under the NSOP may not be less than 100% of
the fair market value of the Common Stock on the date of grant. No option may be
granted with a term exceeding ten years or result in, upon exercise, an optionee
holding over 10% of the outstanding stock. Subject to the provisions of the
NSOP, the Board of Directors has the discretion to determine the optionees, the
terms of the grants and such other related provisions as are consistent with the
NSOP.
The options terminate not more than ten years from the date of grant,
subject to earlier termination on the optionee's death, disability or
termination of employment with the Company. The NSOP terminates in June 2000,
unless sooner terminated by the Board of Directors.
Options are not assignable or otherwise transferable except by will or the
laws of descent and distribution. In the event of a reorganization, merger, or
consolidation in which the Company is not the surviving corporation or upon the
sale of all or substantially all of the Company's assets to another corporation,
the successor corporation shall assume all of the Company's outstanding options
or substitute new options therefor. The Board of Directors shall have the
discretion and power in any such event to determine and to make effective
provisions for the acceleration of time during which an option may be exercised,
in which case the option shall terminate within thirty days from the date of
notification. Notwithstanding the foregoing, the Board of Directors, in its sole
discretion, may determine that in connection with any such reorganization,
45
<PAGE> 47
merger or consolidation in which the Company is not the surviving corporation,
optionees shall receive cash equal to the excess of the fair market value of
such shares immediately prior to the effective date of such reorganization,
merger or consolidation over the exercise price.
The Company has a right of first refusal under the NSOP equivalent to that
under the SOIP.
At the discretion of the Board of Directors, an option agreement granted
pursuant to the NSOP may provide that, upon the purchase of stock of the Company
by a person other than an institutional investor such as a bank, insurance
company, venture capital firm, underwriter or small business investment company,
which results in a change in control, options granted hereunder will become
immediately exercisable without regard to the vesting and installment provisions
thereof.
Stock Option Agreements. In addition to stock options granted pursuant to
one of the aforementioned stock option plans, as of March 31, 1998, options to
purchase 486,057 shares of Common Stock pursuant to individualized stock option
agreements were outstanding at a weighted average exercise price of
approximately $1.42 per share. As of March 31, 1998, approximately 470,307 are
immediately exercisable.
1998 Omnibus Plan. The Company's 1998 Omnibus Stock Plan (the "Omnibus
Plan") was adopted by the Board of Directors and approved by the stockholders in
June 1998. The Omnibus Plan authorizes the issuance of an aggregate of up to
1,500,000 shares of Common Stock with respect to certain "Awards" made under the
Omnibus Plan. All such shares remain available for future grant under the
Omnibus Plan.
The Omnibus Plan provides for grants of options to employees, officers,
directors and consultants of the Company or any affiliate of the Company
provided, however, that no individual may receive an award of more than 250,000
shares in any one fiscal year. "Awards" under the Omnibus Plan may take the form
of grants of stock options, stock appreciation rights, restricted or
unrestricted stock, phantom stock, performance awards or any combination
thereof. The Omnibus Plan is administered by the Board of Directors, or by such
committee or committees as may be appointed by the Board of Directors from time
to time (the "Administrator"). The Administrator has sole power and authority,
consistent with the provisions of the Omnibus Plan, to determine which eligible
participants will receive Awards, the form of the Awards and the number of
shares of Common Stock covered by each Award, to impose terms, limits,
restrictions and conditions upon Awards, to modify, amend, extend or renew
Awards (with the consent of the awardee), to accelerate or change the exercise
timing of Awards or to waive any restrictions or conditions to an Award and to
establish objective and conditions for earning Awards.
Unless otherwise determined by the Administrator, and in any event in the
case of an incentive stock option or a stock appreciation right granted with
respect to an incentive stock option, Awards are not transferable other than by
will or the laws of descent and distribution. Unless otherwise determined by the
Administrator in accordance with the provisions of the immediately preceding
sentence, an Award may be exercised during the lifetime of the grantee, only by
the grantee or, during the period the grantee is under a legal disability, by
the grantee's guardian or legal representative. Unless terminated sooner by the
Board of Directors, the Omnibus Plan terminates in June 2008 or the date on
which all shares available for issuance shall have been issued pursuant to the
exercise or cancellation of Awards under the Omnibus Plan.
1998 Directors' Stock Option Plan. The 1998 Directors' Stock Option Plan
(the "Director Plan") was adopted by the Board of Directors and approved by the
stockholders in 1998. Under the terms of the Director Plan,
directors of the Company who are not employees of the Company (the "Eligible
Directors") are eligible to receive non-statutory options to purchase shares of
Common Stock. A total of shares of Common Stock may be issued
upon exercise of options granted under the Director Plan. Unless terminated
sooner by the Board of Directors, the Director Plan will terminate in June 2008,
or the date on which all shares available for issuance under the Director Plan
shall have been issued pursuant to the exercise of options granted under the
Director Plan.
Under the Director Plan, options to purchase shares of
Common Stock will be granted to each Eligible Director on the date of each
annual meeting of stockholders after the closing of the Offering. Options will
vest at the rate of one-twelfth of the total grant per month, and will vest in
full at the earlier of (i) the first anniversary of the date of the grant or
(ii) the date of the next annual meeting of stockholders.
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<PAGE> 48
The exercise price of options granted under the Director Plan will equal the
fair market value per share of the Common Stock on the date of grant.
Options granted under the Director Plan are not transferable by the
optionee except by will or by the laws of descent and distribution or pursuant
to a qualified domestic relations order. In the event an optionee ceases to
serve as a director, each option may be exercised by the optionee for the
portion then exercisable at any time within 60 days after the optionee ceases to
serve as a director; provided, however, that in the event that the optionee
ceases to serve as a director due to his death or disability, then the optionee,
or his or her administrator, executor or heirs, may exercise the exercisable
portion of the option for up to 180 days following the date the optionee ceases
to serve as a director. No option is exercisable after the expiration of seven
years from the date of grant.
401(k) Retirement Savings Plan. In February 1990, the Company adopted the
FileTek 401(k) Savings Plan, a plan qualified under Sections 401(a) and 401(k)
of the Internal Revenue Service Code. Generally, all employees are eligible to
participate in the 401(k) plan after they complete three months of service.
Eligible employees may contribute up to 15% of their compensation, not to exceed
the maximum excludable amount allowed by the Internal Revenue Service, and such
amounts will be 100% vested at all times. Effective January 1, 1995, the Company
began matching 25% of the first $1,200 of each participating employee's
contributions to the plan. Any matching contributions vest immediately.
AGREEMENTS WITH EMPLOYEES
Employees of the Company are generally required to enter into agreements
(i) prohibiting disclosure of confidential or proprietary information of the
Company, (ii) prohibiting activities involving certain potential conflicts of
interest with the Company and (iii) assigning inventions to the Company. In
addition, in certain cases the agreements generally provide that, upon
termination, the employee will not work in certain capacities for a competitor
and will not competitively solicit Company customers or employees for a
designated period of time. Otherwise, employees of the Company are not subject
to written employment contracts.
The Company presently has no employment contracts with any of its officers,
other than as set forth above. Under certain conditions, the exercisability and
vesting of certain stock options granted to certain Named Executive Officers may
be accelerated in the event of certain corporate transactions or changes in
control.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1997, the Company did not have a Compensation Committee and all of
the directors were involved in compensation decisions. On June 12, 1998, the
Board of Directors established a Compensation Committee composed of the Outside
Directors to administer the Company's executive compensation program. There are
no Compensation Committee interlocks.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Company's Amended and Restated Certificate of Incorporation limits the
liability of directors to the maximum extent permitted by Delaware law and
provides that the Company shall indemnify its officers and directors to the
fullest extent permitted by law. Delaware law provides that directors of a
company will not be personally liable for monetary damages for breach of their
fiduciary duties as directors except for liability (i) for any breach of their
loyalty to the company or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General Corporation Law
or (iv) for any transactions from which the director derived an improper
personal benefit.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened litigation
or proceeding which may result in a claim for such indemnification.
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<PAGE> 49
CERTAIN TRANSACTIONS
During 1996 and 1997, the Company borrowed an aggregate of $2.7 million
from the William C. Thompson Revocable Trust (the "Trust"). William C. Thompson,
the Company's Chief Executive Officer, Chairman of the Board and principal
stockholder is a co-trustee and the sole beneficiary of the Trust. These
borrowings were in the form of subordinated debt at an interest rate of prime
plus 3.5% per annum. In May 1997, the Trust assigned $2.1 million of the
subordinated notes, under the same terms and conditions, to the William C.
Thompson Family Limited Partnership, which is indirectly controlled by Mr.
Thompson. Interest expense accrued on these notes was approximately $282,000 in
1997. All outstanding loans and accrued interest were repaid in full during 1997
and there was no outstanding balance at December 31, 1997.
From 1993 to 1997, the Company borrowed funds from Centennial, an entity
100% owned by Mr. Thompson and his family, the President of which is Mr.
Thompson and the Vice President of Finance of which is William P. Loomis, the
Company's Vice President of Finance and Administration, Chief Financial Officer,
Treasurer and Secretary. These loans, which took the form of demand notes with
interest payable monthly at the rate of prime plus 1% until May 31, 1993 and at
prime thereafter, included aggregate borrowings of $3.9 million in 1997.
Interest expense accrued and paid on these loans was approximately $80,000 in
1997. There was no outstanding balance on these loans at December 31, 1997.
Since 1990, the Company has leased certain equipment and related software
from Centennial at effective annual interest rates ranging from 12% to 18%. All
of the leases are capital leases. Capital lease additions from Centennial were
approximately $45,000 in 1997. Interest expense on these capital lease
obligations was approximately $44,000 in 1997. As of December 31, 1997, monthly
installments were approximately $12,000 and the capital lease obligation balance
to Centennial was approximately $217,000. There were no capital lease additions
subsequent to December 31, 1997 and the entire capital lease obligation to
Centennial was repaid in full in March 1998.
Centennial and FileTek prorate the costs of shared facilities based on
employee counts. Centennial reimbursed FileTek approximately $42,000 in 1997 for
its share of the facilities. The Company is required to provide a letter of
credit to collateralize its lease obligations pursuant to the terms and
conditions of the Company's lease for its headquarters' facility. The amount of
the letter of credit, which varies over time, was $50,272 in April 1998. Mr.
Thompson has personally provided the collateral for this letter of credit and
did not receive any additional consideration for this provision. Upon completion
of this Offering, no letter of credit will be required under the lease.
Since the Company's inception, it has been represented in its legal affairs
primarily by the law firm of Patton Boggs LLP. Elliot H. Cole, a director of the
Company, is a senior partner of that firm.
The Company believes that the terms of all of the transactions described in
this section were no less favorable than those which would have been obtained
had these transactions occurred with unaffiliated persons. All transactions with
affiliates have been, and will continue to be, on terms no less favorable to the
Company than those which could be obtained from unaffiliated parties. The
Company has adopted a policy whereby all future transactions between the Company
and its officers, directors and affiliates will be on terms no less favorable to
the Company than could be obtained from unrelated third parties and will be
approved by a majority of the disinterested members of the Board of Directors.
48
<PAGE> 50
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's outstanding Common Stock as of June 15, 1998, and as
adjusted to reflect the sale of the shares offered by: (i) each person who is
known by the Company to own beneficially more than 5% of the Company's Common
Stock; (ii) each director and Named Executive Officer; (iii) all officers and
directors as a group; and (iv) each Selling Stockholder.
<TABLE>
<CAPTION>
NUMBER OF SHARES NUMBER OF SHARES
BENEFICIALLY OWNED NUMBER OF BENEFICIALLY OWNED AFTER
BEFORE OFFERING(2)(3) SHARES OFFERING(3)
--------------------- BEING -------------------------
NAME OF STOCKHOLDER(1) NUMBER PERCENT OFFERED NUMBER PERCENT
---------------------- ---------- -------- --------- ----------- -----------
<S> <C> <C>
William C. Thompson (4)..................... 8,124,694 91.2%
William P. Loomis (5)(6).................... 526,198 5.8
David L. Beamer (7)......................... 464,775 5.0
Elliot H. Cole (5)(8)....................... 348,075 3.9
John G. Burgess (9)......................... 284,250 3.2
Gary G. Szukalski (10)...................... 87,150 1.0
Greg A. Sheard (11)......................... 75,000 *
Lewis S. Frauenfelder (12).................. 43,875 *
Kenneth W. Simonds (13)..................... 43,875 *
Directors and Executive Officers as a group
(10 persons) (5)(14)...................... 9,795,392 97.7%
</TABLE>
- ---------------
* Less than 1%.
(1) Unless otherwise noted, the stockholder's address is at the Company's
principal executive offices.
(2) The persons named in this table have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them,
subject to community property laws where applicable and except as indicated
in the other footnotes to this table. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission. In
computing the number of shares beneficially owned by a person and the
percentage ownership of that person, shares of Common Stock subject to
options held by that person that are currently exercisable or exercisable
within 60 days after June 15, 1998, are deemed outstanding. Such shares,
however, are not deemed outstanding for the purpose of computing the
percentage ownership of any other person.
(3) Applicable percentage of ownership is based on 8,805,687 shares of Common
Stock outstanding on June 15, 1998, including 8,719,440 shares issuable
upon the conversion of the Preferred Stock, and shares of Common
Stock outstanding after the completion of this Offering. Common Stock
issuable upon exercise of options is deemed to be outstanding and to be
beneficially owned by the person holding such options for the purpose of
computing the percentage ownership of such person but are not treated as
outstanding for the purpose of computing the percentage ownership of any
other person.
(4) Includes 7,533,896 shares of Common Stock held by the Thompson Family
L.L.C., as General Partner for the William C. Thompson Family Limited
Partnership, 485,798 shares of Common Stock held as a life interest,
jointly purchased with Mr. Thompson's adult children, and 103,950 shares of
Common Stock issuable upon exercise of options, 15,000 shares of which are
subject to the Company's repurchase option. Excludes 202,500 shares of
Common Stock held by trusts for the benefit of Mr. Thompson's children, as
to which Mr. Thompson disclaims beneficial ownership. Excludes 125,595
shares of Common Stock held by W. Mark Thompson, son of Mr. Thompson, as to
which Mr. Thompson disclaims beneficial ownership.
(5) Includes 101,250 shares of Common Stock held by Elliot H. Cole and William
P. Loomis as co-trustees for the 1986 William Mark Thompson Trust and
101,250 shares of Common Stock held as co-trustees for the 1986 Katherine
Thompson Trust, as to which Mr. Cole and Mr. Loomis disclaim beneficial
ownership.
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<PAGE> 51
(6) Includes 307,198 shares of Common Stock issuable upon exercise of options,
72,188 of which are subject to the Company's Repurchase Rights pursuant to
the NSOP and of which shares will be issued upon the exercise of
options immediately prior to the closing of the Offering.
(7) Includes 440,775 shares of Common Stock issuable upon exercise of options,
63,750 of which are subject to the Company's Repurchase Rights pursuant to
the NSOP and of which shares will be issued upon the exercise of
options immediately prior to the closing of the Offering.
(8) Includes 15,825 shares of Common Stock issuable upon exercise of options.
(9) Includes 134,250 shares of Common Stock issuable upon exercise of options,
36,250 of which are subject to the Company's Repurchase Rights pursuant to
the NSOP.
(10) Includes 1,500 shares of Common Stock held by Mr. Szukalski's wife and
85,650 shares of Common Stock issuable upon exercise of options,
of which shares will be issued upon the exercise of options immediately
prior to the closing of the Offering.
(11) Includes 75,000 shares of Common Stock issuable upon exercise of options,
of which shares will be issued upon the exercise of options immediately
prior to the closing of the Offering.
(12) Includes 28,875 shares of Common Stock issuable upon exercise of options,
of which shares will be issued upon the exercise of options immediately
prior to the closing of the Offering.
(13) Includes 28,875 shares of Common Stock issuable upon exercise of options,
of which shares will be issued upon the exercise of options immediately
prior to the closing of the Offering.
(14) Includes an aggregate of 1,220,398 shares of Common Stock issuable upon
exercise of options, 172,188 of which are subject to the Company's
Repurchase Rights pursuant to the NSOP and of which shares will
be issued upon the exercise of options immediately prior to the closing of
the Offering.
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<PAGE> 52
DESCRIPTION OF CAPITAL STOCK
Effective upon the closing of the Offering, the authorized capital stock of
the Company will consist of 25,000,000 shares of Common Stock, $.01 par value
per share, and 5,000,000 shares of preferred stock, $.01 par value per share
(the "Preferred Stock").
COMMON STOCK
At May 31, 1998, there were 86,247 shares of Common Stock issued and
outstanding and held of record by 34 stockholders. Following the closing of the
Offering, the Company will have shares of Common Stock issued and
outstanding, comprised of: (i) shares issued and outstanding prior to
this Offering; (ii) shares issued by the Company in connection
with this Offering; and (iii) 8,719,440 shares issued to holders of the
Company's Convertible Preferred Stock which automatically convert into Common
Stock upon the closing of this Offering.
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of Common Stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared by the Board of Directors out of
funds legally available therefor, subject to any preferential dividend rights of
outstanding Preferred Stock. Upon the liquidation, dissolution or winding up of
the Company, the holders of Common Stock are entitled to receive ratably the net
assets of the Company available after the payment of all debts and other
liabilities and subject to the prior rights of any outstanding Preferred Stock.
Holders of the Common Stock have no preemptive, subscription, redemption or
conversion rights. The outstanding shares of Common Stock are, and the shares
offered by the Company in this Offering will be, when issued and paid for, duly
authorized, legally issued, fully paid and nonassessable. The rights,
preferences and privileges of holders of Common Stock are subject to, and may be
adversely affected by, the rights of the holders of shares of any series of
Preferred Stock which the Company may designate and issue in the future.
PREFERRED STOCK
Upon the closing of this Offering, all outstanding shares of Convertible
Preferred Stock will be converted into shares of Common Stock. Thereafter, the
Board of Directors will be authorized, subject to certain limitations prescribed
by law, without further stockholder approval, to issue from time to time up to
an aggregate of 5,000,000 shares of Preferred Stock in one or more series and to
fix or alter the designations, preferences, rights and any qualifications,
limitations or restrictions of the shares of each such series thereof, including
the dividend rights, dividend rates, conversion rights, voting rights, terms of
redemption (including sinking fund provisions), redemption price or prices,
liquidation preferences and the number of shares constituting any series or
designations of such series. The issuance of Preferred Stock may have the effect
of delaying, deterring or preventing a change of control of the Company. The
Company has no present plans to issue any shares of Preferred Stock.
The Company believes that the Preferred Stock will provide the Company with
increased flexibility in structuring possible future financings and
acquisitions, and in meeting other corporate needs that might arise. Having such
authorized shares available for issuance will allow the Company to issue shares
of Preferred Stock without the expense and delay of holding a special
stockholders' meeting. The authorized shares of Preferred Stock, as well as
shares of Common Stock, will be available for issuance without further action by
stockholders of the Company, unless such action is required by applicable law or
the rules of any stock exchange or quotation system on which the Company's
securities may be listed or quoted.
DELAWARE LAW AND CERTAIN PROVISIONS OF THE COMPANY'S AMENDED AND RESTATED
CERTIFICATE AND BYLAWS
The Company's Amended and Restated Certificate of Incorporation and Bylaws
provide that the number of directors shall be determined from time to time by
resolution adopted by a majority of the Board of Directors.
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<PAGE> 53
Section 203 of the Delaware General Corporation Law, as amended ("Section
203"), provides that, subject to certain exceptions specified therein, an
"interested stockholder" of a Delaware corporation shall not engage in any
business combination, including mergers or consolidations, asset sales or other
transactions, with the corporation for a three-year period following the date at
which the stockholder becomes an "interested stockholder" unless (i) prior to
such date, the board of directors of the corporation approved either the
business combination or the transaction which resulted in the stockholder
becoming an "interested stockholder," (ii) upon consummation of the transaction
which resulted in the stockholder becoming an "interested stockholder," the
interested stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time that the transaction commenced (excluding certain
shares), or (iii) on or subsequent to such date, the business combination is
approved by the board of directors of the corporation and authorized at an
annual or special meeting of stockholders by the affirmative vote of at least
66 2/3% of the outstanding voting stock which is not owned by the "interested
stockholder." Except as otherwise specified in Section 203, an "interested
stockholder" is defined to include (x) any person which is the owner of 15% or
more of the outstanding voting stock of the corporation, or is an affiliate or
associate of the corporation and was the owner of 15% or more of the outstanding
voting stock of the corporation at any time within three years immediately prior
to the relevant date and (y) the affiliates and associates of any such person.
The Company's stockholders, by adopting an amendment to its Certificate of
Incorporation or Bylaws, may elect not to be governed by Section 203, effective
immediately upon adoption of such amendment. Neither the Amended and Restated
Certificate of Incorporation nor the Bylaws presently exclude the Company from
the restrictions imposed by Section 203.
These and other provisions could have the effect of making it more
difficult to acquire the Company by means of a tender offer, proxy contest or
otherwise or to remove the incumbent officers and directors of the Company.
These provisions may discourage certain types of coercive takeover practices and
encourage persons seeking to acquire control of the Company to first negotiate
with the Company.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Boston EquiServe
LP.
52
<PAGE> 54
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this Offering, there has been no public market for the securities
of the Company. Upon completion of this Offering, based upon the number of
shares outstanding at , 1998, there will be shares of
Common Stock of the Company outstanding (assuming no exercise of the
Underwriters' over-allotment option or options outstanding under the Company's
stock option plans). Of these shares, the shares sold in this
Offering will be freely tradable without restriction or further registration
under the Securities Act of 1933, as amended (the "Securities Act"), except that
any shares purchased by "affiliates" of the Company, as that term is defined in
Rule 144 ("Rule 144") under the Securities Act ("Affiliates"), may generally
only be sold in compliance with the limitations of Rule 144 described below.
SALES OF RESTRICTED SHARES
The remaining shares of Common Stock are deemed "restricted
securities" under Rule 144. Of the restricted securities, approximately
shares of Common Stock, which are not subject to Lock-up
Agreements with the Representatives of the Underwriters, will be eligible for
immediate sale in the public market pursuant to Rule 144(k) under the Securities
Act. Approximately additional shares of Common Stock, which are
not subject to Lock-up Agreements, will be eligible for sale in the public
market in accordance with Rule 144 or Rule 701 under the Securities Act
beginning 90 days after the date of this Prospectus. Upon expiration of the
Lock-up Agreements 180 days after the date of this Prospectus (and assuming no
exercise of any outstanding options), approximately additional
shares of Common Stock will be available for sale in the public market, subject
to the provisions of Rule 144 under the Securities Act.
Stockholders and optionholders holding in the aggregate approximately
shares of Common Stock (including shares of Common
Stock that may be acquired pursuant to the exercise of options held by them and
exercisable within 60 days of , 1998) on the date of this
Prospectus, have agreed that, for a period of 180 days after the date of this
Prospectus, they will not sell, offer, contract or grant any option to sell,
pledge, transfer, establish an open put equivalent position or otherwise dispose
of any shares of Common Stock, any options to purchase shares of Common Stock or
any shares convertible into or exchangeable for shares of Common Stock, owned
directly by such persons or with respect to which they have the power of
disposition, without the prior written consent of NationsBanc Montgomery
Securities LLC which may be given at any time or from time to time as to any or
all such shares without notice.
In general, under Rule 144 as currently in effect, beginning 90 days after
the effective date of the Registration Statement of which this Prospectus is a
part, a stockholder, including an Affiliate, who has beneficially owned his or
her restricted securities (as that term is defined in Rule 144) for at least one
year from the later of the date such securities were acquired from the Company
or (if applicable) the date they were acquired from an Affiliate is entitled to
sell, within any three-month period, a number of such shares that does not
exceed the greater of 1% of the then outstanding shares of Common Stock
( shares immediately after this Offering) or the average weekly
trading volume in the Common Stock during the four calendar weeks preceding the
date on which notice of such sale was filed under Rule 144, provided certain
requirements concerning availability of public information, manner of sale and
notice of sale are satisfied. In addition, under Rule 144(k), if a period of at
least two years has elapsed between the later of the date the restricted
securities were acquired from the Company or (if applicable) the date they were
acquired from an Affiliate of the Company, a stockholder who is not an Affiliate
of the Company at the time of sale and has not been an Affiliate of the Company
for at least three months prior to the sale is entitled to sell the shares
immediately without compliance with the foregoing requirements under Rule 144.
Securities issued in reliance on Rule 701 (such as shares of Common Stock
acquired pursuant to the exercise of certain options granted under the Company's
stock plans) are also restricted securities and, beginning 90 days after the
date of this Prospectus, may be sold by stockholders other than Affiliates of
the Company subject only to the manner of sale provisions of Rule 144 and by
Affiliates under Rule 144 without compliance with its one-year holding period
requirement.
53
<PAGE> 55
OPTIONS
The Company intends to file registration statements on Form S-8 under the
Securities Act to register shares of Common Stock issued or reserved for
issuance under the Stock Option Plans, thus permitting the resale of such shares
by nonaffiliates in the public market without restriction, subject to Rule 144
limitations applicable to Affiliates and the Lock-up Agreements noted above, if
applicable. Such registration statements will not be effective prior to the date
90 days after the date of the Prospectus.
EFFECT OF SALES OF SHARES
Prior to this Offering, there has been no public market for the Common
Stock of the Company, and no prediction can be made as to the effect, if any,
that market sales of shares of Common Stock or the availability of shares for
sale will have on the market price of the Common Stock prevailing from time to
time. Nevertheless, sales of significant numbers of shares of the Common Stock
in the public market could adversely affect the market price of the Common Stock
and could impair the Company's future ability to raise capital through an
offering of its equity securities.
54
<PAGE> 56
UNDERWRITING
The Underwriters named below (the "Underwriters"), represented by
NationsBanc Montgomery Securities LLC, BancAmerica Robertson Stephens and
FAC/Equities, a division of First Albany Corporation (the "Representatives"),
have severally agreed, subject to the terms and conditions set forth in the
Underwriting Agreement, to purchase from the Company and the Selling
Stockholders the number of shares of Common Stock indicated below opposite their
respective names at the initial public offering price less the underwriting
discount set forth on the cover page of this Prospectus. The Underwriting
Agreement provides that the obligations of the Underwriters are subject to
certain terms and conditions precedent and that the Underwriters are committed
to purchase all of such shares, if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ----------- ---------
<S> <C>
NationsBanc Montgomery Securities LLC.......................
BancAmerica Robertson Stephens..............................
First Albany Corporation....................................
--------
Total
========
</TABLE>
The Representatives have advised the Company and the Selling Stockholders
that the Underwriters initially propose to offer the Common Stock to the public
on the terms set forth on the cover page of this Prospectus. The Underwriters
may allow to selected dealers a concession of not more than $ per share, and
the Underwriters may allow, and any such dealers may reallow, a concession of
not more than $ per share to certain other dealers. After the initial public
offering, the offering price and other selling terms may be changed by the
representatives. The Common Stock is offered subject to receipt and acceptance
by the Underwriters and to certain other conditions, including the right to
reject orders in whole or in part.
The Company and certain Selling Stockholders have granted an option to the
Underwriters, exercisable during the 30-day period after the date of this
Prospectus, to purchase up to an aggregate maximum of additional
shares of Common Stock to cover over-allotments, if any, at the same price per
share as the initial shares to be purchased by the Underwriters. To the extent
that the Underwriters exercise this option, the Underwriters will be committed,
subject to certain conditions, to purchase such additional shares in
approximately the same proportion as set forth in the above table. The
Underwriters may purchase such shares only to cover over-allotments made in
connection with this Offering.
The Underwriting Agreement provides that the Company and the Selling
Stockholders will indemnify the Underwriters against certain liabilities,
including civil liabilities, under the Securities Act, or will contribute to
payments the Underwriters may be required to make in respect thereof.
Stockholders and optionholders of the Company, who immediately following
this Offering (assuming no exercise of the over-allotment option) collectively
will beneficially own shares of Common Stock, have agreed not to
directly or indirectly sell, offer, contract or grant any option to sell,
pledge, transfer, establish an open put equivalent position or otherwise dispose
of any rights with respect to any shares of Common Stock, any options to
purchase Common Stock, or any securities convertible or exchangeable for Common
Stock, owned directly by such holders or with respect to which they have the
power of disposition for a period of 180 days after the date of this Prospectus
without the prior written consent of NationsBanc Montgomery Securities LLC.
NationsBanc Montgomery Securities LLC may, in its sole discretion and at any
time without notice, release all or any portion of the securities subject to the
Lock-up Agreements. In addition, the Company has agreed not to sell, offer to
sell, contract to sell or otherwise sell or dispose of any shares of Common
Stock or any rights to acquire Common Stock, other than pursuant to its stock
plans or upon the exercise of outstanding options, for a period of 180 days
after the date of this Prospectus without the prior consent of NationsBanc
Montgomery Securities LLC. See "Shares Eligible for Future Sale."
55
<PAGE> 57
In connection with this Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock, including over-allotment, stabilization, syndicate covering
transactions and imposition of penalty bids. In an over-allotment, the
Underwriters would allot more shares of Common Stock to their customers in the
aggregate than are available for purchase by the Underwriters under the
Underwriting Agreement. Stabilizing means the placing of any bid, or the
effecting of any purchase, for the purpose of pegging, fixing or maintaining the
price of a security. In a syndicate covering transaction, the Underwriters would
place a bid or effect a purchase to reduce a short position created in
connection with this Offering. Pursuant to a penalty bid, NationsBanc Montgomery
Securities LLC, on behalf of the Underwriters, would be able to reclaim a
selling concession from an Underwriter if shares of Common Stock originally sold
by such Underwriter are purchased in syndicate covering transactions. These
transactions may result in the price of the Common Stock being higher than the
price that might otherwise prevail in the open market. These transactions may be
effected on the Nasdaq National Market, in the over-the-counter market or
otherwise, and, if commenced, may be discontinued at any time.
The Representatives have informed the Company that they do not expect to
make sales to accounts over which they exercise discretionary authority in
excess of 5% of the number of shares of Common Stock offered hereby.
Prior to this Offering, there has been no public market for the Common
Stock of the Company. Consequently, the initial public offering price has been
determined through negotiations among the Company and the Representatives. Among
the factors considered in such negotiations were the history of, and prospects
for, the Company and the industry in which it competes, an assessment of the
Company's management, the present state of the Company's development, the
prospects for future earnings of the Company, the prevailing market conditions
at the time of this Offering, market valuations of publicly traded companies
that the Company and the Representatives believe to be comparable to the
Company, and other factors deemed relevant.
LEGAL MATTERS
Certain legal matters with respect to the Common Stock will be passed upon
for the Company by Piper & Marbury L.L.P., Washington, D.C. and for the Selling
Stockholders by Patton Boggs LLP. Certain legal matters in connection with the
Offering will be passed upon for the Underwriters by Buchanan Ingersoll
Professional Corporation, Princeton, New Jersey.
EXPERTS
The consolidated financial statements of FileTek, Inc. at December 31, 1996
and 1997, and for each of the three years in the period ended December 31, 1997,
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement on Form S-1
(including all amendments thereto, the "Registration Statement") under the
Securities Act of 1933, with respect to the Common Stock offered hereby. As
permitted by the rules and regulations of the Commission, this prospectus omits
certain information contained in the Registration Statement and the exhibits and
schedules filed therewith. For further information with respect to the Company
and the Common Stock offered hereby, reference is made to the Registration
Statement and the exhibits and schedules filed therewith. Statements contained
in this Prospectus concerning the contents of any contract or any other document
referred to are not necessarily complete; reference is made in each instance to
the copy of such contract or document filed as an exhibit to the Registration
Statement. Each such statement is qualified in all respects by such reference to
such exhibits. The Registration
56
<PAGE> 58
Statement, including exhibits and schedules thereto, may be inspected without
charge at the Commission's principal office, Public Reference Section, Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices
of the Commission located at Seven World Trade Center, Suite 1300, NY, NY 10048
and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois,
60661-2511. Copies of all or any part thereof may be obtained from the Public
Reference Section of the Commission after payment of fees prescribed by the
Commission. The Commission also maintains a Web Site that contains reports,
proxy statements and other information regarding registrants, including the
Company, that file such information electronically with the Commission. The
address of the Commission's Web Site is http://www.sec.gov.
The Company intends to distribute to its stockholder annual reports
containing audited financial statements. The Company also intends to make
available to its stockholders, within 45 days after the end of each fiscal
quarter, reports for the first three quarters of each fiscal year containing
interim unaudited financial information.
57
<PAGE> 59
GLOSSARY
<TABLE>
<S> <C>
ADS Atomic Data Store (ADS) is a data warehouse that contains
the most granular level of information that an enterprise
can collect at a single point of service. An atomic data
store contains detail rather than aggregate data.
AMMO-II Alternative to Microfilm/Microfiche On-line (AMMO-II) is
FileTek's enterprise-wide solution for providing on-line
access to multiple terabytes of information that are
typically filed, printed or archived to microfiche or
microfilm. AMMO-II lets end-users store report information
on host DASD and StorHouse Systems, then access and view
that information in seconds.
API Application Programming Interface (API) is a programming
language interface between a system control program or a
licensed program and an end-user program. The StorHouse
Callable Interface is an API.
COLD Computer Output to Laser Disk (COLD) is a software system
that archives computer generated documents to storage media
that can be electronically accessed and viewed on-line.
DASD Direct Access Storage Device (DASD) is a storage device that
provides immediate access to stored data.
Data Mart A subset of the data resource, usually oriented to a
specific purpose or major data subject, that may be
distributed to support business needs. The concept of a data
mart can apply to any data whether they are operational
data, evaluational data, spatial data or metadata.
Data An implementation of an informational database used to store
Warehouse sharable data sourced from an operational
database-of-record. It is typically a subject database that
allows users to tap into a company's vast store of
operational data to track and respond to business trends and
facilitate forecasting and planning efforts.
DRDA Distributed Relational Database Architecture (DRDA) is a
database access standard defined by IBM.
Gigabyte A gigabyte (GB) is a unit of storage equal to 1,000
megabytes.
HSM Hierarchical Storage Management (HSM) is a system
architecture based on a hierarchy of storage technologies
that provide the proper balance between system performance
and storage costs. HSM systems typically migrate data from
expensive high-performance storage media to less expensive
lower-performance storage based on frequency of use. HSM
provides an economical means for managing and storing
massive amounts of data.
LAN-AMMO LAN-AMMO is FileTek's LAN-based client/server extension of
AMMO-II. LAN-AMMO lets end-users view, print and fax
archived documents, including character-based, mixed-mode
and pure AFP, from a local area network.
ODBC Open Database Connectivity (ODBC) is Microsoft's interface,
based on SQL, designed to allow for a universal command set
for data access across multiple database types.
Petabyte A petabyte (PB) is a unit of storage equal to 1,000
terabytes.
RAID Redundant Array of Independent Disks (RAID) is an array of
magnetic disks where part of the storage capacity is used to
store redundant information about data on the other disks.
RDBMS Relational Database Management System (RDBMS) is
comprehensive software that manages one or more databases
perceived as a set of tables and manipulated in accordance
with the relational model of data.
SQL Structured Query Language (SQL) is a standardized language
for defining and manipulating data in a relational database.
</TABLE>
58
<PAGE> 60
<TABLE>
<S> <C>
Storage Storage Machine, FileTek's first storage management system
Machine designed for the COLD market, is the forerunner of
StorHouse/SM.
StorHouse StorHouse is FileTek's patented enterprise-wide software
solution for managing the capture, storage, movement and
access of gigabytes to petabytes of relational and
non-relational atomic data.
StorHouse/RM StorHouse/RM is FileTek's patented relational database
management system (RDBMS) software. It works in conjunction
with FileTek's hierarchical storage management (HSM)
software component, StorHouse/SM, to administer the storage,
access, and movement of relational atomic data.
StorHouse/SM StorHouse/SM is FileTek's patented hierarchical storage
management software for managing terabytes to petabytes of
enterprise-wide atomic data.
SM/API SM/API, or Callable Interface, provides access to StorHouse
from user applications. It is a collection of callable
subroutines that allow an application to perform file
maintenance and status operations and data transfers to and
from StorHouse.
Terabyte A terabyte (TB) is a unit of storage equal to 1,000
gigabytes.
WORM Write Once Read Many (WORM) is a type of optical media that
supports one write and many reads. Data written to WORM
optical is permanent and cannot be erased.
VROM VROM is FileTek's client/server software product for
accessing StorHouse data from Windows applications. VROM
lets end-uses access data from StorHouse just like they
access data on a hard drive or CD-ROM.
VSAC Volume Storage Allocation and Control (VSAC) is FileTek's
patented software component for logically grouping
relational and non-relational data according to specific
access and aging patterns. VSAC tracks available space,
chooses appropriate volumes and allocates or deallocates
physical storage automatically according to user-tunable
parameters.
Web-AMMO Web-AMMO is FileTek's Internet/Intranet report retrieval and
viewing software. It provides World Wide Web access to
documents archived to an AMMO-II system.
</TABLE>
59
<PAGE> 61
FILETEK, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2
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-7
</TABLE>
F-1
<PAGE> 62
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
FileTek, Inc.
We have audited the accompanying consolidated balance sheets of FileTek,
Inc. as of December 31, 1996 and 1997, and the related consolidated statements
of operations, stockholders' equity and cash flows for each of the three years
in the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of FileTek, Inc.
at December 31, 1996 and 1997, and the consolidated results of their operations
and their cash flows for each of the three years in the period ended December
31, 1997, in conformity with generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, in 1997
the Company changed its method of accounting for software revenue recognition.
/s/ Ernst & Young LLP
Vienna Virginia
April 16, 1998, except for Note 13,
as to which the date is June 18, 1998
F-2
<PAGE> 63
FILETEK, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- MARCH 31,
1996 1997 1998
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 31 $ 7,163 $ 10,552
Accounts receivable, less allowance of approximately
$83, $75 and $32 at December 1996 and 1997 and March
31, 1998, respectively............................... 3,371 4,789 3,785
Inventory.............................................. 2,717 5,291 4,571
Receivable from the sale of Common Stock............... -- 50 --
Other.................................................. 111 179 210
Deferred income taxes.................................. -- 235 1,687
-------- -------- --------
Total current assets.............................. 6,230 17,707 20,805
Property and equipment, net................................. 3,867 3,442 3,164
Capitalized software development costs, net................. 1,548 954 792
Other....................................................... 23 28 28
-------- -------- --------
Total assets...................................... $ 11,668 $ 22,131 $ 24,789
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................... $ 863 $ 1,342 $ 578
Accrued liabilities.................................... 1,699 2,536 2,333
Deferred revenues...................................... 2,745 14,812 15,764
Notes payable.......................................... 5,078 -- --
Income taxes payable................................... -- 444 1,343
Current portion of capital lease obligations........... 256 226 104
-------- -------- --------
Total current liabilities......................... 10,641 19,360 20,122
Capital lease obligations, net of current portion........... 294 480 354
-------- -------- --------
Total liabilities................................. 10,935 19,840 20,476
Stockholders' equity:
Preferred Stock, Series A, $.01 par value; 4,500,000
shares authorized; 3,669,986 shares issued and
outstanding at December 31, 1996, 1997 and March 31,
1998................................................. 37 37 37
Preferred Stock, Series B, $.01 par value; 2,400,000
shares authorized; 2,142,973 shares issued and
outstanding at December 31, 1996, 1997 and March 31,
1998................................................. 21 21 21
Common Stock, $.01 par value; 8,400,000 shares
authorized; 7,797, 83,697 and 86,247 shares issued
and outstanding at December 31, 1996, 1997 and March
31, 1998, respectively............................... -- 1 1
Additional capital..................................... 20,814 20,864 21,153
Accumulated deficit.................................... (20,137) (18,628) (16,609)
Unearned compensatory stock options.................... -- -- (287)
Cumulative foreign currency translations............... (2) (4) (3)
-------- -------- --------
Total stockholders' equity........................ 733 2,291 4,313
-------- -------- --------
Total liabilities and stockholders' equity........ $ 11,668 $ 22,131 $ 24,789
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 64
FILETEK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
----------------------------------- -----------------------
1995 1996 1997 1997 1998
--------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Software licenses............. $ 5,055 $ 2,835 $ 5,437 $ 1,338 $ 2,800
Hardware...................... 10,527 5,911 7,486 2,364 2,725
Maintenance and other
services.................... 6,805 9,043 10,776 2,394 3,028
--------- ---------- ---------- ---------- ----------
Total revenues........... 22,387 17,789 23,699 6,096 8,553
--------- ---------- ---------- ---------- ----------
Costs of revenues:
Software licenses............. 896 830 624 125 162
Hardware...................... 5,410 3,955 5,497 2,009 2,006
Maintenance and other
services.................... 4,626 5,846 5,556 1,130 1,770
Write-off of capitalized
software development
costs....................... -- 3,492 -- -- --
--------- ---------- ---------- ---------- ----------
Total costs of
revenues............... 10,932 14,123 11,677 3,264 3,938
--------- ---------- ---------- ---------- ----------
Gross profit....................... 11,455 3,666 12,022 2,832 4,615
--------- ---------- ---------- ---------- ----------
Operating expenses:
Sales and marketing........... 5,763 5,044 3,891 953 1,134
Research and development...... 1,068 3,180 3,646 917 929
General and administrative.... 1,805 1,746 2,148 435 691
--------- ---------- ---------- ---------- ----------
Total operating
expenses............... 8,636 9,970 9,685 2,305 2,754
--------- ---------- ---------- ---------- ----------
Income (loss) from operations...... 2,819 (6,304) 2,337 527 1,861
--------- ---------- ---------- ---------- ----------
Other income (expense):
Interest income............... 10 4 29 -- 137
Interest expense.............. (518) (478) (590) (164) (20)
Capitalized interest.......... 256 44 11 11 --
Other income.................. 148 73 37 11 41
--------- ---------- ---------- ---------- ----------
Total other income
(expense).............. (104) (357) (513) (142) 158
--------- ---------- ---------- ---------- ----------
Income (loss) before provision for
income taxes..................... 2,715 (6,661) 1,824 385 2,019
Provision for income taxes......... 18 47 315 51 --
--------- ---------- ---------- ---------- ----------
Net income (loss).................. $ 2,697 $ (6,708) $ 1,509 $ 334 $ 2,019
========= ========== ========== ========== ==========
Basic net income (loss) per
share............................ $1,047.47 $(1,156.89) $ 187.00 $ 42.79 $ 23.67
========= ========== ========== ========== ==========
Diluted net income (loss) per
share............................ $ 0.31 $(1,156.89) $ 0.17 $ 0.04 $ 0.21
========= ========== ========== ========== ==========
Weighted average shares outstanding
basic............................ 2,575 5,798 8,070 7,797 85,285
========= ========== ========== ========== ==========
Weighted average shares outstanding
diluted.......................... 8,787,281 5,798 8,777,740 8,838,108 9,813,822
========= ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 65
FILETEK, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SERIES A SERIES B
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
------------------ ------------------ --------------- ADDITIONAL ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
--------- ------ --------- ------ ------ ------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1994........................ 3,669,986 $37 2,142,973 $21 2,098 $-- $20,809 $(16,126)
Exercise of stock options..... -- -- -- -- 1,500 -- 1 --
Net income.................... -- -- -- -- -- -- -- 2,697
Foreign currency
translations................ -- -- -- -- -- -- -- --
--------- --- --------- --- ------ --- ------- --------
Balance at December 31,
1995........................ 3,669,986 37 2,142,973 21 3,598 -- 20,810 (13,429)
Exercise of stock options..... -- -- -- -- 4,199 -- 4 --
Net loss...................... -- -- -- -- -- -- -- (6,708)
Foreign currency
translations................ -- -- -- -- -- -- -- --
--------- --- --------- --- ------ --- ------- --------
Balance at December 31,
1996........................ 3,669,986 37 2,142,973 21 7,797 -- 20,814 (20,137)
Exercise of stock options..... -- -- -- -- 75,900 1 50 --
Net income.................... -- -- -- -- -- -- -- 1,509
Foreign currency
translations................ -- -- -- -- -- -- -- --
--------- --- --------- --- ------ --- ------- --------
Balance at December 31,
1997........................ 3,669,986 37 2,142,973 21 83,697 1 20,864 (18,628)
Exercise of stock options
(unaudited)................. -- -- -- -- 2,550 -- 2 --
Net income (unaudited)........ -- -- -- -- -- -- -- 2,019
Foreign currency translations
(unaudited)................. -- -- -- -- -- -- -- --
Issuance of compensatory stock
options (unaudited)......... -- -- -- -- -- -- 287 --
--------- --- --------- --- ------ --- ------- --------
Balance at March 31, 1998
(unaudited)................. 3,669,986 $37 2,142,973 $21 86,247 $ 1 $21,153 $(16,609)
========= === ========= === ====== === ======= ========
<CAPTION>
CUMULATIVE
UNEARNED FOREIGN TOTAL
COMPENSATORY CURRENCY STOCKHOLDERS'
STOCK OPTIONS TRANSLATIONS EQUITY
------------- ------------ -------------
<S> <C> <C> <C>
Balance at December 31,
1994........................ $ -- $(2) $4,739
Exercise of stock options..... -- -- 1
Net income.................... -- -- 2,697
Foreign currency
translations................ -- (1) (1)
----- --- ------
Balance at December 31,
1995........................ -- (3) 7,436
Exercise of stock options..... -- -- 4
Net loss...................... -- -- (6,708)
Foreign currency
translations................ -- 1 1
----- --- ------
Balance at December 31,
1996........................ -- (2) 733
Exercise of stock options..... -- -- 51
Net income.................... -- -- 1,509
Foreign currency
translations................ -- (2) (2)
----- --- ------
Balance at December 31,
1997........................ -- (4) 2,291
Exercise of stock options
(unaudited)................. -- -- 2
Net income (unaudited)........ -- -- 2,019
Foreign currency translations
(unaudited)................. -- 1 1
Issuance of compensatory stock
options (unaudited)......... (287) -- --
----- --- ------
Balance at March 31, 1998
(unaudited)................. $(287) $(3) $4,313
===== === ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 66
FILETEK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------ -------------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)............................. $ 2,697 $ (6,708) $ 1,509 $ 334 $ 2,019
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization................. 1,821 2,222 2,183 522 556
Deferred income taxes......................... -- -- (235) -- (1,452)
Foreign currency translations................. (1) 1 (2) (1) 1
Write-off of capitalized software development
costs....................................... -- 3,492 -- -- --
Changes in operating assets and liabilities:
Accounts receivable, net................. (1,244) 1,987 (1,418) (2,121) 1,004
Inventory, net........................... (683) (702) (2,574) 702 720
Other assets............................. 400 87 (73) (111) (31)
Accounts payable......................... 82 24 479 551 (764)
Accrued expenses......................... 236 (109) 837 417 (203)
Deferred revenue......................... 1,631 (343) 12,067 (546) 952
Income taxes payable..................... -- -- 444 47 899
-------- -------- -------- ------- -------
Net cash provided by (used in) operating
activities.................................. 4,939 (49) 13,217 (206) 3,701
INVESTING ACTIVITIES
Purchase of property and equipment............ (1,060) (1,399) (707) (345) (116)
Capitalized software development costs........ (3,138) (534) (16) (16) --
-------- -------- -------- ------- -------
Net cash used in investing activities......... (4,198) (1,933) (723) (361) (116)
FINANCING ACTIVITIES
Borrowings from related parties............... 8,751 6,257 4,587 640 --
Repayments of borrowings from related
parties..................................... (7,795) (5,113) (6,687) -- --
Borrowings from banks......................... 16,367 18,181 11,941 3,890 --
Repayment of borrowings from banks............ (17,767) (17,003) (14,919) (3,880) --
Repayment of capital lease obligations........ (295) (334) (285) (93) (248)
Proceeds from notes receivable for issuance of
common stock................................ -- -- -- -- 50
Proceeds from issuance of stock............... 1 4 1 -- 2
-------- -------- -------- ------- -------
Net cash provided by (used in) financing
activities.................................. (738) 1,992 (5,362) 557 (196)
-------- -------- -------- ------- -------
Net increase (decrease) in cash and cash
equivalents................................. 3 10 7,132 (10) 3,389
Cash and cash equivalents at beginning of
period...................................... 18 21 31 31 7,163
-------- -------- -------- ------- -------
Cash and cash equivalents at end of period.... $ 21 $ 31 $ 7,163 $ 21 $10,552
======== ======== ======== ======= =======
Supplemental cash flow information:
Interest paid............................ $ 518 $ 372 $ 670 $ 67 $ 16
======== ======== ======== ======= =======
Income taxes paid........................ $ 8 $ 44 $ 99 $ 4 $ 553
======== ======== ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 67
FILETEK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF OPERATIONS
FileTek, Inc. ("the Company") was incorporated on May 1, 1984 under the
laws of Delaware. The Company develops, markets and supports integrated data
storage and access management solutions that allow organizations to meet their
business intelligence needs through efficient collection, storage and management
of, and timely, shared access to, massive amounts of data at their most granular
level ("atomic data"). The Company has a wholly-owned subsidiary, FileTek UK
Limited, which is primarily involved in the marketing of the Company's products
in the U.K. and Europe.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiary. Upon consolidation, all
intercompany accounts and transactions are eliminated.
STATEMENT OF CASH FLOWS
For purposes of the statement of cash flows, cash equivalents are defined
as highly liquid investments with original maturities of three months or less.
INVENTORY
Inventory is stated at the lower of cost or market value on a specific
identification basis which approximates first-in, first-out. Work-in-process
inventory includes cost of materials, direct labor and manufacturing overhead.
REVENUE RECOGNITION
During October 1997, the Accounting Standards Executive Committee ("AcSEC")
of the American Institute of Certified Public Accountants issued Statement of
Position 97-2 ("SOP 97-2"), Software Revenue Recognition. Effective January 1,
1997, the Company elected early adoption of SOP 97-2 and Statement of Position
98-4 ("SOP 98-4"), Deferral of the Effective Date of a Provision of SOP 97-2,
Software Revenue Recognition. As permitted by SOP 97-2, prior year financial
statements have not been restated to reflect the change in accounting method.
There is no cumulative effect as of January 1, 1997, as a result of adopting SOP
97-2.
SOP 97-2, which supersedes Statement of Position 91-1, Software Revenue
Recognition, requires revenue earned on software arrangements involving multiple
elements (i.e., software products, upgrades/enhancements, postcontract customer
support ("PCS"), installation, training, etc.) to be allocated to each element
based on the relative fair values of the elements. The relative fair value of
the elements is determined based on vendor-specific objective evidence ("VSOE").
VSOE as defined by SOP 97-2, is limited to the price charged when the element is
sold separately or if the element is not yet sold separately, the price set by
management having the relevant authority. If VSOE does not exist for the
allocation of revenue to the various elements of
F-7
<PAGE> 68
FILETEK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the arrangement, all revenue from the arrangement should be deferred until the
earlier of the point at which (1) such VSOE does exist or (2) all elements of
the arrangement are delivered.
During March 1998, AcSEC issued SOP 98-4 which defers for one year the
implementation of the provisions of SOP 97-2, which limit what is considered
VSOE. AcSEC is reconsidering the definition of VSOE and may amend SOP 97-2 to
incorporate a revised definition before the one-year deferral in SOP 98-4
expires. SOP 98-4 continues to acknowledge that the price charged for an element
when it is sold separately represents the best evidence of VSOE of fair value,
but recognizes that it is not the only evidence of VSOE fair value.
For arrangements where the Company has established VSOE for hardware,
software licenses and PCS revenues, the Company recognizes hardware revenues and
software license fees, assuming collectibility is probable, at the later of
product shipment to the customer or when significant obligations, if any, have
been fulfilled. Revenues on follow-on sales to existing customers are generally
recognized, assuming collectibility is probable, upon shipment. PCS revenues are
deferred for PCS warranty periods and are recognized over the PCS period.
For arrangements for which VSOE has not been established and the only
undelivered element is PCS, the Company recognizes the revenues for the entire
arrangement ratably over the PCS period.
Maintenance and other services revenues are recognized ratably over the
contractual period as the services are performed. Operating lease revenues are
recognized ratably over the lease term. Direct costs include raw materials,
direct labor, other direct costs, and manufacturing overhead.
As of December 31, 1997 and March 31, 1998, approximately $3,160,000 and
$3,726,000 of inventory and $9,350,000 and $10,794,000 of deferred revenues,
respectively, were due to the adoption of SOP 97-2, as amended by SOP 98-4. The
adoption of SOP 97-2 for any years prior to the year ended December 31, 1997
would have no material impact on the Company's financial results for the years
ended December 31, 1995 and 1996.
DEFERRED REVENUES
The Company records deferred revenues for advance billings while complying
with the aforementioned revenue recognition policies.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization on
property and equipment, spare parts and purchased computer software are
calculated on the straight-line method over the estimated useful lives of the
assets of four to five years. Amortization on equipment under capital leases is
computed under straight-line or accelerated methods in order to result in net
book value that does not exceed any related purchase option price or any
estimated future residual value.
SOFTWARE DEVELOPMENT COSTS
Certain software development costs are capitalized when incurred.
Capitalization of software development costs begins upon the establishment of
technological feasibility. The establishment of technological feasibility and
the ongoing assessment of recoverability of capitalized software development
costs requires considerable judgment by management with respect to certain
external factors, including, but not limited to, technological feasibility,
anticipated future gross revenues, estimated economic life and changes in
software and hardware technologies. The Company amortizes capitalized software
costs on the straight-line method over the shorter of three years or the
remaining estimated economic life of the product.
F-8
<PAGE> 69
FILETEK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During the years ended December 31, 1995, 1996, and 1997 and for the three
months ended March 31, 1997 and 1998, the Company capitalized approximately,
$3,138,000, $534,000, $16,000, $16,000 and $0 respectively, of software
development costs and amortized approximately, $646,000, $798,000, $610,000,
$125,000 and $162,000, respectively, of such software development costs to cost
of revenues. Software development costs also include capitalized interest which
is amortized over the straight-line method over the shorter of three years or
the remaining estimated economic life of the product. All other research and
development costs are charged to expense as incurred.
IMPAIRMENT OF LONG-LIVED ASSETS
At each balance sheet date, management determines whether any property and
equipment and any other assets have been impaired based on the criteria
established in Statement of Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of.
The Company made no adjustments to the carrying values of the assets during the
years ended December 31, 1995 and 1997. During 1996, the Company wrote-off
approximately $3,492,000 of capitalized software development costs as a result
of a reassessment of the recoverability of these costs.
INCOME TAXES
The Company provides for income taxes in accordance with the liability
method. Under this method, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
EARNING (LOSS) PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share ("SFAS No. 128").
SFAS No. 128 replaced the calculation of primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants, and convertible securities. Diluted earnings per share is very similar
to the previously reported fully diluted earnings per share. All earnings (loss)
per share amounts for all periods have been presented, and where appropriate,
restated to conform to the SFAS No. 128 requirements.
Basic and diluted earnings per share is also computed pursuant to SEC Staff
Accounting Bulletin No. 98 ("SAB 98"). SAB 98 requires that all equity
instruments issued at nominal prices, prior to the effective date of an initial
public offering, be included in the calculation of basic and diluted earnings
(loss) per share as if they were outstanding for all periods presented. To date
the Company has not had any nominal issuances or grants at nominal prices.
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, ("SFAS No. 123"). SFAS No. 123 allows companies to account for
stock-based compensation either under the new provisions of SFAS No. 123 or
under the provisions of Accounting Principals Board Opinion No. 25, Accounting
for Stock Issued to Employees ("APB No. 25"), but requires pro forma disclosures
in the footnotes to the consolidated financial statements as if the measurement
provisions of SFAS No. 123 had been adopted. The Company accounts for its
stock-based compensation in accordance with APB No. 25. As such, the adoption of
SFAS No. 123 did not impact the Company's consolidated financial condition or
results of operations.
F-9
<PAGE> 70
FILETEK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
RECENT PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS
No. 130"), which establishes standards for reporting the components of
comprehensive income and requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
included in a financial statement that is displayed with the same prominence as
other financial statements. Comprehensive income includes net income as well as
certain non-owners items that are reported directly within a separate component
of stockholders' equity. The provisions of SFAS No. 130 are effective beginning
with 1998 financial statements. These disclosure requirements will not have a
material impact on the Company's consolidated financial position or results of
operations.
The Company intends to adopt Statement of Financial Accounting Standards
No. 131, Disclosure about Segments of an Enterprise and Related Information
("SFAS No. 131"), in fiscal year 1998. SFAS No. 131 changes the way companies
report segment information and requires segments to be determined based on how
management measures performance and makes decisions about allocating resources.
The adoption of SFAS No. 131 is not expected to materially impact the Company's
financial position or results of operations.
In March 1998, AcSEC issued Statement of Position 98-1 ("SOP 98-1"),
Accounting for the Costs of Computer Software Developed For or Obtained for
Internal Use. SOP 98-1 is effective for the Company beginning after January 1,
1998. SOP 98-1 will require the capitalization of certain costs incurred after
the date of adoption in connection with developing or obtaining software for
internal-use. The Company currently expenses such costs as incurred. The Company
has not yet assessed what the impact of SOP 98-1 will be of the Company's future
earnings or financial position.
INTERIM FINANCIAL STATEMENTS
The accompanying unaudited interim financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. Operating results for the three month period ended March 31,
1998 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1998.
3. PROPERTY AND EQUIPMENT
Property and equipment, at cost, including equipment under capital lease
obligations, consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1997
------ ------
<S> <C> <C>
Equipment................................................... $4,851 $5,294
Spare parts................................................. 3,516 4,210
Purchased software and license agreements................... 695 701
Office furniture and equipment.............................. 377 382
------ ------
9,439 10,587
Less accumulated depreciation and amortization.............. 5,572 7,145
------ ------
$3,867 $3,442
====== ======
</TABLE>
F-10
<PAGE> 71
FILETEK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. ACCRUED LIABILITIES
Accrued liabilities consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1997
------ ------
<S> <C> <C>
Accrued payroll and related costs........................... $ 459 $ 602
Accrued bonuses............................................. -- 648
Accrued vacation............................................ 144 144
Accrued sales tax........................................... 188 299
Accrued maintenance costs................................... 511 388
Accrued interest............................................ 108 13
Other accrued expenses...................................... 289 442
------ ------
$1,699 $2,536
====== ======
</TABLE>
5. INCOME TAXES
The components of the provision (benefit) for income taxes are as follows
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
--------------------- ---------------
1995 1996 1997 1997 1998
---- ---- ----- ---- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current:
Federal............................................ $18 $20 $ 235 $22 $ 1,189
State.............................................. -- 27 315 29 263
--- --- ----- --- -------
Total current.............................. 18 47 550 51 1,452
Deferred:
Federal............................................ -- -- (235) -- (1,189)
State.............................................. -- -- -- -- (263)
--- --- ----- --- -------
Total deferred............................. -- -- (235) -- (1,452)
--- --- ----- --- -------
Total provision for income taxes........... $18 $47 $ 315 $51 $ --
=== === ===== === =======
</TABLE>
F-11
<PAGE> 72
FILETEK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Significant components of the Company's deferred tax liabilities and assets
are (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
----------------- -----------
1996 1997 1998
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax liabilities:
Capitalized software development costs........... $ 588 $ 362 $ 301
Cost of goods sold deferred in accordance with
SOP 97-2....................................... -- 1,199 1,416
Tax in excess of book depreciation............... 342 -- --
Other............................................ 27 23 22
------- ------- -------
Total deferred tax liabilities.............. 957 1,584 1,739
------- ------- -------
Deferred tax assets:
Deferred revenues................................ 246 4,413 5,109
Accrued vacation................................. 55 55 96
Book in excess of tax depreciation............... -- 118 145
Reserve for obsolete inventory................... 131 310 348
Reserve for doubtful accounts.................... 31 29 12
Unused tax credits............................... 74 -- --
Other............................................ 41 19 18
Alternative minimum tax credit................... -- 235 235
Net operating loss carryforwards................. 4,495 -- --
------- ------- -------
Total deferred tax assets................... 5,073 5,179 5,963
Valuation allowance for deferred tax assets...... (4,116) (3,360) (2,537)
------- ------- -------
Net deferred tax assets.......................... 957 1,819 3,426
------- ------- -------
Total....................................... $ -- $ 235 $ 1,687
======= ======= =======
</TABLE>
F-12
<PAGE> 73
FILETEK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 31, 1996, the Company had available tax net operating loss
carryforwards of approximately $10,636,000, which were utilized during the year
ended December 31, 1997. In 1996, the valuation allowance primarily applied to
the net operating loss carryforwards. In 1997, the valuation allowance primarily
applied to deferred tax assets arising from deferred revenues. The valuation
allowance increased by approximately $2,642,000 and decreased by approximately
$756,000 for the years ended December 31, 1996 and 1997, respectively.
At December 31, 1995 and 1996, the Company had unused tax credits of
approximately $74,000 which were utilized during the year ended December 31,
1997. At December 31, 1997, the Company had unused alternative minimum tax
credits of approximately $235,000 that are available to offset future
alternative minimum taxes payable.
The following is a summary of the items that caused recorded income taxes
to differ from taxes computed using the statutory federal income tax rate for
the years ended December 31, 1995, 1996 and 1997 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------ ---------------
1995 1996 1997 1997 1998
----- ----- ------ ------ -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Tax expense (benefit) at statutory
rate................................... 34.0 (34.0) 34.0 34.0 34.0
Effect of:
State income tax, net............... -- 0.3 11.2 5.0 4.7
Other............................... 0.5 0.5 0.5 0.5 0.5
Valuation allowance................. (33.8) 32.5 (28.43) (26.25) (39.2)
----- ----- ------ ------ -----
Provision (benefit) for income taxes..... 0.7 (0.7) 17.27 13.25 --
===== ===== ====== ====== =====
</TABLE>
6. NOTES PAYABLE
Notes payable consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1997
------ ----
<S> <C> <C>
Note payable to the Company's Chairman and Chief Executive
Officer; interest accrues monthly at prime (8.25% at
December 31, 1996) plus 3.5%; principal and unpaid
interest due as follows:
May 10, 1997................................................ $ 210 $--
June 20, 1997............................................... 780 --
August 14, 1997............................................. 35 --
September 5, 1997........................................... 540 --
September 16, 1997.......................................... 400 --
November 14, 1997........................................... 135 --
------ --
2,100 --
Borrowings under bank line of credit........................ 2,978 --
------ --
$5,078 $--
====== ===
</TABLE>
The Company has available a line of credit with a bank which is secured by
the Company's accounts receivable, certain sales-type leases and inventory.
Under the line of credit agreement, the Company may borrow funds, based on
eligible accounts receivable, investment in sales-type leases and inventory
balances, as defined, not to exceed an aggregate borrowing level of $6,000,000.
The Company may obtain up to $400,000 in letters of credit pursuant to the line
of credit agreement. There were no outstanding letters of credit or
F-13
<PAGE> 74
FILETEK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
principal borrowings under the line of credit at December 31, 1997. Any
borrowings under the agreement are due and payable on May 31, 1998, unless
otherwise renewed or extended and may be payable on demand if the Company does
not maintain certain liquidity and net worth conditions. Interest is payable
monthly at the bank's prime rate (8.5 percent at December 31, 1997).
Approximately $181,000, $179,000 and $125,000 in interest payments were made on
the line of credit during the years ended December 31, 1995, 1996 and 1997,
respectively. There was approximately $4,000 and $13,000 of accrued interest due
as of December 31, 1996 and 1997, respectively.
7. COMMITMENTS
The Company leases its facilities under operating leases and certain
equipment and software under capital leases. The facilities' leases provide for
annual minimum rent increases of three percent. Rental expense for operating
leases was approximately $1,013,000, $1,050,000 and $966,000 during the years
ended December 31, 1995, 1996 and 1997, respectively. The Company has posted an
irrevocable letter of credit of $46,000 as a security deposit as of December 31,
1997, which is personally guaranteed by the Company's Chairman and Chief
Executive Officer. Neither the letter of credit obligation nor the personal
marketable securities of the Company's Chairman and Chief Executive Officer used
to collateralize the letter of credit are recorded on the consolidated balance
sheet of the Company at December 31, 1997. This letter of credit requirement
does not encumber the availability of letters of credit under the Company's line
of credit as described in Note 6. The amount of the letter of credit was
increased to $50,000 in April 1998 in accordance with scheduled rent increases.
The Company leases certain equipment under capital leases. The cost of
assets under capital leases and the related accumulated amortization is
$1,001,000, $1,443,000 and $526,000, $709,000, respectively, at December 31,
1996 and 1997, respectively. Amortization expense related to these leases is
included with depreciation and amortization expense in the consolidated
statement of cash flows.
The aggregate liability for future rentals as of December 31, 1997 is as
follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ---------
<S> <C> <C>
1998........................................................ $297 $ 773
1999........................................................ 228 654
2000........................................................ 134 640
2001........................................................ 107 213
2002........................................................ 75 --
---- ------
841 $2,280
======
Less amounts representing interest.......................... 135
----
Present value of minimum lease payments..................... 706
Less current portion........................................ 226
----
$480
====
</TABLE>
8. STOCKHOLDERS' EQUITY
PREFERRED STOCK
During 1989, 1992 and 1994, the Company sold one series of voting preferred
stock ("Series A"). Series A is superior in rights and preferences to all other
classes of stock. Each share of Series A is convertible into one share of Common
Stock at any time subject to adjustment under certain dilutive circumstances.
Conversion is automatic in the event of a public offering of common stock with
aggregate proceeds in excess of
F-14
<PAGE> 75
FILETEK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
specified amounts and per-share prices in excess of $25. See Note 13. Voting
rights are on an as-converted basis. A total of 5,504,979 Common shares have
been reserved for issuance in the event of Series A conversion.
In the event of a merger, consolidation, sale or liquidation, the holders
of Series A will be entitled to distribution preferences of $5 per share, plus
accrued dividends. To date, no dividends have been declared by the Board of
Directors.
During 1990, the Company issued a second series of voting preferred stock
("Series B"). One share of Series B was issued in exchange for each share of
outstanding Common Stock. Series B is subordinate in rights and preferences to
Series A, but is superior in rights and preferences to all other classes of
stock. Each share of Series B is convertible into one share of Common Stock at
any time. Conversion is automatic in the event of a public offering of common
stock with aggregate proceeds in excess of specified amounts and per-share
prices in excess of $12. Voting rights are on an as-converted basis. A total of
3,214,461 Common shares have been reserved for issuance in the event of Series B
conversion.
Series B may be redeemed, at the option on the Company, provided that such
redemption of Series B is approved by a two-thirds vote of the issued and
outstanding shares of Series A. The redemption price for shares of Series B
shall be $5 per share plus all accrued dividends and a prorated $0.50 per share
per year redemption premium.
In the event of a merger, consolidation, sale or liquidation, the holders
of Series B will be entitled to distribution preferences of $5 per share, plus
accrued dividends.
STOCK OPTIONS
The Company has granted nonqualified Common Stock options to certain
employees and directors. Options are granted at the fair market value of the
Company's Common Stock on the date of grant. Generally, the options become
either exercisable over four to five years commencing one year from the date of
the grant or are immediately exercisable, but are subject to repurchase by the
Company on a pro rata basis over four years at the original exercise price. The
options expire seven to ten years from the date of the grant.
Additional information with respect to stock option activity is summarized
as follows:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Outstanding at December 31, 1994......................... 1,514,305 $1.12
Options granted..................................... 250,800 0.68
Options exercised................................... (1,500) 0.67
Options canceled or expired......................... (86,325) 1.11
--------- -----
Outstanding at December 31, 1995......................... 1,677,280 1.05
Options granted..................................... 277,875 0.87
Options exercised................................... (4,199) 0.87
Options canceled or expired......................... (190,689) 1.02
--------- -----
Outstanding at December 31, 1996......................... 1,760,267 1.03
Options granted..................................... 590,907 0.67
Options exercised................................... (75,900) 0.67
Options canceled or expired......................... (351,640) 1.04
--------- -----
Outstanding at December 31, 1997......................... 1,923,634 $0.93
========= =====
Options exercisable at end of year....................... 1,423,463 $1.00
========= =====
</TABLE>
F-15
<PAGE> 76
FILETEK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------- -----------------------------
WEIGHTED-
AVERAGE
REMAINING
CONTRACTUAL WEIGHTED- WEIGHTED-
RANGE OF NUMBER LIFE AVERAGE NUMBER AVERAGE
EXERCISE PRICE OUTSTANDING (IN YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
-------------- ----------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0.67 1,158,279 6.96 $0.67 776,689 $0.67
$0.83 3,750 7.86 0.83 1,872 0.83
$0.87 221,380 8.28 0.87 112,840 0.87
$1.33 464,775 5.79 1.33 456,612 1.33
$2.67 75,450 1.29 2.67 75,450 2.67
--------- ---- ----- --------- -----
$0.67 -- $2.67 1,923,634 6.61 $0.93 1,423,463 $1.00
========= ==== ===== ========= =====
</TABLE>
There were 1,423,463 options exercisable at December 31, 1997, of which
225,625 options were subject to repurchase by the Company at the original
exercise price. At December 31, 1997, 1,923,634 Common shares have been reserved
for issuance upon exercise of the options and 326,362 Common shares have been
reserved for future grants.
Had compensation cost for the Company's stock option plans been determined
based upon the fair value at the grant date for awards under the plans
consistent with the methodology prescribed under SFAS No. 123, the Company's net
income (loss) and earnings (loss) per share would have been the amounts
indicated below (in thousands, except per share data):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1995 1996 1997
--------- ----------- ---------
<S> <C> <C> <C>
Net income (loss) and earnings (loss) per share as
would be reported under SFAS No. 123:
Net income (loss)............................ $ 2,688 $ (6,731) $ 1,222
Basic net income (loss) per share............ $1,043.88 $ (1,160.92) $ 151.43
Diluted net income (loss) per share.......... $ 0.31 $ (1,160.92) $ 0.14
</TABLE>
The effect of applying SFAS No. 123 on 1997 pro forma net income (loss) as
stated above is not necessarily representative of the effects on reported net
income (loss) for future years due to, among other things, (1) the vesting
period of the stock options and (2) the fair value of additional stock options
in future years. The fair value of the options granted during 1995 are estimated
at $0.20 per share on the date of grant using the minimum value option-pricing
model with the following assumptions: dividend yield 0%, risk-free interest rate
of 6.00% and expected life of 6 years. The fair value of the options granted
during 1996 are estimated at $0.25 per share on the date of grant using the
minimum value option-pricing model with the following assumptions: dividend
yield 0%, risk-free interest rate of 6.00% and expected life of 6 years. The
fair value of the options granted during 1997 are estimated at $0.19 per share
on the date of grant using the minimum value option-pricing model with the
following assumptions: dividend yield 0%, risk-free interest rate of 6.00% and
expected life of 6 years.
During the year ended December 31, 1997, employees and directors exercised
75,000 options to purchase Common Stock in exchange for notes receivable
totaling $50,000. Prior to March 31, 1998, the notes receivable were repaid by
these individuals.
F-16
<PAGE> 77
FILETEK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
UNEARNED COMPENSATORY STOCK OPTIONS (UNAUDITED)
The Company applies APB No. 25 in accounting for the stock option plan,
and, accordingly, recognizes compensation expense for the difference between the
deemed fair value of the underlying Common Stock and the grant price of the
option at the date of grant. During the three months ended March 31, 1998, the
Company granted 60,225 options to purchase Common Stock. These options have a
weighted-average exercise price of $3.32. During the three months ended March
31, 1998, the Company recorded unearned compensatory stock options of $287,000
for the difference between the option exercise price and the deemed fair value
on the date of grant of stock options. The Company is amortizing such amounts
ratably over the vesting period of the options, which is generally four years.
9. RELATED PARTY TRANSACTIONS
Centennial Computer Corporation ("Centennial") and the Company are related
by common management and ownership. Centennial made loans to the Company during
the years ended December 31, 1995, 1996 and 1997 totaling approximately
$7,416,000, $4,157,000 and $3,947,000, respectively, which have been repaid as
of December 31, 1997. Interest expense accrued and paid on the loans was
approximately $105,000, $74,000 and $80,000 for the years ended December 31,
1995, 1996 and 1997, respectively.
Centennial also leases computer equipment to the Company under obligations
classified as capital leases. Decreasing monthly installments beginning at
approximately $17,000, including interest at 12 to 18 percent, are due through
December 1998. The capital lease obligation to Centennial was approximately
$330,000 and $217,000 at December 31, 1996 and 1997, respectively. Interest
expensed and paid on the capital leases for the years ended December 31, 1995,
1996 and 1997 was approximately $51,000, $52,000 and $44,000, respectively.
During March 1998, the Company repaid the entire capital lease obligation to
Centennial.
In addition to the financing activities discussed above, the companies
prorate the costs of shared facilities based on employee counts. Centennial
reimbursed the Company approximately $38,000, $36,000 and $42,000 for its share
of facilities during the years ended December 31, 1995, 1996 and 1997,
respectively.
During years ended December 31, 1995, 1996 and 1997, the Company's Chairman
and Chief Executive Officer made loans totaling $1,335,000, $2,100,000 and
$640,000, respectively, to the Company. During the years ended December 31,
1995, 1996 and 1997, the Company made principal and interest payments totaling
approximately $106,000, $956,000 and $2,382,000. In May 1997, this individual
assigned these subordinated notes to a related family entity under the same
terms and conditions. Interest expense incurred on these notes was approximately
$282,000 during 1997, including interest accrued on notes entered into during
both 1996 and 1997. There was approximately $103,000 of accrued interest at
December 31, 1996. All outstanding loans and accrued interest were repaid in
full during 1997 and there was no outstanding balance at December 31, 1997.
10. MAJOR CUSTOMERS
During 1995, three customers accounted for an aggregate of approximately
37% of the Company's revenues. During 1996, two customers accounted for an
aggregate of approximately 23% of the Company's revenues. During 1997, two
customers accounted for an aggregate of approximately 31% of the Company's
revenues.
11. RETIREMENT PLAN
Effective January 1, 1990, the Company established a defined contribution
plan (the "Plan") which covers substantially all the employees of the Company
and qualifies as a deferred salary arrangement under Section 401(k) of the
Internal Revenue Code. The Company may make matching contributions at its
discretion of up to 25% of the participants' first $1,200 contribution. Employee
contributions are limited to the
F-17
<PAGE> 78
FILETEK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Internal Revenue Service annual contribution limit ($9,500 for calendar year
1997). The Company made contributions of $22,000, $22,000 and $19,000 to the
Plan for the years ended December 31, 1995, 1996 and 1997, respectively.
12. NET INCOME (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted net
income (loss) per share (in thousands, except share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------------ -----------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Numerator:
Net income (loss).......................... $ 2,697 $ (6,708) $ 1,509 $ 334 $ 2,019
========== ========== ========== ========== ==========
Denominator:
Denominator for basic earnings per share --
weighted-average shares.................. 2,575 5,798 8,070 7,797 85,285
Effect of dilutive securities:
Employee stock options..................... 65,266 -- 50,230 110,871 1,046,869
Unearned compensatory stock options........ -- -- -- -- (37,772)
Conversion of Series A Preferred Stock..... 5,504,979 -- 5,504,979 5,504,979 5,504,979
Conversion of Series B Preferred Stock..... 3,214,461 -- 3,214,461 3,214,461 3,214,461
---------- ---------- ---------- ---------- ----------
Dilutive potential common shares:.............. 8,784,706 -- 8,769,670 8,830,311 9,728,537
---------- ---------- ---------- ---------- ----------
Denominator for diluted earnings per
share -- adjusted weighted-average
shares................................... 8,787,281 5,798 8,777,740 8,838,108 9,813,822
========== ========== ========== ========== ==========
Basic net loss per share................... $ 1,047.47 $(1,156.89) $ 187.00 $ 42.79 $ 23.67
========== ========== ========== ========== ==========
Diluted net loss per share................. $ 0.31 $(1,156.89) $ 0.17 $ 0.04 $ 0.21
========== ========== ========== ========== ==========
</TABLE>
13. SUBSEQUENT EVENTS
PREFERRED STOCK
On June 12, 1998, the stockholders of the Company approved an amendment to
the Company's certificate of incorporation to modify the conversion rights of
Series A and Series B. Effective June 17, 1998, the conversion price for Series
A is $3.33 per share and the conversion price for Series B is $3.33 per share.
In addition, each share of Series A and Series B shall automatically convert
into shares of Common Stock upon the consummation of an initial public offering
in which the public offering price is not less than $8.00 per share, and the net
proceeds to the Company are not less than $15,000,000.
COMMON STOCK
On June 12, 1998, the Board of Directors approved a 3-for-2 stock split in
the form of a stock dividend of the Company's Common Stock, which became
effective on such date. All references in the accompanying consolidated
financial statements to the number of shares of Common Stock and per-share
amounts have been restated to reflect the split.
STOCK OPTIONS
In June 1998, the Company adopted the 1998 Omnibus Plan (the "Omnibus
Plan"). Pursuant to the Omnibus Plan, employees, officers, directors of the
Company or any affiliate of the Company may receive options to purchase Common
Stock. The Omnibus Plan is administered by the Board of Directors, or by such
committee or committees as may be appointed by the Board of Directors. 1,500,000
shares have been reserved for issuance under the Omnibus Plan.
F-18
<PAGE> 79
======================================================
No dealer, sales representative or other person has been authorized to give
any information or to make any representations in connection with this Offering
other than those contained in this Prospectus, and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Company or the Underwriters. This Prospectus does not constitute an offer
to sell or a solicitation of an offer to buy any securities other than the
shares of Common Stock to which it relates or an offer to, or a solicitation of,
any person in any jurisdiction in which such offer or solicitation would be
unlawful. Neither the delivery of this Prospectus nor any sale made hereunder
shall, under any circumstances, create any implication that there has been no
changes in the affairs of the Company or that the information contained herein
is correct as of any time subsequent to the date hereof.
----------------------------
TABLE OF CONTENTS
----------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................... 3
Risk Factors......................... 6
Use of Proceeds...................... 15
Dividend Policy...................... 15
Capitalization....................... 16
Dilution............................. 17
Selected Consolidated Financial
Data............................... 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 19
Business............................. 30
Management........................... 40
Certain Transactions................. 48
Principal and Selling Stockholders... 49
Description of Capital Stock......... 51
Shares Eligible for Future Sale...... 53
Underwriting......................... 55
Legal Matters........................ 56
Experts.............................. 56
Additional Information............... 56
Glossary............................. 58
Index to Financial Statements........ F-1
Until , 1998 (25 days
after the date of this Prospectus), all
dealers effecting transactions in the
Common Stock, whether or not participating
in this distribution, may be required to
deliver a Prospectus. This is in addition
to the obligation of dealers to deliver a
Prospectus when acting as Underwriters and
with respect to their unsold allotments or
subscriptions.
</TABLE>
======================================================
======================================================
SHARES
[FILETEK LOGO]
COMMON STOCK
----------------------------
PROSPECTUS
----------------------------
NationsBanc Montgomery
Securities LLC
BancAmerica
Robertson Stephens
FAC/Equities
, 1998
======================================================
<PAGE> 80
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses to be paid by the
Registrant in connection with the sale and distribution of the securities
offered hereby, other than underwriting discounts and commissions. All of the
amounts shown are estimated except the Securities and Exchange Commission
registration fee, the NASD filing fee and the Nasdaq listing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission filing fee............... $ 14,750
National Association of Securities Dealers, Inc. filing
fee....................................................... 5,500
Nasdaq/NNM listing fee...................................... *
Transfer agent's and registrar's fees....................... *
Printing expenses........................................... 200,000
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Blue Sky filing fees and expenses........................... 10,000
Miscellaneous expenses...................................... *
--------
Total............................................. $
========
</TABLE>
- ---------------
*To be added by amendment.
All of the above expenses will be paid by the Registrant.
14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Subsection (a) of Section 145 of the Delaware General Corporation Law
empowers a corporation to indemnify any person who was or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the corporation) by reason of the fact that he is or was
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 expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he 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 expenses (including attorneys' fees) actually and reasonably
incurred by him in connection with the defense or settlement of such action or
suit if he acted in good faith and in a manner he reasonably believed to be in
or not opposed to best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery or the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all of the circumstances of the
case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Court of Chancery or such other court shall deem proper.
Section 145 further provides that to the extent a director or officer of a
corporation has been successful in the defense of any action, suit or proceeding
referred to in subsection (a) and (b) or in the defense of any
II-1
<PAGE> 81
claim, issue or matter therein, he shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection therewith; that the indemnification provided by Section 145 shall not
be deemed exclusive of any other rights to which the indemnified party may be
entitled; and that the scope of indemnification is extended to directors,
officers, employees or agents of a constituent corporation absorbed in a
consolidation or merger and persons serving in that capacity at the request of
the constituent corporation. Section 145 also empowers the corporation to
purchase and maintain insurance on behalf of a director or officer of the
corporation against any liability asserted against him or 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 liabilities under
Section 145.
The Registrant has executed indemnification agreements with each of its
officers and directors pursuant to which the registrant has agreed to indemnify
such parties to the full extent permitted by law, subject to certain exceptions,
if such party becomes subject to an action because such party is a director or
officer of the Registrant.
Section 102(b)(7) of the Delaware General Corporation Law enables a
corporation in its certificate of incorporation to limit the personal liability
of members of its board of directors for violation of a director's fiduciary
duty of care. This Section does not, however, limit the liability of a director
for breaching his duty of loyalty, failing to act in good faith, engaging in
intentional misconduct or knowingly violating a law, or from any transaction in
which the director derived an improper personal benefit. This Section also will
have no effect on claims arising under the federal securities laws. The
Registrant's Amended and Restated Certificate of Incorporation limits the
liability of its directors as authorized by Section 102(b)(7).
The Registrant intends to obtain liability insurance for the benefit of its
directors and officers that provides coverage of losses of directors and
officers for liabilities arising out of claims against such persons acting as
directors or officers of the registrant (or any subsidiary thereof) due to any
breach of duty, neglect, error, misstatement, misleading statement, omission or
act done by such directors and officers, except as prohibited by law.
At present, there is no pending litigation or proceeding involving a
director or officer of the Registrant as to which indemnification is being
sought nor is the Registrant aware of any threatened litigation that may result
in claims for indemnification by any officer or director. The form of
Underwriting Agreement filed as Exhibit 1 to this Registration Statement
provides for indemnification by the Underwriters of the Registrant and its
directors and officers, and by the Registrant of the Underwriters, for certain
liabilities arising under the Securities Act of 1933, as amended (the "Act") or
otherwise.
15. RECENT SALES OF UNREGISTERED SECURITIES
Since June 1, 1995, the Registrant has issued unregistered securities in
the transactions described below. Securities issued in such transactions were
offered and sold in reliance upon the exemption from registration under Section
4(2) of the Act, relating to sales by an issuer not involving any public
offering, or under Rule 701 under the Act as transactions made pursuant to a
written compensatory plan or pursuant to a written contract relating to
compensation. The sales of securities were made without the use of an
underwriter and the certificates evidencing the shares bear a restrictive legend
permitting the transfer thereof only upon registration of the shares or an
exemption under the Act. All recipients had adequate access to information about
the Registrant.
(i) Since June 1, 1995, the Registrant has issued 84,149 shares of Common
Stock due to the exercise of options at a weighted average exercise price of
$0.68 per share.
(ii) Since June 1, 1995, the Registrant has issued stock options to
purchase an aggregate of 742,200 shares of its Common Stock under the 1990 Stock
Option Incentive Plan at a weighted average exercise price of $2.07 per share.
(iii) Since June 1, 1995, the Registrant has issued stock options to
purchase an aggregate of 288,750 shares of its Common Stock under the 1990
Non-Statutory Option Plan at a weighted average exercise price of $1.33 per
share.
II-2
<PAGE> 82
(iv) Since June 1, 1995, the Registrant has issued stock options to
purchase an aggregate of 104,757 shares of its Common Stock through separate
option agreements at a weighted average exercise price of $2.15 per share.
16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation of the
Registrant.
3.2 Amended and Restated Bylaws of the Registrant.
4.1* Specimen stock certificate for shares of Common Stock of the
Registrant.
5.1 Form of Opinion of Piper & Marbury L.L.P. regarding legality
of securities being registered.
10.1 Amended and Restated 1990 Stock Option Incentive Plan.
10.2 Amended and Restated 1990 Non-qualified Stock Option Plan.
10.3 1998 Omnibus Stock Plan.
10.4* 1998 Directors' Stock Option Plan.
10.5 Lease Agreement dated April 13, 1993, by and between the
Registrant and Principal Mutual Life Insurance Company.
10.6 First Addendum to Lease Agreement dated September 30, 1993,
by and between the Registrant and Principal Mutual Life
Insurance Company (relating to Exhibit 10.5).
10.7 First Lease Amendment dated July 9, 1997, by and between the
Registrant and Principal Mutual Life Insurance Company
(relating to Exhibit 10.5).
10.8 Loan Agreement dated May 31, 1998, by and between the
Registrant and NationsBank, N.A.
10.9 Revolving Promissory Note issued by the Company on May 31,
1998, to NationsBank, N.A.
10.10 Security Agreement dated August 31, 1994, by and between the
Registrant and/or Filetek UK Limited and NationsBank, N.A.
10.11 Subordination Agreement dated August 31, 1994, by and
between William C. Thompson Revocable Trust, Patsy A.
Thompson Revocable Trust, William C. Thompson, Individually
and/or Patsy A. Thompson, Individually, the Registrant and
NationsBank, N.A.
10.12* Direct Original Equipment Manufacturer Agreement dated
December 9, 1996, by and between the Registrant and Sun
Microsystems Computer Company, a division of Sun
Microsystems, Inc.
10.13* Joint Marketing Agreement dated June 9, 1998, by and between
the Registrant and Storage Technology Corporation.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2 Consent of Piper & Marbury L.L.P. (to be included as part of
Exhibit 5.1 hereto).
23.3 Consent of Patton Boggs LLP.
24.1 Power of Attorney (included in signature pages).
27 Financial Data Schedule.
</TABLE>
- ---------------
* To be filed by amendment.
(B) FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
SCHEDULE DESCRIPTION
-------- -----------
<S> <C>
Schedule II... Valuation and Qualifying Accounts and Reserves
</TABLE>
17. UNDERTAKINGS
A. The undersigned Registrant hereby undertakes to provide to the
Underwriter at the closing specified in the Underwriting Agreement certificates
in such denominations and registered in such names as required by the
Underwriter to permit prompt delivery to each purchaser.
B. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the provisions described in Item 14, or
II-3
<PAGE> 83
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 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 of whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
C. 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 a part of this registration
statement as of the time it was declared effective.
D. 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-4
<PAGE> 84
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Rockville,
State of Maryland, on the 2nd day of July, 1998.
FILETEK, INC.
By: /s/ WILLIAM C. THOMPSON
------------------------------------
William C. Thompson
Chairman of the Board and Chief
Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENT, that each person whose signature appears
below constitutes and appoints William C. Thompson, William P. Loomis and Edwin
M. Martin, Jr., and each of them, his or her true and lawful attorney-in-fact
and agents, with full power of substitution and resubstitution, from such person
and in each person's name, place and stead, in any and all capacities, to sign
any and all amendments (including post-effective amendments) to the Registration
Statement, any Registration Statement relating to this Registration Statement
under Rule 462 and to file the same, with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, full power and authority to do
and perform each and every act and thing requisite and necessary to be done as
fully to all intents and purposes as he or she might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
any of them, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ WILLIAM C. THOMPSON Chairman of the Board and Chief Executive July 2, 1998
- ------------------------------------------ Officer (Principal Executive Officer)
William C. Thompson
/s/ DAVID L. BEAMER President, Chief Operating Officer and July 2, 1998
- ------------------------------------------ Director
David L. Beamer
/s/ WILLIAM P. LOOMIS Vice President, Finance and Administration, July 2, 1998
- ------------------------------------------ Chief Financial Officer, Treasurer and
William P. Loomis Secretary (Principal Accounting
and Financial Officer)
/s/ ELLIOT H. COLE Director July 2, 1998
- ------------------------------------------
Elliot H. Cole
Director July 2, 1998
- ------------------------------------------
Lewis S. Frauenfelder
Director July 2, 1998
- ------------------------------------------
Kenneth W. Simonds
</TABLE>
II-5
<PAGE> 85
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
FILETEK, INC.
<TABLE>
<CAPTION>
BALANCE AT BALANCE
BEGINNING OF AT END OF
CLASSIFICATION PERIOD ADDITIONS DEDUCTIONS PERIOD
-------------- ------------ --------- ---------- ---------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended December 31, 1995.............. 45 55 -- 100
Year ended December 31, 1996.............. 100 19 36(1) 83
Year ended December 31, 1997.............. 83 67 75(1) 75
Reserve for inventory obsolescence:
Year ended December 31, 1995.............. 159 -- 159
Year ended December 31, 1996.............. 159 185 -- 344
Year ended December 31, 1997.............. 344 528 -- 872
</TABLE>
- ---------------
(1) Write off of accounts receivable
S-1
<PAGE> 86
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
FileTek, Inc.
We have audited the consolidated financial statements of FileTek, Inc. as
of December 31, 1996 and 1997 and for each of the three years in the period
ended December 31, 1997 and have issued our report thereon dated April 16, 1998,
except for Note 13, as to which the date is June 18, 1998 (included elsewhere in
this Registration Statement). Our audits also included the financial statement
schedule listed in Item 16(b) of this Registration Statement. The 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,
present fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Vienna, Virginia
April 16, 1998, except Note 13,
as to which the date is June 18, 1998
S-2
<PAGE> 1
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
FILETEK, INC.
(UNDER SECTIONS 242 AND 245 OF THE GENERAL CORPORATION LAW)
(AMENDED AND RESTATED AS OF JUNE 17, 1998)
FILETEK, INC., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware, hereby
certifies as follows:
FIRST: The name of the corporation is FileTek, Inc. FileTek, Inc.
was originally incorporated under the same name, and the original Certificate
of Incorporation of the corporation was filed with the Secretary of State of
the State of Delaware on May 10, 1984.
SECOND: Pursuant to Sections 228, 242 and 245 of the General
Corporation Law of the State of Delaware, this Amended and Restated Certificate
of Incorporation has been adopted and approved by the Directors and
Stockholders of FileTek, Inc., notice to stockholders having been given as
required by Section 228(d) of the General Corporation Law of the State of
Delaware, and hereby restates and integrates and further amends the provisions
of the Certificate of Incorporation of this corporation.
THIRD: The text of the corporation's Restated Certificate of
Incorporation as heretofore amended or supplemented is hereby restated and
further amended to read in its entirety as follows:
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF
FILETEK, INC.
FIRST: The name of the corporation (herein referred to as the
"corporation") is FileTek, Inc.
SECOND: The location of the Registered Office of the corporation in the State
of Delaware is 1209 Orange Street, City of Wilmington, County of New Castle.
The name and address of its Registered Agent in the State of Delaware is The
Corporation Trust Company, 1209 Orange Street, Wilmington, Delaware 19801.
THIRD: The purpose of the corporation is to engage in any lawful act
or activity for which a corporation may be organized under the General
Corporation Law of the State of Delaware.
<PAGE> 2
FOURTH: Capital Stock.
1. Classes of Stock.
1. The total number of all shares of all classes of capital stock which
the corporation shall be authorized to issue is 36,900,000 shares, consisting
of 25,000,000 shares of Common Stock, $.01 par value per share (the "Common
Stock") and 11,900,000 shares of Preferred Stock, $.01 par value per share (the
"Preferred Stock"). The Board of Directors shall have the full authority
permitted by law to fix by resolution the number of shares constituting each
series of capital stock and such voting rights, powers, preferences,
privileges, limitations, options, conversion rights, and relative participating
or other special rights, and the qualifications, limitations or restrictions
thereof, of the Preferred Stock or any series thereof that may be desired and
that have not been fixed in this Certificate of Incorporation.
2. The Common Stock and Preferred Stock may be issued from time to time
for such consideration as may be fixed from time to time by the Board of
Directors, and any and all shares so issued, when the full consideration for
which as fixed by the Board of Directors has been paid or delivered, shall be
deemed fully paid and nonassessable.
3. No holder of Common Stock of the corporation shall be entitled, as
such, as a matter of right to subscribe for or purchase any part of any new or
additional issue of shares of Common Stock of the corporation or any securities
of the corporation convertible into, or evidencing the right to purchase shares
of Common Stock whether now or hereafter authorized, or whether issued for
cash, property or services, or by way of dividend.
1. Preferred Stock. There shall be two classes of currently designated
Preferred Stock, which shall consist of 4,500,000 shares of Preferred Stock
hereby designated Series A Preferred Stock and 2,400,000 shares of Preferred
Stock hereby designated as Series B Preferred Stock (the "Designated Preferred
Stock"). As provided herein, Series A Preferred Stock shall be superior in
rights and preferences to Series B Preferred Stock and to the Common Stock. As
provided herein, Series B Preferred Stock shall be subordinate in rights and
preferences to Series A Preferred Stock but shall be superior in rights and
preferences to the Common Stock.
The relative rights, preferences, privileges and restrictions relating
to the Series A Preferred Stock and the Series B Preferred Stock are as set
forth below:
1. Dividend Rights.
1. When and if dividends are declared by the Board of Directors, the
holders of shares of Series A Preferred Stock shall be entitled to receive
dividends prior and in preference to any payment of any dividend on any other
outstanding shares of the corporation's capital stock, including Series B
Preferred Stock, in an amount equal to any and all dividends declared on any
- 2 -
<PAGE> 3
other outstanding shares of the corporation, whenever funds are legally
available therefor and such dividend shall be payable when and as declared by
the Board of Directors.
2. When and if dividends are declared by the Board of Directors, the
holders of Series B Preferred Stock shall be entitled to receive dividends
prior and in preference to any payment of any dividend on any other outstanding
shares of the corporation's capital stock, with the exception of Series A
Preferred Stock, in an amount equal to any and all dividends declared on any
outstanding shares of the corporation, whenever funds are legally available
therefor and such dividend shall be payable when and as declared by the Board
of Directors.
3. Subject to the above limitations and to the provisions of Section B.6
(a) through (f) of this Article Fourth, dividends may be paid on the Common
Stock or any other junior shares out of any funds legally available for such
purpose when and as declared by the Board of Directors. The term "junior
shares" shall mean any class or series of stock, including Series B Preferred
Stock, junior to the Series A Preferred Stock as to dividends and the
distribution of assets upon liquidation, dissolution, bankruptcy,
reorganization or other insolvency proceeding, or upon the winding up of the
corporation.
2. Liquidation Preference.
(a) In the event of any liquidation, dissolution or
winding up of the corporation, either voluntary or involuntary, the holders of
Series A Preferred Stock shall be entitled to receive, prior and in preference
to any distribution of any of the assets of the corporation to the holders of
shares of the capital stock of the corporation other than Series A Preferred
Stock by reason of their ownership thereof, an amount per share equal to the
sum of (i) $5.00 for each outstanding share of Series A Preferred Stock and
(ii) all previously declared but unpaid dividends on each share of Series A
Preferred Stock. If upon the occurrence of such event, the assets and funds
thus distributed among the holders of the Series A Preferred Stock shall be
insufficient to permit the payment to such holders of the full aforesaid
preferential amounts, then the entire assets and funds of the corporation
legally available for distribution shall be distributed ratably among the
holders of the Series A Preferred Stock in proportion to the amount of such
stock owned by each such holder. The holders of Series A Preferred Stock may,
upon receipt of notice regarding any liquidation, dissolution or winding up of
the corporation and prior to the effectiveness thereof, elect to convert any or
all of their respectively owned shares of Series A Preferred Stock into an
equal number of shares of Common Stock (subject to adjustment in accordance
with Section B.4(c) of this Article Fourth), in which case the shares so
converted would not participate in the liquidation preference described herein,
but would participate in the distribution of the assets of the corporation pro
rata with all other shares of the Common Stock of the corporation issued and
outstanding at such time, to the extent that such assets remain after giving
effect to this Section B.2 (a) and Section B.2 (b) of this Article Fourth.
- 3 -
<PAGE> 4
(b) In the event of any liquidation, dissolution or
winding up of the corporation, either voluntary or involuntary, after giving
effect to Section B.2(a) of this Article Fourth, the holders of Series B
Preferred Stock shall be entitled to receive, prior and in preference to any
distribution of any of the assets of the corporation to the holders of shares
of the capital stock of the corporation other than Series A Preferred Stock or
Series B Preferred Stock by reason of their ownership thereof, an amount per
share equal to the sum of (i) $5.00 for each outstanding share of Series B
Preferred Stock and (ii) all previously declared but unpaid dividends on each
share of Series B Preferred Stock. If upon the occurrence of such event, and
after giving effect to Section B.2(a) of this Article Fourth, the assets and
funds thus distributed among the holders of the Series B Preferred Stock shall
be insufficient to permit the payment to such holders of the full aforesaid
preferential amounts, then the entire remaining assets and funds of the
corporation legally available for distribution shall be distributed ratably
among the holders of the Series B Preferred Stock in proportion to the amount
of such stock owned by each such holder. The holders of Series B Preferred
Stock may, upon receipt of notice regarding any liquidation, dissolution or
winding up of the corporation and prior to the effectiveness thereof, elect to
convert any or all of their respectively owned shares of Series B Preferred
Stock into an equal number of shares of Common Stock (subject to adjustment in
accordance with Section B.4(c) of this Article Fourth), in which case the
shares so converted would not participate in the liquidation preference
described herein, but would participate in the distribution of the assets of
the corporation pro rata with all other shares of the Common Stock of the
corporation issued and outstanding at such time, to the extent that such assets
remain after giving effect to Section B.2(a) of this Article Fourth and this
Section B.2(b).
(c) A consolidation, merger or share exchange by the
corporation with or into any other corporation or corporations, or a sale,
conveyance or disposition of all or substantially all of the assets of the
corporation or the effectuation by the corporation of a transaction or series
of related transactions in which more than 50% of the voting power of the
corporation is disposed of by the corporation, shall be deemed, with relation
to the Series A Preferred Stock, to be a liquidation, dissolution or winding up
within the meaning of this Section B.2, if the holders of more than 50% of the
Series A Preferred Stock outstanding immediately prior to such transaction
elect to have such transaction treated as a liquidation.
(d) A consolidation, merger or share exchange by the
corporation with or into any other corporation or corporations, or a sale,
conveyance or disposition of all or substantially all of the assets of the
corporation or the effectuation by the corporation of a transaction or series
of related transactions in which more than 50% of the voting power of the
corporation is disposed of by the corporation, shall be deemed, with relation
to the Series B Preferred Stock, to be a liquidation, dissolution or winding up
within the meaning of this Section B.2, if (i) the holders of more than 50% of
the Series B Preferred Stock outstanding immediately prior to such transaction
elect to have such transaction treated as a liquidation and (ii) the holders of
more than 50% of the Series A Preferred Stock outstanding immediately prior to
such transaction concur and elect to have such transaction treated as a
liquidation for the purposes of this Section B.2.(d) of this Article Fourth.
- 4 -
<PAGE> 5
3. Redemption. The Series A Preferred Stock is not redeemable.
The Series B Preferred Stock may be redeemed, at the option of the corporation,
at any time after January 1, 1993 provided that such redemption of Series B
Preferred Stock is approved by a two-thirds (2/3rds) vote of the issued and
outstanding shares of Series A Preferred Stock. The redemption price for
shares of Series B Preferred Stock shall be equal to $5.00 per share, plus the
sum of (i) any and all accrued dividends thereon and (ii) a redemption premium
equal in amount to $0.50 per share per year beginning January 1, 1990,
pro-rated to the date of redemption. In the event that the corporation
determines to redeem Series B Preferred Stock, the corporation shall provide
the holders of such stock with written notice, by certified mail, not less than
thirty (30) days prior to the date of such redemption, and upon receipt of such
notice, each holder of the Series B Preferred Stock may elect to convert any or
all such shares, respectively held, into an equal number of shares of Common
Stock.
4. Conversion. The Designated Preferred Stock shall be convertible
into Common Stock only as follows (the "Conversion Rights"):
(a) Time of Conversion.
(i) Each share of Series A Preferred Stock shall, at
any time after the date of issuance, be automatically converted into shares of
Common Stock in accordance with the provisions of subsection B.4 (a)(i) of
this Article Fourth, immediately upon the consummation of the corporation's
sale of its Common Stock in a firmly underwritten public offering of Common
Stock pursuant to a registration statement on Form S-1 under the Securities Act
of 1933, as amended (or any equivalent successor form), the public offering
price of which is not less than $8.00 per share (adjusted to reflect stock
dividends, stock splits or recapitalizations) and the net proceeds to the
corporation from which are not less than $15 million ("Offering").
(ii) Each share of Series A Preferred Stock to be
automatically converted as set forth in Section B.4 (a)(i) of this Article
Fourth, shall be converted into such number of fully paid and nonassessable
shares of Common Stock as is determined by dividing $5.00 by the Conversion
Price at the time in effect for such share. The conversion price per share for
shares of Series A Preferred Stock (the "Conversion Price") initially shall be
$5.00 (before reflecting the split of the corporation's outstanding Common
Stock in the form of a dividend declared by the corporation's Directors on June
12, 1998); provided, however, that the Conversion Price for the Series A
Preferred Stock shall be subject to adjustment as set forth in Section B.4 (c)
of this Article Fourth.
(iii) Each share of Series B Preferred Stock shall,
at any time after the date of issuance of such shares, be automatically
converted into one (1) fully paid and non assessable share of Common Stock
immediately upon the consummation of the corporation's sale of its Common Stock
in an Offering; provided, however, that the number of shares of Common Stock
into which each share of Series B Preferred Stock shall be converted shall be
- 5 -
<PAGE> 6
adjusted, as provided in Section B.4 (e) of this Article Fourth, to reflect any
recapitalization of the Common Stock as described in Section B.4 (e) of this
Article Fourth.
(iv) Upon conversion of any Designated Preferred
Stock, payment shall be made on account of all declared but unpaid dividends on
such Designated Preferred Stock, provided that no such dividend shall be paid
on any shares of Series B Preferred Stock so converted unless and until all
declared but, at the time of such conversion of Series B Preferred Stock,
unpaid dividends on the Series A Preferred Stock have paid to the holders of
Series A Preferred Stock.
(b) Mechanics of Conversion. Immediately upon
consummation of the Offering and automatic conversion pursuant to Section
B.4(a) of this Article Fourth, each holder of Designated Preferred Stock
shall surrender the certificate or certificates therefor, duly endorsed, at
the offices of the corporation or of any transfer agent for the Designated
Preferred Stock, and shall provide the corporation with the name or names in
which the certificate or certificates for shares of Common Stock are to be
issued. The corporation shall, as soon as practicable thereafter, issue and
deliver at such office to such holder of Designated Preferred Stock, or to the
nominee or nominees of such holder, a certificate or certificates for the
number of shares of Common Stock to which such holder shall be entitled as
aforesaid. The certificate or certificates for the shares of Designated
Preferred Stock so converted shall be received by the corporation, and the
person or persons entitled to receive the shares of Common Stock issuable upon
such conversion shall be treated for all purposes as the record holder or
holders of such shares of Common Stock as of such date.
(c) Conversion Price Adjustment of Series A Preferred
Stock. Except as set forth in subsections B.4 (c) (v) of this Article Fourth,
the Conversion Price of the Series A Preferred Stock shall be subject to
adjustment from time to time as follows:
1. (A) If the corporation shall issue any Additional Stock (as defined
below) for a consideration per share less than $5.00 (before reflecting the
split of the corporation's outstanding Common Stock in the form of a dividend
declared by the corporation's Directors on June 12, 1998), and if such per
share issuance price is less than the then effective Conversion Price, the
Conversion Price for all outstanding shares of the Series A Preferred Stock in
effect immediately prior to each such issuance shall forthwith (except as
otherwise provided in this clause (i)) be adjusted to a price for such series
equal to the per share issuance price of such Additional Stock.
(B) No adjustment of the Conversion Price
for the Series A Preferred Stock shall be made in an amount less than one cent
per share, provided that any adjustments which are not required to be made by
reason of this sentence shall be carried forward and shall be either taken into
account in any subsequent adjustment made prior to 3 years from the date of the
event giving rise to the adjustment being carried forward, or, if no such
adjustment is made shall be made at the end of 3 years from the date of the
event giving rise to
- 6 -
<PAGE> 7
the adjustment being carried forward. Except to the limited extent provided
for in subsection B.4 (c) (i) (E) (3) of this Article Fourth, no adjustment of
such Conversion Price pursuant to this subsection B.4 (c) (i) (B) shall have
the effect of increasing the Conversion Price above the Conversion Price in
effect immediately prior to such adjustment.
(C) In the case of the issuance of Common
Stock for cash, the consideration shall be deemed to be the amount of cash paid
therefor before deducting any discounts, commissions or other expenses allowed,
paid or incurred by the corporation for any underwriting or otherwise in
connection with the issuance and sale thereof.
(D) In the case of the issuance of the
Common Stock for consideration in whole or in part other than cash, the
consideration other than cash shall be deemed to be the fair value thereof as
determined by the Board of Directors irrespective of any accounting treatment.
(E) In the case of the issuance of options
to purchase or rights to subscribe for Common Stock, securities by their terms
convertible into or exchangeable for Common Stock (including any new issuance
of shares of Series B Preferred Stock other than the issuance of Series B
Preferred Stock upon the Conversion of shares of Common Stock into Series B
Preferred Stock as provided for in this Section B of this Article Fourth) or
options to purchase or rights to subscribe for such convertible or exchangeable
securities (which are not excluded from the definition of Additional Stock),
the following provisions shall apply:
1. The aggregate maximum number of
shares of Common Stock deliverable upon exercise of such options to purchase or
rights to subscribe for Common Stock shall be deemed to have been issued at the
time such options or rights were issued and for a consideration equal to the
consideration (determined in the manner provided in subsections B.4 (c) (i) (C)
and B.4 (c) (i) (D)) of this Article Fourth, if any, received by the
corporation upon the issuance of such options or rights plus the minimum
purchase price provided in such options or rights for the Common Stock covered
thereby.
2. The aggregate maximum number of
shares of Common Stock deliverable upon conversion of or in exchange for any
such convertible or exchangeable securities or upon the exercise of options to
purchase or rights to subscribe for such convertible or exchangeable securities
and subsequent conversion or exchange thereof shall be deemed to have been
issued at the time such securities were issued or such options or rights were
issued and for a consideration equal to the consideration, if any, received by
the corporation for any such securities and related options or rights
(excluding any cash received on account of accrued interest or accrued
dividends), plus the additional consideration, if any, to be received by the
corporation upon the conversion or exchange of such securities or the exercise
of any related options or rights (the consideration in each case to be
determined in the manner provided in subsections B.4 (c) (i) (C) and B.4 (c)
(i) (D) of this Article Fourth).
- 7 -
<PAGE> 8
3. In the event of any change in the
number of shares of Common Stock deliverable or any change in the consideration
payable to the corporation upon exercise of such options or rights or upon
conversion of or in exchange for such convertible or exchangeable securities,
including but not limited to, a change resulting from the anti-dilution
provisions thereof, the Conversion Price of the Series A Preferred Stock
obtained with respect to the adjustment which was made upon the issuance of
such options, rights, or securities, and any subsequent adjustments based
thereon, shall be recomputed to reflect such change, but no further adjustment
shall be made for the actual issuance of Common Stock or any payment of such
consideration upon the exercise of any such options or rights or the conversion
or exchange of such securities.
1. "Additional Stock" shall mean any shares of Common Stock issued (or
deemed to have been issued pursuant to subsection B.4 (c) (i) (E) of this
Article Fourth) by the corporation after June 29, 1989 other than:
(A) Common Stock issued pursuant to a transaction
described in subsection B.4 (c)(iii) of this Article Fourth,
(B) Common Stock issuable or issued to employees,
officers or directors of the corporation directly or pursuant to a stock option
plan or agreement or restricted stock plan or agreement unanimously approved by
the directors of the corporation at any time when the total number of shares of
Common Stock so issuable or issued and outstanding (and not repurchased at cost
by the corporation in connection with the termination of employment) does not
exceed 3,990,000 (such number reflecting the split of the corporation's
outstanding Common Stock in the form of a dividend declared by the
corporation's Directors on June 12, 1998), or
(C) Common Stock issued or issuable upon
conversion of Preferred Stock.
1. In the event the corporation should at any time or from time to time
fix a record date for the effectuation of a split or subdivision of the
outstanding shares of Common Stock or the determination of holders of Common
Stock entitled to receive a dividend or other distribution payable in
additional shares of Common Stock or other securities or rights convertible
into, or entitling the holder thereof to receive directly or indirectly,
additional shares of Common Stock (hereinafter referred to as "Common Stock
Equivalents") without payment of any consideration by such holder for the
additional shares of Common Stock or the Common Stock Equivalents (including
the additional shares of Common Stock issuable upon conversion or exercise
thereof), then, as of such record date (or the date of such dividend
distribution split or subdivision if no record date is fixed), the Conversion
Price of the Series A Preferred Stock shall be appropriately decreased so that
the number of shares of Common Stock issuable on conversion of each share of
such Series A Preferred Stock shall be increased in proportion to such increase
of outstanding shares determined in accordance with subsection B.4 (c) (i) (E)
of this Article Fourth.
- 8 -
<PAGE> 9
2. If the number of shares of Common Stock outstanding at any time after
June 29, 1989 is decreased by a combination of the outstanding shares of Common
Stock, then, following the record date of such combination, the Conversion
Price for the Series A Preferred Stock shall be appropriately increased so that
the number of shares of Common Stock issuable on conversion of each share of
such stock shall be decreased in proportion to such decrease in outstanding
shares.
3. Notwithstanding the provision of this Section B.4 (c) of this Article
Fourth to the contrary, the Conversion Price of the Series A Preferred Stock
shall no longer be subject to the adjustment on the date on which there are no
outstanding shares of Designated Preferred Stock, whichever first occurs.
(d) Other Distributions. In the event the corporation
shall declare a distribution payable in securities of other persons, evidence
of indebtedness issued by the corporation or other persons, assets (excluding
cash dividends) or options or rights not otherwise referred to herein, then, in
each such case for the purpose of this Section B.4(d), the holders of the
Designated Preferred Stock shall be entitled to a proportionate share of such
distribution as though they were the holders of the number of shares of Common
Stock of the corporation into which their shares of Designated Preferred Stock
are convertible as of the record date fixed for the termination of the holders
of Common Stock of the corporation entitled to receive each distribution.
(e) Recapitalizations. If at any time, or from time to
time, there shall be a recapitalization of the Common Stock (other than a
subdivision of stock, combination of stock or merger or sale of assets
transaction provided for elsewhere in this Section B.4 or Section B.5 of this
Article Fourth), including, without limitation, the split of the corporation's
outstanding Common Stock in the form of a dividend declared by the
corporation's Directors on June 12, 1998, provision shall be made so that the
holders of the Designated Preferred Stock shall thereafter be entitled to
receive upon conversion of the Designated Preferred Stock the number of shares
of stock or other securities or property of the corporation or otherwise, to
which a holder of Common Stock deliverable upon conversion would have been
entitled on such recapitalization. In any such case, appropriate adjustment
shall be made in the application of the provisions of this Section B.4 with
respect to the rights of the holders of the Designated Preferred Stock after
the recapitalization to the end that the provisions of this Section B.4 shall
be applicable after that event as nearly equivalent as may be practicable.
(f) No Impairment. The corporation will not, by further
amendment of this Certificate of Incorporation or through any reorganization,
recapitalization, transfer of assets, consolidation, merger, share exchange
dissolution, issuance or sale of securities or any other action, avoid or seek
the observance or performance of any of the terms to be observed or performed
hereunder by the corporation, but will at all times in good faith assist in the
carrying out of all the provisions of this Section B.4 and in the taking of all
such action as may be necessary or appropriate in order to protect the
Conversion Rights of the holders of the Designated Preferred Stock against
impairment.
- 9 -
<PAGE> 10
(g) No Fractional Shares: Certificate as to Adjustments.
(i) No fractional shares shall be issued upon
conversion of the Designated Preferred Stock, and the number of shares of
Common Stock to be issued shall be rounded to the nearest whole share.
(h) Notices of Record Date. In the event of any taking
by corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than cash dividend) or other distribution, any right to
subscribe for, purchase or otherwise acquire any shares of stock or any class
of any other securities or property, or to receive any other right, the
corporation shall mail to each holder of Designated Preferred Stock, at least
20 days prior to the date specified therein, a notice specifying the date on
which any such record is to be taken for the purpose of such dividend,
distribution or right and the amount and character of such dividend,
distribution or right.
(i) Reservation of Stock Issuable Upon Conversion. The
corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock solely for the purpose of effecting the
conversion of the shares of the Designated Preferred Stock such number of its
shares of Common Stock as shall from time to time be sufficient to effect the
conversion of all outstanding shares of the Designated Preferred Stock; and if
at any time the number of authorized but unissued shares of Common Stock shall
not be sufficient to effect the conversion of all then outstanding shares of
the Designated Preferred Stock, in addition to such other remedies as shall be
available to the holder of such Designated Preferred Stock, the corporation
will take such corporate action as may be necessary to increase its authorized
but unissued shares of Common Stock to such number of shares as shall be
sufficient for such purpose.
(j) Notices. Any notice required by the provisions of
this Section B.4 to be given to the holders of shares of Designated Preferred
Stock shall be deemed given if deposited in the United States mail, postage
prepaid, and addressed to each holder of record at such holder's address
appearing on the books of the corporation.
5. Voting Rights. Subject to Section B.6 of this Article Fourth, the
holder of each share of Designated Preferred Stock shall have the right to one
vote for each share of Common Stock into which such Designated Preferred Stock
could then be converted (with any fractional share determined on an aggregate
conversion basis being rounded to the nearest whole share), and with respect to
such vote, such holder shall have full voting rights and powers equal to the
voting rights and powers of the holders of the Common Stock, and shall be
entitled, notwithstanding any provision hereof, to notice of any stockholders'
meeting in accordance with the Bylaws of the corporation, and shall be entitled
to vote, together with holders of Common Stock, with respect to any question
upon which holders of Common Stock have the right to vote.
- 10 -
<PAGE> 11
6. Protective Provisions. So long as shares of Series A Preferred
Stock are outstanding, the corporation shall not without first obtaining the
approval (by vote or written consent, as provided by law) of the holders of at
least a majority of the then outstanding shares of Series A Preferred Stock:
(a) sell, convey, or otherwise dispose of or encumber all
or substantially all of its property or business or merge, consolidate or
engage in a share exchange with any other corporation (other than a wholly
owned subsidiary corporation) or effect any transaction or series of related
transactions in which more than 505 of the voting power of the corporation is
disposed of;
(b) amend its Certificate of Incorporation so as (i) to
authorize additional shares of Preferred Stock or (ii) to alter, change or
affect the rights, preferences or privileges of the shares of Series A
Preferred Stock;
(c) issue any Preferred Stock other than the Series A
Preferred Stock or create any new series of Preferred Stock;
(d) do any act or thing which would result in taxation of
the holders of shares of the Series A Preferred Stock under Section 305 of the
Internal Revenue Code off 1986, as amended (or any comparable provision of the
Internal Revenue Code as hereafter from time to time amended);
(e) issue any Additional Stock for a consideration less
than the then applicable Conversion Price of the Series A Preferred Stock;
provided, however, the corporation may issue pursuant to employee stock option
purchase agreements and/or employee stock option agreements up to 3,990,000
shares of Common Stock for which the corporation made reservation as of June
12, 1998; or
(f) declare any dividend on any class or series of stock
or repurchase shares of any class or series other than shares repurchased from
directors, officers or employees pursuant to restricted stock purchase
agreements.
8. Status of Converted. In the event any shares of Designated
Preferred Stock shall be converted pursuant to Section B.4 of this Article
Fourth, the shares so converted shall be cancelled and shall not be issuable by
the corporation, and the Certificate of Incorporation of the corporation shall
be appropriately amended to affect the corresponding reduction in the
corporation's authorized capital stock.
C. Common Stock.
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1. Dividend Rights. Subject to the prior rights of holders of
all classes of stock at the time outstanding having prior rights as to
dividends, the holders of the Common Stock shall be entitled to receive, when
and as declared by the Board of Directors, out of any assets of the corporation
legally available therefore, such dividends as may be declared from time to
time by the Board of Directors.
2. Liquidation Rights. Upon the liquidation, dissolution or
winding up of the corporation, the entire remaining assets of the corporation
shall be distributed ratably among the holders of Common Stock in proportion
to the amount of such stock owned by each such holder.
3. Redemption. The Common Stock is not redeemable.
4. Voting Rights. Each holder of Common Stock shall have the
right to one vote for each share of Common Stock held by such holder, and shall
be entitled to notice of any stockholders' meeting in accordance with the
Bylaws of the corporation, and shall be entitled to vote upon such other
matters and in such manner as may be provided by law.
FIFTH: The corporation is to have perpetual existence.
SIXTH: The Board of Directors of the corporation shall have the power
to make, alter and repeal the Bylaws of the corporation, subject to the
reserved power of the stockholders to make, alter and repeal the Bylaws.
SEVENTH: Unless otherwise provided in the Bylaws of this corporation,
elections of directors need not be by written ballot.
EIGHTH: Each person who at any time is or shall have been a director
or officer of this corporation, and who is threatened to be or is made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative, by reason of the fact that he
is, or was, a director or officer of this corporation or served at the request
of this corporation as a director, officer, employee, trustee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
shall be indemnified by the corporation against, and may be advanced, the
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by such person in connection with
any such action, suit or proceeding to the fullest extent provided under
Section 145 of the General Corporation Law of the State of Delaware, as the
same shall be amended or supplemented from time to time, or any successor
statute. The foregoing right of advancement and indemnification shall in no
way be exclusive of any rights of advancement or indemnification, or any other
rights, to which such director, officer, employee or agent may be entitled
under any Bylaw, agreement, vote of stockholder or disinterested directors or
otherwise, both as to action in their official capacities and as to action in
another capacity while holding such office, and shall continue as to a person
who has ceased to be a director or officer, and shall inure to the benefit of
the heirs, executors, and administrators of such a person.
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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, except for liability (i) for any breach of the director's
duty of loyalty to the corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the General Corporation
Law of Delaware, as the same exists or hereafter may be amended, or (iv) for
any transaction from which the director derived an improper personal benefit.
If the General Corporation Law of Delaware hereafter is amended to
authorize the further elimination or limitation of the liability of directors,
then the liability of a director of the corporation, in addition to the
limitation on personal liability provided herein, shall be limited to the
fullest extent permitted by the amended General Corporation Law of Delaware at
that time in force. Any repeal or modification of this paragraph by the
stockholders shall be prospective only, and shall not adversely affect any
limitation on the personal liability of a director of the corporation existing
at the time of such repeal or modification.
NINTH: A director may hold any office of profit in this corporation
in conjunction with the office of director, and may enter into contracts or
arrangements or have dealings with this corporation, and shall not be
disqualified from the office of director thereby, nor shall he be liable to
account to this corporation for any profit arising out of any such contracts,
arrangements, or dealings to which he is party or in which he is interested by
reason of his being at the same time a director of this corporation, regardless
of whether he is present at or participates in the meeting of the Board of
Directors, or a committee thereof, which authorizes any such contract or
transaction, or whether his vote is counted for such purpose, provided that (i)
the material facts as to his relationship or interest and as to the contract or
transaction are disclosed or are known to the Board of Directors or the
committee, and the Board or committee in good faith authorizes the contract or
transaction by the affirmative votes of a majority of the disinterested
directors, even though the disinterested directors be less than a quorum; or
(ii) the material facts as to his relationship or interest and as to the
contract or transaction are disclosed or are known to the stockholders entitled
to vote thereon, and the contract or transaction is specifically approved in
good faith by vote of the stockholders; or (iii) the contract or transaction is
fair as to the corporation as of the time it is authorized, approved or
ratified, by the Board of Directors, a committee thereof, or the stockholders.
TENTH: Any and all right, title, interest and claim in or to any
dividends declared by this corporation, whether in cash, stock or otherwise,
which are unclaimed by the stockholder entitled thereto for a period of six
years after the close of business on the payment date, shall be and is deemed
to be extinguished and abandoned, and such unclaimed dividends in the
possession of this corporation, its transfer agents or other agents or
depositories shall at such time become the absolute property of this
corporation, free and clear of any and all claims of any person whatsoever.
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ELEVENTH: Whenever the vote of the stockholders at a meeting thereof is
required or permitted to be taken for or in connection with any corporate
action, in lieu of holding a stockholders' meeting, such action may be taken
without a meeting, without prior notice, and without a vote, if a consent or
consents in writing, setting forth the actions so taken, shall be signed by the
holders of outstanding stock having not less than the minimum number of votes
that would be necessary to authorize or take such action at a meting at which
all shares entitled to vote thereon were present and voted.
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IN WITNESS WHEREOF, said FileTek, Inc. has caused this Amended and
Restated Certificate of Incorporation to be signed by William C. Thompson, its
Chief Executive Officer and authorized officer, and attested by William P.
Loomis, its Secretary, as of this ________ day of June, 1998.
ATTEST: FileTek, Inc.
- --------------------------------------
William P. Loomis William C. Thompson
Secretary Chief Executive Officer
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<PAGE> 1
EXHIBIT 3.2
AMENDED AND RESTATED
AS OF APRIL 16, 1997
BY-LAWS
OF
FILETEK, INC.
ARTICLE I
OFFICES
Section 1. Registered Office. The registered office of FILETEK, INC.
(hereinafter called the "Corporation") shall be at 100 West Tenth Street,
Wilmington, Delaware 19801.
Section 2. Other Offices. The Corporation also may have offices at such
other place or places within or without the State of Delaware, as the Board of
Directors may from time to time determine or the business of the Corporation
may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. Place of Meeting. All meetings of the stockholders of the
Corporation shall be held at such place, within or without the State of
Delaware, as may from time to time be fixed in the respective notices or
waivers of notices thereof.
Section 2. Annual Meeting. The annual meeting of the stockholders for
the election of directors and for the transaction of such other business as may
come before the meeting shall be held at such time and place as shall be
determined by the Chief Executive Officer, President or the Board of Directors
and stated in the notice of the meeting. Written notice of an annual meeting
shall state the place, date and hour of the meeting and shall be given to each
stockholder entitled to vote at such meeting not less than ten (10) nor more
than sixty (60) days before the
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date of the meeting. Nothing in this Section 2 shall in any way limit the
stockholders from calling a Special Meeting at any time pursuant to Section 3
of this Article II.
Section 3. Special Meetings. Special meetings of the stockholders, for
any purpose or purposes, unless otherwise prescribed by statute or by the
Certificate of Incorporation, may be called by the Chief Executive Officer,
President and shall be called by the Chief Executive Officer, President or
Secretary at the request in writing of a majority of the Board of Directors, or
at the request in writing of stockholders holding of record a majority in
amount of the entire capital stock of the Corporation issued and outstanding
and entitled to vote Such request shall state the purpose or purposes for
which the meeting is called and shall be given not less than ten (10) nor more
than sixty (60) days before the date of the meeting to each stockholder
entitled to vote at such meeting. Business transacted at any special meeting
of stockholders shall be limited to the purposes stated in the notice.
Section 4. Notice of Meetings. Except as otherwise provided by
statute, notice stating the place, day and hour of each meeting of the
stockholders, whether annual or special, shall be delivered not less than ten
(10) nor more than sixty (60) days before the day on which the meeting is to be
held, to each stockholder of record entitled to vote at such meeting, by
delivering a written or printed notice thereof to him personally, or by mailing
such notice in a postage pre-paid envelope addressed to him at his post-office
address furnished by him to the Secretary of the Corporation for such purpose,
or, if he shall not have furnished his post-office address to the Secretary of
the Corporation, to his address last known to the Secretary of the Corporation,
or in the absence of knowledge on the part of the Secretary of any post-office
address of such stockholder, then to the registered office of the Corporation
in the State of Delaware. In the case of a special meeting, the notice shall
state the purpose or purposes for which the meeting is called. Except where
expressly required by law, no publication of any notice of a meeting of
stockholders shall be required.
Section 5. Notice Not Required. Notice of any meeting of stockholders
shall not be required to be given to any stockholder who shall attend such
meeting in person or by proxy
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without objecting thereto, and if any stockholder shall, in person or by
attorney thereunto authorized, in writing or by telegraph, telecopier,
wireless, cable or telex, waive notice of any meeting, whether before or after
such meeting shall be held, notice thereof need not be given to him. Notice of
any adjourned meeting of the stockholders shall not be required to be given,
except when expressly required by law.
Section 6. Quorum; Presiding Officer. At each meeting of the
stockholders, the holders of a majority of each class of the issued and
outstanding stock of the Corporation entitled to vote at such meeting, present
either in person or by proxy, shall constitute a quorum for the transaction of
business of the Corporation. In the absence of a quorum, or if none of the
holders of the respective class of issued and outstanding stock of the
Corporation entitled to vote be present, any officer entitled to preside or act
as secretary at such meeting, shall have the power to adjourn the meeting, from
time to time, until the requisite number of stockholders of each class shall be
present or represented. At any such adjourned meeting at which a quorum shall
be present, any business may be transacted which might have been transacted at
the meeting as originally called. All meetings of the stockholders shall be
presided over by such officer or officers as appointed by the Board of
Directors.
Section 7. Voting. At each meeting of the stockholders, every
stockholder of record of the Corporation entitled to vote at such meeting shall
be entitled to one vote within his class or classes in person or by proxy
(executed in writing by the stockholder or by his duly authorized attorney in
fact) for each share in such class or classes of stock of the Corporation
registered in his name on the books of the Corporation on the date fixed
pursuant to Section 3 of Article VI of these By-Laws as the record date for the
determination of the stockholders entitled to vote at such meeting. Shares of
its own capital stock belonging to the Corporation shall not be voted upon
directly or indirectly. At all meetings of the stockholders, all matters
(except as otherwise provided in the Corporation's Certificate of
Incorporation, these Bylaws, any agreement between or among the Corporation's
stockholders or by statute) to be decided by the stockholders or each
respective class thereof shall be decided by a majority of the votes cast by
the holders of the stock, or each class of stock respectively, present in
person or by proxy and entitled to vote
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thereat, a quorum being present. Unless demanded by a stockholder present in
person or by proxy at any meeting and entitled to vote thereat, the vote on any
question need not be by ballot.
Section 8. Action by Consent. Whenever the vote of any class or all of
the stockholders at a meeting is required or permitted to be taken for or in
connection with any corporate action, in lieu of holding a stockholders'
meeting, such action may be taken without a meeting, without prior notice and
without a vote, if a consent or consents in writing setting forth the actions
so taken, shall be signed by the holders of outstanding stock or class of 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. Such written consent may be given by any
person holding a power of attorney for any stockholder.
ARTICLE III
BOARD OF DIRECTORS
Section 1. General Powers. The business and affairs of the Corporation
shall be managed by the Board of Directors, which may exercise all such powers
of the Corporation and do all such lawful acts and things as are not by statute
or by the Certificate of Incorporation or these By-Laws or any agreement
between or among the Corporation and its stockholders, directed or required to
be exercised and done by the stockholders.
Section 2. Number and Term of Office. The number of directors which
shall constitute the whole Board shall not be less than two (2) nor more than
five (5) as determined by resolution of the Board of Directors from time to
time. Directors need not be stockholders. Directors shall be elected by the
stockholders; however, except in the case where a director has been removed
from office by the stockholders as provided for in Section 10 of this Article
III, vacancies on the Board may be filled by a majority of the directors then
in office, as provided in Section 223 of the General Corporation Law of the
State of Delaware and Section 11 of this Article III. Each director shall hold
office until the annual meeting of the stockholders next following his election
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and until his successor shall have been elected and shall qualify, or until his
death, or until he shall resign, or until he shall have been removed in the
manner provided in these By-Laws.
Section 3. Quorum and Manner of Acting. Except as otherwise provided by
statute or by these By-Laws, a majority of the directors in office shall be
required to constitute a quorum for the transaction of business at any meeting,
and the act of a majority of the directors present at any meeting at which a
quorum is present shall be the act of the Board of Directors. In the absence
of a quorum, a majority of the directors present may adjourn any meeting from
time to time until a quorum shall be present. No notice other than
announcement at the meeting of any adjourned meeting need be given.
Section 4. Place of Meetings, etc. The Board of Directors may hold its
meetings, have one or more offices, and keep the books and records of the
Corporation at such place or places within or without the State of Delaware as
the Board from time to time may determine.
Section 5. First Meeting. The first meeting of each newly elected Board
of Directors shall be held at such time and place as shall be fixed by the vote
of the stockholders at the annual meeting, and no notice of such meeting shall
be necessary to the newly elected directors in order legally to constitute the
meeting, provided a quorum shall be present, or it may convene at such place
and time as shall be fixed by the consent in writing of all the directors.
Section 6. Regular Meetings. Regular meetings of the Board of Directors
shall be held at such places and at such times as the Board shall from time to
time determine. If any day fixed for a regular meeting shall be a legal holiday
at the place where the meeting is to be held, then the meeting which otherwise
would be held on that day shall be held at said place at the same hour on the
next succeeding day not a legal holiday. Notice of regular meetings need not
be given.
Section 7. Special Meetings; Notice. Special meetings of the Board of
Directors shall be held whenever called by the Chief Executive Officer,
President or a majority of the directors. Notice of each such meeting shall be
mailed to each director, addressed to him at his residence or
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usual place of business, at least three (3) days before the day on which the
meeting is to be held, or shall be sent to him at such place by telegraph,
telex or cable, or be delivered personally by telephone, not later than one day
before the day upon which the meeting is to be held. Each such notice shall
state the time and place of the meeting but need not state the purposes thereof
except as otherwise herein expressly provided. Notice of any meeting of the
Board need not be given to any director, however, if waived by him in writing
or by telegraph, cable or wireless, whether before or after such meeting shall
be held, or if he shall be present at such meeting without objecting thereto;
and any meeting of the Board shall be a legal meeting without any notice
thereof having been given, if all the directors of the Corporation then in
office shall be present thereat. All meetings of the Board of Directors shall
be presided over by the Chief Executive Officer, President, or such other
person as may be designated, from time to time, by the Board of Directors.
Section 8. Action Without Meeting. Any action required or permitted to
be taken at a meeting of the Board of Directors may be taken without a meeting
if a consent in writing setting forth the action so taken shall be signed by
all of the members of the Board and filed with the minutes of proceedings of
the Board.
Section 9. Resignation. Any director of the Corporation may resign at
any time by giving written notice to the Secretary of the Corporation. The
resignation of any director shall take effect at the time specified therein;
and, unless otherwise specified therein, acceptance of such resignation shall
not be necessary to make it effective.
Section 10. Removal of Directors. Any director may be removed, either
with or without cause, at any time, but such removal shall require the
affirmative vote of the holders of a majority of all of the shares of the class
of stock by whom he was elected, and the election of a director to fill the
unexpired portion of the term of any director so removed shall require a vote
of at least a majority of the outstanding shares of such class of stock of the
Corporation.
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Section 11. Vacancies. Except as otherwise provided by statute or by
these By-Laws, any vacancy in the Board of Directors caused by death,
resignation, disqualification, or any other cause other than removal of
stockholders, may be filled either by a majority vote of the remaining
directors, though less than a quorum, or by the stockholders of the Corporation
entitled to vote, by class or otherwise, thereon at the next annual meeting or
at any special meeting called for the purpose. A director elected to fill a
vacancy shall be elected for the unexpired term of his predecessor in office.
Any directorship to be filled by reason of an increase in the number of
directors may be filled by election at an annual meeting or at a special
meeting of the class of stockholders entitled to vote thereon called for that
purpose.
Section 12. Compensation. Directors, as such, shall not receive any
stated salary for their services, but by resolution of the Board of Directors a
fixed sum and expenses of attendance, if any, may be allowed for attendance at
each regular and special meeting of the Board. Nothing herein contained shall
be construed so as to preclude any director from serving the Corporation in any
other capacity and receiving compensation therefor.
Section 13. Directors' Committees. The Board of Directors may, by
resolution adopted by a majority of the directors, designate one or more
committees, each committee to consist of one or more of the directors of the
Corporation, which, to the extent provided in the resolution and permitted by
law, shall have and may exercise the powers of the Board of Directors in the
management of the business and affairs of the Corporation and may authorize the
seal of the Corporation to be affixed to all papers which may require it. Such
a committee or committees shall have such name or names as may be determined
from time to time by resolution adopted by the Board of Directors.
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ARTICLE IV
OFFICERS
Section 1. Number. The officers of the Corporation shall be a Chief
Executive Officer, President, a Vice President, a Secretary, a Treasurer and
such other officers as may be appointed by the Board of Directors. Any number
of offices may be held by the same person.
Section 2. Election and Term of Office. The officers shall be elected
annually by the Board of Directors, and, except in the case of officers
appointed in accordance with the provisions of Section 9 of this Article, each
shall hold office until his successor shall have been duly elected and
qualified or until his death, or until he shall resign by written notice to the
Corporation, or until he shall have been removed in the manner hereinafter
provided. A vacancy in any office because of death, resignation, removal or
for any other cause shall be filled for the unexpired portion of the term in
the manner prescribed in these By-Laws for election or appointment to such
office.
Section 3. Removal. Any officer may be removed with or without cause by
the vote of a majority of the Board of Directors at a regular meeting or a
special meeting called for that purpose whenever in the judgment of the Board
of Directors the best interests of the Corporation will be served thereby, but
such removal shall be without prejudice to the contract rights, if any, of the
person so removed. The purpose shall be stated in a notice or waiver of notice
of such meeting unless all the directors of the Corporation shall be present
thereat.
Section 4. Chief Executive Officer. The Chief Executive Officer shall
plan, develop, and establish policies and objectives of the Corporation in
accordance with board directives and corporation charter. He shall plan
business objectives and develop organizational policies to coordinate functions
and operations between departments. He shall establish responsibilities and
procedures for attaining objectives and review activity reports and financial
statements to determine progress in attaining objectives. He shall preside at
all meetings of the Board of
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Directors and at all meetings of the stockholders. He shall execute bonds,
mortgages, leases, contracts, share certificates, and other documents requiring
the seal of the Corporation except where required or permitted by law to be
otherwise signed and executed and except where the signing and execution
thereof shall be expressly delegated by the Board of Directors to some other
officer or agent of the Corporation.
Section 5. President. The President shall have direct charge of the
management of the business operations of the Corporation, subject to general
control of the Chief Executive Officer and the Board of Directors, and in the
absence of the Chief Executive Officer, shall preside at all meetings of the
Board of Directors and at all meetings of the stockholders except as otherwise
provided by these By-Laws. He shall execute bonds, mortgages, leases,
contracts, share certificates, and other documents requiring the seal of the
Corporation, except where required or permitted by law to be otherwise signed
and executed and except where the signing and execution thereof shall be
expressly delegated by the Board of Directors to some other officer or agent of
the Corporation.
Section 6. Vice President. The Vice President shall, in the absence or
disability of the President, perform the duties and exercise the powers of the
President. He shall also perform whatever duties and have whatever power the
Board of Directors from time to time may assign to him.
Section 7. Secretary. The Secretary shall attend all meetings of the
Board of Directors and all meetings of the stockholders and record all the
proceedings of the meetings of the Board of Directors and the stockholders in a
book to be kept for that purpose. He shall give, or cause to be given, notice
of all meetings of the stockholders and special meetings of the Board of
Directors, and shall perform such other duties as may be prescribed by the
Board of Directors, Chief Executive Officer, or President, under whose
supervision he shall be. He shall have custody of the corporate seal of the
Corporation and he shall have authority to affix the same to any instrument
requiring it and, when so affixed, it may be attested by his signature. The
Board of
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Directors may give general authority to any other officer to affix the seal of
the Corporation and to attest the affixing by his signature.
Section 8. Treasurer. If required by the Board of Directors, the
Treasurer shall give a bond for the faithful discharge of his duties, in such
sum and with such surety or sureties as the Board of Directors shall determine.
The Treasurer shall keep and disburse the monies of the Corporation, as
directed by the Board of Directors; shall keep correct books of account; shall
render to the Chief Executive Officer, President and to the Board of Directors
at the regular meetings thereof, or whenever requested by them, reports of
financial transactions by him and of the financial condition of the
Corporation; and, in general, shall perform all duties incident to the office
of Treasurer.
Section 9. Other Officers. The Corporation may have such other officers
and agents as may be deemed necessary by the Board of Directors, who shall be
appointed in such manner, have such duties, and hold their offices for such
terms as may be determined by resolution of the Board of Directors.
Section 10. Salaries. The salaries of the officers shall be fixed from
time to time by the Board of Directors, and no officer shall be prevented from
receiving such salary by reason of the fact that he is also a director of the
Corporation.
ARTICLE V
CONTRACTS AND ACCOUNTS
Section 1. Contracts, Checks, Notes, Bank Accounts, etc. All contracts
and agreements authorized by the Board of Directors, and all checks, drafts,
notes, bonds, bills of exchange and orders for the payment of money, shall be
signed by the Chief Executive, the President, the Treasurer or such officer or
officers or employee or employees as the Board of Directors may from time to
time designate. The Chief Executive Officer, President, or any other officer,
agent, or employee so authorized by the Board of Directors, may enter into any
contract or execute and
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deliver any contract or other instrument in the name and on behalf of the
Corporation, and such authority may be general or confined to specific
instances. Unless authorized so to do by these By-Laws or by the Board of
Directors, 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 pecuniarily for any purpose or in any amount.
Section 2. Deposits. All funds of the Corporation not otherwise
employed shall be deposited from time to time to the credit of the Corporation
as the Board of Directors, the Chief Executive Officer, the President or the
Treasurer shall direct, in such banks, trust companies or other depositories as
the Board of Directors may select or as may be selected by any officer or
officers or agent or agents of the Corporation to whom power in that respect
shall have been delegated by the Board of Directors. For the purpose of
deposit, and for the purpose of collection for the account of the Corporation,
checks, drafts and other orders for the payment of money that are payable to
the order of the Corporation may be endorsed, assigned and delivered by any
officer or agent of the Corporation.
Section 3. General and Special Bank Accounts. The Board of Directors
may from time to time authorize the opening and keeping of general and special
bank accounts with such banks, trust companies or other depositories as the
Board of Directors may select, or as may be selected by any officer or
officers, agent or agents of the Corporation to whom power in that respect
shall have been delegated by the Board of Directors. The Board of Directors
may make such special rules and regulations with respect to such bank accounts,
not inconsistent with the provisions of these By-Laws, as it may deem
expedient.
ARTICLE VI
CAPITAL STOCK
Section 1. Certificates of Stock. Every stockholder shall be entitled
to have a certificate signed by, or in the name of the Corporation by (i) the
Chief Executive Officer or the President and (ii) the Secretary or the
Assistant Secretary of the Corporation, certifying the number of
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shares of stock of the Corporation owned by him. The certificate shall be
sealed with the seal of the Corporation, or a facsimile thereof. No
certificate shall be issued for any share until such share is fully paid. Each
certificate representing shares shall state that the Corporation is organized
under the laws of the State of Delaware, the name of the person to whom issued,
the par value of each share represented by such certificate or a statement that
the shares are without par value, the class and type of shares represented by
such certificate, and shall contain such legend or legends restricting the
transfer or otherwise as the Corporation shall deem appropriate. Until such
time as the Corporation registers its stock under the Securities Act of 1933,
as amended, each stock certificate issued by or on behalf of the Corporation
shall have written, stamped, printed, or otherwise affixed on the face or back
thereof a legend, stating in substance:
The shares represented by this Certificate have not been registered under
the Securities Act of 1933, as amended, and may be offered and sold only
if registered pursuant to the provisions of that Act or if any exemption
from registration is available. The shares represented by this
Certificate may not be transferred unless the holder hereof shall have
complied with all provisions of the Certificate of Incorporation and any
applicable agreement with the Corporation and/or stockholders of the
Corporation affecting the sale thereof.
Section 2. Transfers of Capital Stock. Stock certificates shall be
transferable on the stock books of the Corporation in person or by attorney,
but, except as hereinafter provided in the case of loss, destruction or
mutilation of certificates, no transfer of stock shall be entered until the
previous certificate, if any, given for the same shall have been surrendered
and canceled. No transfer of shares of the capital stock of the Corporation
shall be effective until such transfer is recorded on the stock transfer books
of the Corporation. Until a transfer of shares of the capital stock of the
Corporation is recorded on the stock transfer books of the Corporation, the
record owner of such shares shall have the sole and exclusive right to vote
such shares upon all matters regarding which such shares are entitled to vote,
in accordance with the provisions of Article II.
Section 3. Closing of Transfer Books. For the purpose of determining
stockholders entitled to notice of or to vote at any meeting of stockholders,
or stockholders entitled to receive payment of a dividend, or in order to make
a determination of stockholders for any proper purpose, the
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Board of Directors may provide that the stock transfer books shall be closed
for a stated period but not to exceed, in any case, sixty (60) days. If the
stock transfer books shall be closed for the purpose of determining
stockholders entitled to notice of or to vote at a meeting of stockholders,
such books shall be closed for at least ten (10) days immediately preceding
such meeting. In lieu of closing the stock transfer books, the Board of
Directors may fix in advance a date as the record date for any determination of
stockholders, such date in any case to be not more than sixty (60) days, and in
case of a meeting of stockholders not less than ten (10) days prior to the date
upon which the particular action requiring such determination of stockholders
is to be taken. If no record date is fixed for the determination of
stockholders, the date next preceding the date on which notice of the meeting
is mailed or the date on which the resolution of the Board of Directors
declaring such dividends is adopted, as the case may be, shall be the record
date for such determination of stockholders.
Section 4. Lost, Destroyed or Mutilated Certificates. The Board of
Directors may direct a new certificate or certificates to be issued in place of
any certificate or certificates heretofore issued by the Corporation alleged to
have been lost, destroyed or mutilated upon the making of an affidavit of that
fact by the person claiming the certificates for shares to be lost or
destroyed. When authorizing such issuance of a new certificate or
certificates, the Board of Directors may, in its discretion and as a condition
precedent to the issuance thereof, require the owner of such lost or destroyed
certificate or certificates, or his legal representative, to advertise the same
in such manner as it shall require, or to give the Corporation a bond in such
sums as it may direct, as indemnity against any claim that may be made against
the Corporation with respect to the certificate alleged to have been lost or
destroyed.
ARTICLE VII
DIVIDENDS
Section 1. Payment of Dividends. The Board of Directors may declare and
the Corporation may pay dividends on its outstanding shares in cash, property,
or its shares pursuant to law and subject to the provisions of its Certificate
of Incorporation and By-Laws.
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Section 2. Reserves. Before payment of any dividend, there may be set
aside out of any funds of the Corporation available for dividends such sum or
sums as the Board of Directors from time to time, in their absolute discretion,
deem proper as a reserve or reserves to meet contingencies, or for equalizing
dividends, or for preparing or maintaining any property of the Corporation, or
for such other purpose as the Board of Directors shall deem conducive to the
interest of the Corporation, and the Board of Directors may modify or abolish
any such reserve in the manner in which it was created.
ARTICLE VIII
SEAL
The Board of Directors shall provide a corporate seal, which shall be in
form of a circle and shall have inscribed thereon the name of the Corporation,
the years of its organization, and the state of its incorporation. The seal may
be used by causing it or a facsimile thereof to be impressed or affixed or
reproduced or otherwise.
ARTICLE IX
FISCAL YEAR
The fiscal year of the Corporation shall be as determined by the Board of
Directors.
ARTICLE X
INDEMNIFICATION
Section 1. Directors and Officers. The Corporation shall indemnify its
directors and officers to the fullest extent permitted by the Certificate of
Incorporation and the Delaware General Corporation Law, as the same exists or
may hereafter be amended.
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ARTICLE XI
AMENDMENTS
These By-Laws, or any of them, may be altered, amended or repealed, or new
By-Laws may be made, at any meeting of the Board of Directors, by vote of a
majority of the Board of Directors, provided, however, that the proposed action
in respect thereof shall be stated in the notice of waiver of notice of such
meeting or that all of the directors of the Corporation shall be present at
such meeting; and provided further, that the power of the Board of Directors
to make, alter, amend or repeal the By-Laws shall be subject to the reserved
power of the stockholders to make, alter, amend or repeal the By-Laws.
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<PAGE> 1
Exhibit 5.1
PIPER & MARBURY
L.L.P.
1200 NINETEENTH STREET, N.W. BALTIMORE
WASHINGTON, D.C. 20036-2430 NEW YORK
202-861-3900 PHILADELPHIA
FAX: 202-223-2085 EASTON
July 2, 1998
FileTek, Inc.
9400 Key West Avenue
Rockville, MD 20850
Gentlemen:
We have assisted in the preparation and filing with the Securities and
Exchange Commission of a Registration Statement on Form S-1, file No. 333-_____
(the "Registration Statement"), relating to ______ shares of Common Stock
(including ______ shares to cover over-allotments, if any), $.01 par value per
share, of FileTek, Inc., a Delaware corporation (the "Company"), to be offered
to the public.
We have examined the Amended and Restated Certificate of Incorporation and
the Bylaws of the Company, and all amendments thereto, and have examined and
relied upon the originals, or copies certified to our satisfaction, of such
records of meetings of the directors and stockholders of the Company, documents
and other instruments as in our judgment are necessary or appropriate to enable
us to render the opinions expressed below.
In examining the foregoing documents, we have assumed the genuineness of
all signatures and the authenticity of all documents submitted to us as
originals, the conformity to original documents of all documents submitted to us
as certified or photostatic copies, and the authenticity of the originals of
such latter documents.
Based on the foregoing, we are of the opinion that the shares of Common
Stock have been duly authorized for issuance and, after payment therefor in
advance and in accordance with the terms and provisions of the Underwriting
Agreement among the Company, NationsBanc Montgomery Securities LLC, BancAmerica
Robertson Stephens and First Albany Corporation and issuance of the certificates
therefor by the Company, will be duly and validly issued, fully paid and
nonassessable.
<PAGE> 2
Piper & Marbury
L.L.P.
FileTek, Inc.
July 2, 1998
Page 2
We hereby consent to the use of our name in the Registration Statement and
under the caption "Legal Matters" in the related Prospectus and consent to the
filing of this opinion as an exhibit to the Registration Statement.
Very truly yours,
<PAGE> 1
EXHIBIT 10.1
AMENDED AND RESTATED
(as of 4/16/97)
FILETEK, INC.
1990 STOCK OPTION INCENTIVE PLAN
1. PURPOSE OF THE PLAN
The purpose of this 1990 Stock Option Incentive Plan is to advance the
interests of FileTek, Inc., a Delaware corporation (the "Company") and its
shareholders by providing an effective incentive, in attracting and retaining
the best available personnel for positions of substantial responsibility, and
to furnish additional incentive and encourage continued employment for officers
and certain other key employees upon whose judgement, initiative and efforts
the successful conduct and development of its business largely depends.
It is the intent of the Company that, while the Company is not subject
to the reporting requirements of the Exchange Act, this Plan and the Options
granted pursuant hereto will comply with Rule 701 promulgated under the
Securities Act. Rule 701 provides that shares acquired in Rule 701
transactions may be resold 90 days after the Company becomes subject to the
provisions of the Exchange Act, without compliance with paragraphs (c), (d),
(e) and (h) of Rule 144 if the person is not an affiliate of the issuer or
under Rule 144 without compliance with paragraph (d), if an affiliate.
2. DEFINITIONS
As used herein, the following definitions shall apply:
2.0 "Board" means the Option Committee, if one has been appointed,
or the Board of Directors of the Company if no Option Committee is appointed.
2.1 "Code" means the Internal Revenue Code of 1986, as amended.
2.2 "Common Stock" means the Common Stock, par value $.01 per share
of FileTek.
2.3 "Company" means FileTek, Inc. and its Parents and Subsidiaries.
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2.4 "Continuous Employment" or "Continuous Status As An Employee"
means employment not interrupted or terminated with the Company. Employment
shall not be considered interrupted in the case of sick leave, military leave
or any other leave of absence approved by the Board or transfers between
payroll locations or between the Company, its Parent, its Subsidiaries, or its
successor.
2.5 "Employee" means any person, including officers, employed by
the Company, or any Parent or Subsidiary of the Company.
2.6 "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
2.7 "Fair Market Value" means the fair market value of Shares, as
determined pursuant to Section 9.
2.8 "Option" means a stock option granted pursuant to this Plan.
Options may be at the discretion of the Board and as reflected in the terms of
the written Option Agreement either "Incentive Stock Options", which are
Options intended to be eligible to be treated as such under Section 422A of the
Code, or "NonStatutory Stock Options" which are Options other than Incentive
Stock Options.
2.9 "Option Agreement" means the agreement between FileTek and an
Optionee for the grant of an option.
2.10 "Option Committee" means the Stock Option Committee appointed
by the Board in accordance with Section 4.1 of this Plan, if one is appointed.
2.11 "Option Stock" means stock subject to an Option granted
pursuant to this Plan.
2.12 "Optionee" means an Employee who receives an Option.
2.13 "Parent" means a "parent corporation", whether now or hereafter
existing, as defined in Section 425(e) and (g) of the Code.
2.14 "Plan" means this FileTek 1990 Stock Option Incentive Plan.
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2.15 "Securities Act" means the Securities Act of 1933, as amended.
2.16 "Shares" means shares of the Common Stock.
2.17 "Subsidiary" means a "subsidiary corporation", whether now or
hereafter existing, as defined in Section 425(f) and (g) of the Code.
2.18 "Tax Date" means the date withholding tax is determined under
the Code for a Grantee with respect to the Grantee's exercise of a NonStatutory
Stock Option.
3. STOCK SUBJECT TO THE PLAN.
Subject to the provisions of Section 11 of this Plan, the maximum
aggregate number of Shares which may be optioned and sold under the Plan,
excluding the Shares involved in the unexercised portion of any cancelled,
terminated or expired options, is 660,000 Shares. Such Shares shall be
authorized and unissued shares or treasury shares.
If an Option should expire or become unexercisable for any reason
without having been exercised in full, the unpurchased Shares which were
subject hereto shall, unless the Plan shall have been terminated, become
available for other Options under the Plan.
4. ADMINISTRATION OF THE PLAN.
4.1 Procedure. The Plan shall be administered by (I) the Board
of Directors of the Company, or (ii) a committee appointed by the Board
consisting of three (3) or more Directors, or (iii) an Option Committee of at
least three directors of the Company appointed by the Board of Directors, each
of whom is a "disinterested person" as defined at Rule 16b-3(d) (3) of the
Rules of the Securities and Exchange Commission, which at the time of adoption
of this Plan require that such Option Committee members not be, or have at any
time within one (1) year prior to their appointment been, eligible to
participate in this Plan or any other plan of the Company or any of its
affiliates entitling the participants therein to acquire stock, stock options
or stock appreciation rights of the Company or any of its affiliates. A
majority of the entire Option Committee shall constitute a quorum and the
action of a majority of the members present at any meeting at which a quorum is
present or acts reduced to or approved in writing by a majority of the members
of the Option Committee shall be deemed the action of the Option Committee.
The Option Committee may appoint a secretary to keep
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<PAGE> 4
minutes of its meetings and may make such rules and regulations for the conduct
of its business as it shall deem advisable.
4.2 Powers of the Board. Subject to the provisions of the Plan,
the Board shall have sole authority, in its absolute discretion: (i) to
determine upon review of relevant information and in accordance with Section 9
of the Plan, the Fair Market Value of the Shares covered by each Option; (ii)
to determine the Employees to whom and at what time Options shall be granted,
and the number of Shares to be represented by each Option; (iii) to interpret
the Plan, (iv) to prescribe, amend and rescind rules and regulations relating
to the Plan; (v) to correct any defect or omission, or reconcile any
inconsistency in the Plan or in any Option Agreement, in the manner and to the
extent it shall deem necessary or expedient to make the Plan fully effective;
(vi) to determine the terms and provisions of each Option granted under the
Plan (which need not be identical) and, with the consent of the holder thereof,
modify or amend each Option; (vii) to accelerate any exercise date of any
Option; (viii) to determine the duration and purposes of leaves of absence
which may be granted to Optionees, as a class or in specific cases, without
constituting a termination of their employment for purposes of this Plan; (ix)
to authorize any person to execute on behalf of the Company any instrument
required to effectuate the grant of an Option previously granted by the Board;
and (x) to make all other determinations deemed necessary or advisable to
promote the best interests of the Company with respect to administration of the
Plan.
4.3 Effect of the Board's Decision. All decisions, determinations
and interpretations of the Board shall be final and binding on all Optionees
and other holders of any Options granted under this Plan. No member of the
Board shall be liable for any action or determination made with respect to the
Plan or any Option granted under it, except for willful bad faith or deliberate
fraud resulting in direct financial benefit to such Board or Option Committee
member, and any liability shall be limited to the amount of such benefit.
4.4 Indemnification of the Board. In addition to such other rights
of indemnification as they may have as members of the Board of Directors, the
members of the Board shall be indemnified by the Company against all costs and
expenses (including attorneys' fees) reasonably incurred by them in connection
with any action, suit or proceeding 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 Option granted thereunder (including an action, suit or
proceeding to enforce this indemnification) and against all amounts paid by
them in settlement thereof (provided such settlement is approved by legal
counsel selected by the Company, or paid by them in satisfaction of a judgement
in any such action, suit or proceeding, except a judgement based upon a finding
of bad faith. Upon the
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<PAGE> 5
institution of any such action, suit or proceeding a Board member shall notify
the Company in writing, giving the Company an opportunity, at its own expense,
to handle and defend the same before such Board member undertakes to handle it
on his own behalf.
5. ELIGIBILITY.
5.1 All Employees of the Company shall be eligible to receive
Options granted under this Plan. Options shall be granted to those Employees
(including officers, whether or not they are also directors) of the Company as
the Board shall elect from time to time on the basis of their being key
employees who have made a significant contribution or can make a potential
contribution to the business of the Company. An Employee who has been granted
an Option may, if he is otherwise eligible, be granted an additional Option or
Options.
5.2 In the case of any Incentive Stock Option, the aggregate Fair
Market Value (determined as of the time the Option is granted) of the stock
with respect to which Incentive Stock Options are exercisable for the first
time by such individual during any calendar year (under all plans of his
employer corporation and its parent and subsidiary corporations which are
includible within the limit provided at Section 422A(b)(7) of the Code), shall
not exceed $100,000.
5.3 No Employee is eligible to receive any Options which, if
exercised, would result in his holding beneficially or of record in excess of
ten percent (10%) of the outstanding voting stock of FileTek.
5.4 The Plan shall not confer upon any Optionee any right with
respect to continuation of employment nor shall it interfere in any way with
such Optionee's right or the Company's right to terminate this employment at
any time.
6. TERM OF PLAN.
This Plan shall become effective upon its adoption by the Board of
Directors, and shall continue in effect until all Options granted hereunder
have expired or been exercised, unless sooner terminated under the provisions
relating thereto. No Option shall be granted after ten (10) years from the
earlier of the date of adoption of this Plan or its approval by the
shareholders as contemplated by Section 13.1.
7. OPTION AGREEMENTS.
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<PAGE> 6
This Plan permits the issuance of either Incentive Stock Options or
NonStatutory Stock Options. The Board, in its grant of Options, and the Option
Agreement evidencing such grant, shall clearly identify which type of Option
has been granted. Such Option Agreement shall be substantially in the form of
(i) (Exhibit "A" attached hereto if the option is an Incentive Stock Option,
or (ii) Exhibit "B" attached hereto if the option is a NonStatutory Stock
Option, or such other form (not inconsistent with the Plan) as the Board may
from time to time approve). Each Option Agreement shall contain such
provisions as the Option Committee shall from time to time deem appropriate and
need not be identical.
8. TERM OF OPTIONS.
The term of each Option granted under the Plan shall be specified
therein, but in no event shall any Option be exercisable after the expiration
of ten (10) years from the date of the grant thereof.
9. OPTION PRICE.
The per Share exercise price for the Shares to be issued pursuant to
any Option granted under the Plan shall be not less than one hundred percent
(100%) of the Fair Market Value of such shares on the date the option is
granted, provided, however, that in the case of an Incentive Stock Option
granted to an Employee who, at the time of the grant of such Incentive Stock
Option, owns stock representing more than ten percent (10%) of the voting power
of all classes of stock of the Company or any Parent or Subsidiary, the per
Share exercise price shall be no less than 110% of the fair market value per
Share on the date of grant.
The fair market value shall be determined by the Board in its
discretion; provided, however, in the event the Common Stock is listed on a
stock exchange or traded on the National Association of Securities Dealers
Automated Quotation ("NASDAQ") National Market System, the fair market value
per Share on the date of grant of the Option shall be determined by the Board
of Directors by using any reasonable method using market quotations. Such
reasonable methods shall include (i) the closing price per Share of Common
Stock on such exchange or on the NASDAQ National Market System on the date of
grant of the Option, as reported in the Wall Street Journal, or (ii) when
deemed appropriate in the sole discretion of the Board of Directors, an average
of the daily closing prices per Share of the Common Stock on such exchange or
on the NASDAQ National Market
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System, as reported in the Wall Street Journal, during a limited period
preceding the date of grant of the Option.
10. EXERCISE OF OPTIONS.
10.1 Procedure for Exercise. Any Option granted hereunder shall be
exercisable in such installments, at such times and under such conditions as
the Board shall designate under the terms of the Plan and of the Option
Agreement; provided, that unless otherwise determined by the Board at or after
grant, no Option shall be exercisable prior to the first anniversary of its
date of grant. To the extent not exercised, installments shall, unless
otherwise provided in the Option Agreement, accumulate and be exercisable, in
whole or in part, at any time after becoming exercisable, but not later than
the date the Option expires.
The minimum number of Shares with respect to which an Option may be
exercised at any one time shall be one hundred (100) shares, unless the number
purchased is the total number at the time available for purchase under the
Option. An Option may not be exercised for a fractional Share. No Option may
be exercised after the expiration of its term as specified in Section 8.
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 for the shares to be issued upon exercise of an Option,
including method of payment, shall be determined by the Board and may consist
entirely of cash, check, delivery of previously owned Shares having 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, or any combination of
such methods of payment or such other consideration and method of payment for
the Issuance of Shares to the extent permitted by law and approved by the
Board. In the event that the Optionee elects to pay the total purchase price
in whole or in part with previously acquired Shares, such Shares shall have
been owned by the Optionee a minimum of six months or such other period as
determined by the Board. Until the issuance of the stock certificates (as
evidenced by the appropriate entry on the books of the Company or of a duly
authorized transfer agent of the Company), no right to vote or receive
dividends or any other rights as a stockholder shall exist with respect to
Option Shares notwithstanding the exercise of the Option. No adjustment will
be made for a dividend or other rights for which the record date is prior to
the date the stock certificates are issued except as provided in Section 11 of
the Plan.
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<PAGE> 8
The Board may, in its sole discretion, and to the extent that the
Shares are publicly traded, permit an Optionee to exercise an Option by
delivering to the Company a properly executed Broker Exercise Notice in form
and substance acceptable to the Board. The Broker Exercise Notice shall
contain irrevocable instructions from the Optionee to the Company to issue to a
broker the stock certificates for the shares to be purchased upon exercise of
the Option, and the Company shall, if the Board decides to permit the Option to
be exercised in this manner, acknowledge to the broker that the Company
consents to such procedure. In addition, the Broker Exercise Notice shall
contain or be accompanied by irrevocable instructions from the Optionee to such
broker to sell a number of shares of Common Stock, or loan to the Optionee an
amount, sufficient to pay the exercise price of the Option and any withholding
obligations due upon such exercise and to promptly deliver to the Company the
amount of such sale or loan proceeds.
10.2 The exercise of each Option shall be subject to the condition
that if at any time the Company shall determine in its discretion that the
satisfaction of withholding tax or other withholding liabilities, or that the
listing, registration, or qualification of any Share otherwise deliverable upon
such exercise on any securities exchange or under any state or federal law, or
that the consent or approval of any regulatory body, is necessary or desirable
as a condition of, or in connection with, such exercise or the delivery or
purchase of Shares pursuant thereto, then in any such event, such exercise
shall not be effective unless such withholding, listing, registration,
qualification, consent or approval shall have been effected or obtained free of
any conditions not acceptable to the Company.
10.3 Withholding Taxes. The Company is entitled to (a) withhold and
deduct from future wages of the Optionee, or make other arrangements for the
collection of, all legally required amounts necessary to satisfy any federal,
state, or local withholding tax requirements attributable to the Optionee's
exercise of a NonStatutory Stock Option or otherwise incurred with respect to
the Option, or (b) require the Optionee promptly to remit the amount of such
withholding to the Company before acting on the Optionee's notice of exercise
of the Option.
The Board may, in its sole discretion and subject to such rules as the
Board may adopt, permit an Optionee to satisfy, in whole or in part, any
withholding tax obligation which may arise in connection with the exercise of a
NonStatutory Stock Option either by electing to have the Company withhold from
the Shares to be issued upon exercise that number of Shares, or by electing to
deliver to the Company already-owned Shares, in either case having a Fair
Market Value, on the Tax Date equal to the amount necessary to satisfy the
withholding amount due. An Optionee's election to have the Company withhold
Shares or to deliver already-owned Shares upon exercise must be made on or
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<PAGE> 9
prior to the Tax Date, is irrevocable and is subject to the consent or
disapproval of the Board. If the Optionee is an officer, director, or
beneficial owner of more than 10% of the outstanding Common Stock of the
Company such election may not be made within six months of the date the
NonStatutory Stock Option is granted (unless the death or Disability of the
Optionee occurs prior to the expiration of such six-month period), and must be
made either six months prior to the Tax Date or to the extent that the
Corporation is subject to the reporting requirements of the Exchange Act, at
any time prior to the Tax Date between the third and twelfth business days
following public release of any of the Company's quarterly or annual summary
earnings statements. When Shares of common stock are issued prior to the Tax
Date to an Optionee making such an election, the Optionee shall agree in
writing to surrender that number of shares on the Tax Date having an aggregate
Fair Market Value equal to the tax due.
10.4 Exercise During Employment or Following Death or Disability.
Unless otherwise provided in the terms of an Option, an Option may be exercised
by the Optionee only while he is an Employee or within thirty (30) days
thereafter (other than as set forth in Section 10.5 below) and has maintained
Continuous Status As An Employee since the date of the grant of the Option to a
date within thirty (30) days of the date of exercise; except that if his
Continuous Employment is terminated by reason of his death or Disability, then
to the extent that the Optionee would have been entitled to exercise the Option
immediately prior to his death or Disability, such Option of the deceased or
disabled Optionee may be exercised during the period of one (1) year from the
date of death or Disability of the Employee, unless such Option would otherwise
sooner expire. Such exercise, in the case of Employee's death, shall be by the
person or persons (including his estate) to whom his rights under such Option
shall have passed by will or by laws of descent and distribution.
"Disability", as used herein, means a "disabled person" as defined at Section
422A(c)(9) of the Code.
10.5 Termination for Misconduct. If the Optionee's employment with
the Corporation or any affiliate thereof is terminated for misconduct at any
time after the date hereof, the Optionee's right to exercise the option granted
hereunder shall terminate immediately upon such termination for cause. For
purposes of this section, the term "misconduct" shall mean: (i) committing any
crime punishable by imprisonment; (ii) fraud on or misappropriation of any
funds or property of the Company or any affiliate thereof; or (iii) failure to
comply with the terms of any noncompetition, nondisclosure or related covenant
of employment executed by the Optionee for the benefit of the Company or any
affiliate thereof.
10.6 Non-Transferability of Options. An 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
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or distribution. An Option may be exercised during the lifetime of the
Optionee only by such Optionee.
10.7 Compliance with Law. The exercise of each option shall be on the
condition that the purchases of stock thereunder shall be for investment
purposes, and not with a view to resale or distribution unless the Shares
subject to such Option are registered under the Securities Act, as amended, or
if in the opinion of counsel for the Corporation such registration is not
required under the Securities Act or any other applicable law, regulation, or
rule of any governmental agency.
11. ADJUSTMENT UPON CHANGES IN CAPITALIZATION.
11.1 Changes in Capitalization. If the Shares of the Company''s
Common Stock as a whole are increased, decreased or changed into, or exchanged
for, a different number or kind of shares or securities of the Company, whether
through merger, consolidation, reorganization, recapitalization,
reclassification, stock dividend, stock split, combination of shares, exchange
of shares, change in corporate structure or the like, an appropriate and
proportionate adjustment shall be made in the number and kinds of shares
subject to the Option Plan, and in the number, kinds, and per share exercise
price of Shares subject to unexercised Options or portions thereof granted
prior to any such change. Any such adjustment in an outstanding Option,
however, shall be made without a change in the total price applicable to the
unexercised portion of the Option but with a corresponding adjustment in the
price for each Share covered by the Option.
11.2 Acquisition. Upon a reorganization, a merger or consolidation
in which the Company is not the surviving corporation, or upon the sale of all
or substantially all of the property of the Company to another corporation,
provision shall be made in connection with such transaction for the assumption
of the Plan and the Options theretofore granted by the successor corporation.
Provision may, alternatively, be made for the substitution for such Options of
new options of the successor employer corporation or a Parent or Subsidiary
thereof. In any such case appropriate adjustment as to the number and kind of
shares and the per share exercise prices shall be made by the Board, whose
determination as to what adjustment shall be made, and the extent thereof,
shall be conclusive. The Board shall have the discretion and power in any such
event to determine and to make effective provisions for the acceleration of the
time during which an Option may be exercised, notwithstanding the provisions of
the Option Agreement setting forth the date or dates at which all or any part
of it may be exercised. If the Board makes an Option fully exercisable in
lieu of assumption or substitution in the event of a merger or sale of assets,
the Board shall notify the Optionee that the Option shall be fully exercisable
for a period of thirty (30) days from the date of
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such notice, and the Option will terminate upon the expiration of such period.
No fractional Shares of stock shall be issued under the Option Plan on account
of any adjustment specified above. Notwithstanding the foregoing, the Board,
in its sole discretion, may determine that in connection with any such
reorganization, merger or consolidation in which the Company is not the
surviving corporation, Optionees holding outstanding Options shall receive,
with respect to each share of Common Stock subject to such Options, as of the
effective date of any such reorganization, merger or consolidation, cash in an
amount equal to the excess of the Fair Market Value of such shares immediately
prior to the effective date of such reorganization, merger or consolidation
over the exercise price per share of such Options.
11.3 Dissolution or Liquidation. Upon the dissolution or liquidation
of FileTek, this Option Plan and the Options issued hereunder shall terminate
immediately prior to the consummation of such proposed action, unless otherwise
provided by the Board. The Board may, in the exercise of its sole discretion
in such instances, declare that any options shall terminate as of the date
fixed by the Board and gives each Optionee the right to exercise his option as
to all or any part of the Optional Stock, including shares as to which the
Option would not otherwise be exercisable in Section 6 hereof. Notice of the
determination shall be given to each Employee to whom an Option is so granted
within a reasonable time after the date of such grant.
13. APPROVAL, AMENDMENT AND TERMINATION OF THE PLAN.
13.1 Approval. This Plan shall be adopted by the Board of Directors,
and shall be presented to the shareholders of the Company for their approval,
to be given within twelve (12) months before or after the date of adoption
hereof. Options may be granted prior to such approval, but such Options shall
be contingent upon such approval being obtained and may not be exercised prior
to such approval.
If required to meet the requirements of Rule 16b-3, the Company shall
also furnish in writing to the holders of record of securities entitled to vote
for the Plan substantially the same information concerning the Plan as would be
required by the rules and regulations in effect under Section 14(a) of the
Exchange Act at the time such information is furnished, if proxies to be voted
with respect to approval or disapproval of the Plan were then being solicited,
on or prior to the date of the first annual meeting of security holders held
subsequent to the first registration of an equity security of FileTek under
Section 12 of the Exchange Act; but failure so to do shall not affect the Plan
or any Options granted before or after that date.
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13.2 Amendment. The Board, without further approval of the
stockholders, may amend this Plan at any time and from time to time in such
respects as the Board may deem advisable, subject to any required regulatory
approval and to the limitation that, except as provided in Section 11 hereof no
amendment shall be effective unless approved by vote of a majority of the
outstanding shares of FileTek within twelve (12) months before or after the
date of such amendment's adoption, where such amendment:
(a) Increases (except in accordance with Section 11
of the Plan) the maximum number of Shares for which Options may be granted
under the Plan;
(b) Changes the administration of the Plan prescribed
by Section 4 or the standards of eligibility prescribed by Section 5 of the
Plan;
(c) Changes the minimum Option price; or
(d) Increases the maximum term of Option provided for
herein.
13.3 Termination and Suspension. The Board, without further
approval of the stockholders, may at any time terminate or suspend this Plan.
Any such termination or suspension 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 terminated or suspended. No Option may be granted while the Plan
is suspended or after it is terminated.
Rights and obligations under any Option granted while the Option Plan
is in effect shall not be altered or impaired by suspension or termination of
this Plan, except when the consent of the person to whom the Option was
granted. An Option may be terminated by agreement between an Optionee and
FileTek and, in lieu of the terminated Option, a new Option may be granted with
an exercise price which may be higher or lower than the exercise price of the
terminated Option.
14. TERM OF OPTION
The term of each Option shall be ten (10) years from the date of grant
thereof or such shorter term as may be provided by the Board; provided,
however, that the term of an Incentive Stock Option shall not exceed ten (10)
years from the date of grant. In addition, in the case of an Incentive Stock
Option granted to an Employee who, at the time the Option is granted, owns
stock representing more than ten percent (10%) of the voting power of all
classes of stock of the Company
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or any Parent or Subsidiary, the term of the Option shall be five (5) years
from the date of grant thereof, or such shorter time as may be provided by the
Board.
15. CONDITIONS UPON ISSUANCE OF SHARES.
Shares shall not be issued with respect to any Option granted under
this Plan 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, the Exchange Act, 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 Corporation with respect to such
compliance. Inability of FileTek to obtain authority from any regulatory body
having jurisdictional authority deemed by its counsel to be necessary to the
lawful issuance and sale of any Shares hereunder shall relieve the Corporation
of any liability in respect of the non-issuance or sale of such Shares as to
which such requisite authority shall not have been obtained.
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.
16. RESERVATION OF SHARES.
The Corporation, during the term of this Plan, will at all times
reserve and keep available a number of Shares as shall be sufficient to
satisfy the requirements of the Plan.
17. SUBSTITUTION OF OPTIONS.
Options may be issued hereunder in substitution for Options granted by
other companies. Where such Options are issued in substitution for Options
granted prior to January 1, 1987 they shall include such provisions as were
required to conform the prior Options intended to be treated as Incentive Stock
Options to the requirements of Sections 422A(b)(7) and (8) of the Internal
Revenue
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Code of 1954, and may, to the extent not required in connection with such
substitution, omit the limitation at Section 5.2 hereof.
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EXHIBIT 10.2
AMENDED AND RESTATED
(AS OF 4/16/97)
FILETEK, INC.
1990 NON-QUALIFIED STOCK OPTION PLAN
1. PURPOSE OF THE PLAN
The purpose of this 1990 Non-qualified Stock Option Plan is to advance
the interests of FileTek, Inc., a Delaware corporation (the "Company") and its
shareholders by providing an effective incentive, in attracting and retaining
the best available officers and other key employees for positions of
substantial responsibility, to give officers and key personnel an opportunity
to acquire shares of the Company, and to furnish additional incentive and
encourage continued employment for officers and certain other key employees
upon whose judgement, initiative and efforts the successful conduct and
development of its business largely depends.
Options granted pursuant to this Plan shall be non-qualified options
and shall not qualify as an "incentive stock option" under Section 422A of the
code.
2. DEFINITIONS
As used herein, the following definitions shall apply:
2.0 "Board" means the Option Committee, if one has been appointed,
or the Board of Directors of the Company if no Option Committee is appointed.
2.1 "Code" means the Internal Revenue Code of 1986, as amended.
2.2 "Common Stock" means the Common Stock, par value $.01 per share
of FileTek.
2.3 "Company" means FileTek, Inc. and its Parents and Subsidiaries.
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2.4 "Continuous Employment" or "Continuous Status As An Employee"
means employment not interrupted or terminated with the Company. Employment
shall not be considered interrupted in the case of sick leave, military leave
or any other leave of absence approved by the Board or transfers between
payroll locations or between the Company, its Parent, its Subsidiaries, or its
successor.
2.5 "Date of Grant" means the date on which an Option is granted
under the Plan, which will be the date the Board authorizes the Option unless
the Board supplies a later date.
2.6 "Employee" means any person, including officers, employed by the
Company, or any Parent or Subsidiary of the Company.
2.7 "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
2.8 "Fair Market Value" means the fair market value of Shares, as
determined pursuant to Section 9.
2.9 "Option" means a stock option granted pursuant to this Plan.
Options may be at the discretion of the Board and as reflected in the terms of
the written Option Agreement either "Incentive Stock Options", which are
Options intended to be eligible to be treated as such under Section 422A of the
Code, or "NonStatutory Stock Options" which are Options other than Incentive
Stock Options.
2.10 "Option Agreement" means the agreement between FileTek and an
Optionee for the grant of an option.
2.11 "Option Committee" means the Stock Option Committee appointed by
the Board in accordance with Section 4.1 of this Plan, if one is appointed.
2.12 "Option Stock" means stock subject to an Option granted pursuant
to this Plan.
2.13 "Optionee" means an Employee who receives an Option.
2.14 "Parent" means a "parent corporation", whether now or hereafter
existing, as defined in Section 425(e) and (g) of the Code.
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2.15 "Person" means any individual, corporation, partnership, group,
association, or other "Person" (as such term is used in Section 13(d) and 14(d)
of the Exchange Act, other than the Company, any trustee or other fudiciary
holding securities under an employee benefit plan of the Company, or any
corporation owned, directly or indirectly, by the stockholders of the Company
in substantially the same proportions as their ownership of stock of the
Company.
2.16 "Plan" means this FileTek 1990 Non-qualified Stock Option Plan.
2.17 "Shares" means shares of the Common Stock.
2.18 "Subsidiary" means a "subsidiary corporation", whether now or
hereafter existing, as defined in Section 425(f) and (g) of the Code.
2.19 "Tax Date" means the date withholding tax is determined under
the Code for a Grantee with respect to the Grantee's exercise of a NonStatutory
Stock Option.
3. STOCK SUBJECT TO THE PLAN
Subject to the provisions of Section 11 of this Plan, the maximum
aggregate number of Shares which may be optioned and sold under the Plan,
excluding the Shares involved in the unexercised portion of any canceled,
terminated or expired options, is 450,000 Shares. Such Shares shall be
authorized and unissued shares or treasury shares.
If an Option should expire or become unexercisable for any reason
without having been exercised in full, the unpurchased Shares which were
subject hereto shall, unless the Plan shall have been terminated, become
available for other Options under the Plan.
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4. ADMINISTRATION OF THE PLAN
4.1 Procedure. The Plan shall be administered by (I) the Board
of Directors of the Company, or (ii) a committee appointed by the Board
consisting of three (3) or more Directors, or (iii) an Option Committee of at
least three directors of the Company appointed by the Board of Directors, each
of whom is a "disinterested person" as defined at Rule 16b-3(d) (3) of the
Rules of the Securities and Exchange Commission, which at the time of adoption
of this Plan require that such Option Committee members not be, or have at any
time within one (1) year prior to their appointment been, eligible to
participate in this Plan or any other plan of the Company or any of its
affiliates entitling the participants therein to acquire stock, stock options
or stock appreciation rights of the Company or any of its affiliates. A
majority of the entire Option Committee shall constitute a quorum and the
action of a majority of the members present at any meeting at which a quorum is
present or acts reduced to or approved in writing by a majority of the members
of the Option Committee shall be deemed the action of the Option Committee.
The Option Committee may appoint a secretary to keep minutes of its meetings
and may make such rules and regulations for the conduct of its business as it
shall deem advisable.
4.2 Powers of the Board. Subject to the provisions of the Plan, the
Board shall have sole authority, in its absolute discretion: (i) to determine
upon review of relevant information and in accordance with Section 9 of the
Plan, the Fair Market Value of the Shares covered by each Option; (ii) to
determine the Employees to whom and at what time Options shall be granted, and
the number of Shares to be represented by each Option; (iii) to interpret the
Plan, (iv) to prescribe, amend and rescind rules and regulations relating to
the Plan; (v) to correct any defect or omission, or reconcile any
inconsistency in the Plan or in any Option Agreement, in the manner and to the
extent it shall deem necessary or expedient to make the Plan fully effective;
(vi) to determine the terms and provisions of each Option granted under the
Plan (which need not be identical) and, with the consent of the holder thereof,
modify or amend each Option; (vii) to accelerate any exercise date of any
Option; (viii) to determine the duration and purposes of leaves of absence
which may be granted to Optionees, as a class or in specific cases, without
constituting a termination of their employment for purposes of this Plan; (ix)
to authorize any person to execute on behalf of the Company any instrument
required to effectuate the grant of an Option previously granted by the Board;
and (x) to make all other determinations deemed necessary or advisable to
promote the best interests of the Company with respect to administration of the
Plan.
4.3 Effect of the Board's Decision. All decisions, determinations
and interpretations of the Board shall be final and binding on all Optionees
and other holders of any Options granted under
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this Plan. No member of the Board shall be liable for any action or
determination made with respect to the Plan or any Option granted under it,
except for willful bad faith or deliberate fraud resulting in direct financial
benefit to such Board or Option Committee member, and any liability shall be
limited to the amount of such benefit.
4.4 Indemnification of the Board. In addition to such other rights
of indemnification as they may have as members of the Board of Directors, the
members of the Board shall be indemnified by the Company against all costs and
expenses (including attorneys' fees) reasonably incurred by them in connection
with any action, suit or proceeding 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 Option granted thereunder (including an action, suit or
proceeding to enforce this indemnification) and against all amounts paid by
them in settlement thereof (provided such settlement is approved by legal
counsel selected by the Company, or paid by them in satisfaction of a judgement
in any such action, suit or proceeding, except a judgement based upon a finding
of bad faith. Upon the institution of any such action, suit or proceeding a
Board member shall notify the Company in writing, giving the Company an
opportunity, at its own expense, to handle and defend the same before such
Board member undertakes to handle it on his own behalf.
5. ELIGIBILITY
5.1 All Employees of the Company shall be eligible to receive
Options granted under this Plan. Options shall be granted to those Employees
(including officers, whether or not they are also directors) of the Company as
the Board shall elect from time to time on the basis of their being key
employees who have made a significant contribution or can make a potential
contribution to the business of the Company. An Employee who has been granted
an Option may, if he is otherwise eligible, be granted an additional Option or
Options.
5.2 No Employee is eligible to receive any Options which, if
exercised, would result in his holding beneficially or of record in excess of
ten percent (10%) of the outstanding voting stock of FileTek.
5.3 The Plan shall not confer upon any Optionee any right with
respect to continuation of employment nor shall it interfere in any way with
such Optionee's right or the Company's right to terminate this employment at
any time.
6. TERM OF PLAN
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This Plan shall become effective upon its adoption by the Board of
Directors, and shall continue in effect until all Options granted hereunder
have expired or been exercised, unless sooner terminated under the provisions
relating thereto. No Option shall be granted after ten (10) years from the
earlier of the date of adoption of this Plan or its approval by the
shareholders as contemplated by Section 13.1.
7. OPTION AGREEMENTS
This Plan permits the issuance Non-qualified Stock Option
substantially in the form of Exhibit "A" attached hereto or such other form
(not inconsistent with the Plan) as the Board may from time to time approve).
Each Option Agreement shall contain such provisions as the Option Committee
shall from time to time deem appropriate and need not be identical.
8. TERM OF OPTIONS
The term of each Option granted under the Plan shall be specified
therein, but in no event shall any Option be exercisable after the expiration
of ten (10) years from the date of the grant thereof.
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9. OPTION PRICE
The per Share exercise price for the Shares to be issued pursuant to
any Option granted under the Plan shall be not less than one hundred percent
(100%) of the Fair Market Value of such shares on the date the option is
granted.
The fair market value shall be determined by the Board in its
discretion; provided, however, in the event the Common Stock is listed on a
stock exchange or traded on the National Association of Securities Dealers
Automated Quotation ("NASDAQ") National Market System, the fair market value
per Share on the date of grant of the Option shall be determined by the Board
of Directors by using any reasonable method using market quotations. Such
reasonable methods shall include (i) the closing price per Share of Common
Stock on such exchange or on the NASDAQ National Market System on the date of
grant of the Option, as reported in the Wall Street Journal, or (ii) when
deemed appropriate in the sole discretion of the Board of Directors, an average
of the daily closing prices per Share of the Common Stock on such exchange or
on the NASDAQ National Market System, as reported in the Wall Street Journal,
during a limited period preceding the date of grant of the Option.
10. EXERCISE OF OPTIONS
10.1 Procedure for Exercise. Each Option shall be exercisable at any
time, and from time to time, and in no particular order if the Optionee holds
more than one Option, throughout a period commencing on the first anniversary
from the Date of Grant and ending upon the earliest of the expiration,
cancellation, surrender or termination of the Option.
The minimum number of Shares with respect to which an Option may be
exercised at any one time shall be one hundred (100) shares, unless the number
purchased is the total number at the time available for purchase under the
Option. An Option may not be exercised for a fractional Share. No Option may
be exercised after the expiration of its term as specified in Section 8.
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 for the shares to be issued upon exercise of an Option,
including method of payment, shall be determined by the Board and may consist
entirely of cash, check, delivery of previously owned Shares having a Fair
Market Value on the date of surrender
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<PAGE> 8
equal to the aggregate exercise price of the Shares as to which said Option
shall be exercised, or any combination of such methods of payment or such other
consideration and method of payment for the Issuance of Shares to the extent
permitted by law and approved by the Board. In the event that the Optionee
elects to pay the total purchase price in whole or in part with previously
acquired Shares, such Shares shall have been owned by the Optionee a minimum of
six months or such other period as determined by the Board. Until the issuance
of the stock certificates (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company), no right
to vote or receive dividends or any other rights as a stockholder shall exist
with respect to Option Shares notwithstanding the exercise of the Option. No
adjustment will be made for a dividend or other rights for which the record
date is prior to the date the stock certificates are issued except as provided
in Section 11 of the Plan.
The Board may, in its sole discretion, and to the extent that the
Shares are publicly traded, permit an Optionee to exercise an Option by
delivering to the Company a properly executed Broker Exercise Notice in form
and substance acceptable to the Board. The Broker Exercise Notice shall
contain irrevocable instructions from the Optionee to the Company to issue to a
broker the stock certificates for the shares to be purchased upon exercise of
the Option, and the Company shall, if the Board decides to permit the Option to
be exercised in this manner, acknowledge to the broker that the Company
consents to such procedure. In addition, the Broker Exercise Notice shall
contain or be accompanied by irrevocable instructions from the Optionee to such
broker to sell a number of shares of Common Stock, or loan to the Optionee an
amount, sufficient to pay the exercise price of the Option and any withholding
obligations due upon exercise and to promptly deliver to the Company the amount
of such sale or loan proceeds.
10.2 The exercise of each Option shall be subject to the condition
that if at any time the Company shall determine in its discretion that the
satisfaction of withholding tax or other withholding liabilities, or that the
listing, registration, or qualification of any Share otherwise deliverable upon
such exercise on any securities exchange or under any state or federal law, or
that the consent or approval of any regulatory body, is necessary or desirable
as a condition of, or in connection with, such exercise or the delivery or
purchase of Shares pursuant thereto, then in any such event, such exercise
shall not be effective unless such withholding, listing, registration,
qualification, consent or approval shall have been effected or obtained free of
any conditions not acceptable to the Company.
10.3 Withholding Taxes. The Company is entitled to (a) withhold and
deduct from future wages of the Optionee, or make other arrangements for the
collection of, all legally required amounts
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necessary to satisfy any federal, state, or local withholding tax requirements
attributable to the Optionee's exercise of a NonStatutory Stock Option or
otherwise incurred with respect to the Option, or (b) require the Optionee
promptly to remit the amount of such withholding to the Company before acting
on the Optionee's notice of exercise of the Option.
The Board may, in its sole discretion and subject to such rules as the
Board may adopt, permit an Optionee to satisfy, in whole or in part, any
withholding tax obligation which may arise in connection with the exercise of a
NonStatutory Stock Option either by electing to have the Company withhold from
the Shares to be issued upon exercise that number of Shares, or by electing to
deliver to the Company already-owned Shares, in either case having a Fair
Market Value, on the Tax Date equal to the amount necessary to satisfy the
withholding amount due. An Optionee's election to have the Company withhold
Shares or to deliver already-owned Shares upon exercise must be made on or
prior to the Tax Date, is irrevocable and is subject to the consent or
disapproval of the Board. If the Optionee is an officer, director, or
beneficial owner of more than 10% of the outstanding Common Stock of the
Company such election may not be made within six months of the date the
NonStatutory Stock Option is granted (unless the death or Disability of the
Optionee occurs prior to the expiration of such six-month period), and must be
made either six months prior to the Tax Date or to the extent that the
Corporation is subject to the reporting requirements of the Exchange Act, at
any time prior to the Tax Date between the third and twelfth business days
following public release of any of the Company's quarterly or annual summary
earnings statements. When Shares of common stock are issued prior to the Tax
Date to an Optionee making such an election, the Optionee shall agree in
writing to surrender that number of shares on the Tax Date having an aggregate
Fair Market Value equal to the tax due.
10.4 Exercise During Employment or Following Death or Disability.
Unless otherwise provided in the terms of an Option, an Option may be exercised
by the Optionee only while he is an Employee or within thirty (30) days
thereafter (other than as set forth in Section 10.5 below) and has maintained
Continuous Status As An Employee since the date of the grant of the Option to a
date within thirty (30) days of the date of exercise; except that if his
Continuous Employment is terminated by reason of his death or Disability, then
to the extent that the Optionee would have been entitled to exercise the Option
immediately prior to his death or Disability, such Option of the deceased or
disabled Optionee may be exercised during the period of one (1) year from the
date of death or Disability of the Employee, unless such Option would otherwise
sooner expire. Such exercise, in the case of Employee's death, shall be by the
person or persons (including his estate) to whom his rights under such Option
shall have passed by will or by laws of descent and distribution.
"Disability", as used herein, means a "disabled person" as defined at Section
422A(c)(9) of the Code.
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10.5 Termination for Misconduct. If the Optionee's employment with
the Corporation or any affiliate thereof is terminated for misconduct at any
time after the date hereof, the Optionee's right to exercise the option granted
hereunder shall terminate immediately upon such termination for cause. For
purposes of this section, the term "misconduct" shall mean: (i) committing any
crime punishable by imprisonment; (ii) fraud on or misappropriation of any
funds or property of the Company or any affiliate thereof; or (iii) failure to
comply with the terms of any noncompetition, nondisclosure or related covenant
of employment executed by the Optionee for the benefit of the Company or any
affiliate thereof.
10.6 Non-Transferability of Options. An 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. An Option may be
exercised during the lifetime of the Optionee only by such Optionee.
10.7 Compliance with Law. The exercise of each option shall be on
the condition that the purchases of stock thereunder shall be for investment
purposes, and not with a view to resale or distribution unless the Shares
subject to such Option are registered under the Securities Act, as amended, or
if in the opinion of counsel for the Corporation such registration is not
required under the Securities Act or any other applicable law, regulation, or
rule of any governmental agency.
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11. ADJUSTMENT UPON CHANGES IN CAPITALIZATION
11.1 Changes in Capitalization. If the Shares of the Company''s
Common Stock as a whole are increased, decreased or changed into, or exchanged
for, a different number or kind of shares or securities of the Company, whether
through merger, consolidation, reorganization, recapitalization,
reclassification, stock dividend, stock split, combination of shares, exchange
of shares, change in corporate structure or the like, an appropriate and
proportionate adjustment shall be made in the number and kinds of shares
subject to the Option Plan, and in the number, kinds, and per share exercise
price of Shares subject to unexercised Options or portions thereof granted
prior to any such change. Any such adjustment in an outstanding Option,
however, shall be made without a change in the total price applicable to the
unexercised portion of the Option but with a corresponding adjustment in the
price for each Share covered by the Option.
11.2 Acquisition. Upon a reorganization, a merger or consolidation
in which the Company is not the surviving corporation, or upon the sale of all
or substantially all of the property of the Company to another corporation,
provision shall be made in connection with such transaction for the assumption
of the Plan and the Options theretofore granted by the successor corporation.
Provision may, alternatively, be made for the substitution for such Options of
new options of the successor employer corporation or a Parent or Subsidiary
thereof. In any such case appropriate adjustment as to the number and kind of
shares and the per share exercise prices shall be made by the Board, whose
determination as to what adjustment shall be made, and the extent thereof,
shall be conclusive. The Board shall have the discretion and power in any such
event to determine and to make effective provisions for the acceleration of the
time during which an Option may be exercised, notwithstanding the provisions of
the Option Agreement setting forth the date or dates at which all or any part
of it may be exercised. If the Board makes an Option fully exercisable in
lieu of assumption or substitution in the event of a merger or sale of assets,
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 the Option
will terminate upon the expiration of such period. No fractional Shares of
stock shall be issued under the Option Plan on account of any adjustment
specified above. Notwithstanding the foregoing, the Board, in its sole
discretion, may determine that in connection with any such reorganization,
merger or consolidation in which the Company is not the surviving corporation,
Optionees holding outstanding Options shall receive, with respect to each share
of Common Stock subject to such Options, as of the effective date of any such
reorganization, merger or consolidation, cash in an amount equal to the excess
of the Fair Market Value of such shares immediately prior to the effective date
of such reorganization, merger or consolidation over the exercise price per
share of such Options.
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11.3 Dissolution or Liquidation. Upon the dissolution or liquidation
of FileTek, this Option Plan and the Options issued hereunder shall terminate
immediately prior to the consummation of such proposed action, unless otherwise
provided by the Board. The Board may, in the exercise of its sole discretion
in such instances, declare that any options shall terminate as of the date
fixed by the Board and gives each Optionee the right to exercise his option as
to all or any part of the Optional Stock, including shares as to which the
Option would not otherwise be exercisable in Section 6 hereof. Notice of the
determination shall be given to each Employee to whom an Option is so granted
within a reasonable time after the date of such grant.
11.4 Change in Control. At the discretion of the Board, an Option
Agreement may provide that upon the purchase of Stock of the Company by another
Person, other than an institutional investor such as a bank, insurance,
company, venture capital firm, underwriter, or small business investment
company, which results in a change in control, (i.e., by the acquisition of
more than fifty percent of the stock of the Corporation), this Option, to the
extent not theretofore exercised, will become immediately vested and
exercisable, without regard to the vesting and installment provisions thereof.
This provision will only apply if it is explicitly set forth in the Option
Agreement.
12. USE OF PROCEEDS
Proceeds from the sale of Shares pursuant to this Plan shall be used by
the Company for general corporate purposes.
13. APPROVAL, AMENDMENT AND TERMINATION OF THE PLAN
13.1 Approval. This Plan shall be adopted by the Board of Directors,
and shall be presented to the shareholders of the Company for their approval,
to be given within twelve (12) months before or after the date of adoption
hereof. Options may be granted prior to such approval, but such Options shall
be contingent upon such approval being obtained and may not be exercised prior
to such approval.
If required to meet the requirements of Rule 16b-3, the Company shall
also furnish in writing to the holders of record of securities entitled to vote
for the Plan substantially the same information concerning the Plan as would be
required by the rules and regulations in effect under Section 14(a) of the
Exchange Act at the time such information is furnished, if proxies to be voted
with respect to approval or disapproval of the Plan were then being solicited,
on or prior to the date of the first annual meeting of security holders held
subsequent to the first registration of an equity
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security of FileTek under Section 12 of the Exchange Act; but failure so to do
shall not affect the Plan or any Options granted before or after that date.
13.2 Amendment. The Board, without further approval of the
stockholders, may amend this Plan at any time and from time to time in such
respects as the Board may deem advisable, subject to any required regulatory
approval and to the limitation that, except as provided in Section 11 hereof no
amendment shall be effective unless approved by vote of a majority of the
outstanding shares of FileTek within twelve (12) months before or after the
date of such amendment's adoption, where such amendment:
(a) Increases (except in accordance with Section 11 of the
Plan) the maximum number of Shares for which Options may be granted under the
Plan;
(b) Changes the administration of the Plan prescribed by
Section 4 or the standards of eligibility prescribed by Section 5 of the Plan;
(c) Changes the minimum Option price; or
(d) Increases the maximum term of Option provided for herein.
13.3 Termination and Suspension. The Board, without further
approval of the stockholders, may at any time terminate or suspend this Plan.
Any such termination or suspension 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 terminated or suspended. No Option may be granted while the Plan
is suspended or after it is terminated.
Rights and obligations under any Option granted while the Option Plan
is in effect shall not be altered or impaired by suspension or termination of
this Plan, except when the consent of the person to whom the Option was
granted. An Option may be terminated by agreement between an Optionee and
FileTek and, in lieu of the terminated Option, a new Option may be granted with
an exercise price which may be higher or lower than the exercise price of the
terminated Option.
14. TERM OF OPTION
The term of each Option shall be ten (10) years from the date of grant
thereof or such shorter term as may be provided by the Board.
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<PAGE> 14
15. CONDITIONS UPON ISSUANCE OF SHARES
Shares shall not be issued with respect to any Option granted under
this Plan 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, the Exchange Act, 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 Corporation with respect to such
compliance. Inability of FileTek to obtain authority from any regulatory body
having jurisdictional authority deemed by its counsel to be necessary to the
lawful issuance and sale of any Shares hereunder shall relieve the Corporation
of any liability in respect of the non-issuance or sale of such Shares as to
which such requisite authority shall not have been obtained.
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.
16. RESERVATION OF SHARES
The Corporation, during the term of this Plan, will at all times
reserve and keep available a number of Shares as shall be sufficient to
satisfy the requirements of the Plan.
17. SUBSTITUTION OF OPTIONS
Options may be issued hereunder in substitution for Options granted by
other companies. Where such Options are issued in substitution for Options
granted prior to January 1, 1987 they shall include such provisions as were
required to conform the prior Options intended to be treated as Incentive Stock
Options to the requirements of Sections 422A(b)(7) and (8) of the Internal
Revenue Code of 1954, and may, to the extent not required in connection with
such substitution, omit the limitation at Section 5.2 hereof.
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<PAGE> 1
EXHIBIT 10.3
FILETEK, INC.
1998 OMNIBUS STOCK PLAN
1. PURPOSE AND TYPES OF AWARDS
FileTek, Inc. (the "Company") hereby establishes the FileTek, Inc.
1998 Omnibus Stock Plan (the "Plan"). The purpose of the Plan is to promote
the long-term growth and profitability of the Company by (i) providing key
people with incentives to improve stockholder value and to contribute to the
growth and financial success of the Company and (ii) enabling the Company to
attract, retain and reward the best-available persons.
The Plan permits the granting of stock options (including incentive
stock options qualifying under Section 422 of the Internal Revenue Code of
1986, as amended (the "Code") and nonqualified stock options), stock
appreciation rights, restricted or unrestricted stock awards, phantom stock,
performance awards, or any combination of the foregoing (the "Awards").
2. DEFINITIONS
Under this Plan, except where the context otherwise indicates, the
following definitions apply:
(a) "Affiliate" shall mean any entity, whether now or hereafter
existing, which controls, is controlled by, or is under common control with,
the Company (including, but not limited to, joint ventures, limited liability
companies, and partnerships). For this purpose, "control" shall mean ownership
of 50% or more of the total combined voting power or value of all classes of
stock or interests of the entity.
(b) "Award" shall mean any stock option, stock appreciation right,
stock award, phantom stock award, or performance award.
(c) "Board" shall mean the Board of Directors of the Company.
(d) "Code" shall mean the Internal Revenue Code of 1986, as
amended, and any regulations promulgated thereunder.
(e) "Common Stock" shall mean shares of common stock of the
Company, par value of $0.01 per share.
(f) "Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended.
(g) "Fair Market Value" of a share of the Company's Common Stock
for any purpose on a particular date shall be determined in a manner such as
the Administrator shall in good faith determine to be appropriate; provided
that in the event the Common Stock shall become registered under Section 12 of
the Exchange Act, then thereafter the Fair Market Value of the Company's Common
Stock for any purpose on a particular date shall mean the last reported sale
price per share of Common Stock, regular way, on such date or, in case no such
sale takes place on such date, the average of the closing bid and asked prices,
regular way, in either case as reported in the principal consolidated
transaction reporting system with respect to securities listed or admitted to
trading on a national securities exchange or included for quotation on the
Nasdaq National Market, or if the Common Stock is not so listed or
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admitted to trading or included for quotation, the last quoted price, or if the
Common Stock is not so quoted, the average of the high bid and low asked
prices, regular way, in the over-the-counter market, as reported by the
National Association of Securities Dealers, Inc. Automated Quotation System or,
if such system is no longer in use, the principal other automated quotations
system that may then be in use or, if the Common Stock is not quoted by any
such organization, the average of the closing bid and asked prices, regular
way, as furnished by a professional market maker making a market in the Common
Stock as selected in good faith by the Administrator or by such other source or
sources as shall be selected in good faith by the Administrator. If, as the
case may be, the relevant date is not a trading day, the determination shall be
made as of the next preceding trading day. As used herein, the term "trading
day" shall mean a day on which public trading of securities occurs and is
reported in the principal consolidated reporting system referred to above, or
if the Common Stock is not listed or admitted to trading on a national
securities exchange or included for quotation on the Nasdaq National Market,
any business day.
(h) "Grant Agreement" shall mean a written document memorializing
the terms and conditions of an Award granted pursuant to the Plan and shall
incorporate the terms of the Plan.
(i) "Parent" shall mean a corporation, whether now or hereafter
existing, within the meaning of the definition of "parent corporation" provided
in Code section 424(e), or any successor thereto.
(j) "Subsidiary" and "subsidiaries" shall mean only a corporation
or corporations, whether now or hereafter existing, within the meaning of the
definition of "subsidiary corporation" provided in Section 424(f) of the Code,
or any successor thereto.
3. ADMINISTRATION
(a) Administration of the Plan. The Plan shall be administered by
the Board or by such committee or committees as may be appointed by the Board
from time to time (the Board, committee or committees hereinafter referred to
as the "Administrator").
(b) Powers of the Administrator. The Administrator shall have all
the powers vested in it by the terms of the Plan, such powers to include
authority, in its sole and absolute discretion, to grant Awards under the Plan,
prescribe Grant Agreements evidencing such Awards and establish programs for
granting Awards.
The Administrator shall have full power and authority to take all
other actions necessary to carry out the purpose and intent of the Plan,
including, but not limited to, the authority to (i) determine the eligible
persons to whom, and the time or times at which Awards shall be granted, (ii)
determine the types of Awards to be granted, (iii) determine the number of
shares to be covered by or used for reference purposes for each Award, (iv)
impose such terms, limitations, restrictions and conditions upon any such Award
as the Administrator shall deem appropriate, (v) modify, amend, extend or renew
outstanding Awards, or accept the surrender of outstanding Awards and
substitute new Awards (provided however, that, except as provided in Section
7(d) of the Plan, any modification that would materially adversely affect any
outstanding Award shall not be made without the consent of the holder), (vi)
accelerate or otherwise change the time in which an Award may be exercised or
becomes payable and to waive or accelerate the lapse, in whole or in part, of
any restriction or condition with respect to such Award, including, but not
limited to, any restriction or condition with respect to the vesting or
exercisability of an Award following termination of any grantee's employment
and (vii) establish
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<PAGE> 3
objectives and conditions, if any, for earning Awards and determining whether
Awards will be paid after the end of a performance period.
The Administrator shall have full power and authority, in its sole and
absolute discretion, to administer and interpret the Plan and to adopt and
interpret such rules, regulations, agreements, guidelines and instruments for
the administration of the Plan and for the conduct of its business as the
Administrator deems necessary or advisable.
(c) Non-Uniform Determinations. The Administrator's
determinations under the Plan (including without limitation, determinations of
the persons to receive Awards, the form, amount and timing of such Awards, the
terms and provisions of such Awards and the Grant Agreements evidencing such
Awards) need not be uniform and may be made by the Administrator selectively
among persons who receive, or are eligible to receive, Awards under the Plan,
whether or not such persons are similarly situated.
(d) Limited Liability. To the maximum extent permitted by law, no
member of the Administrator shall be liable for any action taken or decision
made in good faith relating to the Plan or any Award thereunder.
(e) Indemnification. To the maximum extent permitted by law and
by the Company's charter and by-laws, the members of the Administrator shall be
indemnified by the Company in respect of all their activities under the Plan.
(f) Effect of Administrator's Decision. All actions taken and
decisions and determinations made by the Administrator on all matters relating
to the Plan pursuant to the powers vested in it hereunder shall be in the
Administrator's sole and absolute discretion and shall be conclusive and
binding on all parties concerned, including the Company, its stockholders, any
participants in the Plan and any other employee of the Company, and their
respective successors in interest.
4. SHARES AVAILABLE FOR THE PLAN; MAXIMUM AWARDS
Subject to adjustments as provided in Section 7(d) of the Plan, the
shares of Common Stock that may be issued with respect to Awards granted under
the Plan shall not exceed an aggregate of 1,500,000 shares of Common Stock. The
Company shall reserve such number of shares for Awards under the Plan, subject
to adjustments as provided in Section 7(d) of the Plan. If any Award, or
portion of an Award, under the Plan expires or terminates unexercised, becomes
unexercisable or is forfeited or otherwise terminated, surrendered or canceled
as to any shares, or if any shares of Common Stock are surrendered to the
Company in connection with any Award (whether or not such surrendered shares
were acquired pursuant to any Award), the shares subject to such Award and the
surrendered shares shall thereafter be available for further Awards under the
Plan; provided, however, that any such shares that are surrendered to the
Company in connection with any Award or that are otherwise forfeited after
issuance shall not be available for purchase pursuant to incentive stock
options intended to qualify under Code section 422.
5. PARTICIPATION
Participation in the Plan shall be open to all employees, officers,
directors, and consultants of the Company, or of any Affiliate of the Company,
as may be selected by the Administrator from time to time.
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6. AWARDS
The Administrator, in its sole discretion, establishes the terms of
all Awards granted under the Plan. Awards may be granted individually or in
tandem with other types of Awards. All Awards are subject to the terms and
conditions provided in the Grant Agreement.
(a) Stock Options. The Administrator may from time to time grant
to eligible participants Awards of incentive stock options as that term is
defined in Code section 422 or nonqualified stock options; provided, however,
that Awards of incentive stock options shall be limited to employees of the
Company or of any Parent or Subsidiary of the Company. Options intended to
qualify as incentive stock options under Code section 422 must have an exercise
price at least equal to Fair Market Value on the date of grant, but
nonqualified stock options may be granted with an exercise price less than Fair
Market Value. No stock option shall be an incentive stock option unless so
designated by the Administrator at the time of grant or in the Grant Agreement
evidencing such stock option.
(b) Stock Appreciation Rights. The Administrator may from time to
time grant to eligible participants Awards of Stock Appreciation Rights
("SAR"). An SAR entitles the grantee to receive, subject to the provisions of
the Plan and the Grant Agreement, a payment having an aggregate value equal to
the product of (i) the excess of (A) the Fair Market Value on the exercise date
of one share of Common Stock over (B) the base price per share specified in the
Grant Agreement, times (ii) the number of shares specified by the SAR, or
portion thereof, which is exercised. Payment by the Company of the amount
receivable upon any exercise of an SAR may be made by the delivery of Common
Stock or cash, or any combination of Common Stock and cash, as determined in
the sole discretion of the Administrator. If upon settlement of the exercise
of an SAR a grantee is to receive a portion of such payment in shares of Common
Stock, the number of shares shall be determined by dividing such portion by the
Fair Market Value of a share of Common Stock on the exercise date. No
fractional shares shall be used for such payment and the Administrator shall
determine whether cash shall be given in lieu of such fractional shares or
whether such fractional shares shall be eliminated.
(c) Stock Awards. The Administrator may from time to time grant
restricted or unrestricted stock Awards to eligible participants in such
amounts, on such terms and conditions, and for such consideration, including no
consideration or such minimum consideration as may be required by law, as it
shall determine. A stock Award may be paid in Common Stock, in cash, or in a
combination of Common Stock and cash, as determined in the sole discretion of
the Administrator.
(d) Phantom Stock. The Administrator may from time to time grant
Awards to eligible participants denominated in stock-equivalent units ("phantom
stock") in such amounts and on such terms and conditions as it shall determine.
Phantom stock units granted to a participant shall be credited to a bookkeeping
reserve account solely for accounting purposes and shall not require a
segregation of any of the Company's assets. An Award of phantom stock may be
settled in Common Stock, in cash, or in a combination of Common Stock and cash,
as determined in the sole discretion of the Administrator. Except as otherwise
provided in the applicable Grant Agreement, the grantee shall not have the
rights of a stockholder with respect to any shares of Common Stock represented
by a phantom stock unit solely as a result of the grant of a phantom stock unit
to the grantee.
(e) Performance Awards. The Administrator may, in its discretion,
grant performance awards which become payable on account of attainment of one
or more performance goals established by the Administrator. Performance awards
may be paid by the delivery of Common Stock or cash, or any combination of
Common Stock and cash, as determined in the sole discretion of the
Administrator.
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Performance goals established by the Administrator may be based on the
Company's or an Affiliate's operating income or one or more other business
criteria selected by the Administrator that apply to an individual or group of
individuals, a business unit, or the Company or an Affiliate as a whole, over
such performance period as the Administrator may designate.
7. MISCELLANEOUS
(a) Withholding of Taxes. Grantees and holders of Awards shall
pay to the Company or its Affiliate, or make provision satisfactory to the
Administrator for payment of, any taxes required to be withheld in respect of
Awards under the Plan no later than the date of the event creating the tax
liability. The Company or its Affiliate may, to the extent permitted by law,
deduct any such tax obligations from any payment of any kind otherwise due to
the grantee or holder of an Award. In the event that payment to the Company or
its Affiliate of such tax obligations is made in shares of Common Stock, such
shares shall be valued at Fair Market Value on the applicable date for such
purposes.
(b) Loans. The Company or its Affiliate may make or guarantee
loans to grantees to assist grantees in exercising Awards and satisfying any
withholding tax obligations.
(c) Transferability. Except as otherwise determined by the
Administrator, and in any event in the case of an incentive stock option or a
stock appreciation right granted with respect to an incentive stock option, no
Award granted under the Plan shall be transferable by a grantee otherwise than
by will or the laws of descent and distribution. Unless otherwise determined
by the Administrator in accord with the provisions of the immediately preceding
sentence, an Award may be exercised during the lifetime of the grantee, only by
the grantee or, during the period the grantee is under a legal disability, by
the grantee's guardian or legal representative.
(d) Adjustments; Business Combinations. In the event of changes
in the Common Stock of the Company by reason of any stock dividend, split-up,
recapitalization, merger, consolidation, business combination or exchange of
shares and the like, the Administrator shall, in its discretion, make
appropriate adjustments to the maximum number and kind of shares reserved for
issuance or with respect to which Awards may be granted under the Plan as
provided in Section 4 of the Plan and to the number, kind and price of shares
covered by outstanding Awards, and shall, in its discretion and without the
consent of holders of Awards, make any other adjustments in outstanding Awards,
including but not limited to reducing the number of shares subject to Awards or
providing or mandating alternative settlement methods such as settlement of the
Awards in cash or in shares of Common Stock or other securities of the Company
or of any other entity, or in any other matters which relate to Awards as the
Administrator shall, in its sole discretion, determine to be necessary or
appropriate.
Notwithstanding anything in the Plan to the contrary and
without the consent of holders of Awards, the Administrator, in its sole
discretion, may make any modifications to any Awards, including but not limited
to cancellation, forfeiture, surrender or other termination of the Awards in
whole or in part regardless of the vested status of the Award, in order to
facilitate any business combination that is authorized by the Board to comply
with requirements for treatment as a pooling of interests transaction for
accounting purposes under generally accepted accounting principles.
The Administrator is authorized to make, in its discretion and without
the consent of holders of Awards, adjustments in the terms and conditions of,
and the criteria included in, Awards in recognition of unusual or nonrecurring
events affecting the Company, or the financial statements of the Company or any
Affiliate, or of changes in applicable laws, regulations, or accounting
principles, whenever the
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<PAGE> 6
Administrator determines that such adjustments are appropriate in order to
prevent dilution or enlargement of the benefits or potential benefits intended
to be made available under the Plan.
(e) Substitution of Awards in Mergers and Acquisitions. Awards
may be granted under the Plan from time to time in substitution for Awards held
by employees or directors of entities who become or are about to become
employees or directors of the Company or an Affiliate as the result of a merger
or consolidation of the employing entity with the Company or an Affiliate, or
the acquisition by the Company or an Affiliate of the assets or stock of the
employing entity. The terms and conditions of any substitute Awards so granted
may vary from the terms and conditions set forth herein to the extent that the
Administrator deems appropriate at the time of grant to conform the substitute
Awards to the provisions of the awards for which they are substituted.
(f) Stock Restriction Agreement. As a condition precedent to the
grant of any Award under the Plan or the exercise pursuant to such an Award or
to the delivery of certificates for shares issued pursuant to any Award, the
Administrator may require the grantee or the grantee's successor or permitted
transferee, as the case may be, to become a party to a Stock Restriction
Agreement of the Company in such form as the Administrator may determine from
time to time.
(g) Termination, Amendment and Modification of the Plan. The
Board may terminate, amend or modify the Plan or any portion thereof at any
time.
(h) Non-Guarantee of Employment or Service. Nothing in the Plan
or in any Grant Agreement thereunder shall confer any right on an individual to
continue in the service of the Company or shall interfere in any way with the
right of the Company to terminate such service at any time.
(i) Compliance with Securities Laws; Listing and Registration.
Common Stock shall not be issued with respect to an Award granted under the
Plan unless the exercise of such Award and the issuance and delivery of stock
certificates for such Common Stock pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act
of 1933 and the Exchange Act, the rules and regulations promulgated thereunder,
and the requirements of any national securities exchange or any listing or
quotation system established by the National Association of Securities Dealers,
Inc. ("Nasdaq System") upon which the Common Stock may then be listed or
quoted, and shall be further subject to the approval of counsel for the Company
with respect to such compliance to the extent such approval is sought by the
Committee. The Company may require that a grantee, as a condition to exercise
of an Award, and as a condition to the delivery of any share certificate,
provide to the Company, at the time of each such exercise and each such
delivery, a written representation that the shares of Common Stock being
acquired shall be acquired by the grantee solely for investment and will not be
sold or transferred without registration or the availability of an exemption
from registration under the Securities Act and applicable state securities
laws. The stock certificates for any shares of Common Stock issued pursuant to
this Plan may bear a legend restricting transferability of the shares of Common
Stock unless such shares are registered or an exemption from registration is
available under the Securities Act and applicable state securities laws.
(j) No Trust or Fund Created. Neither the Plan nor any Award
shall create or be construed to create a trust or separate fund of any kind or
a fiduciary relationship between the Company and a grantee or any other person.
To the extent that any grantee or other person acquires a right to receive
payments from the Company pursuant to an Award, such right shall be no greater
than the right of any unsecured general creditor of the Company.
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(k) Governing Law. The validity, construction and effect of the
Plan, of Grant Agreements entered into pursuant to the Plan, and of any rules,
regulations, determinations or decisions made by the Administrator relating to
the Plan or such Grant Agreements, and the rights of any and all persons having
or claiming to have any interest therein or thereunder, shall be determined
exclusively in accordance with applicable federal laws and the laws of the
State of Delaware, without regard to its conflict of laws principles.
(l) Effective Date; Termination Date. The Plan is effective as of
the date on which the Plan was adopted by the Board, subject to approval of the
stockholders within twelve months before or after such date. No Award shall be
granted under the Plan after the close of business on the day immediately
preceding the tenth anniversary of the effective date of the Plan. Subject to
other applicable provisions of the Plan, all Awards made under the Plan prior
to such termination of the Plan shall remain in effect until such Awards have
been satisfied or terminated in accordance with the Plan and the terms of such
Awards.
Date Approved by the Board: June 12, 1998
Date Approved by the Stockholders: ___________________
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EXHIBIT 10.5
LEASE AGREEMENT
between
PRINCIPAL MUTUAL LIFE INSURANCE COMPANY
and
FILETEK, INC.
Data Sheet
This Data Sheet is an integral part of this Lease and all of the terms hereof
are incorporated into this Lease in all respects. In addition to the other
provisions which are elsewhere in this Lease, the following, whenever used in
this Lease, shall have the meanings set forth in this Data Sheet.
(a) Premises Suite No. 100 and Suite No. 201 in the
Building, generally outlined on the floor
plans attached hereto as Exhibit A and
Exhibit A-1 (Section 1(1)).
(b) Area of Premises Approximately 29,808 rentable square feet on
the first (1st) floor and second (2nd) floor
of the Building (Exhibit A, A-1 and Section
1(1)).
(c) Building 9400 Key West Boulevard,
Rockville, Maryland (Section 1(d).
(d) Basic Rent $13.00 per rentable square foot per year
payable in equal monthly installments of
Thirty-Two Thousand Two Hundred Ninety-Two
and 00/100 Dollars ($32,292.00), subject to
adjustment as herein provided (Sections 1(b)
and 3).
(e) Annual Basic Rental Three Hundred Eighty-Seven Thousand Five
Hundred Four and 00/100 Dollars ($387,504.00)
(Section 3).
(f) Annual Basic Rental Three percent (3%) of the escalated Basic
Rental then in effect (Section 4).
(g) Additional Rent See Section 41.
(h) Lease Term Five (5) years and zero (0) months,
commencing on the Commencement Date (Sections
1(j) and 2).
(i) Commencement Date See Section 1(e).
(j) Building Operation Monday through Friday, 8:00 a.m. to 6:00 p.m.
and Saturday, 9:00 a.m. Hoursto 1:00 p.m.
(k) Permitted Use Any general business office purposes and
computer assembly and repair and for no other
purposes (Sections 1(k) and 9).
(l) Tenant's Proportionate See Section 1(s).
Share of Building
Space
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(m) Tenant's Proportionate 3.5 per 1,000 rentable square feet (Section
Share of Parking 9(f)).
Spaces
(n) Brokers Involved Barnes, Morris, Pardoe & Foster
WEST*GROUP
(o) Security Deposit See Sections 1(n) and 51.
(p) Notices If to Landlord:
Barnes, Morris, Pardoe & Foster Mgmt.
Services
Attn: Julia Calabrese
1150 18th Street, NW, Suite 1000
Washington, DC 20036
With a copy to:
Principal Financial Group
711 High Street
Commercial Real Estate Equities
Southeast Team
DesMoines, Iowa 50392-1370
If to Tenant:
(i) Prior to Tenant's occupancy of the
Premises:
FileTek, Inc.
Attn: Mark Thompson
6100 Executive Boulevard, #600
Rockville, Maryland 20852
(ii) After Tenant's occupancy of the Premises:
At the Premises
Attn: Vice President, Finance &
Administration
(q) Rental Payments Send to:
Barnes, Morris, Pardoe & Foster Mgmt.
Services
Attn: Julia Calabrese
1150 18th Street, NW, Suite 1000
Washington, DC 20036
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<PAGE> 3
LEASE AGREEMENT
THIS LEASE AGREEMENT is entered into as of the 16th day of April,
1993, by and between PRINCIPAL MUTUAL LIFE INSURANCE COMPANY, an Iowa
corporation (hereinafter called "Landlord"), and FILETEK, INC., a Delaware
corporation (hereinafter called "Tenant").
1. DEFINITIONS.
(a) "Basic Cost": The actual costs incurred by the Landlord in
operating and maintaining the Building and the Land during each calendar year
of the Lease Term for which Landlord has not been reimbursed by insurance
proceeds, condemnation awards or otherwise.
Such costs shall include, by way of example rather than of limitation,
(i) real property, front-foot benefit, metropolitan district and other similar
taxes, including any taxes imposed on Leases or income generated thereon
(exclusive of federal and state income and franchise taxes) or public or
private assessments, general or special, ordinary or extraordinary, foreseen or
unforeseen (other than Lease Taxes) levied against the Building or the Land;
(ii) charges or fees for, and taxes on, the furnishing of electricity, water,
sewer service, gas, fuel, or other utility services to the Building and the
Land; (iii) costs of providing janitorial and trash removal service,
restripping, resurfacing, maintaining and repairing all walkways, roadways and
parking areas on the Land, security costs, and cost of maintaining grounds,
common areas and mechanical systems of the Building and the Land; (iv) all
other costs of maintaining and repairing any or all of the Building or Land;
(v) all costs reasonably allocated by Landlord to the common areas of the
Building and the Land in a multi-building development; (vi) charges or fees
for any necessary governmental permits and licenses (except construction and
occupancy permits for tenant's space); (vii) management fees, overhead and
expenses reasonably related to management of the Building (including salaries
for personnel directly responsible for management of the Building); (viii)
premiums for hazard, liability, workmen's compensation or similar insurance
upon any or all of the Building and the Land; (ix) costs arising under service
contracts with independent contractors; and (x) the cost of any other items
which, under generally accepted accounting principles consistently applied from
year to year with respect to the Building or the Land, constitute operating or
maintenance costs attributable to any or all of the Building or the Land.
Such costs shall not include (i) the expense of principal and interest
payments made by the Landlord pursuant to the provisions of any mortgage or
deed of trust covering the Building or the Land; (ii) any deduction for
depreciation of the Building taken on the Landlord's income tax returns; or
(iii) the cost of capital improvements or capital gains made to the Building,
other than capital improvements, modifications or equipment required by
federal, state or local ordinance, rule, regulation or law promulgated after
the Lease Commencement Date or as determined by Landlord in good faith to
result in savings or reductions in Basic Cost generally, in which case the cost
thereof shall be included in Basic Cost for the calendar year in which the cost
shall have been incurred and in subsequent calendar years, on a straight line
basis, such items will be amortized over the useful lives of such items; (iv)
any leasing or mortgage brokerage commission or fee paid or payable by the
Landlord; (v) franchise or income taxes imposed on the Landlord; (vi) costs
incurred in renovating or otherwise improving, decorating, painting or
redecorating space for tenants; (vii) ground rent; (viii) legal expenses and
other costs and expenses incurred in connection with (A) leasing space in the
Building or (B) negotiations or disputes with present or prospective tenants or
other occupants of the Building; (ix) overhead and profit increments paid to
subsidiaries and affiliates of Landlord for services in the Building to the
extent the same significantly exceeds the cost of such services rendered by
unaffiliated third parties on a competitive basis; (x) advertising and
promotional expenses; or (xi) management fees of any kind totaling in excess
of five percent (5%) of the gross rental income of the Building. If Landlord
shall have leased any such items of capital equipment designed to result in
savings or reductions in Basic Cost, then the rental and other costs paid
pursuant to such leasing shall be included in Basic Cost for each calendar year
in which they shall have been incurred.
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In determining Basic Cost, where less than 95% of the Building's
rentable square footage is occupied during all or any part of a year, those
items of the Basic Cost which vary according to occupancy, such as electricity
and janitorial services, shall be increased to that amount which would have
been incurred had the Building been 95% occupied during the entire year.
(b) "Basic Rental": $13.00 per rentable square foot per year
payable in equal monthly installments of Thirty-Two Thousand Two Hundred
Ninety-Two and 00/100 Dollars ($32,292.00), subject to adjustment as herein
provided.
(c) "Base Year Stop": The Basic Cost incurred during the
calendar year 1993, adjusted to reflect 95% occupancy for the entire year as
provided for in Section 1(a)(paragraph 3) hereinabove, divided by the rentable
square feet in the Building.
(d) "Building": The office building which has been constructed on
land located at 9400 Key West Boulevard, Rockville, Maryland.
(e) "Commencement Date": The earlier of: (i) the date of
Substantial Completion or (ii) the date the Tenant or any one claiming under or
through the Tenant first occupies the Premises or any portion thereof.
(f) "Event of Default": As defined in Section 20 of this Lease.
(g) "Excess": As defined in Section 8 of this Lease.
(h) "Land": The entire tract of land on which the Building is
located as shown on the attached Exhibit "F".
(i) "Landlord's Contractor": As defined in Section 7(d) of this
Lease.
(j) "Lease Term": The period commencing on the Commencement Date
and continuing for five (5) years and zero (0) months thereafter; provided,
however, if the term of this Lease commences on a date other than the first
(1st) day of a calendar month, the Lease Term shall consist of, in addition to
the number of years and months provided above, the remainder of the calendar
month during which this Lease is deemed to have commenced.
(k) "Permitted Use": Any general business office purposes and
computer assembly and repair and for no other purpose.
(l) "Premises": Suite No. 100 and No. 201 in the Building,
generally outlined on the floor plans attached hereto as Exhibit A and Exhibit
A-1 and consisting of approximately 29,808 rentable square feet.
(m) "Rules and Regulations": The Landlord's rules and
regulations sent to Tenant in writing from time to time, as amended or
substituted for from time to time, the current form of which is attached hereto
as Exhibit B.
(n) "Security Deposit": As defined in Section 51 of this Lease.
(o) "Special Tenant Work": As defined in Section 7(d) of this
Lease.
(p) "Standard Tenant Work": As defined in Section 7(d) and
referred to in Exhibits C and D of this Lease.
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(q) "Substantial Completion": The date when the work to be
performed by Landlord in the Premises in accordance with this Lease shall have
been substantially completed and Landlord has obtained a certificate of
occupancy, notwithstanding that certain details of construction, mechanical
adjustment or decoration remain to be performed, the noncompletion of which
would not materially interfere with the Tenant's use of the Premises, but which
Landlord shall complete with due diligence.
For purposes of determining the date of Substantial Completion, there
shall not be considered the duration of any delay which is caused by: (i)
changes in the work to be completed by Landlord in readying the Premises for
Tenant's occupancy, which changes have been requested by Tenant after the
approval by Landlord and Tenant of the Tenant Plans; (ii) delays, not caused
by Landlord, in furnishing materials or procuring labor required by Tenant for
installations or work in the premises which are not encompassed within Standard
Tenant Work (only if Landlord informs Tenant of such delays prior to final plan
approval); (iii) any failure by Tenant, to furnish any required plan,
information, approval or consent (including, without limitation, the Tenant
Plans) within the required period of time, or any failure to fully and
completely cooperate with Landlord in the preparation of the Tenant Plan; or
(iv) the performance of any work or activity in the Premises by Tenant or any
of its employees, agents or contractors. Landlord shall provide Tenant with a
ten-day prior notice of estimated occupancy date.
(r) "Tenant Plans": As defined in Section 7(a) of this Lease.
(s) "Tenant's Proportionate Share": Fifty-Nine and 52/100 percent
(59.52%). Such percentage is equal to a fraction, the numerator of which
equals the number of rentable square feet within the Premises (29,808) and the
denominator of which equals the total number of rental square feet in the
Building (50,078).
2. LEASE TERM.
(a) Landlord, in consideration of the rent to be paid and the
other covenants and agreements to be performed by Tenant and upon the terms
hereinafter stated, does hereby lease, demise and let unto Tenant the
premises, as defined herein and generally outlined on the floor plan attached
hereto as Exhibit A, commencing on the Commencement Date and ending, without
the necessity of notice from either party to the other, such notice being
expressly waived, on the last day of the Lease Term, unless sooner terminated
as herein provided.
(b) If the Landlord shall be unable to tender possession of the
Premises on the anticipated occupancy date, the Landlord shall not be liable
for any damage caused thereby, nor shall this Lease be void or voidable by
Tenant, but in such event, unless the delay results (i) from failure of Tenant
to provide plans or otherwise perform in accordance with the requirements of
the Lease or (ii) from any delay in Landlord's ability to tender possession of
the Premises caused by Tenant, no rental shall be payable by Tenant prior to
actual tender to Tenant of possession of the Premises.
(c) By occupying the Premises, Tenant shall be deemed to have
accepted the same as suitable for the purpose herein intended and to have
acknowledged that the Premises comply fully with Landlord's obligations, with
the exception of any "punch list" type items in the Tenant Plans which may not
have been completed. Landlord and Tenant, or their agents, shall meet prior
to occupancy to prepare a "punch list." Prior to occupancy or within three
(3) business days of delivery to Tenant by Landlord, whichever is later, Tenant
agrees to execute and return to Landlord a letter prepared by Landlord
confirming the Commencement Date, certifying that Tenant has accepted delivery
of the Premises and that the condition of the Premises complies with Landlord's
obligations hereunder, subject to any "punch list" items in the Tenant Plans
which may not have been completed.
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<PAGE> 6
3. BASIC RENTAL.
(a) Tenant promises and agrees to pay Landlord the Basic Rental
(subject to adjustment as hereinafter provided) without demand, notice,
deduction, counterclaim or set-off, for each month of the entire Lease Term.
The first monthly installment shall be due and payable upon execution of this
Lease. The Basic Rental for each subsequent month shall be paid in advance
beginning on the first day of the calendar month following the expiration of
the first calendar month of the Lease Term and continuing thereafter on or
before the first day of each succeeding calendar month during the term hereof;
provided, however, that Basic Rental for the second calendar month shall be
prorated based on one-three hundred sixty-fifth (1/365th) of the current annual
Basic Rental for each day of the first partial month, if any, this Lease is in
effect and shall be due and payable as aforesaid.
(b) In the event any installment of the Basic Rental, or any other
sums which became owing by Tenant to Landlord under the provisions hereof, are
not received within seven (7) days after the due date thereof (without in any
way implying Landlord's consent to such late payment), Tenant shall pay, in
addition to such installment of the Basic Rental or such other sums owed, and
not as a penalty, additional rental in the form of a late payment charge equal
to five percent (5%) of such monthly installment of the Basic Rental or such
other sums owed for each month or part thereof such payment is overdue.
Notwithstanding the foregoing, the foregoing late charges shall not apply to
any sums which may have been advanced by Landlord to or for the benefit of
Tenant pursuant to the provisions of this Lease, it being understood that such
sums shall bear interest from the date of the advance until paid in full, which
Tenant hereby agrees to pay to Landlord, at the rate of eighteen percent (18%)
per annum or the highest rate permitted by law, whichever is less.
4. BASIC RENTAL ESCALATION.
The Basic Rental shall be increased annually, effective on
each anniversary of the first full month after the Commencement Date during the
term hereof, by an amount equal to three percent (3%) of the escalated Basic
Rental then in effect.
5. Intentionally Deleted.
6. LANDLORD'S OBLIGATIONS.
(a) Subject to the limitations hereinafter set forth, Landlord
agrees, while Tenant is occupying the Premises, to furnish to Tenant; (i)
facilities to provide water at those points of supply both within the Premises
and those provided for general use of tenants of the Building; (ii) facilities
to provide a supply of electrical current reasonably necessary for general
business office use and occupancy of the Premises and electric lighting and a
supply of electrical current to the common areas of the Building; (iii)
heating and refrigerated air conditioning in season; and (iv) janitorial
service to the Premises, all such services to be provided in scope, quality and
frequency to those services being customarily provided by landlords in
comparable office buildings in the surrounding area. Heating, ventilation and
air conditioning requirements and standards under this Lease shall be subject,
however, to such regulations as the Department of Energy or other local, state
or federal governmental agency, Board or commission shall adopt from time to
time. In addition, Landlord agrees to maintain the public and common areas of
the Building, such as lobbies, stairs, corridors and restrooms, in reasonably
good order and condition; provided, however, that Tenant shall reimburse
Landlord, upon demand, for all repairs and additional maintenance resulting
from damages to such public or common areas caused by Tenant, or its employees,
agents or invitees. Landlord reserves the right, exercisable without notice
and without liability to Tenant for damage or injury to property, persons or
business and without effecting an eviction, constructive or actual, or
disturbance of Tenant's use or possession of the Premises, or giving rise to
any claim by Tenant for setoff or abatement of rent, to decorate and to make
repairs, alterations, additions, modifications, changes or improvements,
whether structural or otherwise, in and about the Building, or any part
thereof,
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<PAGE> 7
and for such purposes to enter upon the premises and, during the continuance of
any such work, to temporarily close doors, entryways, public space and
corridors in the Building and to interrupt or temporarily suspend Building
services and facilities, provided access to the Premises is not materially
impaired and Landlord gives Tenant notice of, and uses reasonable efforts to
avoid, performance of work which will unreasonably disrupt Tenant's business
operations.
(b) If Landlord, to any extent, fails to make available any of the
services to be provided by Landlord expressly set forth above or if any
slowdown, stoppage or interruption of, or any change in the quantity, character
or availability of, the services to be provided by Landlord expressly set forth
above occurs, such failure or occurrence shall not render Landlord liable in
any respect for damages to either person, property or business, nor be
construed as an eviction of Tenant or work an abatement of rent, nor relieve
Tenant from fulfillment of any covenant or agreement hereof. Should any
equipment or machinery furnished by Landlord break down or for any cause beyond
Landlord's reasonable control cease to function properly, Landlord shall use
reasonable diligence to repair same promptly, but Tenant shall have no claim
for abatement of rent or damages on account of any interruptions in service
occasioned thereby or resulting therefrom. Notwithstanding the foregoing, if
Landlord negligently causes Tenant to be unable to occupy the Premises for a
period of three (3) consecutive business days, the per diem Basic Rental and
Basic Cost thereafter shall be abated until such time as Tenant can re-occupy
the Premises.
7. IMPROVEMENT OF THE PREMISES.
(a) Landlord and Tenant agree to comply with the following
schedule in buildout of the Premises:
(i) If a Space Plan has not as yet been prepared and
approved by Landlord and Tenant, Tenant will meet with Landlord or its agents
within three (3) business days after full execution of this Lease and shall
provide Landlord all information reasonably necessary, to prepare a Space Plan
for the Premises. Within five (5) business days after delivery by Landlord to
Tenant of the Tenant's Space Plan, Tenant may accept the Space Plan as proposed
or request reasonable modifications to such Space Plan. Any modifications to
the Space Plan made after such period shall be made at Tenant's expense and, if
delay in occupancy occurs as a result of such modifications, Tenant shall be
liable to Landlord for each day beyond the projected Commencement Date that
delivery of the Space Plan is delayed.
(ii) Upon Tenant's acceptance of the Space Plan, either
because of Tenant's approval or failure to object within the requisite five (5)
business day period, Landlord shall prepare and deliver to Tenant detailed
floor plan layouts, together with working drawings and written instructions
sufficiently detailed to enable Landlord to let firm contracts (herein called
"Tenant Plans") with respect to and reflecting the partitions and improvements
in the Premises. Tenant shall fully and completely cooperate with Landlord in
the preparation of the Tenant Plans, shall promptly respond to Landlord's
requests for information and approvals within five (5) business days after
inquiry, and shall use its best efforts to assist Landlord to complete the
Tenant Plans as soon as possible. Tenant agrees to deliver to Landlord, not
later than five (5) business days after delivery of the Tenant Plans to Tenant,
an original executed copy of the Tenant Plans approved by Tenant; provided,
however, if Tenant, in good faith, reasonably objects to any aspect of the
Tenant Plans submitted by Landlord, Tenant shall specify in detail any
objection to such Tenant Plans as submitted to Tenant in a written notice to
Landlord within such 5-day period. Landlord shall, if applicable, modify such
Tenant Plans to address Tenant's written objections, and submit new Tenant
Plans to Tenant for approvals. Notwithstanding the foregoing, the Tenant Plans
shall remain subject to Landlord's review and approval, which approval shall
not be unreasonably withheld, and shall be deemed modified to take account of
any changes reasonably required by Landlord. If Tenant fails to timely
deliver the Tenant Plans as required herein or makes modifications to the
Tenant Plans after the deadlines provided in this subsection, Tenant shall (1)
pay to Landlord all reasonable expenses incurred by Landlord due to Tenant's
modifications and/or delay in delivering the Tenant Plans; and (2) pay to
Landlord as additional rent a per diem charge for each day beyond the
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<PAGE> 8
initially projected Commencement Date that occupancy is delayed due to Tenant's
failure to timely comply with the requirements in this Section.
(iii) Time is of the essence as to all dates provided in
this subsection.
(b) Any changes to any approved Tenant Plans desired by Tenant
shall be submitted in writing and in detail to Landlord and shall be subject to
Landlord's consent, which consent shall not be unreasonably withheld.
(c) Landlord shall, in a good and workmanlike manner, cause the
Premises to be improved and completed in accordance with the Tenant Plans by
"Landlord's Contractor" (as hereinafter defined). Landlord reserves the right
however, (i) to make substitutions of material of equivalent grade and quality
when and if any specified material shall not be readily and reasonably
available, subject to Tenant's reasonable approval and (ii) to make changes
necessitated by conditions met in the course of construction, provided that
Tenant's approval of any substantial change shall first be obtained (which
approval shall not be unreasonably withheld or delayed so long as there shall
be general conformity with Tenant Plans. Any Special Tenant Work shall be
contracted by obtaining at least three (3) contractor's competitive bids for
such work; provided, however, that if Landlord's contractor incurs any
additional expense because of the need to deal with the additional contractor,
Tenant shall be responsible for all such expenses.
(d) In the completion and preparation of the Premises in
accordance with the Tenant Plans, Landlord agrees to perform at its own expense
those items of work set forth on the schedules attached hereto as Exhibit C -
Building Standard Materials, and Exhibit D - Tenant Space Plan (herein
collectively referred to as "Standard Tenant Work"), to the extent required by
Tenant Plans. All work to be performed by Landlord in addition to or in
substitution for Standard Tenant Work is hereinafter referred to as "Special
Tenant Work". All Special Tenant Work shall be furnished, installed and
performed by Landlord, utilizing a general contractor or construction manager
("Landlord's Contractor") selected by Landlord (which may be an affiliate of
Landlord or a partner in Landlord or an affiliate of a partner in Landlord) for
and on behalf of Tenant and at Tenant's sole expense, based on Landlord's
out-of-pocket contract or purchase price for materials, labor and service,
including, without limit, any reasonable contractor's fee (not to exceed ten
percent (10%)) for the contractor's overhead and profit and charges for
cutting, patching, cleaning up and removal of waste and debris, plus
architects' and engineers' fees, plus the product obtained by multiplying all
of the foregoing, except architect's and engineer's fees (as reduced by
appropriate credits for substituted Standard Tenant Work) by ten percent (10%)
for Landlord's expenses and profit in handling the substitution.
(e) Tenant shall pay Landlord as additional rent for all Special
Tenant Work from time to time during the progress of the work, within five (5)
days after Landlord shall have given Tenant an invoice or invoices therefor.
All costs relating to Special Tenant Work shall be paid by Tenant to Landlord
one-third (1/3) upon approval of pricing, one-third (1/3) upon commencement of
construction with the balance due at the time of completion. Any failure by
Tenant to pay for all Special Tenant Work shall constitute failure to pay rent
when due and an Event of Default by Tenant hereunder, giving rise to all
remedies available to Landlord under this Lease and at law or equity for
non-payment of rent.
8. OPERATING EXPENSES.
(a) During the term of this Lease, Tenant shall pay as additional
rent an amount (per each square foot within the Premises) equal to the excess
("Excess") from time to time of the per square foot Basic Cost (which shall be
calculated by dividing the Basic Cost by the total rentable square feet in the
Building) over the Base Year Stop. Beginning with the first day of the
thirteenth month of the Lease Term following the Commencement Date, and on each
January 1 thereafter, Landlord shall make a good faith estimate of the Excess
for each upcoming calendar year and Tenant shall pay monthly additional rent
equal to one-twelfth (1/12) of such estimate.
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<PAGE> 9
(b) By May 1 of each calendar year during Tenant's occupancy and
the calendar year following termination of this Lease, or as soon thereafter as
practical, Landlord shall furnish to Tenant a detailed statement certified as
correct by a certified public accountant or officer of Landlord's managing
agent of Landlord's actual Basic Cost for the previous year. If for any
calendar year additional rent collected for the prior year as a result of
Landlord's estimate of Basic Cost is (i) in excess of the additional rent
actually due during such prior year, then Landlord shall either credit such
overpayment towards Tenant's estimated share of operating expenses for the next
year or refund to Tenant any overpayment, or (ii) less than the additional rent
actually due during such prior year, then Tenant shall pay to Landlord, on
demand, any underpayment with respect to the prior year.
(c) Each statement furnished by Landlord to Tenant shall be
conclusive and binding upon Tenant unless, within ninety (90) days after
receipt of such statement, Tenant delivers to Landlord a written notice
specifying the particular details for which such statement is claimed to be
incorrect. Pending the determination of such dispute, Tenant shall pay without
delay the full amount of the additional rent payable by Tenant in accordance
with each such statement that Tenant is disputing. Without limiting the
preceding sentence, Tenant, or its authorized agent, shall have the right,
during Landlord's normal business hours and after reasonable notice, to
inspect/audit, the books and records of Landlord applicable to the
determination of any statement of any additional rent payable by Tenant for the
purpose of verifying in good faith the information contained in such statement
for a period of up to one year after the receipt of such statement by Tenant,
by a certified public accountant. If the audit determines that the statement
overstates the amount due by Tenant by five percent (5%) or more, (i) Landlord
shall refund any overpayment revealed by Tenant's audit; (ii) Landlord shall
pay the reasonable costs of the audit; provided, however, that Landlord shall
have the right to dispute the findings of the audit and to obtain a
reimbursement from Tenant for the costs associated thereto if it is later
determined that the audit was in error to the Landlord's detriment; and (iii)
Tenant shall then have the right to audit previous year's statements.
(d) Should Tenant require any additional work or service,
including but not limited to heating, ventilation and air conditioning ("HVAC")
furnished outside Landlord's normal operating hours of 8:00 a.m. to 6:00 p.m.,
Monday through Friday, 9:00 a.m. to 1:00 p.m., Saturday, excluding Christmas,
New Year's Day, Fourth of July, Memorial Day, Labor Day, and Thanksgiving Day,
Landlord may, upon reasonable advance notice by Tenant, furnish such additional
services at a charge not more than Landlord's actual cost, plus reasonable
overhead for the additional services provided, it being agreed that the cost to
the Landlord of such additional services shall not be considered or treated as
Basic Cost.
(e) Landlord may, at any time in its sole discretion, require
separate metering for gas, electric power or for any other utility service
required by Tenant if such service is reasonably deemed by Landlord to be in
excess of Building standard usage, in which case the cost of such metering
shall be at Tenant's sole cost and expense, due and payable upon demand by
Landlord, and in which event Tenant shall pay for all such utility service in
excess of its normal and customary usage, as metered. For any utility
services that are separately metered as prescribed herein the amount of said
services which had been included in the calculation of the Base Year Stop or
the calculation of Basic Cost shall be excluded therefrom.
(f) Notwithstanding any expiration or termination of this Lease
prior to the end of the Lease Term, Tenant's obligations to pay any and all
additional rent pursuant to this Lease shall continue and shall cover all
periods up to the expiration or termination date of this Lease. Tenant's
obligation to pay any and all additional rent or other sums owing by Tenant to
Landlord under this lease shall survive any expiration or termination of this
Lease.
9. USE.
(a) Tenant shall use the Premises only for the Permitted Use.
Tenant will not occupy or use the Premises, or permit any portion of the
Premises to be occupied or used, for any business or purpose other than the
Permitted Use or for any use or purpose which is unlawful, in part or in whole,
disreputable
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<PAGE> 10
in any manner, or extra hazardous, nor will Tenant permit anything to be done
which shall in any way cause substantial noise, vibrations or fumes, or
increase the rate of insurance on the Building or contents or cause any
cancellation of any insurance policy covering the Building or any portion of
its contents. In the event that, by reason of acts or omissions of Tenant,
there shall be any increase in the rate of insurance on the Building or
contents created by Tenant's acts, omissions or conduct of business, Tenant
hereby agrees to pay to Landlord the amount of such increase on demand. Tenant
will conduct its business and control its agents, employees and invitees in
such a manner as not to create any nuisance, nor interfere with or disturb the
possession of other tenants or Landlord in the management of the Building.
Tenant shall not, without the prior written consent of Landlord, paint, install
lighting or decorations, or install any signs, window or door lettering or
advertising media of any type on or about the Premises or any part thereof.
Landlord shall provide, at no cost to Tenant, Building Standard signage
displaying Tenant's name at Tenant's suite entrance and one listing for Tenant
on the Building directory. In accordance with the provisions of Exhibit "E",
attached hereto and made a part hereof, Tenant, at its sole cost and expense,
may install a sign on the exterior of the Building. The size, design,
location and method of installation of said sign must be approved in advance,
in writing by Landlord, and must satisfy all applicable state, county and
municipal laws and regulations, with Tenant, at Tenant's expense, being
responsible for securing all necessary approvals and permits. Tenant shall be
responsible for all costs related to the repair of the Building's exterior if
the sign is moved or relocated.
(b) Notwithstanding the generality of subsection (a) above, Tenant
shall conduct all activity in compliance with all federal, state, and local
laws, statutes, ordinances, rules, regulations, orders and requirements of
common law concerning protection of the environment or human health
("Environmental Laws"). Tenant shall also cause its subtenants (if subtenants
are permitted by this Lease or are hereafter approved by Landlord), licensees,
invitees, agents, contractors, subcontractors and employees to comply with all
Environmental Laws. Tenant and its permitted subtenants, licensees, invitees,
agents, contractors, and subcontractors shall obtain, maintain, and comply with
all necessary environmental permits, approvals, registrations and licenses.
In addition to and not in limitation of the foregoing, Tenant, its
permitted subtenants, licensees, invitees, agents, contractors, subcontractors
and employees shall not generate, refine, produce, transfer, process or
transport Hazardous Material on, above, beneath or near the Premises, the
Building or the Land. As used herein, the term "Hazardous Materials" shall
include, without limitation, all of the following: (1) hazardous substances,
as such term is defined in the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA"), 42 U.S.C. Section 9601 (14), as
amended by the Superfund Amendments and Reauthorization Act of 1986, Pub. L.
No. 99-499, 100 Stat. 1613 (Oct. 17, 1986) ("SARA"); (2) regulated substances,
within the meaning of Title I of the Resource Conservation and Recovery Act, 42
U.S.C. Sections 6991-6991(i), as amended by SARA; (3) any element, compound or
material which can pose a threat to the public health of the environment when
released into the environment; (4) hazardous waste as defined in the Maryland
Environmental Code Section 7-101(c) or hazardous substances as defined in
Maryland Environmental Code Section 7-201(m); (5) petroleum and petroleum
byproducts; (6) an object or material which is contaminated with any of the
foregoing; (7) any other substance designated by any of the Environmental Laws
or a federal, state or local agency as detrimental to public health, safety and
the environment.
(c) Tenant shall protect, indemnify and save Landlord harmless
from and against any and all liability, loss, damage, cost or expense
(including reasonable attorneys' fees) that Landlord may suffer or incur as a
result of any claims, demands, damages, losses, liabilities, costs, charges,
suits, orders, judgments or adjudications asserted, assessed, filed, or entered
against Landlord or any of the Building or the Land, by any third party,
including, without limitation, any governmental authority, arising from
Tenant's breach of Environmental Laws or otherwise arising from Tenant's
generation, refining, production, storage, handling, use, transfer, processing,
transportation, release, spillage, pumping, pouring, emission, emptying,
dumping, discharge or escape of Hazardous Materials on, from or affecting the
Premises, the Building or the Land, including, without limitation, liability
for costs and expenses of
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<PAGE> 11
abatement, correction, clean-up or other remedy, fines, damages, response
(including death) and property damage.
(d) To the best of Landlord's knowledge, Landlord states that,
during the period of its ownership, it has not used or deposited or consented
to the use or deposit by others of Hazardous Materials on, from, or affecting
the Premises in any manner which violates federal, state or local laws,
ordinances, rules, or regulations governing the use, storage, treatment,
transportation, manufacture, refinement, handling, production or disposal of
Hazardous Materials.
Landlord shall indemnify, defend (by counsel reasonably acceptable to
Tenant), protect, and hold Tenant, and each of the Tenant's employees, officer,
directors, shareholders, agents, successors and assigns, free and harmless from
and against any and all claims, actions, causes of action, liabilities,
penalties, fines, forfeitures, losses or expenses (including reasonable
attorneys' fees and cost) or death of or injury to any person or damage to any
property whatsoever (excluding damage to Tenant's personal property) arising
from the presence of Hazardous Materials caused by Landlord and Landlord's
agents, employees and contractors.
(e) Tenant, its permitted subtenants, licensees, invitees, agents,
contractors, subcontractors and employees shall not release, spill, pump, pour,
emit, empty, dump or otherwise discharge or allow to escape Hazardous Materials
onto the Land or Building, and Tenant shall take all action necessary to remedy
the results of any such release, spillage, pumping, pouring, emission,
emptying, dumping, discharge, or escape.
(f) Tenant shall within 48 hours of receipt deliver to Landlord
copies of any written communication relating to the Building or the Land
between Tenant and any governmental agency or instrumentality concerning or
relating to Environmental Laws.
(g) Landlord agrees to provide: (1) free unreserved parking
spaces to Tenant, up to the percentage set forth on the Data Sheet during the
Term of the Lease; and (2) five (5) reserved visit spaces, available to all
tenants in the Building, in an area determined by Landlord in its reasonable
discretion, at the main entrance to the Building; it being hereby acknowledged
and agreed by Tenant that Landlord shall not be responsible for enforcement
thereof and that Landlord shall in no way be considered in Default of this
Lease due to noncompliance of Tenant's visitor parking restriction for said
spaces. Tenant, its permitted subtenants, licensees, invitees, agents,
contractors, subcontractors and employees shall not use parking spaces on the
Land or Building in excess of that number set out on the attached Data Sheet
which has been reasonably determined by Landlord to be Tenant's proportionate
share of the total parking spaces available on the Building and Land.
Notwithstanding anything contained herein, if any governmental regulation or
ordinance is enacted or amended after the effective date of this Lease so as to
allow or require a modification in Tenant's number of parking spaces, Landlord
reserves the right to make such modification without modifying in any way the
rent due hereunder or any other obligations of Tenant.
10. TENANT'S REPAIRS AND ALTERATIONS.
Tenant shall not in any manner deface or injure or make
unapproved modifications of the Premises or the Building and will pay the cost
of repairing any damage or injury done to the Premises or the Building or any
part thereof by Tenant or Tenant's agents, employees or invitees. Tenant
shall throughout the Lease Term take good care of the Premises and keep them
free from waste and nuisance of any kind. Tenant agrees, at Tenant's sole
cost and expense, to keep the Premises, including, without limitation, all
fixtures installed by Tenant and any plate glass and special store fronts, in
good condition and make all necessary non-structural repairs and replacements
except those caused by fire, casualty or acts of God covered by Landlord's fire
insurance policy covering the Building. Such repairs and replacements shall be
in quality equal to the original work and installation. If Tenant fails to
commence such repairs within fifteen (15) days after the occurrence of the
damage or injury and complete same as soon as reasonably practicable
thereafter, Landlord may, at its sole option, make such repair, and Tenant
shall,
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upon demand therefor, pay Landlord for Landlord's cost thereof plus fifteen
percent (15%) for overhead costs. Notwithstanding the foregoing, Landlord
shall maintain and repair the roof and all structural and exterior walls of the
Building, as well as the common utility system and equipment.
Notwithstanding anything in the Lease to the contrary, Tenant will not
make or allow to be made any alterations or physical additions in or to the
Premises, including changes in locks on doors, plumbing, lighting, wiring or
partitions, without the prior written consent of Landlord, which shall not be
unreasonably withheld for non-structural, interior alterations and additions.
All maintenance, repairs, alterations, additions or Improvements shall be
conducted only by contractors or subcontractors approved in advance in writing
by Landlord, which approval shall not be reasonably withheld, it being
understood that Tenant shall procure and maintain, and shall cause such
contractors and subcontractors engaged by or on behalf of Tenant to procure and
maintain, insurance coverage against such risks, in such amounts and with such
companies as Landlord may reasonably require in connection with any such
maintenance, repair, alteration, addition or improvement.
At the end or other termination of this Lease, Tenant shall deliver up
the Premises with all improvements located therein in good repair and
condition, reasonable wear and tear and casualty damage excepted, and shall
deliver to Landlord all keys to the Premises. All alterations, additions or
improvements (whether temporary or permanent in character) made in or upon the
Premises by Landlord or Tenant shall be Landlord's property upon termination of
this Lease and shall remain on the Premises without compensation to Tenant;
provided, however, that if Landlord so elects at the time of consenting to
same, then on or prior to the termination or upon earlier vacation of the
Premises, Tenant shall remove all alterations, additions, improvements and
partitions erected by Landlord or Tenant (i) after the Commencement Date and
(ii) prior to the Commencement Date, if such alterations, additions or
improvements exceed those which would be otherwise provided by Landlord as
Standard Tenant Work and shall restore the Premises to their original condition
by the date of termination of this Lease or upon earlier vacating of the
Premises, except as provided herein. If Tenant fails to restore the Premises
upon Landlord's request, Landlord shall have the right to perform such
restoration and Tenant shall be liable for all costs and expenses incurred by
Landlord therefor.
11. ASSIGNMENT AND SUBLETTING.
(a) Landlord's Prior Consent Required. Neither Tenant nor
Tenant's representatives, successors and assigns nor any subtenant or assignee
will assign, transfer, mortgage or otherwise encumber this Lease or sublet or
rent (or permit the occupancy or use of) the Premises, or any part thereof,
without obtaining the prior written consent of Landlord, which consent will not
be unreasonably withheld as provided in subsection (b) below, nor shall any
assignment or transfer of this Lease or the right of occupancy hereunder be
effectuated by operation of law or otherwise without the prior written consent
of Landlord. Any reasonable expenses incurred by Landlord with respect to the
review and consent or denial of consent of the foregoing shall be paid by
Tenant to Landlord as additional rent, and shall be due and payable with the
monthly installment of rent when billed.
(b) Qualification of Subtenant. Subject to the provisions of
Section 11(c) hereof, Landlord shall not unreasonably withhold its consent
hereunder to any sublease by Tenant, provided that all of the following
conditions are met:
(i) Tenants must first notify Landlord, in writing, of
any proposed sublease, at least thirty (30) days prior to the effective date of
such proposed sublease. The notice to Landlord must include a copy of the
proposed sublease and a copy of the proposed subtenant's financial statement
for its most recent fiscal year, prepared in accordance with generally accepted
accounting principles and certified by a public accountant or an executive
officer of the proposed subtenant.
(ii) The subtenant must have a credit rating satisfactory
to Landlord (in Landlord's reasonable judgment).
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(iii) The sublease must be expressly subject and
subordinate to this Lease, must require that any subtenant must comply with and
abide by all of the terms of the Lease, and must provide that any termination
of this Lease shall extinguish the sublease as well.
(iv) The subtenant may not propose to change the use of
the premises to a purpose other than as stated in Section 9 hereof, nor conduct
its business in a manner which, in Landlord's reasonable judgment, is not
appropriate for a first-class office building in the metropolitan Washington,
D.C. area.
(v) The subtenant may not be a tenant, subtenant, or
other occupant of any part of the Building, unless Landlord is unable to offer
such occupant comparable space elsewhere in the Building.
(vi) The Tenant may not be in default under this Lease, or
have committed three (3) events of monetary default hereunder during the
previous twelve (12) months, whether cured or not.
(vii) The sublease shall contain the following clause:
"Underlying Lease Agreement. This Sublease and
Subtenant's rights under this Sublease shall at all times be subject
and subordinate to the underlying Lease identified in Paragraph ____
hereof, and Subtenant shall perform all obligations of Tenant under
said Lease, with respect to the Sublease Premises. Subtenant
acknowledges that any termination of the underlying Lease shall
extinguish this Sublease. Landlord's consent to this Sublease shall
not make Landlord a party to this Sublease, shall not create any
privity of contract between Landlord and Subtenant or other
contractual liability or duty on the part of the Landlord to the
Subtenant, shall not constitute its consent or waiver of consent to
any subsequent sublease or sub-sublease, and shall not in any manner
increase, decrease or otherwise affect the rights and obligations of
Landlord and Tenant under the underlying Lease, in respect of the
Sublease Premises. Subtenant shall have no right to assign this
Sublease or further sublet the Premises without the prior written
consent of Landlord. Any term of this Sublease that in any way
conflicts with or alters the provisions of the underlying Lease shall
be of no effect as to Landlord and Landlord shall not assume any
obligations as Landlord under the Sublease and Tenant shall not
acquire any rights under the Sublease directly assertable against
Landlord under the underlying Lease. Tenant hereby collaterally
assigns to Landlord this Sublease and any and all payments due to
Tenant from Subtenant as additional security for Tenant's performance
of all of its covenants and obligations under the underlying Lease,
and, after an Event of Default under the underlying Lease, authorizes
Landlord to collect the same directly from Subtenant and otherwise
administer the provisions of this Sublease, at the option of Landlord.
Subtenant hereby consents to such collateral assignment of this
Sublease to Landlord and agrees to observe its obligations created
hereby."
(c) Landlord's Right of First Refusal. Landlord shall have the
right, within fourteen (14) days after receipt of the notice from Tenant,
required under Section 11 (b) (i) above, that Tenant proposes to sublease all
or a portion of the Premises, to elect (i) to sublet the Premises from Tenant
for the term proposed by Tenant at the rent then being paid by Tenant for the
Premises under Section 3 hereof (or that portion thereof which Tenant proposes
to sublease) or the proposed sublease rent, whichever is higher, by a
proportionate reduction in the rent as hereinafter set forth; (ii) to
terminate this Lease in its entirety if Tenant intends to sublet all or
substantially all of the Premises; or (iii) to require Tenant to pay Landlord,
within ten (10) days of receipt, one-half (1/2) of the amount of rent payable
by such sublease in excess of the amount of rent payable by Tenant hereunder
with respect to the portion of the Premises sublet, offset by any direct
expenses incurred by Tenant in subleasing such portion of the Premises
(amortized in equal monthly payments over the initial term of such sublease).
Upon exercise by Landlord of either of the
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options set forth in subsection (i) or (ii) above, Tenant shall surrender the
Premises or such portion of the Premises, as the case may be, to Landlord, and
thereafter the rent to be paid by Tenant pursuant to Section 3 above shall be
that portion of the total rent which the amount of square foot area remaining
in the possession of Tenant bears to the total square foot area of the
Premises. In the event that Landlord does not exercise its right to sublet the
Premises, or such portion of the Premises, as the case may be, or to terminate
this Lease, within said fourteen (14) day period, Tenant shall have the right,
subject to the provisions of subsection (iii) above, to sublet the Premises or
a portion thereof after first obtaining the written consent of Landlord as
provided in Section 11(a) above. Upon exercise by Landlord of the option set
forth in subsection (iii) above, Tenant covenants and agrees to provide
Landlord with semi-annual statements, prepared and verified by a certified
public accountant or executive officer of Tenant, stating the amount of rent
received by Tenant from its subtenant(s) during such semi-annual period. If
such statement shows Tenant failed to make the full payment required by
subsection (iii) above, a late charge equal to ten percent (10%) of the amount
due shall be paid by Tenant to Landlord as additional rent, and shall be due
and payable with the monthly installment of rent next becoming due. For
purposes of calculating any amounts due from Tenant pursuant to subsection
(iii) above, the "amount of rent payable by Tenant" exclusive of such amounts
due pursuant to subsection (iii) shall be that portion of the total rent which
the amount of square foot area sublet by Tenant bears to the total square foot
area of the Premises.
(d) No Waiver or Release. The consent by Landlord to any
assignment or subletting shall not be construed as a waiver or release of
Tenant from the terms of any covenant or obligation under this Lease, nor shall
the collection or acceptance of rent from any such assignee, subtenant or
occupant constitute a waiver or release of Tenant of any covenant or obligation
contained in this Lease, nor shall any such assignment or subletting be
construed to relieve Tenant from obtaining the consent in writing of Landlord
to any further assignment or subletting. Tenant hereby assigns to Landlord
the rent due from any subtenant of Tenant and hereby authorizes each such
subtenant to pay said rent direct to Landlord, at Landlord's option, in the
event of any Event of Default by Tenant under the terms of this Lease.
(e) Subsidiary of Tenant. Tenant may assign all or part of this
Lease, or sublease, all or part of the Premises, without the consent of
Landlord, to any corporation or partnership that controls, is controlled by, or
under common control with Tenant.
12. INDEMNITY.
(a) Landlord shall not be liable for, and Tenant shall indemnify
and save harmless Landlord, ground lessor, if any, and Landlord's managing
agent, if any, from and against and from all fines, damages, suits, claims,
demands, losses and actions (including reasonable attorneys' fees) for any
injury to person (including death) or damage to or loss of property on or about
the Premises caused by Tenant, its employees, contractors, subtenants, invitees
or by any other person entering the Premises or the Building under the express
or implied invitation of Tenant, or arising out of Tenant's use of the
Premises. Landlord shall not be liable or responsible for any loss or damage
to any property or death or injury to any person occasioned by theft, fire, act
of God, public enemy, criminal conduct of third parties, injunction, riot,
strike, insurrection, war, court order, requisition or other governmental body
or authority, by other tenants of the Building or any other matter beyond the
reasonable control of Landlord, or for any injury or damage or inconvenience
which may arise through repair or alteration of any part of the Building, or
failure to make repairs, or from any cause whatever except Landlord's and
Landlord's agents', employees' or contractors' gross negligence or willful
misconduct.
(b) Landlord hereby agrees to make no claim against Tenant, and
will indemnify and save Tenant, its agents, employees and invitees harmless
from any claim which shall be made against Tenant by any agent, employee,
licensee or invitee of Landlord or by others claiming the right to be on or
about the common area for any injury, loss or damage to person or property
occurring upon the common areas, unless due to Tenant's and Tenant's agents,
employees or invitees gross negligence or willful misconduct.
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<PAGE> 15
13. SUBORDINATION.
This Lease and all rights of Tenant hereunder shall be and are subject
and subordinate at all times to any deeds of trust, mortgages, installment sale
agreements and other instruments or encumbrances, as well as to any ground
leases or primary leases, that now or hereafter cover all or any part of the
Building, the land or an interest of Landlord therein, and to any and all
advances made on the security thereof, and to any and all increases, renewals,
modifications, consolidations, replacements and extensions of any of such deeds
of trust, mortgages, installment sale agreements, instruments, encumbrances or
leases, as well as any substitutions therefor, all automatically and without
the necessity of any further action on the part of Tenant to effectuate such
subordination. Tenant shall, however, upon demand at any time or times
execute, acknowledge and deliver to Landlord any and all instruments and
certificates that in the reasonable judgment of Landlord may be necessary or
proper to confirm or evidence such subordination. Notwithstanding the
foregoing, if any mortgagee, trust beneficiary or ground lessor shall elect to
have this Lease treated as if it became effective and Tenant had taken
possession prior to the lien of its mortgage or deed of trust or prior to its
ground lease, and shall give notice thereof to Tenant, this Lease shall be
deemed to have become effective and Tenant's right to possession shall be
considered prior to such mortgage, deed of trust, or prior to its ground lease
whether this Lease is dated prior or subsequent to the date of said mortgage,
deed of trust or ground lease or the date of recording thereof. In the event
any mortgage or deed of trust to which this Lease is subordinate is foreclosed
or a deed in lieu of foreclosure is given to the mortgagee or beneficiary,
Tenant shall attorn to the purchaser at the foreclosure sale or to the grantee
under the deed in lieu of foreclosure; in the event any ground lease to which
this Lease is subordinate is terminated, Tenant shall attorn to the ground
lessor. Tenant shall upon demand at any time execute, acknowledge and deliver
to Landlord's mortgagee (including the beneficiary under any deed of trust) or
other holder any and all instruments and certificates that in the judgment of
Landlord's mortgagee may be necessary or proper to confirm or evidence such
attornment. Landlord shall obtain a Non-Disturbance Agreement from the holder
of each mortgage, Deed of Trust and ground lease encumbering the building, per
the terms of Section 52 hereinbelow.
14. RULES AND REGULATIONS.
Tenant and Tenant's agents, contractors, employees and invitees will
comply fully with all requirements of the Rules and Regulations of the Building
and related facilities, as specified in the Rules and Regulations now or
hereafter sent by Landlord to Tenant. Landlord shall at all times have the
right to change the rules and regulations to promulgate other Rules and
Regulations in such manner as Landlord may deem advisable, in its reasonable
discretion, for safety, care or cleanliness of the Building and related
facilities or the Premises, and for preservation of good order therein, all of
which Rules and Regulations, changes and amendments will be forwarded to Tenant
in writing and shall be carried out and observed by Tenant. Tenant shall be
responsible for compliance therewith by the agents, contractors, employees and
invitees of Tenant.
15. INSPECTION.
Landlord or its officers, agents and representatives, and any ground
lessor or mortgagee thereof, shall have the right to enter into and upon any
and all parts of the Premises at all reasonable hours upon reasonable advance
notice (or, in any emergency or for the purpose of performing routine
maintenance, at any hour and without advance notice) to (a) inspect the
Premises at any time, (b) clean or make repairs or alterations or additions as
Landlord may deem necessary (but without any obligation to do so, except as
expressly provided for herein), or (c) show the Premises to prospective
tenants, purchasers or lenders; and Tenant shall not be entitled to any
abatement or reduction of rent by reason thereof, nor shall such be deemed to
be an actual or constructive eviction. Landlord agrees to use reasonable
efforts to minimize disruption of Tenant's business.
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<PAGE> 16
16. CONDEMNATION.
If the whole or, as determined by Landlord in its sole discretion, any
substantial part of the Land or the Building should be taken for any public or
quasi-public use under governmental law, ordinance or regulation, or by right
of eminent domain, or by private purchase in lieu thereof and the taking would
prevent or materially interfere with the use of the Premises for the purpose
for which they are being used, as determined by Landlord and Tenant, this Lease
shall terminate and the rent shall be abated during the unexpired portion of
this Lease, effective when the physical taking of said Land or the Building
shall occur. If part of the Land or Building shall be taken for any public or
quasi-public use under any governmental law, ordinance or regulation, or by
right of eminent domain, or by private purchase in lieu thereof, and this Lease
is not terminated as provided in the sentence above, this Lease shall not
terminate but the rent payable hereunder during the unexpired portion of this
Lease shall be reduced to such extent as Landlord and Tenant shall determine
may be fair and reasonable under all of the circumstances. In such event,
Landlord, at its expense, shall restore the remaining premises to a complete
architectural unit. In the event of any such taking or private purchase in
lieu thereof, Landlord and Tenant shall each be entitled to all remedies
provided by law; provided, however, that any award paid to Tenant shall not
detract from any award which Landlord is entitled to receive; and if
Landlord's award is reduced to any extent as a result of any award to Tenant,
then Tenant shall assign and pay over to Landlord the amount by which
Landlord's award was so reduced.
17. FIRE OR OTHER CASUALTY.
In the event of damage to or destruction of the Premises or the
Building, or the entrances and other common facilities necessary to provide
normal access to the Premises, caused by fire or other casualty, Tenant shall
provide immediate notice thereof to Landlord, and Landlord shall make repairs
and restorations as hereafter expressly provided, unless this Lease shall be
terminated by Landlord or Tenant or unless any mortgagee which is entitled to
receive casualty insurance proceeds fails to make available to Landlord a
sufficient amount of such proceeds to cover the cost of such repairs and
restoration.
If (i) the damage is of such nature or extent, in the judgment of
Landlord's architect, that more than one hundred twenty (120) consecutive days,
after the event of the damage or destruction would be required (with normal
work crews and hours) to repair and restore the part of the Premises or
Building which has been damaged, or (ii) a substantial portion of the Premises
or the Building is so damaged that, in Landlord's sole judgment, it is
uneconomic to restore or repair the Premises or the Building or the repairs to
the Premises or the Building will take more than one hundred twenty (120) days
to substantially complete, as the case may be, Landlord shall so advise Tenant
in writing within thirty (30) days of the date of the destruction, and Landlord
or Tenant, for a period of ten (10) days thereafter, shall have the right to
terminate this Lease by written notice to the other, as of the date specified
in such notice, which termination date shall be no later than thirty (30) days
after the date of such notice. In the event of such fire or other casualty,
if this Lease is not terminated pursuant to the terms of this Section 17, and
if (i) sufficient casualty insurance proceeds are available for use for such
restoration or repair, and (ii) this Lease is then in full force and effect,
Landlord shall proceed promptly and diligently to restore the Premises to its
substantially similar condition prior to the occurrence of the damage, provided
that Landlord shall not be obligated to repair or restore any alterations,
additions or fixtures which Tenant or any other tenant may have installed
unless Tenant, in a manner satisfactory to Landlord, assures payment in full of
all costs which may be incurred by Landlord in connection therewith. Landlord
shall not insure any improvements or alterations to the Premises in excess of
Standard Tenant Work, or any fixtures, equipment or other property of Tenant.
Tenant shall, at its sole expense, insure the value of its leasehold
improvements, fixtures, equipment or other property located in the Premises,
for the purpose of providing funds to Landlord to repair and restore the
Premises to its substantially similar condition prior to occurrence of the
damage. If there be any such alteration, fixtures or additions and Tenant
does not assure or agree to assure payment of the cost or restoration or repair
as aforesaid, Landlord shall have the right to determine the manner in which
the Premises shall be restored so as to be substantially the same as the
Premises existed
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<PAGE> 17
prior to the damage occurring, as if such alterations, additions or fixtures
had not been made or installed. The validity and effect of this Lease shall
not be impaired in any way by, and Landlord shall have no liability as a result
of, the failure of Landlord to complete repairs and restoration of the Premises
or of the Building within one hundred twenty (120) consecutive days after the
date of damage or destruction, even if Landlord had in good faith notified
Tenant that it estimated that the repair and restoration would be completed
within such period, provided that Landlord proceeds diligently with such repair
and restoration, except that Tenant shall have the right to terminate this
lease by providing Landlord with written notice thereof within five (5) days of
the expiration of said one hundred twenty (120) day period.
In the case of damage to the Premises is of a nature or extent that
Tenant's continued occupancy of all or any material part of the Premises is
substantially impaired, the rent otherwise payable by Tenant hereunder shall be
equitably abated or adjusted for the duration of such impairment. In no
event, however, shall any damages be payable by Landlord to Tenant in respect
of business interruption resulting from any fire or other casualty on the
Premises or Building. Tenant shall be responsible to insure and/or repair all
of Tenant's leasehold improvements and all equipment, fixtures and personal
property located in the Premises.
18. HOLDING OVER.
Tenant shall, at the termination of this Lease by lapse of time or
otherwise, yield up immediate possession to Landlord. If Landlord agrees in
writing that Tenant may hold over after the expiration or termination of this
Lease, unless the parties hereto otherwise agree in writing on the terms of
such holding over, the holdover tenancy shall be subject to termination by
either Landlord or Tenant at any time upon not less than thirty (30) days
advance written notice, and all of the other terms and provisions of this Lease
shall be applicable during that period, except Tenant shall pay Landlord from
time to time upon demand, as a rental for the period of any holdover, an amount
equal to one hundred fifty percent (150%) of the Basic Rental in effect on the
termination date, computed on a daily basis for each day of the holdover
period. No holding over by Tenant, whether with or without consent of
Landlord, shall operate to extend this Lease except as otherwise expressly
provided in this Lease. The foregoing notwithstanding, if Landlord does not
agree in writing that Tenant may hold over after the expiration or termination
of this Lease, Landlord, in addition to accepting the daily rental during the
period of such holding over, as hereinabove provided, shall be entitled to
pursue all remedies at law to which Landlord is entitled, including, without
limitation, rights to ejectment and damages.
19. TAXES.
Tenant shall be liable for all taxes levied or assessed against
personal property, furniture or fixtures placed by Tenant in the Premises, and
if any such taxes for which Tenant is liable are in any way levied or assessed
against Landlord, Tenant shall pay the Landlord upon demand that part of such
taxes for which Tenant is primarily liable hereunder.
20. EVENTS OF DEFAULT.
The occurrence of any of the following events shall be deemed to be an
event of default ("Event of Default") by Tenant under this Lease:
(a) Tenant shall fail to pay when due any rental or other
sums payable by Tenant hereunder (or under any other lease now or hereafter
executed by Tenant in connection with space in the Building), and same is not
cured within five days after Landlord's written notice thereof to Tenant,
provided, however, that Landlord shall not be required to provide notice upon
the third (3rd) such default by Tenant within any twelve (12) month period.
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<PAGE> 18
(b) Tenant shall fail to comply with or observe Section 9
of this Lease (or a comparable section of any other lease now or hereafter
executed by Tenant in connection with space in the Building).
(c) Tenant shall fail to comply with or observe any other
provision of this Lease (or any other lease now or hereafter executed by Tenant
in connection with space in the Building), and same is not cured within fifteen
(15) days after Landlord's written notice thereof to Tenant identifying the
specific failure or violation, provided however, that in the event the
violation identified is incapable of being cured within such fifteen (15) day
period for reasons which are beyond the reasonable control of Tenant, then such
fifteen (15) day cure period shall be extended for an additional reasonable
amount of time necessary for Tenant to effect such cure, but in any event not
longer than forty-five (45) days, as long as Tenant proceeds diligently to
effect such cure upon its receipt of Landlord's written notice.
(d) Tenant or any partner or guarantor of Tenant, as the
case may be, shall apply for or consent to the appointment of a receiver,
trustee or liquidator of itself or himself or any of its or his property, admit
in writing its or his inability to pay its or his debts as they mature, make a
general assignment for the benefit of creditors, be adjudicated a bankrupt,
insolvent or file a voluntary petition in bankruptcy or a petition or an answer
seeking reorganization or an arrangement with creditors or to take advantage of
any bankruptcy, reorganization, insolvency, readjustment of debt, dissolution
or liquidation law or statute, or an answer admitting the material allegations
of a petition filed against it or him in any proceeding under any such law, or
if action shall be taken by Tenant or any partner or guarantor of Tenant for
the purposes of effecting any of the foregoing.
(e) Any court of competent jurisdiction shall enter an
order, judgment or decree approving a petition seeking reorganization of Tenant
or all or a substantial part of the assets of Tenant or any partner or
guarantor of Tenant, or appointing a receiver, sequestrator, trustee or
liquidator of Tenant or any partner or guarantor of Tenant or any of its or his
property, and such order, judgment or decree shall continue unstayed and in
effect for any period of at least ninety (90) days.
21. REMEDIES.
Upon the occurrence of any Event of Default specified in this Lease,
Landlord shall have the option to pursue any one or more of the following
remedies without any notice or demand whatsoever:
(a) Distrain, collect or bring an action for such rent as may be
in arrears, and request entry of judgment therefor as provided for in case of
rent in arrears, or file a proof of claim in any bankruptcy or insolvency
proceeding for such rent, or institute any other proceedings, whether similar
or dissimilar to the foregoing, to enforce payment thereof.
(b) Declare due and payable and sue for and recover, all unpaid
rent for the unexpired period of the Lease Term (and also all additional rent
as the amounts thereof can be determined or reasonably estimated) as if by the
terms of this Lease the same were payable in advance, discounted to its present
value at an interest rate equal to the prime rate as announced in the Wall
Street Journal or if not published, another comparable publication on the date
that Landlord seeks such remedy, together with all legal fees and other
expenses incurred by Landlord in connection with the enforcement of any of
Landlord's rights and remedies hereunder.
(c) Terminate this Lease, in which event Tenant shall immediately
surrender the Premises to Landlord; and if Tenant fails to do so, Landlord
may, without prejudice to any other remedy which it may have for possession or
arrearages in rent, enter upon and take possession of the Premises and expel or
remove Tenant and any other person who may be occupying the Premises or any
part thereof, without being liable for trespass or any claim for damages
therefor, and Tenant agrees to pay to Landlord on demand the amount of all loss
and damage which Landlord may suffer by reason of such termination,
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<PAGE> 19
whether through inability to relet the Premises on satisfactory terms or
otherwise, including the loss of rental for the remainder of the Lease Term.
(d) Without termination of the Lease, enter upon and take
possession of the Premises and expel or remove Tenant and any other person who
may be occupying the Premises or any part thereof, without being liable for
trespass or any claim or damages therefor; and relet the Premises on behalf of
the Tenant on such terms as Landlord shall deem advisable and receive the rent
therefor, and Tenant agrees to pay to Landlord on demand any deficiency that
may arise by reason of such reletting for the remainder of the Lease Term.
(e) Without termination of the Lease, enter upon the Premises, by
force of law, without being liable for trespass or any claim for damages
therefor, and do whatever Tenant is obligated to do under the terms of this
Lease; and Tenant agrees to reimburse Landlord on demand for any expenses
which Landlord may incur in thus effecting compliance with Tenant's obligations
under this Lease, and Tenant further agrees that Landlord shall not be liable
for any damages resulting to the Tenant from such action.
(f) If Tenant fails to perform any covenant or observe any
condition to be performed or observed by Tenant hereunder or acts in violation
of any covenant or condition hereof beyond any applicable cure or grace period
set forth in this Lease, Landlord may, but shall not be required to on behalf
of Tenant, perform such covenant and/or take such steps, including entering
upon the Premises, as may be necessary or appropriate, if Landlord shall have
given Tenant at least three (3) days prior written notice of Landlord's
intention to do so, unless an emergency situation exists, in which case
Landlord shall have the right to proceed immediately and all costs and expenses
incurred by Landlord in so doing, including reasonable legal fees, shall be
paid by Tenant to Landlord upon demand, plus interest at the overdue interest
rate set forth herein from the date of expenditure(s) by Landlord, as
additional rent. Landlord's proceeding under the rights reserved to Landlord
under this Section shall not in any way prejudice or waive any rights Landlord
might otherwise have against Tenant by reason of Tenant's default.
(g) Exercise any other rights and remedies available to Landlord
at law or in equity. No reentry or taking possession of the Premises by
Landlord shall be construed as an election on its part to terminate this Lease,
unless a written notice of such intention be given to Tenant. Neither pursuit
of any of the foregoing remedies provided nor any other remedies provided
herein or by law shall constitute a forfeiture or waiver of any rent due to
Landlord hereunder or of any damages accruing to Landlord by reason of the
violation of any of the terms, provisions and covenants herein contained.
Landlord's acceptance of rent following an Event of Default hereunder shall not
be construed as Landlord's waiver of such Event of Default. No waiver by
Landlord of any violation or breach of any of the terms, provisions and
covenants herein contained shall be deemed or construed to constitute a waiver
of any other violation or Event of Default. The loss or damage that Landlord
may suffer by reason of termination of this Lease or the deficiency from any
reletting as provided for above shall include the expense of repossession and
any repairs or remodeling undertaken by Landlord following possession. Should
Landlord at any time terminate this Lease for any default, Tenant shall not be
relieved of its liabilities and obligations hereunder and, in addition to any
other remedy Landlord may have, Landlord may recover from Tenant all damages
Landlord may incur by reason of such default, including the cost of recovering
the Premises and the loss of rental for the remainder of the Lease Term.
Tenant's obligations and liabilities under this Lease shall also survive
repossession and reletting of the Premises by Landlord pursuant to the
foregoing provisions of this Section 21.
(h) The abatement of Basic Rental, if any, and other concessions
of the Landlord (which may include among other items: (i) brokerage fees; (ii)
moving allowances; (iii) Tenant improvements; (iv) Lease assumptions; (v)
unamortized portions of the buildout; and (vi) any other cash allowances or
payments) are subject to the condition that, throughout the Lease Term, Tenant
will perform and comply with all of the terms, covenants and conditions of this
Lease to be performed or complied with by Tenant. If, after the occurrence of
an Event of Default, Landlord terminates this Lease or re-enters and takes
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possession of the Premises without such a termination, the abatement of Basic
Rental and other Landlord concessions shall cease to apply and Tenant shall be
obligated within 10 days after demand, to pay to Landlord the unamortized
portion of the Basic Rental abated and the value of all Landlord's concessions,
said amounts to be amortized on a straight-line basis over the initial lease
term. Landlord's right to recover the Basic Rental abated and the value of
all Landlord's concessions shall be in addition to any other remedies available
to Landlord as a result of such termination or re-entry.
(i) All rights and remedies of Landlord and Tenant herein
enumerated shall be cumulative, and none shall exclude any other right or
remedy allowed by law.
(j) In addition to any other rights and remedies provided in this
Lease, and with or without terminating this Lease, Landlord may with force of
law, re-enter, terminate Tenant's right of possession and take possession of
the Premises, the provision of this Section 21 operating as a notice to quit,
any other notice to quit or of Landlord's intention to re-enter the Premises
being hereby expressly waived.
(k) Notwithstanding anything to the contrary contained in this
Section 21, Landlord agrees to use reasonable efforts to re-rent the Premises;
provided, however, that Landlord shall have no obligation to re-rent the
Premises before any other space which may be available in properties owned by
Landlord in the Rockville market at the time of re-possession by Landlord or
which may thereafter become available in such properties.
22. SURRENDER OF PREMISES
No act done and no failure to act by Landlord or its agents during the
term hereby granted shall be deemed an acceptance of a surrender of the
Premises, and no agreement to accept a surrender of the Premises shall be valid
unless the same be made in writing and signed by Landlord.
23. ATTORNEYS' FEES
In case it should be necessary or proper for Landlord or Tenant to
bring any action under this Lease or to consult or place this Lease, or any
amount payable by Tenant or Landlord hereunder, with an attorney concerning a
default of Landlord or Tenant hereunder, whether such default is later cured,
then the non-prevailing party shall pay any and all reasonable attorney's fees,
court costs and expenses of the prevailing party incurred in connection with
such enforcement.
24. INTENTIONALLY OMITTED
25. MECHANICS' LIENS
Tenant shall not permit any mechanics' lien or other liens to be
placed upon the Premises or the Building or improvements thereon during the
Lease Term, caused by or resulting from any work performed, materials furnished
or obligation incurred by or at the request of Tenant. In the case of the
filing of any such lien Tenant will promptly, and in any event within thirty
(30) days after the filing thereof, satisfy or release such lien by means of
payment thereof, bonding Landlord against any loss occasioned thereby (in which
case Tenant shall have the right in due diligence to contest and dispute such
lien so long as such bond remains in place), or take such other action as may
be otherwise acceptable to Landlord.
26. WAIVER OF SUBROGATION; INSURANCE
(a) Landlord and Tenant hereby release the other from any and all
liability or responsibility to the other or anyone claiming through or under
them by way of subrogation or otherwise for any loss or damage to property, but
only to the extent that such loss or damage is covered by any insurance then in
force, even if such fire or other casualty shall have been caused by the fault
of negligence of the other
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party, or anyone for whom such party may be responsible; provided, however,
that such release shall be applicable and in force and effect only with respect
to any loss or damage occurring during such time as the policy or policies of
insurance covering said loss shall contain a clause or endorsement to the
effect that this release shall not adversely affect or impair said insurance or
prejudice the right of the insured to recover thereunder. If Landlord or
Tenant is unable to obtain a waiver of subrogation at a commercially reasonable
cost, it must give notice to the other party within fifteen (15) days of the
date of final execution of the Lease; in which event the waiver of subrogation
provision herein will not be applicable to either party.
(b) Tenant shall maintain throughout the Lease Term, at Tenant's
sole cost and expense, insurance against loss or liability in connection with
bodily injury, death, property damage and destruction, in or upon the premises
or the remainder of the Land, and arising out of the use of all or any portion
of the same by Tenant or its agents, employees, officers, invitees, visitors
and guests, under policies of comprehensive general public liability insurance
having such limits as to each as may be reasonably required by Landlord from
time to time, but in any event of not less than One Million Dollars
($1,000,000) per occurrence for death or injury and One Million Dollars
($1,000,000) per occurrence for property damage or destruction. Such policies
shall name Landlord and Tenant, (and, at Landlord's or such mortgagee's or
paramount lessor's or installment seller's request) any mortgagee of all or any
portion of the Buildings and any landlord of, or installment seller to,
Landlord as the insured parties, shall provide that they shall not be
materially modified or cancelled without at least thirty (30) days' prior
written notice to Landlord and any other party designated as aforesaid and
shall be issued by insurers of recognized responsibility licensed to do
business in the jurisdiction in which the Building is located and acceptable to
Landlord. Copies of all such policies certified by the insurers to be true
and complete or certificates of insurance shall be supplied to Landlord and
such mortgagees, paramount lessors and installment sellers at all times.
27. INTENTIONALLY OMITTED
28. BROKERAGE
Tenant warrants that it has had no dealings with any broker or agent
other than Barnes, Morris, Pardoe & Foster and West Group in connection with
the negotiation or execution of this Lease, and Tenant agrees to indemnify
Landlord against all costs, expenses, attorneys' fees or other liability for
commissions or other compensation or charges claimed by West Group and any
other broker or agent, except Barnes, Morris, Pardoe & Foster, claiming the
same by, through or under Tenant. Tenant and Landlord agree that under no
circumstances shall Landlord have an obligation to pay a fee or commission to
WEST*GROUP.
29. ESTOPPEL CERTIFICATES
Tenant shall from time to time, within ten (10) days after Landlord
shall have requested the same of Tenant, execute, acknowledge and deliver to
Landlord a written instrument in recordable form and otherwise in such form as
required by Landlord (i) certifying that this Lease is in full force and
effect and has not been modified, supplemented or amended in any way (or, if
there have been modifications, supplements or amendments thereto, that it is in
full force and effect as modified, supplemented or amended and stating such
modifications, supplements and amendments); and (ii) stating any other fact or
certifying any other condition reasonably requested by Landlord or requested by
any mortgagee or prospective mortgagee or purchaser of the Property or of any
Interest therein. In the event that Tenant shall fail to return a fully
executed copy of such certificate to Landlord within the foregoing ten (10) day
period, then Tenant shall be deemed to have approved and confirmed all of the
terms, certifications and representations contained in such certificate.
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30. NOTICES
Each provision of this Lease or of any applicable governmental laws,
ordinances, regulations and other requirements with reference to the sending,
mailing or delivery of any notice or the making of any payment by Landlord to
Tenant or with reference to the sending, mailing or delivery or the making of
any payment by Tenant to Landlord shall be deemed to be complied with when and
if the following steps are taken:
(a) All rent and other payments required to be made by Tenant to
Landlord hereunder shall be payable to Landlord at the address for Landlord set
forth below or at such other address as Landlord may specify from time to time
by written notice delivered in accordance herewith. Tenant's obligation to pay
rent and any other amounts to Landlord under the terms of this Lease shall not
be deemed satisfied until such other amounts have been actually received by
Landlord.
(b) All payments required to be made by Landlord to Tenant
hereunder shall be payable to Tenant at the address set forth below, or at such
other address within the continental United States as Tenant may specify from
time to time by written notice delivered in accordance herewith.
(c) With the exception of subsection (a) above, any notice or
document required or permitted to be delivered hereunder shall be deemed to be
delivered when actually received when deposited in the United States Mail,
postage prepaid, registered or certified mail, return receipt requested, or
hand delivered or via overnight express, addressed to the parties hereto at the
respective addresses set out below, or at such other address as they have
previously specified by written notice delivered in accordance herewith.
If to Landlord, at: (per Section (p) and (q) of the Data Sheet
attached hereto)
If to Tenant, at: (per Section (p) of the Data Sheet attached
hereto)
If and when included within the term "Landlord", as used in this
instrument, there are more than one person, firm or corporation, all shall
jointly arrange among themselves for their joint execution of such notice
specifying some individual at the specific address for the receipt of notices
and payments to Landlord if and when included within the term Tenant, as used
in this instrument, there are more than one person, firm or corporation, all
shall jointly arrange among themselves for their joint execution of such notice
specifying some individual at some specific address within the continental
United Sates for the receipt of notices and payment to Tenant. All parties
included within the terms "Landlord" and "Tenant", respectively, shall be bound
by notices given in accordance with the provisions of this paragraph to the
same effect as if each had received such notice.
31. FORCE MAJEURE
Whenever a period of time is herein prescribed for action to be taken
by Landlord or Tenant or whenever Landlord or Tenant is otherwise obligated to
perform hereunder, such party shall not be liable or responsible for, and there
shall be excluded from the computation for any such period of time, any delays
or failures to perform due to strikes, riots, acts of God, shortages of labor
or materials, war, governmental laws, regulations or restrictions or any other
causes of any kind whatsoever which are beyond the reasonable control of that
party; provided, however, that this section shall not be applicable in the
event of any monetary default by Tenant.
32. SEVERABILITY
If any clause or provision of this lease is illegal, invalid or
unenforceable under present or future laws effective during the Lease Term,
then and in that event, the remainder of this Lease shall not be
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affected thereby. Each covenant and agreement contained in the Lease shall be
construed as a separate and independent covenant or agreement.
33. AMENDMENTS; WAIVER; BINDING EFFECT
The provisions of this lease may not be waived, altered, changed or
amended, except by instrument in writing signed by both parties hereto, and
such instrument may be subject to the approval of any mortgagees, and ground
lessors of record. The terms and conditions contained in this Lease shall
apply to, inure to the benefit of, and be binding upon the parties hereto, and
upon their respective successors in interest and legal representatives, except
as otherwise herein expressly provided.
34. QUIET ENJOYMENT
Provided Tenant has performed all of the terms and conditions of this
Lease, including the payment of rent, to be performed by Tenant, Tenant shall
peaceably and quietly hold and enjoy the Premises for the Lease Term, without
hindrance from Landlord or others claiming through Landlord, subject to the
terms and conditions of this Lease and to all mortgages, ground leases and
other encumbrances to which this Lease is subject and subordinate.
35. LIABILITY OF TENANT
If there is more than one Tenant, the obligations hereunder imposed
upon Tenant shall be joint and several. If there is a guarantor of Tenant's
obligations hereunder, the obligations hereunder imposed upon Tenant shall be
the joint and several obligations of Tenant and such guarantor, and Landlord
need not first proceed against Tenant before proceeding against such guarantor
nor shall any such guarantor be released from its guaranty for any reason
whatsoever, including without limitation any extensions or renewals hereof, any
amendments hereto, any waivers hereof or failure to give such guarantor any
notices hereunder.
36. LANDLORD LIABILITY
The liability of Landlord and all officers, employees, shareholders,
venturers or partners (general or limited) of Landlord to Tenant for any
default by Landlord under the terms of this Lease shall be non-recourse and
limited to the interest of Landlord in the Building, and Landlord or any
officer, employee, shareholder, venturer or partner (general or limited) of
Landlord shall have the right to sell or transfer all or any portion of the
Land or the Building to any third party, and upon any such sale or other
transfer of all of the Building or the Land, and the corresponding assignment
of this lease, the previous Landlord shall have no further liability or
obligation to Tenant hereunder or otherwise for obligations arising after the
date of transfer.
37. CERTAIN RIGHTS RESERVED BY LANDLORD
Landlord shall have the following rights, exercisable without notice,
except as provided herein, and without liability to Tenant for damage or injury
to property, persons or business and without effecting an eviction,
constructive or actual, or disturbance of Tenant's use or possession or giving
rise to any claim or setoff or abatement of rent or affecting any of Tenant's
obligations hereunder:
(a) To change the name by which the Building is designated upon
four (4) months written notice to Tenant.
(b) To decorate and to make repairs, alterations, additions,
changes or improvements, whether structural or otherwise, in and about the
Building, or any part thereof, and for such purposes to enter upon the Premises
and, during the continuance of any such work, to temporarily close doors, entry
ways, public space and corridors in the Building, to interrupt or temporarily
suspend Building services and
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facilities and to change the arrangement and location of entrances or
passageways, doors and doorways, corridors, elevators, stairs, toilets, or
other public parts of the Building, so long as the Premises are reasonably
accessible. Landlord agrees to use reasonable efforts not to disturb Tenant's
business operations.
(c) To grant to anyone the exclusive right to conduct any business
or render any service in or to the Building, provided such exclusive right
shall not operate to exclude Tenant from the use expressly permitted herein.
(d) To take all such reasonable measures as Landlord may deem
advisable for the security of the Building and its occupants, including without
limitation, the search of all persons entering or leaving the Building, the
evacuation of the Building for cause, suspected cause, or for drill purposes,
the temporary denial of access to the Building, and the closing of the Building
after normal business hours and on Saturdays, Sundays and holidays; subject,
however, to Tenant's right to admittance when the Building is closed after
normal business hours under such reasonable regulations as Landlord may
prescribe from time to time which may include, by way of example but not of
limitation, that person entering or leaving the Building, whether or not during
normal business hours, identify themselves to a security officer by
registration or otherwise and that such persons establish their right to enter
or leave the Building.
38. FINANCIAL STATEMENTS
Tenant agrees to provide to Landlord within 14 days of request by
Landlord but no more than once per year, the most recent audited annual
financial statements of Tenant, including balance sheets, income statements,
and financial notes ("Statements"), only in connection with the transfer of
ownership, sale or refinancing of the Building. Tenant consents that Landlord
may release the Statements to Landlord's subsidiaries, affiliates, lenders,
advisors, joint venture partners, or potential purchasers of the property
solely for the purposes of evaluating Tenant's financial condition with respect
to performance under the Lease. Landlord and Landlord's subsidiaries,
affiliates, lenders, advisors, joint venture partners or potential purchasers
of the property agree to keep the Statements confidential and to not release
the Statements to third parties except as set forth herein.
39. NOTICE TO LENDER
If the Premises or the Building or any part thereof are at any time
subject to a mortgage or a deed of trust or other similar instrument and the
Lease or the rentals are assigned to such mortgagee, trustee or beneficiary and
the Tenant is given written notice thereof, including the post office address
of such assignee, then Tenant shall not terminate this Lease or abate rentals
for any default on the part of Landlord without first giving written notice by
certified or registered mail, return receipt requested, to such mortgagee,
trustee, beneficiary and assignee, specifying the default in reasonable detail,
and affording such mortgagee, trustee, beneficiary and assignee a reasonable
opportunity to make performance, at its election, for and on behalf of the
Landlord.
40. REPRESENTATIONS
(a) Any approval by Landlord and Landlord's architects and/or
engineers of any of Tenant's drawings, plans and specifications which are
prepared in connection with any construction of improvements in the Premises
shall not in any way be construed or operate to bind Landlord or to constitute
a representation or warranty of Landlord as to the adequacy or sufficiency of
such drawings, plans and specifications, or the improvements to which they
relate, or any use, purpose, or condition, but such approval shall merely be
the consent of Landlord as may be required hereunder in connection with
Tenant's construction of improvements in the Premises in accordance with such
drawings, plans and specifications.
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(b) Each and every covenant and agreement contained in this Lease
is, and shall be construed to be, a separate and independent covenant and
agreement.
(c) Neither Landlord nor Landlord's agents or brokers have made
any representations or promises with respect to the premises, the Building or
the Land except as herein expressly set forth and no rights, easements or
licenses are acquired by Tenant by implication or otherwise except as expressly
set forth in the provisions of this Lease.
(d) The submission of this Lease to Tenant shall not be construed
as an offer, nor shall Tenant have any rights with respect thereto unless and
until Landlord shall, or shall cause its managing agent to, execute a copy of
this Lease and deliver the same to Tenant.
41. ADDITIONAL RENT
The Tenant shall pay as additional rent any money required to be paid
pursuant to the provisions of this lease whether or not the same be designated
"additional rent". If such amounts or charges are not paid at the time
provided in this Lease, they shall nevertheless, if not paid when due, be
collectable as additional rent with the next installment of rent thereafter
falling due hereunder, but nothing herein contained shall be deemed to suspend
or delay the payment of any amount of money or charge at the time the same
becomes due and payable hereunder, or limit any other remedy of the Landlord.
42. ENTIRE AGREEMENT
The Lease contains all covenants and agreements between Landlord and
Tenant relating to any manner to the rent, use and occupancy of Premises and
Tenant's use of the Building and other matters set forth in this lease. No
prior agreement or understanding pertaining to the same shall be valid or of
any force or effect and the covenants and agreements of this Lease shall not be
altered, modified or added to except in writing signed by Landlord and Tenant.
43. LEGAL PROCEEDINGS
Landlord and Tenant hereby waive the right to a jury trial in any
action, proceeding or counterclaim between Tenant and Landlord or their
successors arising out of this Lease or Tenant's occupancy of the Premises or
Tenant's right to occupy the same.
44. LAWS AND REGULATIONS
Tenant agrees at Tenant's expense to comply with all applicable laws,
ordinances, rules, and regulations, whether now in effect or hereafter enacted
or promulgated, of any governmental entity or agency having jurisdiction of the
Premises relating to Tenant's use or occupancy of the Premises.
45. EXHIBITS
(i) Exhibit A - Outline of Premises
(ii) Exhibit B - Rules and Regulations
(iii) Exhibit C - Building Standard Materials
(iv) Exhibit D - Tenant Space Plan
(v) Exhibit E - Signage
(vi) Exhibit F - Land Description
46. RENEWAL OPTIONS
(a) As long as Tenant is not in material or monetary default of
this Lease, and Tenant is still in occupancy of a substantial portion of the
Premises, Tenant shall have and is hereby granted the option
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(the "Extension Option") to extend the Term for up to two (2) consecutive
periods of three (3) additional Lease Years each (together referred to as the
"Extension Periods" and individually referred to as an "Extension Period")
provided Tenant gives written notice to Landlord of its election to exercise
such extension at least nine (9) months prior to the expiration of the last day
of the original Term with respect to the first Extension Option, and at least
nine (9) months prior to the last day of the first Extension Period with
respect to the second Extension Option.
(b) All terms and conditions of this Lease, including without
limitation, all provisions governing the payment of Additional Rent, shall
remain in full force and effect during the Extension Period(s), except the (1)
Basic Rent payable upon the commencement of each Extension Period shall be
ninety-five percent (95%) of the respective prevailing market rental rate
(incorporating market concessions such as rent abatement and Tenant work
allowance) with respect to comparable space in comparable buildings in the
vicinity of 9400 Key West Boulevard (the "Current Market Rental Rate") at the
time of the commencement of the applicable Extension Period, and (2) for
purposes of computing the annual adjustments to the Basic Rent pursuant to
Section 4 shall be used with subsequent escalations in Basic Rent thereafter to
be determined by market practice with respect to comparable space. Landlord
and Tenant shall negotiate in good faith to determine the amount of Basic Rent
for the applicable Extension Period within seventy-five (75) days of the date
of Landlord's receipt of Tenant's written notice of its election to exercise
the respective Extension Option provided for under this Section 46.
(c) In the event Landlord and Tenant are unable to agree upon the
Basic Rent for any such Extension Period within said seventy-five (75) day
period, then the Basic Rent for such Extension Period shall be based upon
ninety-five percent (95%) of the Current Market Rental Rate determined by a
board of three (3) licensed real estate brokers, one of whom shall be named by
Landlord, one by Tenant, and the two so appointed shall select a third. Each
member of the board of brokers shall be licensed in Maryland as a real estate
broker, specializing in the field of commercial office leasing in the Rockville
area of Maryland, have no less than ten (10) years' experience in such field,
and recognized as ethical and reputable within the field. Landlord and Tenant
agree to make their appointments promptly within five (5) days after the
expiration of the seventy-five (75) day period, or sooner if mutually agreed
upon. The two (2) brokers selected by Landlord and Tenant shall promptly
select a third broker within ten (10) days after they both have been appointed,
and each broker, within fifteen (15) days after the third broker is selected,
shall submit his or her determination of said Current Market Rental Rate. The
Current Market Rental Rate shall be the determination of the broker that is not
the highest or the lowest (or if two brokers reach an identical determination,
the determination of such two brokers). Landlord and Tenant shall each pay
the fee of the broker selected by it, and they shall equally share the payment
of the fee of the third broker.
47. RIGHT OF FIRST OPTION - SECOND (2nd) FLOOR
(a) Subject to the existing rights of U.S. West under its current
lease, Tenant shall have the first (1st) option to expand into the 7,111 square
feet currently under lease to U.S. West on the second (2nd) floor upon the
expiration of the existing tenant's (or their assigns) prime lease or any
option period.
(b) Tenant may exercise the right of first (1st) option set forth
in Subsection 47(a) as follows: (i) Landlord shall give Tenant written notice
of the existing tenant's anticipated lease expiration, (ii) Tenant shall have
fourteen (14) days after receipt of Landlord's notice to notify Landlord in
writing whether Tenant desires to exercise its right of first option to expand
into said space, and (iii) if Tenant declines to exercise its right of first
option, or fails to reply to Landlord's notice within the time provided, then,
in any of said events the right described hereinabove shall become null and
void with respect to such space, and Landlord shall have the right to lease
such space to another tenant. Time is of the essence for the provisions of
this Section 47.
(c) If Tenant elects to exercise its right of first option,
Landlord and Tenant shall promptly enter into a modification of this lease
which will bring such space under the terms and conditions of this Lease,
except that the rental rate for the additional space shall be the then current
escalated rental rate being
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paid by Tenant. In addition, Landlord shall provide Tenant with a total
allowance of Twelve and 00/100 Dollars ($12.00) per rentable square foot which
Tenant may apply to any and all construction improvements which Tenant requests
Landlord to make to the existing conditions. The commencement date for the
right of first option space shall be in accordance with Subsection 1(c) of this
Lease. Landlord and Tenant agree that the build-out of the option space shall
be substantially in accordance with the provisions of Section 7 of this lease,
including the receipt of three (3) competitive bids for all construction.
(d) Tenant shall have no right of first option at any time that
Tenant shall be in material and/or monetary default under the terms of this
lease.
48. INTENTIONALLY DELETED
49. CONTINUING RIGHT OF FIRST REFUSAL
(a) Tenant shall have the right of first (1st) refusal for all
space in the Building. At such time or times as Landlord receives a bona fide
offer from a third party or Landlord extends a bona fide offer to a third party
to lease all or a portion of the available second (2nd) floor space, Landlord
shall provide written notice to Tenant during the period commencing on the date
of execution of this Lease through and including the day prior to the Lease
expiration date, including extensions thereto. Notwithstanding anything to the
contrary contained in subsection (47) above, within ten (10) days of receipt of
such written notice from Landlord, Tenant shall notify Landlord in writing of
its decision whether or not to lease the entire amount of the available second
(2nd) floor space for which Landlord has received such bona fide offer. If
Tenant elects not to lease such Additional Space or fails to notify Landlord of
its decision prior to the expiration of such ten (10) day period, then Landlord
shall have the right to lease such Additional Space to any other person or
entity upon the terms and conditions specified to Tenant by Owner, provided,
however, that if the offeree fails to lease such space and Landlord receives
another bona fide offer from a third party or Landlord extends another bona
fide offer from a third party to lease all or a portion of such space, then
Landlord shall re-offer such space to Tenant in accordance with this
subsection. Additionally, Tenant's right of first (1st) refusal shall be in
effect upon the subsequent termination of said third (3rd) party Tenant's lease
for said space. Time is of the essence for the provisions of this Section 49.
(b) If Tenant exercises this right of First Refusal during the
first two (2) years of the initial lease term, pursuant to the notification
provisions herein provided or otherwise, the rental rate for said space shall
be Tenant's then current escalated rental rate on a per square foot basis, at
the commencement of the additional space. In addition, Landlord shall provide
Tenant with a total allowance of (i) Twelve and 00/100 Dollars ($12.00) per
rentable square foot of additional space leased if the space is leased during
the first (1st) lease year and (ii) Ten and 00/100 Dollars ($10.00) per
rentable square foot of additional space if the space is leased during the
second (2nd) lease year. The commencement date for the right of first
refusal space shall be in accordance with Subsection 1(e) of this Lease.
Landlord and Tenant agree that the build-out of the option space shall be
substantially in accordance with the provisions of Section 7 of this Lease,
including the receipt of three (3) competitive bids for all construction. The
expiration date for this First Right of Refusal space shall be coterminous with
this lease; however, in no event will Landlord be required to expend more
than the total allowance set forth hereinabove.
(c) If Tenant exercises this Right of First Refusal after the end
of the second (2nd) lease year, the economic terms and conditions shall be
exactly as proposed to the third (3rd) party tenant.
(d) The Additional Space shall become a part of the Demised
Premises on the date which is the earlier of (i) the date on which the
Additional Space is substantially completed (as such term is defined in Section
1(e) and ready for occupancy by Tenant for the normal conduct of its business,
or (ii) the date Tenant or anyone claiming through or under Tenant first
commences beneficial use of the Additional Space (the "Additional Space
Commencement Date"). Notwithstanding anything to the contrary herein, in the
event of Tenant Delay, the date of substantial completion of the Additional
Space shall be deemed to be
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the date on which the Additional Space would have been substantially complete
in the absence of such Tenant Delay.
(e) (i) Within ten (10) days of the date of Tenant's exercise
of its option to lease the Additional Space, or as soon thereafter as
reasonably possible but in no event longer than thirty (30) days with both
parties hereto agreeing to negotiate in good faith with time being of the
essence, Landlord and Tenant shall execute an addendum to this Lease to set
forth (a) the number of Rentable Square Feet of space constituting the Demised
Premises after the addition of the Additional Space; (b) the location of the
Additional Space by amending Exhibit A-1 of this Lease; (c) the amount of the
Monthly Basic Rent for the Demised Premises as increased by the Additional
Space; (d) the adjustments to the percentages for determining additional rent;
and (e) the schedule for the construction of the improvements in the Additional
Space.
(ii) Within ten (10) days after the Additional Space
Commencement Date, Landlord and Tenant shall execute a declaration to confirm
the Additional Space Commencement Date.
(f) Tenant shall have no right of First Refusal at any time that
Tenant shall be in material or monetary default under the terms of this Lease,
or if Tenant is subletting more than fifty percent (50%) of the Demised
Premises.
50. RENTAL CREDITS
(a) Notwithstanding any other provisions of this Lease, Landlord
shall provide Tenant with a Rental Credit equal to Fifty-Three Thousand Seven
Hundred Twenty-Six and 84/100 Dollars ($53,726.84) (hereinafter referred to as
"Rental Credit"). Tenant may apply the Rental Credit towards those items as
stated in Subsections 50(a)(i), 50(a)(ii) and 50(a)(iii), subject to the
provisions provided for hereinbelow.
(i) Tenant may apply the Rental Credit towards
construction costs related to Special Tenant Work.
(ii) Tenant may apply the Rental Credit towards the
following items: Cabling (provides for voice/data distribution throughout
facility); actual cost of moving furniture; Building signage; and telephone
switch.
(iii) Any amounts of the Rental Credit not used pursuant to
Subsections 50(a)(i) and 50(a)(ii) above, shall be used to off-set Basic Rental
as it becomes due and payable, in addition to the Rental Abatement as provided
for in Subsection 50(b) below.
(iv) To the extent that the costs associated with those
items as stated in Subsection 50(a)(ii) are not construction related and Tenant
directly receives invoices from contractors/vendors for same, Tenant shall be
responsible for directly reimbursing said contractors/vendors. Tenant shall
provide Landlord with copies of invoices, and Landlord shall promptly reimburse
Tenant within thirty (30) days of Landlord's receipt of said invoices, up to
the amount of the Rental Credit provided for in Subsection 50(a) above.
(b) In addition to the Rental Credit provided for hereinabove,
Landlord shall abate Five Thousand Four Hundred Twenty-Eight and 58/100 Dollars
($5,428.58) of Tenant's Basic Rental each month for the first (1st), four (4)
months of the Lease Term as it becomes due and payable.
51. SECURITY DEPOSIT
(a) Upon execution of this Lease, Tenant shall deliver to
Landlord, as a security deposit, an irrevocable letter of credit in form and
substance reasonably satisfactory to Landlord, in the amount of Two Hundred
Ninety-Four Thousand and 00/100 ($294,000.00), running in favor of Landlord,
with such letter
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of credit securing Tenant's obligations hereunder subject to the terms and
conditions set forth hereinbelow. The letter of credit shall not be
considered an advance payment of rental or a measure of Landlord's damages in
case of default by Tenant. The letter of credit shall be issued by a bank
acceptable to Landlord in Landlord's sole and reasonable discretion and under
the supervision of the Superintendent of Banks for the State of Maryland, or a
National Banking Association. If the credit of the bank which originally
issues the letter of credit becomes unacceptable to Landlord, Tenant shall
substitute another letter of credit from a bank which is acceptable to Landlord
in Landlord's sole and reasonable discretion. The letter of credit shall be
irrevocable for the period ending thirty (30) days after the later of (i) the
date of actual termination of this Lease or (ii) the date Tenant shall have
vacated and surrendered the entire Premises to Landlord and shall provide that
it is automatically renewable for said period hereby demised unless released
pursuant to the provisions of this Section 51.
(b) The form and terms of the letter of credit shall be reasonably
acceptable to Landlord and shall provide, among other things in effect that:
(i) Landlord ("Beneficiary") shall have the right to draw
down an amount up to the then current face amount of the letter of credit upon
presentation to the issuing bank of Landlord's sworn declaration signed or
purportably signed by or on its behalf reading as follows:
1. that the declarant is an officer (or general
partner or sole proprietor in the case of a general
partnership or sole proprietorship respectively) of
the beneficiary on behalf of the Beneficiary;
2. that the declarant has authority to make the
statutory declaration on behalf of the
Beneficiary:
3. that the declarant certifies that the
statements made herein are accurate;
4. the declaration is made pursuant to the terms
of the letter of credit number ___________;
5. the amount claimed is not greater than the
maximum aggregate amount available under the letter
of credit number ________ as of the date of
presentation;
6. the amount claimed represents an amount due
and owing to the Beneficiary under the terms of a
lease made between the beneficiary and FileTek, Inc.,
relating to the premises at 9400 Key West Boulevard,
Rockville, Maryland;
7. that FileTek, Inc. is either (i) in monetary
default of the above referenced lease and demand for
payment of such amount or amounts has been made by
the Beneficiary to FileTek, Inc. and such demand
remains unsatisfied beyond any applicable grace
period in an amount equal to or greater than the
amount requested to be drawn down or (ii) FileTek,
Inc., fails to provide a renewal or substitute letter
of credit or cash not later than thirty (30) days
prior to the expiration of this letter of credit;
and
8. any amount drawn down under the letter of
credit and paid to the Landlord shall be applied in
full against any amounts owed by FileTek, Inc. to
Landlord under the terms and conditions of this
Lease.
(ii) The letter of credit will be honored by the issuing
bank without inquiry as to the accuracy thereof and regardless of whether the
Tenant disputes the content of such statement;
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(iii) In the event of a transfer of Landlord's interest in
the building of which the Demised Premises are a part, Landlord shall have the
right to transfer the letter of credit to the transferee, and it is agreed that
the provisions hereof shall apply to every transfer or assignment of said
letter of credit to a new Landlord. In the event of such a transfer, the
provider of the letter of credit must be notified by Landlord by return of a
transfer agreement and Landlord agrees to pay the expense of any applicable
transfer fee charged by the provider of the letter of credit.
(c) If, as a result of any such application of all or any part of
such letter credit, the amount secured by the letter of credit shall be less
than the amount provided for in Section 51(a) herein as the same may be reduced
pursuant to Section 51(f) herein, Tenant shall forthwith provide Landlord with
an additional letter of credit which meets the requirements of this Section 51
to cover the deficiency, or restore the letter of credit to the then required
level upon written notice from Landlord to Tenant.
(d) Tenant further covenants that it will not assign or encumber
said letter of credit or any part thereof and that neither Landlord nor its
successors or assigns will be bound by any such assignment, encumbrance,
attempted assignment or attempted encumbrance.
(e) Without limiting the generality of the foregoing, if the
letter of credit expires earlier than as provided for herein, or the issuing
bank notifies Landlord that it shall not renew the letter of credit, Landlord
will accept a renewal thereof or substitute letter of credit (such renewal or
substitute letter of credit to be in effect not later than thirty (30) days
prior to the expiration thereof), irrevocable and automatically renewable from
a bank meeting the requirements of Section 51(as) as provided herein for the
period as provided for in this Section upon the same terms as the expiring
letter of credit or such other terms as may be acceptable to Landlord.
However, (i) if the letter of credit is not timely renewed or a substitute
letter of credit is not timely received, or (ii) if Tenant fails to maintain
the letter of credit in the amount and terms set forth in this Section, Tenant,
at least thirty (30) days prior to the expiration of the letter of credit, or
immediately upon its failure to comply with each and every term of this
Section, must deposit with Landlord cash security in the amounts required by,
and to held subject to this Section 51 hereof, failing which the Landlord may
present such letter of credit to the bank, in accordance with the terms of this
Section, and the entire sum secured thereby shall be paid to Landlord, as a
substitute security deposit, to be held by Landlord in the manner as provided
for in this Section. Landlord shall return to Tenant the Security Deposit,
less such portion thereof as Landlord shall have apportioned to cure any damage
to the Premises which is beyond reasonable wear and tear, as described in
Section 10 and/or any Default by Tenant with respect to any of Tenant's
obligations of this Lease, within thirty (30) days after the later of (i) the
date of actual Lease expiration, or (ii) the date Tenant shall have vacated and
surrendered the entire Premises to Landlord. Any cash security provided by
Tenant pursuant to the terms hereof shall be held by Landlord in an interest
bearing separate escrow account. All direct out of pocket reasonable expenses
to set up and maintain such account shall be paid by Tenant. All interest
earned on such amount shall be credited to Tenant. In the event of such
deposit of cash security, Tenant shall have the option of replacing such cash
security at any time with a substitute letter of credit which is pursuant to
the terms hereof.
(f) If no uncured monetary default of this Lease by Tenant exists
during a calendar month, Tenant shall have the right to decrease the amount of
the letter of credit referred to herein by an amount of Seven Thousand and
00/100 Dollars ($7,000.00) for each month where no such monetary default exists
during the term of this Lease, commencing on the last day of the first full
month following the scheduled commencement date. In the event of a cash
security deposited with Landlord pursuant to Section 51(e), Landlord shall
apply from the amount of the cash security an amount of Seven Thousand and
00/100 Dollars ($7,000.00) for each month where no such monetary default exists
during the term of this Lease to the amounts otherwise due by Tenant, subject
to the terms of subsection (h) below.
(g) Landlord acknowledges and agrees that should Tenant
successfully undertake an initial public offering which generates in excess of
Fifteen Million Dollars ($15,000,000.00), the amount of the
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letter of credit required of Tenant shall be immediately reduced to the level
provided for in subsection (h) below.
(h) Notwithstanding the provisions of subsections (f) and (g)
above, the amount of the letter of credit required of Tenant shall never fall
below Thirty-Two Thousand Five Hundred and 00/100 Dollars ($32,500.00) without
the express written consent of Landlord.
52. NON-DISTURBANCE AGREEMENT
Landlord shall obtain from any future mortgagee or beneficiary under a
deed of trust (collectively, a "mortgagee") or any lessor under a ground lease,
a non-disturbance agreement, subject to the terms as hereinafter provided,
which shall provide in substance that so long as there has been no default by
Tenant under this Lease, this Lease and Tenant's right to use and enjoy the
Premises shall remain undisturbed by any foreclosure of such mortgage or deed
of trust or termination of any ground lease; provided, that Tenant shall also
execute an attornment agreement in form reasonable acceptable to such mortgagee
or beneficiary. Landlord warrants that the Building and Land has no recorded
debt as of the date of this Lease.
53. [DELETED]
IN WITNESS WHEREOF, the parties hereto have executed this Lease and
affixed their seals as of the date first above written.
TENANT:
<TABLE>
<S> <C>
ATTEST: FILETEK, INC.
By: By: /s/ William P. Loomis
---------------------------------------- ------------------------------------------------
Name: William P. Loomis
----------------------------------------------
Title: V-P - Finance & Admin.
---------------------------------------------
LANDLORD:
PRINCIPAL MUTUAL LIFE INSURANCE COMPANY
ATTEST:
By: By: /s/ Ronald B. Franklin
---------------------------------------- ------------------------------------------------
Name: Ronald B. Franklin
----------------------------------------------
Title: Vice President & Secretary
---------------------------------------------
By: /s/ Julia Lawler
------------------------------------------------
Julia Lawler
Assistant Director
Commercial Real Estate Equities
</TABLE>
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EXHIBIT A
FileTek - First Floor Plan
Entire Floor - 24,797 Rentable Square Feet
Diagram of first floor plan consisting of 24,797 rentable square feet.
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Exhibit A-1
FileTek - Second Floor Plan
5011 Rentable Square Feet
Diagram of second floor plan consisting of 511 rentable square feet.
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EXHIBIT "B"
RULES AND REGULATIONS
9400 Key West Avenue
Street Address
Rockville, Maryland
City, State
1. No part or the whole of the sidewalks, plaza areas, entrances,
passages, courts, elevators, vestibules, stairways, loading docks, corridors,
or halls of the building shall be obstructed or encumbered by any tenant or
used for any purpose other than ingress and egress to and from the Premises
leased to such tenant.
2. No awnings or other projections shall be attached to the
outside walls or windows of the building. No curtains, drapes, blinds,
shades, or screens (other than those furnished by Landlord as part of
Landlord's work) shall be attached to or hung in, or used in connection with,
any window or door of the Premises leased to any tenant.
3. No show cases or other articles shall be put in front of or
affixed to any part of the exterior of the building, nor placed in the halls,
corridors, vestibules, or other public parts of the building.
4. The water closets, lavatories, and other plumbing fixtures
shall not be used for any purposes other than those for which they were
constructed, and no sweepings, rubbish, rags, or other substances (including,
without limitation, coffee grounds) shall be thrown therein. All damages
resulting from misuse of the fixtures shall be borne by Tenant who or whose
servants, employees, agents, visitors or licensees, shall have caused such
damage.
5. No tenant shall bring or keep, or permit to be brought or
kept, any inflammable, combustible, or explosive fluid, material, chemical, or
substances in or about the building.
6. No tenant shall mark, paint, drill into, or in any way deface,
any part of the building. No boring, cutting, or stringing of electrical or
other wires shall be permitted.
7. No cooking shall be done or permitted in the building by any
tenant except those in the business of preparing and selling food. No tenant
shall cause or permit any unusual or objectional odors to emanate from the
Premises leased to such tenant.
8. Neither the whole nor any part of the Premises leased to any
tenant shall be used for manufacturing, or for the sale of property offered for
auction.
9. No tenant shall make, or permit to be made, any unseemly or
disturbing noises or disturb or interfere with other tenants or occupants of
the building or neighboring buildings whether by the use of musical instrument,
radio, television set, other audio device, unmusical noise, whistling, singing,
or in any other way.
10. No additional locks or bolts of any kind shall be placed upon
any of the doors or windows of the Premises leased to any tenant, nor shall any
changes be made in locks or the mechanism thereof. Each tenant must, upon the
termination of his tenancy, restore to Landlord all keys to offices and toilet
rooms, either furnished to, or otherwise procured by, such tenant, and in the
event of the loss of any such keys, such tenant shall pay Landlord the
reasonable cost of replacement keys.
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11. No object shall be thrown, kicked or otherwise projected out
of any door, window or skylight, or down any halls or other passageways.
12. The normal hours of operation of the building and parking
areas shall be 8:00 a.m. to 5:00 p.m. Monday to Friday and 8:00 a.m. to 12:00
p.m. on Saturday.
13. No tenant shall use or occupy or permit any portion of the
Premises leased to such tenant to be used or occupied as an employment bureau
or for the storage, manufacture, or sale of prescription or non-prescription
narcotics. No tenant shall engage or pay any employees in the Building,
except those actually working for such tenant in the Building, nor advertise
for laborers giving an address at the Building.
14. Landlord shall have the right to prohibit any advertising by
any tenant which, in Landlord's opinion, tends to impair the reputation of the
building or its desirability as a building for offices, and upon notice from
Landlord, such tenant shall refrain from or discontinue such advertising.
15. Landlord reserves the right to control and operate the public
portions of the Building and the public facilities, as well as facilities
furnished for the common use of the tenants, in such a manner as it deems best
for the benefit of the tenants generally including, without limitations, the
right to exclude from the Office Building, between the hours of 5 p.m. and 8
a.m. on business days and at all hours on Saturdays, except 8 a.m. to 12 p.m.
and on all hours on Sundays and holidays, all persons who do not present a pass
to the building signed by Landlord or other suitable identification
satisfactory to Landlord. Landlord will furnish passes at Tenant's expense to
persons for whom any tenant requests such passes. Each tenant shall be
responsible for all persons for whom it requests such passes and shall be
liable to Landlord for all acts of such persons.
16. Each tenant, before closing and leaving the Premises leased to
such tenant at any time, shall see that all entrance doors are locked, and that
all lights and electrical appliances are turned off.
17. No portions of the Building shall be used, or permitted to be
used, for lodging or sleeping or for any immoral or illegal purpose.
18. The requirements of tenants will be attended to only upon
application at the office of Landlord. Building employees shall not be
required to perform, and shall not be requested by any tenant to perform, any
work outside of their regular duties, unless under specific instructions from
the office of Landlord.
19. Canvassing, soliciting, and peddling in the Building are
prohibited, and each tenant shall cooperate in seeking their prevention.
20. There shall not be used in the Building, either by tenant or
by its agents or contractors, in the delivery or receipt of merchandise,
freight, or other matter, any hand trucks, or other means of conveyance, except
those equipped with rubber tires, rubber side guards, and such other safeguards
as Landlord may require.
21. No animals of any kind shall be brought into or kept about the
Building by any tenants.
22. No vending machines, other than for Tenant's or Tenant's
employees or visitors sole use, or lottery machines shall be permitted to be
placed or installed in any part of the Building by any tenant. Landlord
reserves the right to place or install vending machines in any of the common
areas of the Building.
23. No plumbing or electrical fixtures shall be installed by
Tenant without the written consent of Landlord.
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<PAGE> 36
24. Bicycles, motorcycles or any other type of vehicle shall not
be brought into the lobby or common areas of the building or into the leased
Premises.
25. Tenant will refer all contractors, contractor's
representatives and installation technicians rendering any service on or to the
premises for Tenant to Landlord for Landlord's approval and supervision before
performance of any contractual service. This provision shall apply to all work
performed in the Building, including installation of telephones, telegraph
equipment, electrical devices and attachments and installations of any nature
affecting floors, walls, woodwork, trim, windows, ceilings, equipment or any
other physical portion of the Building. Such approval, if given, shall in no
way make Landlord, a party to any contract between Tenant and any such
contractor, and Landlord shall have no liability therefor.
26. Landlord shall have the right to designate parking areas for
the use of the building tenants and their employees, and the tenants and their
employees shall not park in parking areas not so designated, specifically
including driveways, fire lanes, loading/unloading areas, walkways and building
entrances. Tenant agrees that upon written notice from Landlord, it will
furnish to Landlord, within five (5) days from receipt of such notice, the
state automobile license numbers assigned to the automobiles of the Tenant and
its employees. Landlord may tow, at Tenant's sole risk and expense, any
automobile which violates any term of the Lease, including, but not limited to,
the number of assigned spaces for tenant parking, or violates any of the rules
and regulations contained herein; or violates any state, county or local law
or regulation. Landlord will not be liable for damage to vehicles in the
parking areas or for theft of vehicles, personal property from vehicles, or
equipment of vehicles.
27. Tenant hereby agrees to maintain in full force and effect at
all times during the term of this Lease, at its own expense, for the protection
of Tenant and Landlord, as their interests may appear, policies of insurance
issued by a responsible carrier or carriers acceptable to Landlord which afford
the following coverages:
<TABLE>
<S> <C> <C>
- Workmen's Compensation Statutory
- Employer's Liability Not less than:
$100,000 each accident
$500,000 policy limit
$100,000 each employee
- Comprehensive General Liability Not less than a total
Insurance including: $1,000,000. Bodily injury and property
Contractual Liability; damage combined single limit.
Property Injury;
Completed Operations and Products
</TABLE>
28. All removals from the building, or the carrying in or out of
the building or the Premises leased to any tenant of any safes, freight,
furniture, or bulky matter of any description must take place during such hours
and in such manner as Landlord or its agents may determine, from time to time.
Landlord reserves the right to inspect all freight for violation of any of
these Rules and Regulations or the provisions of such tenant's lease.
29. Landlord reserves the right, at any time and from time to
time, to rescind, alter, or waive, in whole or part, or add to, any of these
Rules and Regulations.
30. Violations of these rules, or any amendments thereon or
additions thereto may be considered a default of Tenant's Lease and shall be
sufficient cause for termination of this Lease at the option of Landlord.
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EXHIBIT "C"
Building Standard Materials
Intentionally Omitted
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<PAGE> 38
EXHIBIT "D"
(Tenant Space Plan)
Together with the executed copies of this Lease, Tenant has conveyed
to Landlord a set of space plans, approved as noted by Tenant (hereinafter
referred to as "Architectural Plans"). Said Architectural Plans, generated by
DNC Architects and dated 1-22-93, approved as noted by Tenant, are hereby
incorporated into this Lease by reference.
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<PAGE> 39
EXHIBIT "E"
Signs. No sign, advertisement or notice shall be inscribed, painted,
affixed or displayed on the windows or exterior walls of the Premises or on any
public area of the Building, except the directory and the office doors, and
then only in such places, numbers, sizes, colors and styles as are approved by
Landlord and which conform to all applicable laws and ordinances and to
Landlord's signage package, if applicable. Any and all permitted signs shall
be installed and maintained by Landlord, at Tenant's sole expense. In
addition, Tenant shall not install any graphics of any nature that would be
visible from the exterior of the Premises without the prior written consent of
Landlord. Notwithstanding the foregoing, Landlord shall provide Tenant with a
listing strip on the directory board in the main lobby of The Building
identifying Tenant and Tenant's suite number. Landlord shall be responsible
for the cost of Tenant's initial listing strip, and Tenant shall reimburse
Landlord for all costs incurred by Landlord in making any changes or additions
thereto. Landlord also shall provide Tenant one (1) suite entry graphic
identifying Tenant and Tenant's suite number at the entry to Tenant's Premises.
Tenant shall have the right to install signage identifying Tenant on
the exterior of the Building, provided that the sign is permitted under the
laws, rules and regulations of the governmental authorities with appropriate
jurisdiction and that such sign conforms to all such laws, rules and
regulations. Tenant will pay for all costs associated with the sign,
including, without limitation, design, construction, installation and
permitting as well as ongoing maintenance costs which are in addition to the
costs of maintaining the exterior of the Building without such sign. The
proposed specifications and placement of the exterior signage shall be
presented to Landlord for approval. The exterior signage mock-up, approved
by Landlord, will be labelled Exhibit E and will be made part of this Lease.
On or before the end of the Term, Tenant shall, at its expense, remove the sign
and repair the Building affected thereby to as reasonably as practicable the
condition such part of the Building was in at the time such sign was installed.
Notwithstanding anything to the contrary herein, Landlord shall have the right
to remove the exterior signage, at Tenant's expense, prior to the end of the
Term if FileTek, Inc. occupies less than 20,800 rentable square feet within the
Premises.
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<PAGE> 40
EXHIBIT F
THE BUILDING
(including the building, improvements and adjacent land)
The Building:
9400 Key West Avenue
Rockville, Maryland 20850
The Land:
Parcel Lettered "K" in "Discovery Hall Subdivision"
per plat thereof recorded in Plat Book 123
at Plat 14470 among the Land Records of Montgomery County,
Maryland.
Together with all right, title and interest contained
in Declaration and Grant of Easements recorded in Liber 7413
at folio 565.
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EXHIBIT 10.6
FIRST ADDENDUM TO LEASE AGREEMENT
THIS FIRST ADDENDUM TO LEASE AGREEMENT (this "Addendum") is made as of
the 30th day of September, 1993, by and between Principal Mutual Life Insurance
Company ("Landlord"), and FileTek, Inc. ("Tenant").
R E C I T A L S:
WHEREAS, Landlord and Tenant have entered into that certain Lease
Agreement dated April 16, 1993 (the "Lease"), for certain premises described
therein (the "Original Premises") and situated within the office located at
9400 Key West Avenue, Rockville, Maryland (the "Building"); and
WHEREAS, the term of the Lease commenced on April 16, 1993 and expires
on April 30, 1998; and
WHEREAS, pursuant to Paragraph 49 of the Lease, Tenant was granted
certain rights with regard to available space in the Building; and
WHEREAS, Landlord has provided Tenant with notice of its receipt of a
bona fide offer from a third party to lease a portion of the second (2nd) floor
in the Building; and
WHEREAS, Tenant wishes to exercise its right of first refusal with
regard to such portion of the second floor, with certain modifications to the
provisions otherwise set forth in Paragraph 49 of the Lease, all as more
particularly set forth hereinafter; and
WHEREAS, Landlord is willing to agree to modify certain terms set
forth in Section 49 of the Lease as it relates to Tenant's exercise of its
right of first refusal in this instance, subject to the further terms and
conditions hereinafter set forth.
W I T N E S S E T H:
NOW, THEREFORE, in consideration of the foregoing recitals, of Ten
Dollars ($10.00) in hand paid, of the mutual covenants hereinafter set forth,
and of other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, Landlord and Tenant agree as follows:
1. Addendum. This Addendum shall supplement and form a part of
the Lease, and all capitalized terms used herein shall have the same meaning as
was ascribed to such terms in the Lease, unless expressly indicated to the
contrary herein. It is the intention of Landlord and Tenant that this
Addendum be construed in such a manner so as to reconcile the terms hereof with
the terms of the Lease to the fullest extent possible;
1
<PAGE> 2
provided, however, that in the event of any irreconcilable conflict between the
terms of this Addendum and the terms of the Lease, the terms of this Addendum
shall control.
2. Grant of Leasehold. Landlord, in consideration of the rent
to be paid and the other covenants and agreements to be performed by Tenant,
and upon the terms hereinafter stated, does hereby lease, demise and let unto
Tenant the "Expansion Premises" as hereinafter defined. The "Expansion
Premises" shall mean Suite #200 in the Building, generally outlined in the
floor plans attached hereto as Exhibit "A", consisting of 12,152 Rentable
Square Feet of space. On or before the Expansion Commencement Date (as
defined below), Landlord shall deliver to Tenant a certificate of the
Landlord's architect, confirming the Rentable Square Foot area of the Expansion
Premises, measured in accordance with the Washington, D.C. Association of
Realtors Method of Measurement dated January 1989 reflecting the Building core
factor of twelve and one-half percent (12.5%) or lower. If there is any
discrepancy between the measurement so certified by Landlord's architect and
that set forth above, appropriate adjustments will be made to the Tenant's
Basic Rent, Tenant's Proportionate Share and the Expansion Allowance (as
defined herein). The initial rental rate for the Expansion Premises shall be
Tenant's then escalated rental rate for the Original Premises (calculated on a
per square foot basis) determined as of the Expansion Commencement Date (as
defined below), with future escalations to coincide with any escalations of
rent with respect to the Original Premises, as set forth in the Lease. For
all purposes of this Addendum, Landlord and Tenant agree that the Commencement
Date for the Expansion Premises (the "Expansion Commencement Date") shall be
November 1, 1993, irrespective of the deferral of the construction of leasehold
improvements therein under Paragraph 7, below; provided, however, that if the
Tenant commences beneficial occupancy of any portion(s) of the Expansion
Premises prior to November 1, 1993, then the Expansion Commencement Date with
respect to such portion(s) of the Expansion Premises shall be the date upon
which Tenant commences beneficial occupancy thereof. From the Expansion
Commencement Date until April 30, 1994, Tenant's Basic Rent for the Expansion
Premises shall equal $13.00 per Rentable Square Foot per year, payable in equal
monthly installments of $13,164.67 each (or a prorated portion thereof, for any
period when the Expansion Commencement Date has occurred with respect to a
portion of the Expansion Premises but not with respect to the remainder of the
Expansion Premises), subject to escalation on May 1, 1994, and annually
thereafter, as otherwise provided for in the Lease. All escalations of rent
for the Expansion Premises shall be effective at the same time and in the same
manner as escalations to the Basic Rent payable by Tenant with regard to the
Original Premises. For all purposes of the Lease, the term "Premises" shall
mean both the Original Premises and the Expansion Premises and all provisions
of the Lease which are applicable to the Premises shall apply to both the
Original Premises and the Expansion Premises, with the same force and effect as
if restated fully herein, but amended mutatis mutandis to reflect and conform
to the provisions of this Addendum.
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3. Aggregate Square Feet. After addition of the Expansion
Premises to the Original Premises, the number of Rentable Square Feet of space
constituting the Premises shall equal 41,960 square feet.
4. Depiction of Post-Expansion Premises. Exhibit "A-1" of the
Lease shall be, and the same hereby is, amended by substituting in place
thereof the document entitled "Exhibit A-1 to Lease" which is attached as
Exhibit "B" to this Addendum.
5. Aggregate Monthly Basic Rent. Effective on the Expansion
Commencement Date, the amount of Monthly Basic Rent for the Premises (as
increased by the Expansion Premises) shall equal $45,832.58 (or a prorated
portion thereof, for any period when the Expansion Commencement Date has
occurred with respect to a portion of the Expansion Premises but not with
respect to the remainder of the Expansion Premises), subject to escalation in
accordance with Paragraph 4 of the Lease on May 1, 1994 and annually
thereafter.
6. Tenant's Proportionate Share. Effective on the Expansion
Commence-ment Date, Tenant's Proportionate Share shall be, and hereby is,
increased from fifty-nine and 52/100 percent (59.52%) to Eight-Three and 79/100
percent (83.79%) (or a prorated portion thereof, for any period when the
Expansion Commencement Date has occurred with respect to a portion of the
Expansion Premises but not with respect to the remainder of the Expansion
Premises). Such percentage is equal to a fraction, the numerator of which
equals the number of Rentable Square Feet within the Premises (41,960) and the
denominator of which equals the total number of Rentable Square Feet in the
Building (50,078).
7. Construction of the Expansion Premises. Landlord and Tenant
agree that, notwithstanding any provision of Sections 49 and 7 of the Lease to
the contrary, Landlord and Tenant shall defer the buildout of leasehold
improvements within the Expansion Premises, and the application of Landlord's
$12.00 per square foot allowance toward the cost of buildout of such leasehold
improvements (or to the other leasehold improvements referenced in Subparagraph
7(i) herein), in accordance with the terms and conditions provided for below:
a. In accordance with Section 49 of the Lease, Landlord
hereby confirms its agreement to construct leasehold improvements to the
Expansion Premises and apply an allowance toward the hard and soft costs of
such construction (or to the other leasehold improvements referenced in
Subparagraph 7(i) herein) in an amount equal to $145,824.00 (which is
calculated at a rate of $12.00 per Rentable Square Foot of the Expansion
Premises), with such allowance (the "Expansion Allowance") to be paid as, when
and in the manner provided for hereunder. Tenant agrees that the Expansion
Allowance shall be applicable solely to the construction of leasehold
improvements in the Expansion Premises, and shall not be available to Tenant
for any other purposes (such as, but not limited to, application against moving
expenses, equipment purchases or any rental obligation of Tenant under the
Lease); provided that, to the extent the Expansion
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<PAGE> 4
Allowance exceed the Hard Costs and Soft Costs (as defined below) of Landlord's
Work in constructing the Expansion Premises, after final completion of all such
work, Tenant shall have the right to apply any remaining amount thereof to the
cost of permitted additional leasehold improvements to the Original Premises or
the Expansion Premises or to the cost of leasehold improvements associated with
any future expansion by Tenant in the Building, in accordance with Subparagraph
7(i) below. Landlord's obligation to construct the Expansion Premises, or to
fund the Expansion Allowance, shall be excused for so long as Tenant shall be
in monetary default under this Lease beyond any applicable cure period, and
shall be terminated upon any termination of the Lease whether before or after
completion of such construction, or expenditure of such Expansion Allowance.
b. At any time after execution of this Addendum by
Landlord and Tenant, Tenant may elect to commence the process of constructing
leasehold improvements to the Expansion Premises by so notifying Landlord in
writing. After such notice, Tenant shall meet with Landlord's space planner
and provide such space planner with all information reasonably necessary to
prepare a space plan for the Expansion Premises. Landlord's space planner
will prepare a space plan based upon such information within five (5) business
days after receipt of such information. After such delivery by Landlord to
Tenant of such space plan, Tenant may accept the space plan as proposed or
request reasonable modifications to such space plan. If Tenant requests
modifications to the space plan, Landlord shall deliver a revised space plan to
Tenant within five (5) business days after such request.
c. As soon as reasonably practicable (and in all events
within thirty (30) days) after Tenant's written approval of the space plan,
Landlord shall provide Tenant with Landlord's final construction plans and
specifications for the Expansion Premises showing all electrical, mechanical,
HVAC and partitioning requirements (including equipment specifications)
necessary to complete the construction of the Expansion Premises in accordance
with the approved space plan. Tenant shall review and either approve in
writing such plans for the Expansion Premises or advise Landlord in writing of
any objection thereto within a time period after delivery of such plans. If
Tenant makes objections to such plans, Landlord shall cause its architect
and/or engineer to make appropriate changes thereto, and shall deliver revised
plans to Tenant as soon thereafter as is reasonably practicable (and in all
events within ten (10)days thereafter). Landlord agrees to construct the
Expansion Premises for occupancy by Tenant in accordance with the final
construction plans and specifications agreed upon by the parties in accordance
with the procedure set forth above ("Landlord's Work").
d. Landlord and Tenant shall use all reasonable efforts
to agree on final construction plans and specifications. Landlord shall not be
obligated to accept any requested plans or revisions by Tenant which (1) would
adversely affect the structural integrity of the Building and Premises, or the
proper functioning of the electrical, plumbing, HVAC and other mechanical
systems serving the Building and Premises, or (2) would not be "Standard
Improvements". The term "Standard Improvements" shall mean office leasehold
improvements which are substantially similar to the types and
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<PAGE> 5
design of the office leasehold improvements now constructed within the first
floor of Tenant's premises, or which are substantially in accordance with the
space planning program set forth on Exhibit "C" attached hereto and made a part
hereof. The foregoing notwithstanding, if Tenant agrees that, upon Landlord's
election at the time of expiration or earlier termination of this Lease, Tenant
will remove all improvements which are not Standard Improvements from the
Premises upon expiration or earlier termination of this Lease and restore the
affected areas to "vanilla finish" office improvements or Standard Improvements
at Tenant's sole expense, Tenant shall have the right to use the Expansion
Allowance for the construction of improvements which are not Standard
Improvements. In the event Landlord and Tenant are unable to agree upon final
construction plans and specifications despite using all reasonable efforts,
then the parties agree to submit the matters in dispute to binding arbitration
in accordance with the commercial arbitration rules of the American Arbitration
Association, with such arbitration to be conducted (i) by one or more
arbitrators who are qualified and experienced in arbitrating commercial lease
disputes in the Washington, D.C. metropolitan area and, in particular, the
suburban Maryland office/R&D submarket, (ii) on an expedited basis, with full
discovery, and (iii) with each party to bear its own costs in connection
therewith.
e. After final approval, Landlord shall promptly let for
bid the approved plans and specifications for Landlord's Work, to at least
three (3) qualified and available general contractors, and shall deliver copies
of all such bids to Tenant within five (5) business days after receipt of the
bids. Landlord and Tenant agree to accept the lowest bid within a reasonable
time period after delivery of all bids received to Tenant, unless Landlord and
Tenant agree to accept a higher bid, or either Landlord or Tenant, if the other
party does not wish to accept a higher bid, agrees to pay the incremental
additional cost associated with such higher bid. Prior to acceptance of the
applicable bid, Landlord shall deliver to Tenant a schedule of values showing
the actual costs of Landlord's Work with line itemization and breakdowns of all
bids by subcontractors. Landlord agrees that it will formally accept the
successful bid within two (2) business days after the date Landlord and Tenant
mutually agree upon which bid is to be accepted, as provided above. Except
for approved Change Orders, such schedule shall set forth the entire Hard Costs
and Soft Costs (as defined below) of Landlord's Work. Prior to commencement
of Landlord's Work, Tenant shall deposit with Landlord an amount equal to all
Hard Costs and Soft Costs of Landlord's Work in excess of the Expansion
Allowance (the "Excess Amount"), as follows: (A) The first three dollars
($3.00) per square foot of Excess Amount shall be deposited with or paid to
Landlord in three (3) equal installments, the first one-third (1/3) payable on
the date Landlord accepts the successful bid for Landlord's Work (and in all
events prior to the date Landlord commences construction of Landlord's Work),
the second one-third (1/3) payable upon 50% completion of Landlord's Work, as
certified by the general contractor and Landlord's construction manager or
architect, and the final one-third (1/3) payable upon substantial completion of
such work (as defined in Paragraph 7(j), (below); and (B) One hundred percent
(100%) of the portion of Excess Amount which exceeds three dollars ($3.00) per
square foot shall be deposited with Landlord prior to the commencement of
Landlord's Work. Such deposit ("Tenant's Expansion Deposit") shall be applied
by
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Landlord (pro-rata with the Expansion Allowance) to satisfy the Hard Costs and
Soft Costs of Landlord's Work. Landlord agrees to construct the Expansion
Premises on a fixed-price contract basis (subject to written change orders
approved by Landlord and Tenant which are required by prudent construction
practices or unavailability of specified materials) which approval shall not be
unreasonably withheld, conditioned or delayed. Any delay in completion of
Landlord's Work caused by Tenant's failure to respond promptly (i.e., within
three (3) business days) to requested change orders described in the previous
sentence shall be considered a "Tenant Delay" hereunder.
f. The "Hard Costs and Soft Costs" of Landlord's Work
shall include (i) all reasonable costs associated with the preparation of plan
and specifications by Landlord or Landlord's architects and engineers, (ii)
reasonable construction management fees (not to exceed five percent (5%) of the
amount of all other Hard Costs and Soft Costs), and (iii) all reasonable and
customary costs, fees and expenses incurred by Landlord and paid to
contractors, subcontractors, suppliers, and manufacturers, for all labor and
materials, general conditions and contractor profits (not to exceed ten percent
(10%) with respect to Landlord's Work in constructing the Expansion Premises in
accordance with the final construction plans and specifications approved by
Landlord and Tenant. The Hard Costs and Soft Costs of Landlord's Work shall
not include general overhead charges of Landlord. Within thirty (30) days
after completion of Landlord's Work as to any stage of construction, Landlord
shall prepare a reconciliation of all actual Hard Costs and Soft Costs of
Landlord's Work with respect to such stage as such costs may change from the
costs previously submitted (the "Actual Costs"). Subject to the provisions of
Subparagraph 7(h), below, to the extent (i) the Actual Costs exceeded the sum
of the Expansion Allowance allocable to such stage plus Tenant's Expansion
Deposit, Tenant shall pay to Landlord the amount of such excess within ten (10)
days after Tenant's receipt of Landlord's reconciliation, and (ii) the Actual
Costs were less than the sum of the Expansion Improvement Allowance allocable
so such stage plus Tenant's Expansion Deposit, Landlord shall pay to Tenant the
amount of such difference (but in no event more than the amount of Tenant's
Expansion Deposit) within ten (10) days after Landlord's delivery of its
reconciliation to Tenant. In the event the Actual Costs are less than the
Expansion Improvement Allowance, Tenant shall be entitled to a credit as a
result thereof, in accordance with Subparagraph 7(i), below.
g. In no event will Tenant be entitled to any rental
abatements, rent or cash concession, or other offset or credit, as a result of
Landlord's Work in constructing the Expansion Premises, except as set forth in
Subparagraph 7(h), below, and Tenant agrees that rent shall be payable with
respect to the Expansion Premises from and after the Expansion Commencement
Date set forth above, without regard to the status of completion or the manner,
timing or conduct of Landlord's Work except as set forth in Subparagraph 7(j),
below.
h. Notwithstanding anything to the contrary in this
Section 7, Tenant, at its sole option, may elect to commence the construction
of leasehold improvements to only a portion of the Expansion Premises at any
time after execution of this Addendum
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by both parties. In such event, the construction of leasehold improvements to
each portion of the Expansion Premises shall be performed in accordance with
the provisions of this Section 7, but subject to the following. To the extent
Tenant requests that Landlord construct improvements to the Expansion Premises
in stages, the Expansion Allowance shall be prorated on a per Rentable Square
Foot basis (for the stage then under construction) in determining the amount of
the Expansion Allowance which Landlord is obligated to apply to such stage of
construction, as well as the amount of Tenant's Expansion Deposit with respect
thereto. The foregoing notwithstanding, if (i) Tenant makes an Expansion
Deposit in connection with the construction of an earlier stage of Landlord's
Work in the Expansion Premises, and (ii) in constructing all subsequent stages
of the Expansion Premises, Landlord's Hard Costs and Soft Costs for such
subsequent stages are in the aggregate less than the pro-rata portion of the
Expansion Allowance allocated to such stages in accordance with this
Subparagraph 7(h), Landlord agrees to pay to Tenant the difference (but in no
event more than the aggregate amount of Tenant's Expansion Deposit deposited by
Tenant as to all previous stages) within ten (10) business days after
Landlord's final reconciliation of Actual Costs for all stages of construction
has been completed. It is the intention of the parties that the Expansion
Allowance generally be pro-rated over the construction of the entire Expansion
Premises, but that Tenant not ultimately be required to incur out-of-pocket
expenses in connection therewith if, after final reconciliation, the total
Actual Cost of Landlord's Work on the Expansion Premises (after final
completion thereof) is less than the total available Expansion Allowance.
i. If, after final completion of Landlord's Work on the
entire Expansion Premises, there is any portion of the Expansion Allowance
which has not been expended, such portion (the "Remaining Balance") shall be
available to be utilized by Tenant, at Tenant's written election, either (1) in
the construction of further leasehold improvements to the Premises otherwise
permitted under the Lease and this Subparagraph 7(i), or (2) to be added to any
tenant improvement allowance applicable to further expansion by Tenant in the
Building. If Tenant elects to utilize the Remaining Balance, if any, for the
construction of further leasehold improvements to the Premises, the following
requirements shall apply: (i) the improvements proposed by Tenant shall comply
in all respects with Section 10 of the Lease; and (ii) the improvements shall
not include any improvements which are not Standard Improvements, as the same
are defined in (and except to the extent the same would be permitted under the
penultimate sentence of) Subparagraph 7(d), above. The provisions of Section
10 of the Lease, and of this Section 7, shall apply to the construction of any
such additional improvements, and the timing and amount of Landlord's
application of any such Remaining Balance to the costs associated therewith.
j. Subject to Unavoidable Delays and Tenant Delays (as
defined in Subparagraph 7(k), below), Landlord shall substantially complete
Landlord's Work with respect to each portion of the Expansion Premises, (i)
within forty-five (45) days after Landlord's acceptance of the successful bid
for Landlord's Work or, if applicable, Landlord's receipt of Tenant's Expansion
Deposit as to such work, whichever is later, if
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the portion of the Expansion Premises then being improved by Landlord has 5,000
or fewer Rentable Square Feet, or (ii) within sixty (60) days after Landlord's
acceptance of the successful bid for Landlord's Work or, if applicable,
Landlord's receipt of Tenant's Expansion Deposit as to such Work, whichever is
later, if the portion of the Expansion Premises then being improved by Landlord
has more than 5,000 Rentable Square Feet. If Landlord shall fail to complete
Landlord's Work with respect to any portion of the Expansion Premises within
the time period hereinabove specified in this Subparagraph 7(b), other than as
a result of Unavoidable Delays (up to the first fifteen (15) days thereof) or
Tenant Delays, then all Basic Rent and other charges for such portion of the
Expansion Premises shall be abated from the expiration of such period until
Landlord's Work with respect to such portion of the Expansion Premises is
substantially completed (i.e., completed except for minor punch list items) and
Landlord has obtained Tenant's final certificate of use and occupancy, provided
that any delay in obtaining a final certificate of use and occupancy which was
not caused by Landlord's failure to complete Landlord's Work in accordance with
applicable codes (i.e., such as due to Tenant's failure to install its
furniture and equipment in accordance with applicable fire or other codes or
due to unusual governmental delays not caused by Landlord's failure to make
reasonably diligent application for necessary permits or inspections) shall
constitute either a Tenant Delay or an Unavoidable Delay (as the case may be)
and Basic Rent and other charges will not be abated for the period
corresponding to such Tenant Delays or for the first fifteen (15) days of such
Unavoidable Delays, if any.
k. The term "Unavoidable Delays" shall mean (1) delays
sustained by Landlord in obtaining permits for, or governmental inspections of,
Landlord's Work despite Landlord's reasonable diligence, or (2) delays due to
the unavailability of labor and/or materials specified in the approved plans
and specifications despite Landlord's reasonable diligence, or due to war,
strikes, civil unrest or other causes beyond Landlord's reasonable control.
The term "Tenant Delays" shall mean delays caused by the acts and/or omissions
of Tenant, its agents, employees, invitees and contractors, which hinder,
interfere with or otherwise delay Landlord's completion of Landlord's Work.
Landlord's obligation to complete Landlord's Work within specified time periods
under Subparagraph 7(j), above, shall be extended one (1) day for each day of
delay due to Unavoidable Delays or Tenant Delays, provided Landlord shall
notify Tenant promptly (and in all events within three (3) business days) after
the occurrence of an Unavoidable Delay or a Tenant Delay, of the existence and
nature thereof, and, provided further, that Tenant shall be entitled, as
Tenant's sole remedy, to abatement of Basic Rent and other charges for any
portion (but only such portion) of the Expansion Premises which is not
completed within fifteen (15) days after the time specified for such completion
under Paragraph 7(j), above due to Unavoidable Delays which, in the aggregate,
exceed such fifteen (15) day period, such abatement to commence on the 16th day
after the date Landlord's Work was otherwise required to be completed but for
such Unavoidable Delays, and to expire on the date Landlord's Work is completed
within the meaning of the last sentence of Paragraph 7(j), above.
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8. Additional Security. Paragraph 51(h) of the Lease shall be,
and hereby is, amended by deleting the phrase "Thirty-Two Thousand Five Hundred
and 00/100 Dollars ($32,500.00)" and inserting in place thereof the phrase
"Forty-Five Thousand Six Hundred Sixty-Five and 00/100 Dollars ($45,665.00)",
and Tenant shall cause the bank which issued the letter of credit referenced in
paragraph 51(h) of the Lease to amend the letter of credit to conform to this
Paragraph 8 within thirty (30) days after execution of this Addendum.
9. Additional Provisions.
a. Landlord and Tenant acknowledge and agree that (i)
Landlord will not be providing the services and facilities described in Section
6 of the Lease to the Expansion Premises prior to completion of Landlord's Work
therein unless Tenant requests in writing that such services and facilities be
provided to all or part of the Expansion Premises, in which event, subject to
the last sentence of this Subparagraph 9(a) (A) such request shall constitute
Tenant's assumption of beneficial occupancy of the applicable portion of the
Expansion Premises on the date such services and facilities commence, and (B)
such services and facilities will, subject to the third to last sentence of
this Subparagraph 9(a), be provided to the applicable portion of the Expansion
Premises solely to the extent feasible taking into account the design of
mechanical systems serving the Expansion Premises as soon after Landlord's
receipt of Tenant's written notice as is reasonably practicable in the exercise
of reasonable diligence by Landlord, and Tenant further agrees that such
services and facilities may be temporarily interrupted or disrupted to the
extent necessary in order for Landlord to complete Landlord's Work in
situations where Tenant has elected to take occupancy of all or a portion of
the Expansion Premises prior to the completion of Landlord's Work; (ii) Tenant
may, subject to compliance with applicable laws and ordinances and the other
terms and provisions of this Addendum, elect to take beneficial occupancy of
all or part of the Expansion Premises prior to completion of Landlord's Work;
(iii) any breach of the provisions of this Addendum shall constitute a breach
of the Lease and shall be subject in all respects to the provision of Sections
20 and 21 of the Lease; (iv) the provisions of this Addendum shall not be
cited in any legal proceeding to support any contention by Tenant that it has
the right, pursuant to Section 49 of the Lease, to defer its construction
obligations under Sections 49 and 7 of the Lease in connection with any future
exercise by Tenant of its right of first refusal pursuant to the Lease; (v)
this Addendum, and Tenant's use of the Expansion Allowance other than for costs
associated with constructing leasehold improvements to the Expansion Premises,
shall not be cited in any legal proceedings by Tenant to support any contention
by Tenant that it has the right to apply any future allowance provided for
under Sections 47 and 49 of the Lease in connection with a future expansion of
the Premises for purposes other than constructing leasehold improvements to
such expansion area; and (vi) if Tenant uses the Expansion Allowance solely to
pay the cost of leasehold improvements to the Expansion Premises, such use
shall not be cited in any legal proceeding to support any contention by
Landlord that the allowance to be provided by Landlord to Tenant under Section
49 of the Lease must be used by Tenant solely to pay the cost of leasehold
improvements to expansion
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space acquired by exercise of the right of first refusal provided for therein.
The foregoing understandings shall not be construed to limit any other
arguments which may be asserted by either Landlord or Tenant in support of any
contention relating to the enforcement of the Lease and the appropriate
construction of any provisions therein relating to Tenant's expansion rights
thereunder. To the extent Tenant requests that services and facilities be
supplied to any portion(s) of the Expansion Premises less than the whole
thereof, and the supply of such services and facilities to such portion would
involve modifying the Building's mechanical, utility or other systems in order
to supply such portion only (and not other portions of the Expansion Premises)
Tenant agrees that Landlord may decline to supply such services and facilities
to the portion designated by Tenant unless Tenant agrees (A) to assume
beneficial occupancy of the entire Expansion Premises, or such larger portion
thereof to which such services and facilities can be supplied by Landlord
without having to modify the Building's mechanical, utility or other systems,
or (B) that all costs and expenses associated with the necessary systems
modifications shall be deemed part of the Hard Costs and Soft Costs of
Landlord's Work and thus chargeable to (and payable out of) the Expansion
Allowance (in which event Landlord shall incorporate such systems modifications
into Landlord's Work and complete them as soon as reasonably practicable after
approved plans and bids therefore have been arrived at (and any required Tenant
Deposit made) in accordance with the procedures set forth in Paragraph 7,
above, and such services and facilities shall thereafter be supplied by
Landlord as soon after the date such systems modifications are completed by
Landlord as is reasonably practicable in the exercise of reasonable diligence,
and otherwise within the time frames referenced in Paragraph 7(j), above).
Landlord agrees that, at Landlord's sole cost and expense, the HVAC equipment
serving the Expansion Premises will be in good and proper working condition as
of the date Landlord commences supplying services thereto. The foregoing
notwithstanding, Tenant acknowledges that water, HVAC and/or electricity
provided to the Expansion Premises shall necessarily be supplied within the
parameters of the systems as presently configured, and that all modifications
thereto (if any) required or requested by Tenant will be paid for by Tenant,
either out of the Expansion Allowance, or Tenant's separate funds, as the case
may be.
b. Landlord agrees that, to the extent the services and
facilities described in Section 6 of the Lease are not being supplied to a
portion of the Expansion Premises after the Expansion Commencement Date, Tenant
shall be entitled to a monthly rent credit (the "Rent Credit") against Monthly
Basic Rent for the Expansion Premises equal to six and 58/100 cents ($0.0658)
per rentable square foot of that portion of the Expansion Premises as to which
such services and facilities are not being supplied. The foregoing
notwithstanding, Tenant agrees that such Rent Credit shall (i) not apply to
that portion of the Expansion Premises which Tenant will immediately be
occupying, as described in the preliminary space plan attached as Exhibit C
hereto, and (ii) terminate upon the earlier to occur of the date such service
and facilities commence being supplied to such portion of the Expansion
Premises, or that date which is one (1) year after the Expansion Commencement
Date.
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10. Acknowledgement Regarding Right of First Option. Landlord and
Tenant acknowledge and agree that Section 47 of the Lease is, and shall
continue, in full force and effect, as if fully restated herein, and that
nothing set forth in this Addendum shall affect the continuing applicability of
Section 47 of the Lease to the remaining premises leased to U. S. West pursuant
to the lease referenced in said Section 47. Without limiting the entire
restatement of Section 47 set forth above, Landlord acknowledges that the U S
West Lease expires by its terms on March 31, 1994, and that Landlord will give
Tenant written notice of such expiration within a reasonable time prior to such
expiration date, and Tenant shall then have the right to exercise its right of
first option to lease such space, pursuant to and in accordance with Section 47
of the Lease, by written notice to Landlord within fourteen (14) days after its
receipt of Landlord's notice.
11. Full Force and Effect. Except as modified hereby, the Lease
shall continue in full force and effect unmodified.
IN WITNESS WHEREOF, Landlord and Tenant have executed this First
Addendum as of the day and year first written above.
TENANT:
FILETEK, INC.
By: /s/ William P. Loomis
----------------------------------------
Name: William P. Loomis
Title: V.P., Finance & Administration
-------------------------------------
LANDLORD:
---------
PRINCIPAL MUTUAL LIFE INSURANCE
COMPANY
By: /s/ Randall C. Mundt
----------------------------------------
Name: Randall C. Mundt
Title: Director, Commercial Real Estate
--------------------------------------
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Exhibit "A"
A diagram of Suite #200 in the Building consisting of 12,152 rentable square
feet of space.
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Exhibit "B"
A diagram of the post expansion premises.
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EXHIBIT "C" TO FIRST ADDENDUM
I. OUTLINE INTENT
The following outline is provided to generally describe the
information associated with the construction of the building standard tenant
improvements for FileTek, Inc., Located at 9400 Key West Avenue, Rockville.
This outline will not cover all materials, methods and equipment
required to complete the improvements currently in place or planned in future
projects, but provides for an overview of the level of work to be completed and
generally describes building standard improvements.
II. CONSTRUCTION SPECIFICATIONS
1. Demolition
A. Partitions
1. Demolition of all existing tenant improvements shall
be complete all terminations made to utilities and
repairs made to core elements of the building.
2. After demolition, repair all work on existing
partitions to remain.
3. If partitions are mechanically attached to window
mullions, after demolition, repair all screw holes
and refinish mullion to match existing finish.
4. Replace all damaged ceiling tiles and ceiling grid.
B. Metal Door Frames
1. Reuse existing frames where applicable.
Repair and refinish all existing frames to be reused
to match in quality of all new frames.
2. New frames as required at interior locations shall be
16 gauge with 2" face dimension and to be KD type.
All frames will be reinforced to receive hardware.
C. Wood Doors
1. Reuse and hang all existing doors in new locations
compatible with swing and hand of door.
Repair and refinish all existing doors to be reused
to match in quality all new doors.
2. All new doors shall be 3'-0" x 6'-8" x 1 3/4" wood
hollow core with paint grade birch veneer unless
noted otherwise.
3. Reinforce all doors to receive hardware.
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4. All relocated or revised hardware within the FileTek
space will be made to comply with the A.D.A.
requirements.
D. Computer Room Raised Floor
1. Existing computer room raised floor shall be
disassembled, refurbished and reinstalled along with
all necessary hardware.
III. NEW CONSTRUCTION
A. Metal Studs and Gypsum Board
1. Material selections, including stud gauges and sizes, will
be based on manufacturer's printed data and requirements,
and on ANSI Standard A97.2.
2. Wallboard will be manufacturer's standard products, ASTM
C36, tapered edge, 48" wide, typically 1/2" thick unless
otherwise indicated. Gypsum Board at wet locations to be
moisture resistant.
3. Studs will be screw-type, zinc-coated, prepunched; sized
and gauged as appropriate for height, span and partition
thickness. Channel and stud assemblies will have a minimum
deflection of L/240. Studs, runners and furring channels
will conform to ASTM C645.
4. Trim and accessories including casing beads, corner beads,
edge beads, control joint and reveals will be zinc-coated
steel, PVC or aluminum where approved. Exposed "J" trim
will not be permitted.
5. Joint compound will be ready-mixed, prefill, taping and
topping compound complying with ASTM C475. Reinforcing
tape will be ASTM C475 perforated cross-fibered paper with
feathered edges.
6. Fasteners and screws will be as required by the
manufacturer.
7. Installation as shown will be 4 pcf density, semi-ridged
mineral fiber batt or blanket; U.S. Gypson 1 1/2"
"Thermafiber" or equal. Insulation shall be provided at
all conference rooms, corner offices and computer rooms.
Provide 2' wide 3 1/2" batt fiberglass insulation above
ceiling on each side of partitions for rooms indicated
above.
8. Sealant at partitions will be similar to Tremco Acoustical
Sealant or "Acrylic Latex Caulk AC-20" by Pecora
Corporation.
9. Provide floor to deck partitions with 1 1/2" thermafiber
insulation at computer room. Provide 2' side 3 1/2" batt
fiberglass insulation above ceiling on each side of
partitions on rooms indicated above. Install 6 mil
polyvinyl sheet on walls at computer room side.
10. All new wall board partitions to be spackled and sanded
ready for painting. Where new partitions align with
existing match existing in type of construction of
thickness.
B. Acoustical Ceiling
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1. Ceiling tile and grid are existing. Contractor to remove
and protect ceiling tiles to be reinstalled after work in
plenum is complete. Damaged tiles are to be replaced by
Contractor; match existing.
2. Contractor to provide edge angles at partitions to be
extended to structure above.
C. Glass Partitions
1. A glass and aluminum window wall system shall be provided at
the computer room.
2. The computer room system shall consist of a narrow line
mullion system, anodized aluminum finish. Glass shall be
3/8" to 1/2" tempered glass.
3. The glass wall and doors at the reception area shall match
those provided at the lower level.
4. This entrance shall be constructed in phases to accommodate
anticipated expansion into adjoining areas.
5. Hardware shall be provided for each phase as required and to
match function and finish of existing.
6. The glass wall and doors will have an etched logo and
graphics.
D. Finish Hardware
1. Work included: Provide finish hardware throughout the work
as specified herein and as needed for a complete and proper
installation.
2. Existing hardware to be reused in new locations shall be in
good working condition.
3. New Hardware:
a. Coat Closets Hardware: "Stanley" Series 2700 or
equal with "Ives" Modern Pulls No. 1130-3" with 625
finish.
b. All other doors unless indicated otherwise:
Hinges: Stanley or equal five knuckle full mortise
hinges No. FBB17 4x4, 1 1/2 pair per door, prime
coated for painting.
Lockset: "Schlage" medium duty, classroom lock lever
handles ATH (Athens) with 626 finish and cylinder
lock.
c. Closers: "LCN" closers, Superstock Series 1460/1461
or equal.
d. Panic Devices; Von Duprin or equal.
e. Cypher Locks: Simplex/Unican high frequency use.
"Unican" 1000 push-button combination.
4. All doors to have locksets unless noted.
5. Locksets shall be master keyed and keyed by department.
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E. Computer Access Floor System
1. Relocate 24" x 24" x 12" high computer access floor with
plastic laminate cover, high wear type, grade HW 120 (0.120
inch thick). Provide 20 fully trimmed 6" x 6" grommets and
10 perforated return grilles, include two (2) sets of steps
and a ramp as indicated, complete with handrails. Provide
one suction floor tile removal handle. See material finish
for tile selection.
Provide carpet tiles with static control at raised floor in
Demo Room. See material finish for carpet selection.
Computer access floor shall be as manufactured by Tate
Access Floors, Inc., or equal.
F. Folding Panel Partitions
1. Where required provide a folding partition similar to
"HUFCOR" classic services 7500, paired panels with custom
fabric face. Folding panels shall have STC rating of 49.
G. Project Screens
1. Projection screens shall be recessed in the ceiling, 6' x 6'
electrically operated. Projection screens shall be Day-Lite
Electrol or equal.
H. Residential Equipment (Two Kitchens)
1. Type of equipment included:
a. Dishwasher
b. Full height refrigerator
c. See plumbing drawing for garbage disposal.
2. Products
a. Dishwasher shall be Kenmore, Model 14411, 120v/60hz
or equal.
b. Full height refrigerator shall be Kenmore, Model
61261 with icemaker, white on white or equal.
I. Architectural Woodwork
1. Provide 'Merrillat Industries' Avia series cabinets above
and under counter at all kitchens. See elevations on
drawings A-1 and A-3.
J. Access Control System
1. Furnish and install access control system at first floor
front and rear doors and at a second floor suite entry.
System will consist of card readers, door contacts, passive
infrared detectors and exist buttons, and to be connected to
a security company with a U.L. approved control station.
2. At first floor provide loading dock buzzer system with
activation switch in loading dock and a bell and light in
engineering lab. (modification to location).
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<PAGE> 18
K. Vertical Blinds (Computer Room)
1. Vertical blinds shall be as manufactured by Graber or equal,
G-71 top and bottom channels and vertical louvers. Vertical
louvers shall be solid PVC color No. 3304 silver gray.
Install blinds to stack on both sides of glass wall.
IV. FINISHES
A. Carpet shall be "Stevens," 30 oz., glue down installation or
equal.
B. Resilient Flooring shall comply with RSSS-T-312, Type IV,
Composition 1, size 12" x 12" x 1/8", colors and patterns to be
selected later. Resilient flooring shall be "Armstrong
Stonetex" or equal.
Resilient flooring shall be installed in the Kitchens, Mail Room
and Copy Rooms.
C. Vinyl base shall be "Armstrong Embossed" 4"H vinyl wall base or
equal, throughout.
D. Painting
1. Gypsum dry wall:
Primer: Acrylic primer sealer - Duron Drywall
Printer vinyl latex sealer, 18-004
1st and 2nd coats: Acrylic latex flat - Duron Deluxe
Flat vinyl latex, 38 series
2. Wood Doors: (Semi-Gloss Finish)
Primer: Alkyd primer sealer - Duron Alkyd
Enamel undercoater, 04 series
1st and 2nd coats: Acrylic latex semi-gloss
- Duron Deluxe
Semi-gloss enamel, 35 series
Products from The Glidden Company, Benjamin Moore and Pratt
and Lambert are acceptable substitutions.
E. Wallcoverings
1. Where required vinyl wallcoverings will be used that are
similar in weight to those specified for use on the lower
level.
V. MECHANICAL CONSTRUCTION
A. All mechanical and air handling equipment shall, where applicable,
match those materials and equipment currently used within this
project.
B. All General Office areas, Coffee Stations, Copy Rooms and Storage
areas shall be heated and cooled by the base building perimeter
heat pump or interior ducted system.
C. All supply and return air diffusers shall match building standard.
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<PAGE> 19
D. All duct work shall be of the required sizes and gauge to allow
for an efficient, balanced, air delivery system.
E. All existing mechanical controls shall be relocated as required
and new controls added compatible with existing system.
F. Where perimeter office layouts require the relocation or addition
of heat pump units the new units shall match existing and will be
installed to match the current operating system.
G. Computer room cooling shall be provided with a self contained,
glycol cooled, air conditioning unit as required.
1. The system shall be a down flow air discharge complete with
infrared humidifier, electric reheat, dual semi-hermetic
compressors, floorstand, intergal non-locking disconnect
switch with over current protection, condensate pump, 4 step
capacity control, 2 Liqui-tech sensors, smoke detections and
be approximately 460 V 3 phase.
2. Provide new complete dry cooler unit as required by the
computer room air conditioning unit.
3. An alternate scenario will be to provide air conditioning for
the upper level computer room, via ducting, from the existing
self contained unit on the lower level.
4. This approach will require the necessary ductwork, insulation,
fire dampers at floor, controls, return air ducting, ceiling
and floor registers to provide for a working, efficient, well
balanced air distribution system.
VI. PLUMBING
A. All piping, fixtures and hardware necessary to complete the
required tenant improvements shall meet all local codes and
correspond to existing building standard where possible.
B. All sprinkler head relocations or additions shall be made to
meet all local codes and will be completed with materials to
match existing and provide for a complete, fire marshall
approved system.
VII. ELECTRICAL AND LIGHTING
A. All electrical distribution materials and equipments shall
meet required building codes and be consistent with those
currently utilized within the project.
1. Provide special outlets and circuiting for Computer
Room, Coffee Area appliances, copiers, and security
system as required.
B. All offices shall have a quadtruplex outlet, one duplex outlet
and a phone/data outlet to correspond to existing FileTek
systems.
1. The installation of the phone and data outlets,
associated wiring and tie into the phone system shall be
a part of the project scope.
2. "Texel" was the FileTek installer for the previous
improvements.
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<PAGE> 20
3. FileTek shall retain the option of directly contracting
with "Texel" or any other telecommunications
subcontractor for the installation of the phone and data
system.
4. If FileTek elects to have "Texcel", or any other
telecommunications subcontractor install this system
directly, any savings to the build out allowance
realized by this approach shall be rebated to the
overall build out allowance.
C. All light fixtures shall be reused as available for the new
tenant improvements.
1. If new lights are required they shall match existing.
D. Switching of lighting will be at the individual offices and
spaces or 3-way locations in corridor areas.
1. Conference rooms and the computer room shall have two
zone switching of fixtures.
E. The reception area shall have down lights and track lighting
similar to the lower level reception area.
F. Computer room grounding shall be provided similar to that
system used on the lower level.
G. Fire alarm wiring, devices and emergency lighting shall be
relocated or installed to provide for a complete fire marshall
approved system.
H. Power feeds and phone/data for the systems furniture areas
will be located in the adjacent drywall partitions.
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<PAGE> 1
EXHIBIT 10.7
FIRST LEASE AMENDMENT
THIS FIRST LEASE AMENDMENT (this "Amendment") dated as of July 9, 1997
is made by and between PRINCIPAL MUTUAL LIFE INSURANCE COMPANY ("Landlord") and
FILETEK, INC. ("Tenant").
WHEREAS, pursuant to that certain Lease dated April 16, 1993,
(hereinafter referred to as the "Lease"), Tenant is leasing from Landlord the
29,808 rentable square feet commonly known as Suite 100 and Suite 201, 9400 Key
West Avenue, Rockville, Maryland (the "Original Premises");
WHEREAS, pursuant to that certain First Addendum To Lease Agreement
dated September 30, 1993, (hereinafter referred to as the "Addendum"), Tenant
increased the "Original Premises" by 12,152 Rentable Square feet of space
(hereinafter referred to as the "Expansion Premises"), making the total leased
area 41,960 Rentable square feet of space (the "Updated Premises");
WHEREAS, pursuant to that certain Letter Agreement dated February 15,
1994, (hereinafter referred to as the "Letter"), Tenant increased the
"Expansion Premises" by 349 Rentable Square feet of space, making the total
leased area 42,309 Rentable square feet of space (the "Premises);
WHEREAS, pursuant to a notice letter written by Tenant to Landlord on
January 21, 1997, Tenant confirmed its intention to exercise its Option to
Extend the lease term for an additional three year period;
WHEREAS, Landlord and Tenant desire to amend the Lease to extend the
Term thereof on the terms and conditions hereinafter set forth. The Lease, as
amended by the Addendum and the Letter, are hereinafter collectively referred
to as the "Lease";
NOW, THEREFORE, in consideration of the foregoing recitals and for
other good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, the parties hereto hereby agree as follows:
1. Incorporation of Recitals. The foregoing recitals are hereby
incorporated herein and made a part hereof by this reference.
2. Definitions. All capitalized terms in this Amendment shall have the
meanings assigned thereto in the Lease unless otherwise defined herein.
3. Basic Cost. From and after May 1, 1998, Section 1.(a)(ii) of the
Lease (as amended by the First Addendum to Lease and the Letter to Lease) shall
be, and hereby is, amended by deleting "electricity". Tenant's Premises shall
be sub-metered for electricity, and Tenant shall be responsible for reimbursing
Landlord on a monthly basis for Tenant's actual costs of electrical consumption
and usage. Costs are actual kilowatt rates established by Pepco and are the
same rates paid by the Landlord to Pepco. Tenant has the right to verify meter
readings and will have access to the meter, accompanied by the Building
Engineer, for this purpose.
4. Right Of First Option - Second Floor. Section 47 of the Lease shall
be, and hereby is, deleted in its entirety.
5. Lease Term. Section 2 of the Lease shall be, and the same is hereby,
amended to provide that the Lease Term shall be extended for a thirty-six (36)
month period commencing May 1, 1998. The Revised Lease Expiration Date shall
be April 30, 2001. Any exercise of Tenant's option under Section 46 of the
Lease or any other extension of the term shall not be effective until an
amendment to the Lease is executed by Landlord and Tenant.
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<PAGE> 2
6. Basic Rental. Section 1(b) of the Lease shall be, and the same is
hereby, amended to provide that the basic monthly rent due for the Premises
effective on May 1, 1998 (the "Renewal Period Commencement Date") shall be as
follows:
<TABLE>
<S> <C>
5/1/98 - 4/30/99: $50,241.94 per month, NET of Electric
5/1/99 - 4/30/00: $51,749.20 per month, NET of Electric
5/1/00 - 4/30/01: $53,301.67 per month, NET of Electric
</TABLE>
The foregoing amounts replace the amounts owed pursuant to the Lease from and
after the Renewal Period Commencement Date, irrespective of Section 1(b) of the
Lease.
7. Operating Expenses. Section 8 of the Lease shall be, and hereby is
amended. Tenant shall not be responsible for passthrough Basic Cost(s) for
the Premises for the period 1/1/96 - 4/30/98, and Landlord shall forgive all
unpaid sums relating thereto.
From and after the Renewal Period Commencement Date, Tenant's Base
Year for Basic Cost(s) shall be the Basic Cost(s) incurred in Calendar
Year 1998, Net of Electrical Charges. Tenant shall pay its Pro Rata
share (84.49%) of any Basic Costs increases over the Base Year.
8. Tenant Improvements. Tenant accepts the Premises in its "as is"
condition, subject to the terms of the Lease. Landlord has agreed to provide
an improvement allowance to the Premises in accordance with Exhibit C-1 of this
Amendment. Section 7 and Exhibit C of the Lease shall be, and the same is
hereby, deleted in its entirely and replaced with Exhibit C-1 of this Amendment
which if attached hereto, is incorporated herein by this reference.
9. Security Deposit. Landlord currently holds a Letter of Credit in
the amount of $45,835.00 which expires 6/30/98. Effective 6/30/98, Tenant
shall increase the Letter of Credit to $50,241.94 and renew the term for three
(3) years, pursuant to Section 51 of the Lease.
10. Conflict. This Amendment and the Lease shall be construed to give
the fullest possible effect to both, and provisions of this Amendment which
might be construed to be in conflict with provisions of the Lease shall be
harmonized with such potentially conflicting provisions to the greatest extent
possible, so as to give maximum effect to all provisions. However, in the
event there is irreconcilable conflict between any provision(s) of this
Amendment and any provision(s) of the Lease, the provisions of this Amendment
shall be controlling.
11. Ratification. Except as otherwise modified herein, all provisions of
the Lease remain in full force and effect, and by their signatures below, are
hereby ratified and confirmed by the parties hereto.
12. Notice. All notices to Landlord shall be in writing and shall be
deemed to be fully given only if sent by registered mail or certified mail
return receipt requested, postage prepaid, or by a nationally recognized
overnight delivery service to the following:
Principal Mutual Life Insurance Company
c/o Barnes, Morris, Pardoe & Foster Management Services, LLC
1015 15th Street, N.W.
Suite 1000
Washington, D.C. 20005-2606
13. Representations. Tenant hereby represents and warrants to Landlord
that Tenant (i) to its knowledge, is not in default of any of its obligations
under the Lease and that such Lease is valid, binding
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<PAGE> 3
and enforceable in accordance with its terms; (ii) has full power and
authority to execute and perform this Amendment; and (iii) has taken all
action necessary to authorize the execution and performance of this Amendment.
14. Brokers. Tenant represents and warrants to Landlord that neither
Tenant nor its officers, agents, employees nor anyone acting on its behalf has
dealt with any real estate broker except Barnes Morris Pardoe & Foster (which
is representing the Landlord) in the negotiating or making of this Amendment.
Tenant agrees to indemnify and hold Landlord, its agents, employees, partners,
directors, shareholders and independent contractors harmless from all
liabilities, costs, demands, judgments, settlements, claims and losses,
including reasonable attorneys fees and costs, incurred by Landlord in
conjunction with any such claim or claims of any other broker or brokers with
whom Tenant has had any business dealings regarding this Amendment.
15. Miscellaneous. This Amendment (i) shall be binding upon and inure to
the benefit of the parties hereto and their respective successors and assigns
(subject to the restrictions on assignment set forth in the Lease); (ii) shall
be governed by and construed in accordance with the laws of the State of
Maryland; and (iii) may be executed in multiple counterparts, each of which
shall constitute an original and all of which shall constitute one and the same
agreement.
The Lease, as amended by this Amendment, contains the entire agreement of the
parties hereto and no representations, inducements, promises or agreements,
oral or otherwise, between the parties, not embodied herein, shall be of any
force or effect. The Lease may be further amended only in writing signed by
both Landlord and Tenant.
The capitalized terms used in this Amendment shall have the same meaning
ascribed to them under the Lease, unless specified otherwise herein.
If any provision of this Amendment is held to be invalid or unenforceable, the
same shall not affect the validity or enforceability of the other provisions of
this Amendment, which shall continue in full force and effect, as if the
invalid or unenforceable provision had been deleted.
IN WITNESS WHEREOF, Landlord and Tenant have caused this First Lease Amendment
to be signed in the names by their duly authorized representatives and
delivered as their act and deed, intending to be legally bound by its terms and
provisions as of the day and year first written above.
LANDLORD:
PRINCIPAL MUTUAL LIFE
INSURANCE COMPANY
By: /s/ Michael D. Ripson
-----------------------------------------
Name: Michael D. Ripson
---------------------------------------
Title: Assistant Director, Commercial
Real Estate/Equities
---------------------------------------
TENANT:
FILETEK, INC.
By: /s/ William P. Loomis
------------------------------------------
Name: William P. Loomis
----------------------------------------
Title: V.P., Finance & Administration
---------------------------------------
3
<PAGE> 4
EXHIBIT C-1
TO
FIRST LEASE AMENDMENT
BY AND BETWEEN
PRINCIPAL MUTUAL LIFE INSURANCE COMPANY
AND
FILETEK, INC.
DATED: JULY 9, 1997
1. Landlord's Work. Tenant shall accept, the Premises in "as
is" condition.
The foregoing shall constitute all of Landlord's obligations, at its
costs, with respect to the condition of and improvements to the Premises, and
shall be referred to hereinafter as "Landlord's Work." Landlord will be
responsible for the coordination and supervision of the separate metering and
will bear all costs over $5,000.00.
2. Tenant's Work. Tenant shall be solely responsible for the
purchase, construction and installation of any and all leasehold improvements
to the Premises which are not specifically designated as Landlord's Work by
this Exhibit C-1 (hereinafter, "Tenant's Work"), in accordance with this
Exhibit C-1 and the Approved Plans (defined below.) Subject to Section 7(b),
below, Tenant's Work shall be performed at Tenant's sole expense. Tenant
shall make diligent efforts to complete Tenant's Work promptly, and without
unnecessary delay. Tenant's Work shall include, without limitation, the
leasehold improvements to the Premises shown on the Approved Plans. Tenant
shall be responsible for actual costs, not to exceed $5,000.00, associated with
separately metering the electrical usage of the Premises. Landlord will be
responsible for the coordination and supervision of the separate metering and
will bear all costs over $5,000.00.
3. Plans and Specifications.
A. Preparation of Plans and Specifications. With
respect to Tenant's Work, Tenant's architect shall prepare a full and complete
set of architectural and mechanical, electrical and plumbing ("MEP") plans,
drawings and finishes for the Premises, and engineering working drawings for
all improvements to the Premises proposed by Tenant, as required for the
permitting and construction of the Premises ("Plans and Specs"), and as may be
required for Tenant's particular requirements or design, and all of which
preparation shall be at Tenant's sole expense subject to reimbursement as
provided in 6(b). Tenant shall deliver the completed Plans and Specs to
Landlord promptly after completion.
B. Approval of Plans and Specs. As soon as practicable
after receipt of such Plans and Specs, but in no event more than five (5) days
after receipt thereof, Landlord shall return to Tenant such Plans and Specs
with its objections, suggested modifications and/or approval, which approval
shall not be unreasonably withheld or delayed. If, upon receipt of Landlord's
modified Plans and Specs, Tenant wishes to take exception thereto, Tenant may
do so within thirty (30) days after the date upon which Tenant receives
Landlord's modified Plans and Specs. If Tenant takes exception, then Tenant
and Landlord shall negotiate expeditiously and in good faith to promptly
resolve any disagreements and make modifications to the Plans and Specs which
are acceptable to both parties. The parties shall attempt to reach agreement
as soon as possible, and in all events within fourteen (14) days after the date
upon which Tenant receives Landlord's modified Plans and Specs. Any party
that does not respond to any submission or objection communicated to such party
within the period for response prescribed in this Exhibit C-1 shall be deemed
to have approved any such submission or to have acquiesced to such objection.
C. Revisions to Plans and Specs. If Landlord's
modifications are acceptable to Tenant, said Plans and Specs shall thereafter
be revised by Tenant to address Landlord's objection(s) and reflect the
Landlord's suggested modifications, and the same shall be resubmitted to
Landlord for
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<PAGE> 5
Landlord's information only. If Tenant takes exception to Landlord's
modifications, said Plans and Specs shall be revised by Tenant to reflect any
changes agreed upon in the above referenced good faith negotiations within five
(5) days after the expiration of the ten (10) day negotiating period set forth
in subparagraph 3.B, above. Tenant shall deliver the revised Plans and Specs
to Landlord prior to the expiration of such five (5) day period, and Landlord
shall grant its approval or disapproval thereto within two (2) business days
after receipt thereof, which approval shall not be unreasonably withheld or
delayed and which review and approval by Landlord shall be for the limited
purpose of the revisions made by Tenant in the Plans and Specs and for no other
purpose. In the event Landlord requests additional modification to the
revised Plans and Specs, based upon the limited scope of review in the prior
sentence, the parties shall make prompt, good faith efforts to reach agreement
as quickly as possible, and shall adhere to the time frames stated herein for
any subsequent revision(s) of the Plans and Specs (i.e., 5 days/2 days).
D. Approved Plans. After Landlord and Tenant have
reached agreement on the Plans and Specs for the leasehold improvements to be
constructed in the Premises by Tenant (the approved Plans and Specs being
hereinafter referred to as the "Approved Plans"), all of the improvements shown
on such final Plans and Specs shall be included in Tenant's Work unless
otherwise noted thereon.
E. Landlord's Review. Landlord's review and/or
approval of any Plans and Specs shall not constitute the assumption of any
responsibility by Landlord for their accuracy, sufficiency or compliance with
sound architectural or engineering practices or compliance with any laws,
rules, orders, regulations, codes, ordinances, requirements or other legal or
quasi-governmental requirements, nor any warranty by Landlord regarding the
fitness of the Plans and Specs for the intended uses of the Premises by Tenant,
and Tenant shall be solely responsible therefor.
4. Construction of Tenant's Work. Tenant shall enter into a
construction contract with a general contractor selected by Tenant, subject to
the reasonable approval of Landlord, to construct Tenant's Work in accordance
with the Approved Plans and otherwise in accordance with the terms of this
Lease. Tenant shall be responsible for all matters that must be accomplished
to complete Tenant's Work, including filing plans and other required
documentation with the proper governmental authorities and securing all
necessary permits for the performance of any and all of Tenant's Work required
under the Approved Plans, and, upon completion of Tenant's Work, all approvals
and permits necessary for Tenant to occupy the Premises including all final
inspections for issuance of Tenant's final certificate of use and occupancy.
Landlord shall cooperate with and assist Tenant in obtaining the necessary
permits, including, without limitation joining in applications or other filings
to obtain the necessary permits. Tenant shall apply for a building permit
within a reasonable time after final approval of the Approved Plans, and, upon
issuance thereof, to work diligently to cause Tenant's Work to be completed,
installed or performed, as the case may be, in accordance with the Approved
Plans, subject only to non-structural, non-material variations and/or
variations necessitated by the unavailability of specified materials and
equipment.
5. Change Orders. Subject to the last sentence of Paragraph 4,
Tenant shall be allowed to make change orders to the Approved Plans provided
that (i) any such proposed change order in excess of $5,000.00 which is not
expressly permitted under the last sentence of Section 4 of this Exhibit C-1
shall be submitted to Landlord and Landlord shall have two (2) business days
after receipt thereof to review and approve same, which approval shall not be
unreasonably withheld or delayed (provided that, in the event Landlord does not
approve all items set forth in said proposed change order, Landlord and Tenant
will work together expeditiously and in a commercially reasonable manner to
reach agreement on any such proposed change order), and (ii) Tenant shall be
obligated to pay any and all costs associated with such change order(s)
("Excess Costs"), in accordance with the terms of Paragraph 7, below.
Landlord shall be allowed to make reasonable change orders to
the Approved Plans provided that (i) any such proposed change order shall be
submitted to Tenant and Tenant shall have five (5) business days after receipt
thereof to review and approve same (provided that, in the event Tenant does not
approve all items set forth in said proposed change order, Landlord and Tenant
will work together expeditiously and in a commercially reasonable manner to
reach agreement on any such proposed change
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<PAGE> 6
order), (ii) Landlord shall be obligated to pay the net cost of such change
orders (i.e., after factoring in any associated savings) (excluding, however,
any change orders Landlord requests (a) in order to cause Tenant to comply with
the terms of the Lease, or (b) because the conduct of Tenant's Work by Tenant
and/or its contractor(s) is disruptive or objectionable to other Building
tenants, or (c) due to governmental requirements, applicable codes or any other
circumstances beyond Landlord's control, which change order shall be at
Tenant's sole cost).
6. Payment of Costs.
(a) General. Subject to Section 7(b) below, Tenant shall be
responsible for and shall pay when due all costs associated with the
preparation of plans and the performance of Tenant's Work incurred in
accordance with this Exhibit C-1. Tenant shall further be responsible for all
costs of Tenant's work in excess of allowance described in 6(b). Failure by
Tenant to pay the costs associated with Tenant's Work on a timely basis which
results in the assertion of any statutory and/or common law lien against the
Premises or the Property, or the project known as 9400 KEY WEST AVENUE, shall
constitute a default by Tenant for all purposes of the Lease, unless Tenant
bonds off or otherwise discharges the lien within thirty (30) days after the
filing of same. Tenant shall cause its contractor to commence construction of
Tenant's Work promptly and to perform such work diligently and in a good and
workmanlike manner, and its failure to do so shall constitute a default by
Tenant under the Lease, subject to applicable cure periods. If any such
default by Tenant shall occur and is not cured within applicable cure periods,
then Landlord shall have the right (but not the obligation) to pay such costs
to the extent unpaid after five (5) business days notice to Tenant, and bill
Tenant for (or deduct from the Tenant Improvement Allowance, as defined below)
any amount so paid by Landlord and (2) Landlord shall be entitled (but not
obligated) at Landlord's sole election to take over the performance of Tenant's
Work if Tenant or its contractor(s) fails to commence or perform Tenant's Work
in a diligent fashion and in a good and workmanlike manner, within ten (10)
days after Landlord's written notice of such failure, and subject to the
allowance, to charge Tenant for all work theretofore performed by or under
Tenant's direction and to pay over the amount of such charge to Tenant's
contractor(s) and/or materialmen, and to bill Tenant for any and all costs and
expenses incurred in Landlord's exercise of such self-help remedy.
(b) Tenant Improvement Allowance. Landlord shall pay to Tenant
an allowance (the "Allowance") equal to Seventy Four Thousand Forty and 75/100
Dollars ($74,040.75) as set forth below in this Section 6(b), and Tenant agrees
that the Allowance shall be applied as set forth herein. One-half (1/2) of the
Allowance shall be payable by Landlord to Tenant within thirty (30) days after
Tenant's Work has been fifty percent (50%) completed (the "first payment");
and the final one-half (1/2) of the Allowance shall be payable by Landlord to
Tenant within thirty (30) days after Tenant completes Tenant's Work (the "final
payment"). Tenant will have the right to apply the applicable portion of the
Tenant Improvement Allowance to any or all of its costs of the electrical
metering. Tenant's payment request for any installment of the Allowance must
be accompanied by all (in the case of the final payment) or some of the
following items (in the case of the final payment or the electrical metering),
as indicated.
(i) Verification by Landlord and copies of bills
associated with electrical metering (electrical only).
(ii) A certificate of Tenant's architect that Tenant's
Work is fifty percent (50%) completed, as to the first payment, and has been
substantially completed, as to the final payment, in accordance with the
Approved Plans;
(iii) A copy of the final certificate of use and occupancy
(or its equivalent), if applicable, issued to Tenant by the applicable
government authority (final payment only);
(iii) A copy of the most comprehensive and up-to-date Plans
and Specs then available for Tenant's Work if modified subsequent to the Plans
and Specs last delivered to Landlord (final payment only);
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(iv) A duly executed interim release of liens (first
payment) and a final release of liens (final payment) subject to receipt of the
current payment, executed by Tenant's general contractor and any and all
subcontractors and/or materialmen supplying labor and/or materials in
connection with Tenant's Work, in form and substance reasonably satisfactory to
Landlord, acknowledging payment of one-half (first payment) and in full (final
payment) (subject to receipt of the final payment) for such labor and/or
materials and fully and forever waiving any and all statutory and/or common law
liens which might otherwise be asserted by them against the Premises (or any
portion thereof), and the Property in connection with Tenant's Work to the
applicable extent; and
(v) Notwithstanding the foregoing, any Tenant work not
requiring an Architect or General Contractor (i.e. painting, carpeting, etc.)
and not requiring an Architect's Certificate or a release of liens, shall
require an invoice.
Landlord shall have no obligation to pay either the first payment or
the final payment of the Allowance to Tenant unless and until thirty (30) days
after Landlord has received a payment request with all required attachments
properly supplied.
(c) Inspection. Tenant acknowledges and agrees that Landlord
will have the right to inspect the performance of Tenant's Work by Tenant's
contractor(s) and subcontractor(s), through Landlord's construction manager,
and Tenant agrees to cooperate with Landlord to facilitate such inspection,
including without limitation, (A) using reasonable efforts to notify Landlord
and such construction manager prior to any and all government inspections of
Tenant's Work so that Landlord's construction manager can be present therefor,
(B) permitting Landlord's construction manager free and clear access to the
Premises during the construction period, as necessary to perform such
supervision, and (C) complying (or causing its contractor to comply) with the
reasonable directions of such construction manager in connection with Tenant's
Work, as long as such directions are not inconsistent with the Approved Plans
or changes permitted hereunder.
(d) Unspent Tenant Improvement Allowance. Tenant shall be
allowed to utilize up to twenty percent (20%) of Tenant Improvement Allowance
towards rental abatement, or a rental credit. Tenant can exercise this right
at any time during the term under the First Lease Amendment.
7. General Provisions Regarding Construction. In performance of
Tenant's Work in accordance with this First Lease Amendment, Tenant agrees that
all such work will be performed in a good and workmanlike manner (in accordance
with Section 7(a), above) and that Tenant shall cause its contractor to use
reasonable and diligent efforts not to interfere with ongoing operations in the
Premises and Property. Without limiting the foregoing, Tenant agrees to cause
its contractor to use reasonable and diligent efforts to minimize excess noise,
and to limit its construction activities to the portion of the Premises being
constructed and those portions of the common area in which Tenant is permitted
to perform Tenant's Work in accordance with the Approved Plans. Landlord, upon
request, shall cooperate with Tenant and Tenant's contractor so as to
facilitate Tenant's Work in accordance with the Approved Plans (e.g., providing
the use of elevators, truck docks, and temporary utilities and permit Tenant's
Work) provided such requests are reasonable. If access to portions of the
Property outside of the Premises is required, Landlord shall cooperate in
providing such reasonable access to Tenant and its general contractor and
subcontractors.
Tenant's contractor shall keep all construction areas
reasonably clean and free of trash and debris, and shall monitor the activities
of its contractors, subcontractors and their respective employees with regard
to keeping the Property clean, and not unreasonably interfering with the other
tenants and occupants of the Property in the course of such construction
activities. Tenant agrees to follow (or to cause its contractors and
subcontractors to follow) all reasonable directions given to Tenant or its
contractor and subcontractors by Landlord's construction managers with respect
to non-interference with other tenants of the Property and work in common areas
of the Property.
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Tenant's contractor(s) shall be adequately insured, and shall
carry liability and other insurance (including but not limited to Builder's
Risk Insurance or other equivalent insurance) naming Landlord as an additional
insured and loss payee (as to Builder's risk) in amounts and in form and
substance reasonably satisfactory to Landlord. Tenant's Work shall not
commence, and Tenant's contractor(s) or subcontractors shall not commence any
work in the Premises unless and until Landlord has approved and consented to
the insurance carried by same, which approval shall not be unreasonably
withheld, conditioned or delayed, and Tenant has provided certificates of
insurance therefor to Landlord. Tenant's construction contract shall indemnify
Tenant, Landlord and Landlord's Agent for damages, losses and expenses
associated with the acts and omissions of Tenant's contractor, its agents,
employees and subcontractors, and shall otherwise be subject to Landlord's
prior reasonable approval. All contractors and subcontractors performing any
work for Tenant within the Premises shall be bonded (or bondable), and licensed
to do business in MARYLAND.
Tenant shall provide to Landlord copies of all applications
for permits, copies of all governmental inspection reports and/or certificates,
and any and all notices or violations communicated to Tenant or its contractors
by applicable governmental authorities, promptly upon receipt and/or submission
thereof, as the case may be. Tenant agrees to comply (or to cause its
contractors to comply) with all applicable federal, state and local laws,
regulations and ordinances in the performance of Tenant's Work, and to promptly
rectify any violations of such laws, and Tenant shall be responsible for any
non-compliance by Tenant or its agents, employees and contractors. The
performance of Tenant's Work shall be lien-free and shall be performed in a
good and workmanlike manner.
8. Remedies. In the event Tenant (i) violates the terms of this
Exhibit C-1, or (ii) constructs any improvements in the Premises which are not
within the scope of the Approved Plans, or have not been approved by Landlord
or are not otherwise permitted herein, then in addition to any other remedies
available to Landlord after written notice to Tenant and Tenant's failure to
cure the violation within five (5) business days after receipt of notice,
Landlord shall have the right to cause Tenant and Tenant's contractor to stop
Tenant's Work and to remove any such improvements which have been constructed
in violation of the Approved Plans or this Exhibit C-1 at Tenant's expense, and
to seek any and all appropriate legal and equitable relief in order to enforce
the provisions of this Exhibit C-1.
9. Substantial Completion. The Premises shall be substantially
complete when the Tenant's Work described herein is completed (subject only to
incomplete, minor or insubstantial details of construction; necessary
mechanical adjustments and needed finishing touches that do not unreasonably
interfere with Tenant's intended use of the Premises) and Tenant has obtained a
Certificate of Occupancy for the Premises.
10. Landlord Delays. Landlord acknowledges that delays in
preparation of Approved Plans and/or in the construction of Tenant's Work
caused by Landlord will not result in deferral of the renewal period
Commencement Date and thus Tenant's obligation to pay Rent, additional rent and
other charges due under this First Lease Amendment to Landlord.
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<PAGE> 1
EXHIBIT 10.8
LOAN AGREEMENT
This Loan Agreement (the "Agreement") dated as of May 31, 1998, by and
between NationsBank, N.A., a national banking association (the "Bank ") and the
Borrower described below.
In consideration of the Loan or Loans described below and the mutual
covenants and agreements contained herein, and intending to be legally bound
hereby, Bank and Borrower agree as follows:
1. DEFINITIONS AND REFERENCE TERMS. In addition to any other
terms defined herein, the following terms shall have the meaning set forth with
respect thereto:
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A. BORROWER:
FileTek, Inc. (hereinafter when referred to alone, will be called the "Company"),
FileTek UK Limited
William Thompson Revocable Trust, (a "Trust")
Patsy Thompson Revocable Trust, (a "Trust")
William and Patsy Thompson
B. BORROWER'S ADDRESS:
9400 Key West Avenue
Rockville, Maryland 20850
</TABLE>
C. CURRENT ASSETS. Current Assets means the aggregate
amount of all of Borrower's assets which would, in accordance with GAAP,
properly be defined as current assets.
D. CURRENT LIABILITIES. Current Liabilities means the
aggregate amount of all current liabilities as determined in accordance with
GAAP, but in any event shall include all liabilities except those having a
maturity date which is more than one year from the date as of which such
computation is being made.
E. HAZARDOUS MATERIALS. Hazardous Materials include all
materials defined as hazardous materials or substances under any local,
state or federal environmental laws, rules or regulations, and petroleum,
petroleum products, oil and asbestos.
F. LOAN. Any loan described in Section 2 hereof and any
subsequent loan which states that it is subject to this Loan Agreement.
G. LOAN DOCUMENTS. Loan Documents means this Loan
Agreement and any and all promissory notes executed by Borrower in favor of
Bank and all other documents, instruments, guarantees, certificates and
agreements executed and/or delivered by Borrower, any guarantor or third
party in connection with any Loan.
H. TANGIBLE NET WORTH. Tangible Net Worth means the
amount by which total assets exceed total liabilities in accordance with
GAAP.
I. ACCOUNTING TERMS. All accounting terms not
specifically defined or specified herein shall have the meanings generally
attributed to such terms under generally accepted accounting principles
("GAAP"), as in effect from time to time, consistently applied, with respect
to the financial statements referenced in Section 3.H. hereof.
2. LOANS.
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A. LOAN. Bank hereby agrees to make (or has made) one
or more loans to Borrower. The obligation to repay the loans is evidenced by a
promissory note or notes of various dates (the promissory note or notes
together with any and all renewals, extensions or rearrangements thereof being
hereafter collectively referred to as the "Note") having a maturity date,
repayment terms and interest rate as set forth in the Note.
i . REVOLVING CREDIT FEATURE. The Loan provides
for a revolving line of credit (the "Line") under which Borrower may from time
to time, borrow, repay and re-borrow funds.
ii. USAGE FEE. Borrower will pay hereafter on
June 30, 1998 and on the last day of each quarter for the period from and
including the date the Line was established to and including the maturity date
of the Line, a usage fee at a rate per annum of 0.25% of the average daily
unused portion of the Line during such period.
iii. LETTER OF CREDIT SUBFEATURE. As a subfeature
under the Line, Bank may from time to time up to and including May 31, 1999,
issue letters of credit for the account of Borrower (each, a "Letter of Credit"
and collectively, "Letters of Credit"); provided, however, that the form and
substance of each Letter of Credit shall be subject to approval by Bank in its
sole discretion; and provided further that the aggregate undrawn amount of all
outstanding Letters of Credit shall not at any time exceed $400,000.00. Each
Letter of Credit shall be issued for a term not to exceed 360 days, as
designated by Borrower, provided, however, that no Letter of Credit shall have
an expiration date subsequent to May 31, 2000. The undrawn amount of all
Letters of Credit plus any and all amounts paid by Bank in connection with
drawings under any Letter of Credit for which the Bank has not been reimbursed
shall be reserved under the Line and shall not be available for advances
thereunder. Each draft paid by Bank under a Letter of Credit shall be deemed
an advance under the Line and shall be repaid in accordance with the terms of
the Line; provided however, that if the Line is not available for any reason
whatsoever, at the time any draft is paid by Bank, or if advances are not
available under the Line in such amount due to any limitation of borrowing set
forth herein, then the full amount of such drafts shall be immediately due and
payable, together with interest thereon, from the date such amount is paid by
Bank to the date such amount is fully repaid by Borrower, at that rate of
interest applicable to advances under the Line. In such event, Borrower agrees
that Bank, at Bank's sole discretion may debit Borrower's deposit account with
Bank for the amount of such draft.
3. REPRESENTATIONS AND WARRANTIES. Borrower hereby represents
and warrants to Bank as follows:
A. GOOD STANDING. Borrower is a corporation, duly
organized, validly existing and in good standing under the laws of Delaware and
has the power and authority to own its property and to carry on its business in
each jurisdiction in which Borrower does business.
B. AUTHORITY AND COMPLIANCE. Borrower has full power
and authority to execute and deliver the Loan Documents and to incur and
perform the obligations provided for therein, all of which have been duly
authorized by all proper and necessary action of the appropriate governing body
of Borrower. No consent or approval of any public authority or other third
party is required as a condition to the validity of any Loan Document, and
Borrower is in compliance with all laws and regulatory requirements to which it
is subject.
C. BINDING AGREEMENT. This Agreement and the other Loan
Documents executed by Borrower constitute valid and legally binding obligations
of Borrower, enforceable in accordance with their terms.
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D. LITIGATION. There is no proceeding involving
Borrower pending or, to the knowledge of Borrower, threatened before any court
or governmental authority, agency or arbitration authority, except as disclosed
to Bank in writing and acknowledged by Bank prior to the date of this
Agreement.
E. NO CONFLICTING AGREEMENTS. There is no charter,
bylaw, stock provision, partnership agreement or other document pertaining to
the organization, power or authority of Borrower and no provision of any
existing agreement, mortgage, indenture or contract binding on Borrower or
affecting its property, which would conflict with or in any way prevent the
execution, delivery or carrying out of the terms of this Agreement and the
other Loan Documents.
F. OWNERSHIP OF ASSETS. Borrower has good title to its
assets, and its assets are free and clear of liens, except those granted to
Bank and as disclosed to Bank in writing prior to the date of this Agreement.
G. TAXES. All taxes and assessments due and payable by
Borrower have been paid or are being contested in good faith by appropriate
proceedings and the Borrower has filed all tax returns which it is required to
file.
H. FINANCIAL STATEMENTS. The financial statements of
Borrower heretofore delivered to Bank have been prepared in accordance with
GAAP applied on a consistent basis throughout the period involved and fairly
present Borrower's financial condition as of the date or dates thereof, and
there has been no material adverse change in Borrower's financial condition or
operations since December 31, 1997. All factual information furnished by
Borrower to Bank in connection with this Agreement and the other Loan Documents
is and will be accurate and complete on the date as of which such information
is delivered to Bank and is not and will not be incomplete by the omission of
any material fact necessary to make such information not misleading.
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I. PLACE OF BUSINESS. Borrower's chief executive office is located at:
9400 Key West Avenue
Rockville, Maryland 20850
</TABLE>
J. ENVIRONMENTAL. The conduct of Borrower's business
operations and the condition of Borrower's property does not and will not
violate any federal laws, rules or ordinances for environmental protection,
regulations of the Environmental Protection Agency, any applicable local or
state law, rule, regulation or rule of common law or any judicial
interpretation thereof relating primarily to the environment or Hazardous
Materials.
K. CONTINUATION OF REPRESENTATIONS AND WARRANTIES. All
representations and warranties made under this Agreement shall be deemed to be
made at and as of the date hereof and at and as of the date of any advance
under any Loan.
4. AFFIRMATIVE COVENANTS. Until full payment and performance of
all obligations of Borrower under the Loan Documents, Borrower will, unless
Bank consents otherwise in writing (and without limiting any requirement of any
other Loan Document):
A. FINANCIAL CONDITION. Maintain Borrower's financial
condition as follows, determined in accordance with GAAP applied on a
consistent basis throughout the period involved except to the extent modified
by the following definitions:
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i. Maintain a Fixed Charge Coverage Ratio defined as net income
plus depreciation and amortization, plus interest less capitalized
research and development costs, divided by interest plus current
maturities of long term debt (except that on subordinated debt),
tested quarterly, using a rolling four quarter basis, of not less than
1.25:1.0 for each quarter.
ii. Maintain a minimum of Tangible Capital Funds of $1,900,000.00,
tested quarterly. Tangible Capital Funds is defined as net worth plus
subordinated debt plus interest on the subordinated debt plus product
and software license revenues deferred in accordance with SOP 97-2,
less cost of sales deferred in accordance with SOP 97-2, less
capitalized software costs less intangibles.
B. FINANCIAL STATEMENTS AND OTHER INFORMATION. Maintain
a system of accounting satisfactory to Bank and in accordance with GAAP applied
on a consistent basis throughout the period involved, permit Bank's officers or
authorized representatives to visit and inspect Borrower's books of account and
other records at such reasonable times and as often as Bank may desire, and pay
the reasonable fees and disbursements of any accountants or other agents of
Bank selected by Bank for the foregoing purposes. Unless written notice of
another location is given to Bank, Borrower's books and records will be located
at Borrower's chief executive office set forth above. All financial statements
called for below shall be prepared in form and content acceptable to Bank and
by independent certified public accountants acceptable to Bank.
In addition, Borrower will:
i. Furnish to Bank audited financial statements of Borrower, along
with a covenant compliance certificate for each fiscal year of Borrower, within
125 days after the close of each such fiscal year.
ii. Furnish to Bank quarterly financial statements (including a
balance sheet and profit and loss statement) of Borrower, along with a covenant
compliance certificate for each quarter of each fiscal year of Borrower, within
45 days after the close of each such period.
iii. Furnish to Bank quarterly accounts receivable agings, inventory
and sales pipeline reports within 45 days of quarter end.
iv. Furnish to Bank personal financial statements of William C. and
Patsy A. Thompson within 125 days of fiscal year end.
v. Furnish to Bank personal tax returns of William C. and Patsy A.
Thompson within 30 days of filing.
vi. Furnish to Bank promptly such additional information, reports and
statements respecting the business operations and financial condition of
Borrower(s), from time to time, as Bank may reasonably request.
C. INSURANCE. Maintain insurance with responsible
insurance companies on such of its properties, in such amounts and against such
risks as is customarily maintained by similar businesses operating in the same
vicinity, specifically to include fire and extended coverage insurance covering
all assets, business interruption insurance, workers compensation insurance and
liability insurance, all to be with such companies and in such amounts as are
satisfactory to Bank and providing for at least 30 days prior notice to Bank
of any cancellation thereof. Satisfactory evidence of such insurance will be
supplied to Bank prior to funding under the Loan(s) and 30 days prior to each
policy renewal.
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D. EXISTENCE AND COMPLIANCE. Maintain its existence,
good standing and qualification to do business, where required and comply with
all laws, regulations and governmental requirements including, without
limitation, environmental laws applicable to it or to any of its property,
business operations and transactions.
E. ADVERSE CONDITIONS OR EVENTS. Promptly advise Bank
in writing of (i) any condition, event or act which comes to its attention that
would or might materially adversely affect Borrower's financial condition or
operations or Bank's rights under the Loan Documents, (ii) any litigation filed
by or against Borrower, (iii) any event that has occurred that would constitute
an event of default under any Loan Documents and (iv) any uninsured or
partially uninsured loss through fire, theft, liability or property damage in
excess of an aggregate of $500,000.00.
F. TAXES AND OTHER OBLIGATIONS. Pay all of its taxes,
assessments and other obligations, including, but not limited to taxes, costs
or other expenses arising out of this transaction, as the same become due and
payable, except to the extent the same are being contested in good faith by
appropriate proceedings in a diligent manner.
G. MAINTENANCE. Maintain all of its tangible property
in good condition and repair and make all necessary replacements thereof, and
preserve and maintain all licenses, trademarks, privileges, permits,
franchises, certificates and the like necessary for the operation of its
business.
H. ENVIRONMENTAL. Immediately advise Bank in writing
of (i) any and all enforcement, cleanup, remedial, removal, or other
governmental or regulatory actions instituted, completed or threatened pursuant
to any applicable federal, state, or local laws, ordinances or regulations
relating to any Hazardous Materials affecting Borrower's business operations;
and (ii) all claims made or threatened by any third party against Borrower
relating to damages, contribution, cost recovery, compensation, loss or injury
resulting from any Hazardous Materials. Borrower shall immediately notify Bank
of any remedial action taken by Borrower with respect to Borrower's business
operations. Borrower will not use or permit any other party to use any
Hazardous Materials at any of Borrower's places of business or at any other
property owned by Borrower except such materials as are incidental to
Borrower's normal course of business, maintenance and repairs and which are
handled in compliance with all applicable environmental laws. Borrower agrees
to permit Bank, its agents, contractors and employees to enter and inspect any
of Borrower's places of business or any other property of Borrower at any
reasonable times upon three (3) days prior notice for the purposes of
conducting an environmental investigation and audit (including taking physical
samples) to insure that Borrower is complying with this covenant and Borrower
shall reimburse Bank on demand for the costs of any such environmental
investigation and audit. Borrower shall provide Bank, its agents, contractors,
employees and representatives with access to and copies of any and all data and
documents relating to or dealing with any Hazardous Materials used, generated,
manufactured, stored or disposed of by Borrower's business operations within
five (5) days of the request therefore.
5. NEGATIVE COVENANTS. Until full payment and performance of all
obligations of Borrower under the Loan Documents, Borrower will not, without
the prior written consent of Bank (and without limiting any requirement of any
other Loan Documents):
A. TRANSFER OF ASSETS OR CONTROL. Sell, lease, assign
or otherwise dispose of or transfer any assets, except in the normal course of
its business, or enter into any merger or consolidation, or transfer control or
ownership of the Borrower or form or acquire any subsidiary.
B. LIENS. Grant, suffer or permit any contractual or
noncontractual lien on or security interest in its assets, except in favor of
Bank, or fail to promptly pay when due all lawful claims, whether for labor,
materials or otherwise. Purchase money security interests included in
Borrower's vendor
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<PAGE> 6
agreements are permitted, provided the liens are not perfected by either public
filings or notice to the Bank.
C. EXTENSIONS OF CREDIT. Make or permit any subsidiary
to make, any loan or advance to any person or entity in excess of $100,000, or
purchase or otherwise acquire, or permit any subsidiary to purchase or
otherwise acquire, any capital stock, assets, obligations, or other securities
of, make any capital contribution to, or otherwise invest in or acquire any
interest in any entity, or participate as a partner or joint venturer with any
person or entity, except for the purchase of direct obligations of the United
States or any agency thereof with maturities of less than one year. Loans
resulting from the purchase of FileTek, Inc.'s stock are allowed, provided
such transactions are secured by the related FileTek, Inc. stock.
D. BORROWINGS. Create, incur, assume or become liable
in any manner for any indebtedness (for borrowed money, deferred payment for
the purchase of assets, lease payments, as surety or guarantor for the debt for
another, or otherwise) other than to Bank, except for normal trade debts
incurred in the ordinary course of Borrower's business, and except for existing
indebtedness disclosed to Bank in writing and acknowledged by Bank prior to the
date of this Agreement. Leases may be entered into so long as they are in the
normal course of business and for fair value.
E. DIVIDENDS AND SIMILAR EVENTS. In the case of the
Company and its subsidiaries, purchase, redeem or otherwise retire any shares
of its capital stock, voluntarily prepay, acquire or anticipate any sinking
fund requirement of any indebtedness, declare or pay any cash dividends or make
other distributions in respect of capital. Notwithstanding the foregoing, for
purposes of this covenant, the Company shall be entitled to repurchase, for
fair value, shares of its capital stock from employees who have terminated
their employment with the Company
F. CHARACTER OF BUSINESS. Change the general character
of business as conducted at the date hereof, or engage in any type of business
not reasonably related to its business as presently conducted.
G. MANAGEMENT CHANGE. Change the current ownership in a
manner that the Bank determines adversely affects its interest with respect to
the Note or control of the Borrower and its subsidiaries. The Borrower shall
retain management reasonably satisfactory to the Bank.
H. MERGER OR ACQUISITION. In the case of the Company
and its subsidiaries, enter into any merger or consolidation agreement to
acquire all or substantially all of the assets of any person or entity, or to
dissolve, merge or consolidate into any person or entity.
I. SUBSIDIARIES; INVESTMENTS. In the case of the
Company and its subsidiaries, create any subsidiaries or make any equity
investments or acquire any other interest in any corporation, association,
partnership, limited liability company, joint venture or other party or make
any advances to any such party. Notwithstanding the foregoing, for the purpose
of this covenant, the Company shall be allowed to make advances, loans or
equity investments to or in FileTek UK Limited.
J. SUBORDINATED DEBT PAYMENTS. Repay subordinated debt
in the event of a continuing default. Notwithstanding such an event of
default, principal and interest payments on subordinated debt is permitted.
6. DEFAULT. Borrower shall be in default under this Agreement
and under each of the other Loan Documents if it shall default in the payment
of any amounts due and owing under the Loan or should it fail to timely and
properly observe, keep or perform any term, covenant, agreement or condition in
any Loan Document or in any other loan agreement, promissory note, security
agreement, deed of trust,
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deed to secure debt, mortgage, assignment or other contract securing or
evidencing payment of any indebtedness of Borrower to Bank or any affiliate or
subsidiary of NationsBank Corporation.
7. REMEDIES UPON DEFAULT. If an event of default shall occur,
Bank shall have all rights, powers and remedies available under each of the
Loan Documents as well as all rights and remedies available at law or in
equity.
8. NOTICES. All notices, requests or demands which any party is
required or may desire to give to any other party under any provision of this
Agreement must be in writing delivered to the other party at the following
address:
Borrower:
FileTek, Inc., FileTek UK Limited
William Thompson Revocable Trust
Patsy Thompson Revocable Trust
William and Patsy Thompson
Fax. No. (301) 251-1990
Bank:
NationsBank, N.A.
6610 Rockledge Drive
Bethesda, Maryland 20850
Fax No. (301) 493-7059
or to such other address as any party may designate by written notice to the
other party. Each such notice, request and demand shall be deemed given or
made as follows:
A. If sent by mail, upon the earlier of the date of
receipt or five (5) days after deposit in the U.S. Mail, first class postage
prepaid;
B. If sent by any other means , upon delivery.
9. COSTS, EXPENSES AND ATTORNEYS' FEES. Borrower shall pay to
Bank immediately upon demand the full amount of all costs and expenses,
including reasonable attorneys' fees (to include outside counsel fees and all
allocated costs of Bank's in-house counsel if permitted by applicable law),
incurred by Bank in connection with (a) negotiation and preparation of this
Agreement and each of the Loan Documents, and (b) all other costs and
attorneys' fees incurred by Bank for which Borrower is obligated to reimburse
Bank in accordance with the Terms of the Loan Documents.
10. MISCELLANEOUS. Borrower and Bank further covenant and agree
as follows, without limiting any requirement of any other Loan Document:
A. CUMULATIVE RIGHTS AND NO WAIVER. Each and every
right granted to Bank under any Loan Document, or allowed it by law or equity
shall be cumulative of each other and may be exercised in addition to any and
all other rights of Bank, and no delay in exercising any right shall operate as
a waiver thereof, nor shall any single or partial exercise by Bank of any right
preclude any other or future exercise thereof or the exercise of any other
right. Borrower expressly waives any presentment, demand, protest or other
notice of any kind, including but not limited to notice of intent to accelerate
and notice of acceleration. No notice to or demand on Borrower in any case
shall, of itself, entitle Borrower to any other or future notice or demand in
similar or other circumstances.
-7-
<PAGE> 8
B. APPLICABLE LAW. This Loan Agreement and the rights
and obligations of the parties hereunder shall be governed by and interpreted
in accordance with the laws of and applicable United States federal law.
C. AMENDMENT. No modification, consent, amendment or
waiver of any provision of this Loan Agreement, nor consent to any departure by
Borrower therefrom, shall be effective unless the same shall be in writing and
signed by an officer of Bank, and then shall be effective only in the specified
instance and for the purpose for which given. This Loan Agreement is binding
upon Borrower, its successors and assigns, and inures to the benefit of Bank,
its successors and assigns; however, no assignment or other transfer of
Borrower's rights or obligations hereunder shall be made or be effective
without Bank's prior written consent, nor shall it relieve Borrower of any
obligations hereunder. There is no third party beneficiary of this Loan
Agreement.
D. DOCUMENTS. All documents, certificates and other
items required under this Loan Agreement to be executed and/or delivered to
Bank shall be in form and content satisfactory to Bank and its counsel.
E. PARTIAL INVALIDITY. The unenforceability or
invalidity of any provision of this Loan Agreement shall not affect the
enforceability or validity of any other provision herein and the invalidity or
unenforceability of any provision of any Loan Document to any person or
circumstance shall not affect the enforceability or validity of such provision
as it may apply to other persons or circumstances.
F. INDEMNIFICATION. Notwithstanding anything to the
contrary contained in Section 10(G), Borrower shall indemnify, defend and hold
Bank and its successors and assigns harmless from and against any and all
claims, demands, suits, losses, damages, assessments, fines, penalties, costs
or other expenses (including reasonable attorneys' fees and court costs)
arising from or in any way related to any of the transactions contemplated
hereby, including but not limited to actual or threatened damage to the
environment, agency costs of investigation, personal injury or death, or
property damage, due to a release or alleged release of Hazardous Materials,
arising from Borrower's business operations, any other property owned by
Borrower or in the surface or ground water arising from Borrower's business
operations, or gaseous emissions arising from Borrower's business operations or
any other condition existing or arising from Borrower's business operations
resulting from the use or existence of Hazardous Materials, whether such claim
proves to be true or false. Borrower further agrees that its indemnity
obligations shall include, but are not limited to, liability for damages
resulting from the personal injury or death of an employee of the Borrower,
regardless of whether the Borrower has paid the employee under the workmen' s
compensation laws of any state or other similar federal or state legislation
for the protection of employees. The term "property damage" as used in this
paragraph includes, but is not limited to, damage to any real or personal
property of the Borrower, the Bank, and of any third parties. The Borrower's
obligations under this paragraph shall survive the repayment of the Loan and
any deed in lieu of foreclosure or foreclosure of any Deed to Secure Debt, Deed
of Trust, Security Agreement or Mortgage securing the Loan.
G. SURVIVABILITY. All covenants, agreements,
representations and warranties made herein or in the other Loan Documents shall
survive the making of the Loan and shall continue in full force and effect so
long as the Loan is outstanding or the obligation of the Bank to make any
advances under the Line shall not have expired.
11. NO ORAL AGREEMENT. THIS WRITTEN LOAN AGREEMENT AND THE OTHER
LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES.
-8-
<PAGE> 9
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed under seal by their duly authorized representatives as of the
date first above written.
<TABLE>
<CAPTION>
WITNESS/ATTEST: BORROWER:
FileTek, Inc.
<S> <C>
_________________________ By: /s/ William C. Thompson (Seal)
---------------------------------------------------------
William C. Thompson, Chief Executive Officer
FileTek UK Limited
_________________________ By: /s/ William C. Thompson (Seal)
--------------------------------------------------------
William C. Thompson, Director
William C. Thompson Revocable Trust
_________________________ By: /s/ William C. Thompson (Seal)
--------------------------------------------------------
William C. Thompson, Trustee
Patsy A. Thompson Revocable Trust
_________________________ By: /s/ Patsy A. Thompson (Seal)
--------------------------------------------------------
Patsy A. Thompson, Trustee
_________________________ /s/ William C. Thompson (Seal)
------------------------------------------------------------
William C. Thompson, Individually
_________________________ /s/ Patsy A. Thompson (Seal)
------------------------------------------------------------
Patsy A. Thompson, Individually
<CAPTION>
BANK:
NationsBank, N.A
<S> <C>
_________________________ By: /s/ Elizabeth F. Shore (Seal)
--------------------------------------------------------
Elizabeth F. Shore, Vice President
</TABLE>
-9-
<PAGE> 1
EXHIBIT 10.9
NATIONSBANK, N. A.
PROMISSORY NOTE
Customer# 61-187514
Date May 31, 1998 []New [X]Renewal Amount $6,000,000.00 Maturity Date May 31,
1999
<TABLE>
<CAPTION>
================================================================================================================================
Bank: Borrower:
<S> <C>
NationsBank, N.A.
Banking Center: Filetek, Inc.; FileTek UK Limited; William C. Thompson Revocable
Trust; Patsy A. Thompson Revocable Trust; William C. Thompson
Commercial Banking and Patsy A. Thompson
6610 Rockledge Drive 9400 Key West Avenue
Bethesda, Maryland 20817-1811 Rockville, Maryland 20850-3322
County: Montgomery
County: Montgomery
================================================================================================================================
</TABLE>
FOR VALUE RECEIVED, the undersigned Borrower unconditionally (and jointly and
severally, if more than one) promises to pay to the order of Bank, its
successors and assigns, without setoff, at its offices indicated at the
beginning of this Note, or at such other place as may be designated by Bank,
the principal amount of Six Million and 00/100 Dollars ($6,000,000.00), or so
much thereof as may be advanced from time to time in immediately available
funds, together with interest computed daily on the outstanding principal
balance hereunder, at an annual interest rate, and in accordance with the
payment schedule, indicated below.
[THIS NOTE CONTAINS SOME PROVISIONS PRECEDED BY BOXES. IF A BOX IS MARKED, THE
PROVISION APPLIES TO THIS TRANSACTION; IF IT IS NOT MARKED, THE PROVISION DOES
NOT APPLY TO THIS TRANSACTION.]
1. Interest Rate. The Rate shall be the Eurodollar Rate, plus 2.00 percent,
per annum. The "Eurodollar Rate" is a fluctuating rate of interest equal to
the 1 month rate of interest (rounded upwards, if necessary to the nearest
1/100 of 1%) appearing on Telerate Page 3750 (or any successor page) as the 1
month London interbank offered rate for deposits in Dollars at approximately
11:00 a.m. (London time) on the second preceding business day, as adjusted from
time to time in Bank's sole discretion for then-applicable reserve
requirements, deposit insurance assessment rates and other regulatory costs.
If for any reason such rate is not available, the term "Eurodollar Rate" shall
mean the fluctuating rate of interest equal to the 1 month rate of interest
(rounded upwards, if necessary to the nearest 1/100 of 1%) appearing on Reuters
Screen LIBO Page as the 1 month London interbank offered rate for deposits in
Dollars at approximately 11:00 a.m. (London time) on the second preceding
business day, as adjusted from time to time in Bank's sole discretion for
then-applicable reserve requirements, deposit insurance assessment rates and
other regulatory costs; provided, however, if more than one rate is specified
on Reuters Screen LIBO Page, the applicable rate shall be the arithmetic mean
of all such rates.
Notwithstanding any provision of this Note, Bank does not intend to charge and
Borrower shall not be required to pay any amount of interest or other charges
in excess of the maximum permitted by the applicable law of the State of
Maryland; if any higher rate ceiling is lawful, then that higher rate ceiling
shall apply. Any payment in excess of such maximum shall be refunded to
Borrower or credited against principal, at the option of Bank.
2. ACCRUAL METHOD. Unless otherwise indicated, interest at the Rate set forth
above will be calculated by the 365/360 day method (a daily amount of interest
is computed for a hypothetical year of 360 days; that amount is multiplied by
the actual number of days for which any principal is outstanding hereunder).
If interest is not to be computed using this method, the method shall be: N/A.
3. RATE CHANGE DATE. Any Rate based on a fluctuating index or base rate will
change, unless otherwise provided, each time and as of the date that the index
or base rate changes. If the Rate is to change on any other date or at any
other interval, the change shall be: N/A. In the event any index is
discontinued, Bank shall substitute an index determined by Bank to be
comparable, in its sole discretion.
4. PAYMENT SCHEDULE. All payments received hereunder shall be applied first to
the payment of any expense or charges payable hereunder or under any other loan
documents executed in connection with this Note, then to interest due and
payable, with the balance applied to principal, or in such other order as Bank
shall determine at its option.
1
<PAGE> 2
SINGLE PRINCIPAL PAYMENT. Principal shall be paid in full in a single payment
on May 31, 1999. Interest thereon shall be paid monthly, commencing on June
30, 1998, and continuing on the last day of each successive month, quarter or
other period (as applicable) thereafter, with a final payment of all unpaid
interest at the stated maturity of this Note.
5. REVOLVING FEATURE.
[X] Borrower may borrow, repay and reborrow hereunder at any time, up to a
maximum aggregate amount outstanding at any one time equal to the principal
amount of this Note, provided, that Borrower is not in default under any
provision of this Note, any other documents executed in connection with this
Note, or any other note or other loan documents now or hereafter executed in
connection with any other obligation of Borrower to Bank, and provided that the
borrowings hereunder do not exceed any borrowing base or other limitation on
borrowings by Borrower. Bank shall incur no liability for its refusal to
advance funds based upon its determination that any conditions of such further
advances have not been met. Bank records of the amounts borrowed from time to
time shall be conclusive proof thereof.
[] UNCOMMITTED FACILITY. Borrower acknowledges and agrees that,
notwithstanding any provisions of this Note or any other documents executed
in connection with this Note, Bank has no obligation to make any advance,
and that all advances are at the sole discretion of Bank.
[] OUT-OF-DEBT PERIOD. For a period of at least __ consecutive days during
[] each fiscal year, [] any consecutive 12-month period, Borrower shall
fully pay down the balance of this Note, so that no amount of principal or
interest and no other obligation under this Note remains outstanding.
6. AUTOMATIC PAYMENT.
[X] Borrower has elected to authorize Bank to effect payment of sums due under
this Note by means of debiting Borrower's account number 2086538774. This
authorization shall not affect the obligation of Borrower to pay such sums when
due, without notice, if there are insufficient funds in such account to make
such payment in full on the due date thereof, or if Bank fails to debit the
account.
7. WAIVERS, CONSENTS AND COVENANTS. Borrower, any indorser, or guarantor
hereof or any other party hereto (individually an "Obligor" and collectively
"Obligors") and each of them jointly and severally: (a) waive presentment,
demand, protest, notice of demand, notice of intent to accelerate, notice of
acceleration of maturity, notice of protest, notice of nonpayment, notice of
dishonor, and any other notice required to be given under the law to any
Obligor in connection with the delivery, acceptance, performance, default or
enforcement of this Note, any indorsement or guaranty of this Note, or any
other documents executed in connection with this Note or any other note or
other loan documents now or hereafter executed in connection with any
obligation of Borrower to Bank (the "Loan Documents"); (b) consent to all
delays, extensions, renewals or other modifications of this Note or the Loan
Documents, or waivers of any term hereof or of the Loan Documents, or release
or discharge by Bank of any of Obligors, or release, substitution or exchange
of any security for the payment hereof, or the failure to act on the part of
Bank, or any indulgence shown by Bank (without notice to or further assent from
any of Obligors), and agree that no such action, failure to act or failure to
exercise any right or remedy by Bank shall in any way affect or impair the
obligations of any Obligors or be construed as a waiver by Bank of, or
otherwise affect, any of Bank's rights under this Note, under any indorsement
or guaranty of this Note or under any of the Loan Documents; and (c) agree to
pay, on demand, all costs and expenses of collection or defense of this Note or
of any indorsement or guaranty hereof and/or the enforcement or defense of
Bank's rights with respect to, or the administration, supervision,
preservation, protection of, or realization upon, any property securing payment
hereof, including, without limitation, reasonable attorney's fees, including
fees related to any suit, mediation or arbitration proceeding, out of court
payment agreement, trial, appeal, bankruptcy proceedings or other proceeding,
in the amount of 15% of the principal amount of this Note, or such greater
amount as may be determined reasonable by any arbitrator or court, whichever is
applicable.
8. PREPAYMENTS. Prepayments may be made in whole or in part at any time on
any loan for which the Rate is based on the Prime Rate or on any other
fluctuating Rate or index which may change daily. All prepayments of principal
shall be applied in the inverse order of maturity, or in such other order as
Bank shall determine in its sole discretion. No prepayment of any other loan
shall be permitted without the prior written consent of Bank. Notwithstanding
such prohibition, if there is a prepayment of any such loan, whether by consent
of Bank, or because of acceleration or otherwise, Borrower shall, within 15
days of any request by Bank, pay to Bank any loss or expense which Bank may
incur or sustain as a result of such prepayment. For the purposes of
calculating the amounts owed only, it shall be assumed that Bank actually
funded or committed to fund the loan through the purchase of an underlying
deposit in an amount and for a term comparable to the loan, and such
determination by Bank shall be conclusive, absent a manifest error in
computation.
9. DELINQUENCY CHARGE. To the extent permitted by law, a delinquency charge
may be imposed in an amount not to exceed four percent (4%) of any payment that
is more than fifteen days late.
10. EVENTS OF DEFAULT. The following are events of default hereunder:
(a) the failure to pay or perform any obligation, liability or indebtedness of
any Obligor to Bank, or to any affiliate or subsidiary of NationsBank
Corporation, whether under this Note or any Loan Documents, as and when due
2
<PAGE> 3
(whether upon demand, at maturity or by acceleration); (b) the failure to pay
or perform any other obligation, liability or indebtedness of any Obligor to
any other party; (c) the death of any Obligor (if an individual); (d) the
resignation or withdrawal of any partner or a material owner/Guarantor of
Borrower, as determined by Bank in its sole discretion; (e) the commencement
of a proceeding against any Obligor for dissolution or liquidation, the
voluntary or involuntary termination or dissolution of any Obligor or the
merger or consolidation of any Obligor with or into another entity; (f) the
insolvency of, the business failure of, the appointment of a custodian,
trustee, liquidator or receiver for or for any of the property of, the
assignment for the benefit of creditors by, or the filing of a petition under
bankruptcy, insolvency or debtor's relief law or the filing of a petition for
any adjustment of indebtedness, composition or extension by or against any
Obligor; (g) the determination by Bank that any representation or warranty made
to Bank by any Obligor in any Loan Documents or otherwise is or was, when it
was made, untrue or materially misleading; (h) the failure of any Obligor to
timely deliver such financial statements, including tax returns, other
statements of condition or other information, as Bank shall request from time
to time; (i) the entry of a judgment against any Obligor which Bank deems to be
of a material nature, in Bank's sole discretion; (j) the seizure or forfeiture
of, or the issuance of any writ of possession, garnishment or attachment, or
any turnover order for any property of any Obligor; (k) the determination by
Bank that it is insecure for any reason; (l) the determination by Bank that a
material adverse change has occurred in the financial condition of any Obligor;
or (m) the failure of Borrower's business to comply with any law or regulation
controlling its operation.
11. REMEDIES UPON DEFAULT. Whenever there is a default under this Note (a) the
entire balance outstanding hereunder and all other obligations of any Obligor
to Bank (however acquired or evidenced) shall, at the option of Bank, become
immediately due and payable and any obligation of Bank to permit further
borrowing under this Note shall immediately cease and terminate, and/or (b) to
the extent permitted by law, the Rate of interest on the unpaid principal shall
be increased at Bank's discretion up to the maximum rate allowed by law, or if
none, 25% per annum (the "Default Rate"). The provisions herein for a Default
Rate shall not be deemed to extend the time for any payment hereunder or to
constitute a "grace period" giving Obligors a right to cure any default. At
Bank's option, any accrued and unpaid interest, fees or charges may, for
purposes of computing and accruing interest on a daily basis after the due date
of the Note or any installment thereof, be deemed to be a part of the principal
balance, and interest shall accrue on a daily compounded basis after such date
at the Default Rate provided in this Note until the entire outstanding balance
of principal and interest is paid in full. Bank is hereby authorized at any
time to set off and charge against any deposit accounts of any Obligor, as well
as any money, instruments, securities, documents, chattel paper, credits,
claims, demands, income and any other property, rights and interests of any
Obligor which at any time shall come into the possession or custody or under
the control of Bank or any of its agents, affiliates or correspondents, without
notice or demand, any and all obligations due hereunder. Additionally, Bank
shall have all rights and remedies available under each of the Loan Documents,
as well as all rights and remedies available at law or in equity.
DEBTOR AUTHORIZES ANY ATTORNEY ADMITTED TO PRACTICE BEFORE ANY COURT OF RECORD
IN THE UNITED STATES TO APPEAR ON BEHALF OF DEBTOR IN ANY COURT IN ONE OR MORE
PROCEEDINGS, OR BEFORE ANY CLERK THEREOF OR PROTHONOTARY OR OTHER COURT
OFFICIAL, AND TO CONFESS JUDGMENT AGAINST DEBTOR IN FAVOR OF THE HOLDER OF THIS
AGREEMENT IN THE FULL AMOUNT DUE UNDER THIS AGREEMENT (INCLUDING PRINCIPAL,
ACCRUED INTEREST AND ANY AND ALL CHARGES, FEES AND COSTS) PLUS ATTORNEYS' FEES
EQUAL TO FIFTEEN PERCENT (15%) OF THE AMOUNT DUE, PLUS COURT COSTS, ALL WITHOUT
PRIOR NOTICE OR OPPORTUNITY OF DEBTOR FOR PRIOR HEARING. DEBTOR AGREES AND
CONSENTS THAT VENUE AND JURISDICTION SHALL BE PROPER IN THE CIRCUIT COURT OF
ANY COUNTY OF THE STATE OF MARYLAND OR OF BALTIMORE CITY, MARYLAND, OR IN THE
UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MARYLAND. DEBTOR WAIVES THE
BENEFIT OF ANY AND EVERY STATUTE, ORDINANCE, OR RULE OF COURT WHICH MAY BE
LAWFULLY WAIVED CONFERRING UPON DEBTOR ANY RIGHT OR PRIVILEGE OF EXEMPTION,
HOMESTEAD RIGHTS, STAY OF EXECUTION, OR SUPPLEMENTARY PROCEEDINGS, OR OTHER
RELIEF FROM THE ENFORCEMENT OR IMMEDIATE ENFORCEMENT OF A JUDGMENT OR RELATED
PROCEEDINGS ON A JUDGMENT. THE AUTHORITY AND POWER TO APPEAR FOR AND ENTER
JUDGMENT AGAINST DEBTOR SHALL NOT BE EXHAUSTED BY ONE OR MORE EXERCISES
THEREOF, OR BY ANY IMPERFECT EXERCISE THEREOF, AND SHALL NOT BE EXTINGUISHED BY
ANY JUDGMENT ENTERED PURSUANT THERETO; SUCH AUTHORITY AND POWER MAY BE
EXERCISED ON ONE OR MORE OCCASIONS FROM TIME TO TIME, IN THE SAME OR DIFFERENT
JURISDICTIONS, AS OFTEN AS THE HOLDER SHALL DEEM NECESSARY, CONVENIENT, OR
PROPER.
12. NON-WAIVER. The failure at any time of Bank to exercise any of its options
or any other rights hereunder shall not constitute a waiver thereof, nor shall
it be a bar to the exercise of any of its options or rights at a later date.
All rights and remedies of Bank shall be cumulative and may be pursued singly,
successively or together, at the option of Bank. The acceptance by Bank of any
partial payment shall not constitute a waiver of any default or of any of
Bank's rights under this Note. No waiver of any of its rights hereunder, and
no modification or amendment of this Note, shall be deemed to be made by Bank
unless the same shall be in writing, duly signed on behalf of Bank; each such
waiver shall apply only with respect to the specific instance involved, and
shall in no way impair the rights of Bank or the obligations of Obligor to Bank
in any other respect at any other time.
13. APPLICABLE LAW, VENUE AND JURISDICTION. This Note and the rights and
obligations of Borrower and Bank shall be governed by and interpreted in
accordance with the law of the State of Maryland. In any litigation in
connection with or to enforce this Note or any indorsement or guaranty of this
Note or any Loan Documents, Obligors, and each of them, irrevocably consent to
and confer personal jurisdiction on the courts of the State of Maryland or the
3
<PAGE> 4
United States located within the State of Maryland and expressly waive any
objections as to venue in any such courts. Nothing contained herein shall,
however, prevent Bank from bringing any action or exercising any rights within
any other state or jurisdiction or from obtaining personal jurisdiction by any
other means available under applicable law.
14. PARTIAL INVALIDITY. The unenforceability or invalidity of any provision of
this Note shall not affect the enforceability or validity of any other
provision herein and the invalidity or unenforceability of any provision of
this Note or of the Loan Documents to any person or circumstance shall not
affect the enforceability or validity of such provision as it may apply to
other persons or circumstances.
15. WAIVER OF JURY TRIAL. Obligors waive trial by jury in any action or
proceeding to which Obligors and Bank may be parties, arising out of, in
connection with or in any way pertaining to, this Note or the Loan Documents.
It is agreed and understood that this waiver constitutes a waiver of trial by
jury of all claims against all parties to such action or proceedings, including
claims against parties who are not parties to this Note. This waiver is
knowingly, willingly and voluntarily made by Obligors.
16. BINDING EFFECT. This Note shall be binding upon and inure to the benefit
of Borrower, Obligors and Bank and their respective successors, assigns, heirs
and personal representatives, provided, however, that no obligations of
Borrower or Obligors hereunder can be assigned without prior written consent of
Bank.
17. CONTROLLING DOCUMENT. To the extent that this Note conflicts with or is in
any way incompatible with any other Loan Document concerning this obligation,
the Note shall control over any other document, and if the Note does not
address an issue, then each other document shall control to the extent that it
deals most specifically with an issue.
18. YEAR 2000 REPRESENTATIONS AND WARRANTIES.
(A) Borrower has (i) begun analyzing the operations of Borrower and its
subsidiaries and affiliates that could be adversely affected by failure to
become Year 2000 compliant (that is, that computer applications, imbedded
microchips and other systems will be able to perform date-sensitive functions
prior to and after December 31, 1999) and; (ii) developed a plan for becoming
Year 2000 compliant in a timely manner, the implementation of which is on
schedule in all material respects. Borrower reasonably believes that it will
become Year 2000 compliant for its operations and those of its subsidiaries and
affiliates on a timely basis except to the extent that a failure to do so could
not reasonably be expected to have a material adverse effect upon the financial
condition of Borrower.
(B) Borrower reasonably believes any suppliers and vendors that are
material to the operations of Borrower or its subsidiaries and affiliates will
be Year 2000 compliant for their own computer applications except to the extent
that a failure to do so could not reasonably be expected to have a material
adverse effect upon the financial condition of Borrower.
(C) Borrower will promptly notify Bank in the event Borrower determines
that any computer application which is material to the operations of Borrower,
its subsidiaries or any of its material vendors or suppliers will not be fully
Year 2000 compliant on a timely basis, except to the extent that such failure
could not reasonably be expected to have a material adverse effect upon the
financial condition of Borrower.
BORROWER REPRESENTS TO BANK THAT THE PROCEEDS OF THIS LOAN ARE TO BE USED
PRIMARILY FOR BUSINESS, COMMERCIAL OR AGRICULTURAL PURPOSES. BORROWER
ACKNOWLEDGES HAVING READ AND UNDERSTOOD, AND AGREES TO BE BOUND BY, ALL TERMS
AND CONDITIONS OF THIS NOTE, AND HEREBY EXECUTES THIS NOTE INTENDING TO CREATE
AN INSTRUMENT EXECUTED UNDER SEAL.
NOTICE OF FINAL AGREEMENT. THIS WRITTEN PROMISSORY NOTE REPRESENTS THE FINAL
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS.
BORROWERCORPORATE OR PARTNERSHIP BORROWER
FILETEK, INC.
4
<PAGE> 5
<TABLE>
<S> <C>
/s/ William C. Thompson (Seal) By: /s/ William C. Thompson (Seal)
- --------------------------------------------------- -------------------------------------------
WILLIAM C. THOMPSON
Name: William C. Thompson
Title: Chief Executive Officer
/s/ Patsy A. Thompson (Seal)
- ---------------------------------------------------
PATSY A. THOMPSON
------------------------------------------------
Attest (If Applicable)
[Corporate Seal]
FILETEK UK LIMITED WILLIAM C. THOMPSON REVOCABLE TRUST
By: /s/ William C. Thompson (Seal) By: William C. Thompson (Seal)
---------------------------------------- ---------------------------------------
Name: William C. Thompson Name: William C. Thompson
Title: Director Title: Trustee
- -------------------------------------------- ----------------------------------------------------
Attest (If Applicable) Attest (If Applicable)
[Corporate Seal] [Corporate Seal]
PATSY A. THOMPSON REVOCABLE TRUST
By: Patsy A. Thompson (Seal)
----------------------------------------
Name: Patsy A. Thompson
Title: Trustee
- --------------------------------------------
Attest (If Applicable)
[Corporate Seal]
</TABLE>
5
<PAGE> 1
EXHIBIT 10.10
NationsBank, N.A. AMENDED AND RESTATED
1501 Pennsylvania Ave. N.W. SECURITY AGREEMENT
Washington DC 20005 4293718
THIS SECURITY AGREEMENT (this Agreement') is made this 31st day of
August, 1994 by and between NationsBank, N.A.. formerly known as NationsBank of
Maryland, N.A. and successor by merger to Maryland National Bank. successor by
merger to American Security Bank, N.A. (the "Bank"), and FileTek, Inc. and
FileTek UK Limited (the "Grantor", whether one or more than one).
WHEREAS, at various times and from time to time, the Bank has extended
loans to the Grantor as evidenced by Loan Documents delivered by the Grantor
and/or by any other Obligor (as hereinafter defined) to the Bank, which Loan
Documents may have been modified and extended from time to time (the Loan
Documents and all amendments, modifications and extensions thereto are
collectively referred to herein as the "Loan Documents"); and
WHEREAS, to secure the Grantor's obligations to the Bank under the
Loan Documents, the Grantor executed a Security Agreement dated January 27,
1992 granting a lien to the Bank in certain Collateral, as defined in the
Security Agreement (the Security Agreement and all amendments and modifications
thereto are collectively referred to herein as the "Security Agreement"); and
WHEREAS, the Grantor has requested the Bank to modify and amend
certain provisions of the Security Agreement and the Bank has agreed to do so
pursuant to the terms of this Amended and Restated Security Agreement.
NOW, THEREFORE, in consideration of the premises and for other good,
valuable and legal consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto do hereby agree to amend and restate the
Security Agreement as follows:
WHEREAS, the Grantor wishes to receive a loan from the Bank and the
Bank is willing to make such a loan provided, among other things, that the
Grantor's obligations to the Bank are secured pursuant to this Agreement; and
WHEREAS, the Grantor is willing to enter into this Agreement to secure
its obligations to the Bank.
NOW, THEREFORE, in consideration of the premises and the agreements
and covenants contained herein and for other good and valuable consideration
the receipt and sufficiency of which are hereby acknowledged, the Grantor,
intending to be legally bound, agrees as follows:
1. Construction of Security Agreement and Definitions. Unless
varied by this Agreement, all of the terms used herein without
definition which are defined
1
<PAGE> 2
by the applicable Uniform Commercial Code pursuant to paragraph 24 hereof shall
have the meanings assigned to them by that law. Whenever used herein, the
words "Grantor," "Obligor" and "Bank," shall be deemed to include their
respective heirs, legal representatives, successors and assigns. All words used
herein shall be deemed to refer to the singular, plural, masculine, feminine or
neuter as the identity of the person or entity or the context may require. The
following terms shall have the following meanings when used herein:
1.1 "Collateral" shall mean the following property of the
Grantor, including specifically, but without limitation: (a) all amounts now
and in the future owed by the Bank or any affiliate of the Bank to the Grantor
and/or on deposit in any account maintained by the Grantor with the Bank or any
affiliate of the Bank; (b) all present and future substitutions, replacements,
appurtenances, accessories and accessions relating to any of the following; (c)
all of the Grantor's books, records, computer programs, other software,
computer files and diskettes or disk storage media and rights under any and all
licenses to use computer programs, software, files and hardware relating to any
of the following; (d) all proceeds (cash and noncash, including insurance
proceeds) and products of all of the following in any form whatsoever; and (e)
all accounts, chattel paper, instruments, inventory, or other goods or property
purchased or acquired with the cash and/or non-cash proceeds of any of the
following:
All of the Grantor's present and future accounts,
contract rights, promissory notes, notes receivable, drafts, acceptances and
other instruments and documents, chattel paper, leases and writings evidencing
a monetary obligation or a security interest in or lease of goods, tax refunds,
all rights to receive the payment of money or other consideration under present
or future contracts (including without limitation, all rights to receive
payments under presently existing), choices in action, judgments and cash, and
all rights to the payment of money due or to become due to the Grantor for any
reason whatsoever, and all goods returned, repossessed or stopped in transit,
the sale, lease or other disposition of which contributed to the creation of
any account, instrument or chattel paper, and all rights which the Grantor may
at any time have against any account debtor or other borrower of the Grantor,
including liens and security interests for the benefit of the Grantor.
All of the inventory of the Grantor of every type
and description, now owned and hereafter acquired and wherever located,
including raw materials, work in process, finished goods, materials and
supplies, goods returned or repossessed, and goods held for demonstration,
marketing or similar purposes, and all property in or on which any of the
foregoing is stored or maintained, and all documents of title and trust
receipts relating to any inventory, and all present and future rights, claims
and causes of action of the Grantor in connection with contracts for the
purchase of, or warranties relating to, or damages to, goods held or to be held
by the Grantor as inventory, and all warranties, manuals and other written
materials (and packaging thereof or relating thereto) relating to inventory.
1.2 "Loan Documents" shall mean this Agreement, any note,
letter agreement, line of credit agreement, commercial financing agreement,
other security agreement, guaranty of payment, mortgage, deed of trust, pledge
agreement, loan agreement, hypothecation agreement, indemnity agreement, letter
of credit application and agreement, assignment or any other
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document or agreement previously, simultaneously or hereafter executed and
delivered by the Grantor and/or by any other Obligor, as hereinafter defined,
singly or jointly with another person or persons to the Bank, in connection
with Obligations, whether or not this Agreement is specifically referred to
therein as the same may from time to time be amended, restated, supplemented or
otherwise modified.
1.3 "Obligations" shall mean the full and punctual
observance and performance of all present and future duties, covenants and
responsibilities due to the Bank by the Grantor or by any other Obligor of any
nature whatsoever, including to the fullest extent permitted by applicable law,
all past, present and future indebtedness and liabilities of the Grantor or any
Obligor to the Bank for the payment of money (extending to all principal,
interest, fees, expense payments, liquidation costs, and attorneys' fees and
expenses), whether similar or dissimilar, related or unrelated, matured or
unmatured, direct or indirect, contingent or noncontingent, primary or
secondary, alone or jointly with others, now due or to become due, now existing
or hereafter created, and whether or not now contemplated.
1.4 'Obligor' shall mean individually and collectively
the Grantor and each endorser, guarantor and surety of any of the Obligations,
any person who is primarily or secondarily liable for the repayment of any of
the Obligations, or any portion thereof, and any person who has granted
security for the repayment of any of the Obligations.
1.5 "Permitted Liens' shall mean: (a) liens and security
interests of the Bank; (b) liens for taxes not delinquent; (c) mechanics',
artisans', landlords', carriers' and other like liens arising in the ordinary
course of business with respect to obligations which are not due; and (d) liens
and security interests specifically consented to by the Bank in writing.
2. Payment and Performance by the Parties. The Grantor will pay
the Obligations or cause the Obligations to be paid as and when due and
payable, and will perform, comply with, and otherwise assure the observance of
the terms, covenants and conditions of the Loan Documents by the Grantor and/or
by any Obligor.
3. Security Interest and Collateral. As security for all of the
Obligations, whether or not any agreement relating to any Obligations
specifically refers to this Agreement or the security interest created
hereunder, the Grantor hereby grants to the Bank a security interest in, and
pledges and assigns to the Bank, the Collateral. The Grantor agrees that the
Bank shall have a perfected lien and continuing security interest in the
Collateral. The Grantor agrees to defend its title to the Collateral against
all persons and will, upon request of the Bank, furnish such further assurances
of title as may be required by the Bank. In addition, the Grantor agrees to
execute and deliver to the Bank, whenever requested by the Bank, any security
agreements, financing statements, amendments to or assignments of financing
statements, security interest filing statements and such other documents as the
Bank may request, in form and content satisfactory to the Bank and otherwise do
or cause to be done from time to time all things requested by the Bank, in
order to confirm, preserve, protect or perfect, or to maintain the perfection
of, the Bank's security interest in any of the Collateral and/or its priority.
The Grantor will, on demand, pay the cost of filing any financing,
continuation, termination or security
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interest filing statement as well as any recordation or transfer tax required
by law to be paid in connection with the filing or recording of any such
statement. Upon the request of the Bank, the Grantor will promptly deliver to
the Bank, with such endorsements and/or assignments as may be requested by the
Bank, the originals of all promissory notes and other instruments, chattel
paper, guaranties, documents of title, certificates of origin and certificates
of title, as well as other documents that may be requested by the Bank,
previously or hereafter received by the Grantor and constituting or evidencing
the Collateral. The Grantor hereby irrevocably constitutes and appoints the
Bank its attorney-in-fact and hereby irrevocably authorizes and empowers the
Bank to execute, deliver and, if appropriate, record with the appropriate
filing office or offices, in the name of the Grantor, all financing statements,
amendments to, or assignments of, financing statements, certifications,
acknowledgments, security interest filing statements, and/or other documents as
the Bank may request or require in order to perfect, preserve, maintain,
continue, protect and/or extend the security interest and lien granted to the
Bank under this Agreement or under any of the Loan Documents and its priority,
such power of attorney being coupled with an interest. To the extent that the
proceeds of any of the Collateral are expected to become subject to the control
of, or in the possession of, a party other than the Grantor or the Bank, the
Grantor shall, at its expense, cause all such parties to execute and deliver
security documents, consents, acknowledgments, financing statements or other
documents as requested by the Bank as may be necessary in the Bank's sole
discretion to evidence and/or perfect the security interest in and lien on all
or any portion of such Collateral. In the Bank's sole discretion, a photocopy
of this Agreement fully executed by the Grantor shall be sufficient to serve as
a financing statement under the applicable Uniform Commercial Code.
4. Representations and Warranties. The Grantor represents,
warrants and agrees that, except as previously disclosed to the Bank in
writing: (a) it is and shall remain the owner of the Collateral and has good
and marketable title to the Collateral free and clear of all liens, pledges,
security interests and other encumbrances except for Permitted Liens; (b) the
Collateral is not on consignment: (c) the Collateral was acquired by the
Grantor from a person whose primary and customary business is the sale of such
Collateral in the ordinary course of business; (d) this Security Agreement and
any other Loan Documents executed by the Grantor constitute the legally binding
obligations of the Grantor and are fully enforceable against the Grantor in
accordance with their terms; (a) the Grantor's name is as specified on the
signature line of this Security Agreement and each legal or trade name of the
Grantor for the previous twelve (12) years (if different from the current legal
name) is as specified below the signature lines of this Security Agreement; (f)
the address of the Grantor's chief executive office and the address of each
other place of business of the Grantor are as specified below the signature
lines of this Security Agreement: (g) except for mobile equipment and motor
vehicles, the Collateral and all books and records pertaining to the Collateral
have for the previous 4 months (unless acquired by the Grantor during the
previous 4 months) are and will be located only at the Grantor's chief
executive office specified below or at any other place of business which may be
specified below; (h) the Grantor will immediately advise the Bank in writing of
any change in the location of its chief executive office and the places where
the Collateral, or any part thereof, or the books and records concerning the
Collateral, or any part thereof, are kept; (i) to the Grantor's knowledge,
there are no judgments, injunctions or similar orders outstanding against the
Grantor or any of the Collateral, and no actions, suits or proceedings pending
or threatened against the Grantor; (j)
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the Grantor has filed all tax returns which are required to be filed by the
Grantor and the Grantor has paid all taxes shown to be due thereon or which
have been assessed against the Grantor; and (k) all information contained in
any financial statement, application, schedule, report or any other document
given by the Grantor, any other Obligor or by any other person in connection
with the Obligations is in all material respects true and accurate and the
Grantor, any Obligor or such other person has not omitted to state any material
fact or any fact necessary to make such information not misleading.
5, Environmental Compliance. The Grantor has obtained or will
obtain all permits, licenses and other authorizations ("Environmental
Authorizations") which are required under any and all federal, state, local and
foreign statutes, ordinances, codes, laws, regulations and other such
authorities relating to the environment or the release of any materials into
the environment ("Environmental Laws"). The Grantor is and will remain in
compliance with the terms and conditions of all such permits, licenses and
authorizations, and is and will remain in compliance with all other
limitations, restrictions, conditions, standards, prohibitions, requirements,
obligations, schedules and timetables contained in any applicable Environmental
Law or in any regulation, code, plan, order, decree, judgment, injunction,
notice or demand letter issued, entered, promulgated or approved thereunder. No
notice, notification, demand, request for information, citation, summons or
order has been issued, no complaint has been filed, no penalty has been
assessed and no investigation or review is pending or threatened by any
governmental or other entity (a) with respect to any alleged failure by the
Grantor to have any Environmental Authorization required in connection with the
conduct of the business of the Grantor; (b) with respect to any generation.
treatment, storage, recycling, transportation, disposal, or any release as
defined in 42 U.S.C. Section 9601(22) ("Release') on, at, under, about or from
the Collateral or any property or facility now, or in the past, owned, leased
or operated by Grantor of any substance regulated under any Environmental Laws
('Hazardous Material"); or (c) with respect to any arrangement by Grantor for
disposal, treatment or transport of any Hazardous Material. No oral or written
notification of a Release of a Hazardous Material has been filed by or on
behalf of the Grantor and no property or facility now or previously owned,
leased or operated by the Grantor is listed or proposed for listing on the
National Priorities List under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, or on any similar state
list of sites requiring investigation or clean-up. There are no liens arising
under or pursuant to any Environmental Laws on any of the Collateral or on any
real property or properties owned or leased by the Grantor and no governmental
actions have been taken or are in process which could subject any of the
Collateral or such properties to such liens such that the Grantor would be
required to place any notice or restriction relating to the presence of
Hazardous Materials at any property owned by it or in any deed of such
property. There are no Hazardous Materials present on, in, at, under or about
the Collateral or any real property or properties, owned or leased by the
Grantor in amounts or concentrations or under circumstances that materially
adversely affect the use or value of the Collateral, or such property or
properties.
6. Affirmative Covenants. Until all of the Obligations have been
performed and paid in full, the Grantor covenants and agrees that the Grantor
will. except as otherwise agreed to in writing by the Bank: (a) at all times
maintain, in accordance with generally accepted accounting principles
consistently applied, accurate and complete books and records pertaining to the
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operation, business and financial condition of the Grantor and pertaining to
the Collateral and any contracts and collections relating to the Collateral;
(b) furnish to the Bank promptly upon request and in the form and content and
at the intervals specified by the Bank, such written statements and reports,
schedules and other information with respect to the Collateral, any other
assets of the Grantor or the operation, business, affairs and financial
condition of the Grantor as the Bank may from time to time require; (c) at all
reasonable times and without hindrance or delay, permit the Bank or any person
designated by the Bank to enter any place of business of the Grantor or any
other premises where any books, records and other data concerning the Grantor
and/or the Collateral may be kept and to examine, audit, inspect and make
extracts from, and photocopies of, any such books, records and other data; (d)
furnish to the Bank promptly upon request and in the form and content specified
by the Bank and acceptable to Bank in its sole discretion lists of purchasers
of inventory, aging of accounts, aggregate cost or wholesale market value of
inventory, schedules of equipment and other data concerning the Collateral as
the Bank may from time to time specify; (e) mark its books and records in a
manner satisfactory to the Bank so that the Bank's rights in and to the
Collateral will be shown; (f) pay as and when due all taxes, levies, license
fees, assessments and other impositions levied on the Collateral or any part
thereof or for its use and operation; (g) do, file, record, make, execute and
deliver all such additional and further acts, things, notices, deeds,
assurances, instruments and documents as the Bank may reasonably request to
vest in and assure to the Bank its rights hereunder or in any of the
Collateral, and pay to the Bank all taxes, fees and costs (including reasonable
attorneys' fees) paid or incurred by the Bank in connection with the
preparation, filing or recordation thereof; (h) on demand, pledge and assign to
the Bank a security interest in additional property satisfactory to the Bank as
security for the Obligations, if at any time the existing Collateral becomes
unsatisfactory to the Bank and the term "Collateral", as used herein, shall be
deemed to include any such additional property; and (i) comply with the
requirements of all applicable laws, rules, regulations and orders of
governmental or regulatory authorities or agencies to which the Grantor is
subject (including, but without limitation, all environmental laws, the
Occupational Safety and Health Act and the Americans With Disabilities Act).
7. Negative Covenants. Until all of the Obligations have been
performed and paid in full, the Grantor covenants and agrees that the Grantor
will not, except as otherwise agreed to in writing by the Bank: (a) In the case
of the Company and its subsidiaries, endorse, guarantee or become surety for
the obligation of any person or entity, except that the Borrower may endorse
checks and negotiable instruments for collection or deposit in the ordinary
course of business and the Company may endorse or guarantee the obligations of
its subsidiaries provided that such subsidiaries are also a Borrower, as
defined in the Loan Documents; (b) In the case of the Company and its
subsidiaries, enter into any merger or consolidation agreement to acquire all
or substantially all of the assets of any person or entity, or to dissolve,
merge or consolidate into any person or entity; (c) In the case of the Company
and its subsidiaries, change its name or engage in any business in which it was
not engaged on the date of this Agreement; (d) Sell, lease, assign, pledge or
otherwise dispose of any of the Borrowers properties or assets, whether now
owned or hereafter acquired, except in the ordinary course of business and for
fair value; (e) In the case of the Company and its subsidiaries, create, incur,
assume, or suffer to exist or to be incurred, any lease obligation, other than
lease obligations incurred in the ordinary course of the Borrower's business,
and for fair value; (f) In the case of the Company and its subsidiaries, create
any
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<PAGE> 7
subsidiaries or make any equity investments or acquire any other interest in
any corporation, association, partnership, limited liability company, joint
venture or other party or make any advances to any such party. Notwithstanding
the foregoing, for the purposes of this covenant, the Company shall be allowed
to make advances, loans or equity investments to or in FileTek UK Limited; (g)
In the case of the Company and its subsidiaries, make any loans to any of its
officers, partners, directors or stockholders in excess of $100,000.00 in
aggregate; however, for purposes of this covenant, the Company may extend loans
to such parties solely for the purpose of allowing the parties to purchase the
Company's capital stock and such loans will not count towards the
aforementioned dollar limit provided that said capital stock secures repayment
of such loans; (h) Sell, issue or transfer stock of any class of the Company or
any subsidiary with a non-discretionary cash dividend or a "put option"
redemption feature exercisable by the shareholders; (i) In the case of the
Company and its subsidiaries, 1. Take or permit any action with respect to an
employee benefit plan which would result in the imposition of any lien under
ERISA or the Internal Revenue Code on the assets of the Borrower; 2. engage in
or permit any violation of ERISA (including, but not limited to, any breach of
fiduciary duty, within the meaning of Title I, subtitle B. part 4 of ERISA, or
prohibited transaction, within the meaning of Sections 406 through 408 of ERISA
or Section 4975 of the Internal Revenue Code); 3. withdraw (complete or
partial) from any multi-employer plan if such withdrawal would result in the
imposition of a material liability on the Borrower; and 4. take any other
action with respect to an employee benefit plan which would have a material
adverse affect on the financial condition of the Borrower; (j) Change the
current ownership in a manner that the Bank determines adversely affects its
interests with respect to the Obligations or control of the Company and its
subsidiaries. The Company shall retain management reasonably satisfactory to
the Bank; (k) In the case of the Company and its subsidiaries, purchase, redeem
or otherwise retire any shares of its capital stock, voluntarily prepay,
acquire or anticipate any sinking fund requirement of any indebtedness, declare
or pay any cash dividends or make other distributions in respect of capital.
Notwithstanding the foregoing, for purposes of this covenant, the Company shall
be entitled to repurchase, for fair value, shares of its capital stock from
employees who have terminated their employment with the Company; (l) In the
case of the Company and its subsidiaries, incur any indebtedness for money
borrowed; (m) In the case of the Company, its subsidiaries and the Trusts,
mortgage, pledge, or otherwise encumber or permit any lien, security interest,
or other encumbrance to arise upon any of its assets or properties excepting
security interests and liens granted to the Bank, liens for Taxes not yet due
or which are being contested in good faith by appropriate proceedings or
purchase money liens on the assets or properties of the Company or its
subsidiaries in the normal course of business and for fair value.
Notwithstanding the foregoing, no purchase money security interest shall be
permitted to be perfected on the Collateral whether by public filing or notice
to the Bank or any other means used for the purpose of perfection; (n) sell,
lease, transfer, exchange or otherwise dispose of the Collateral, or any part
thereof, without the prior written consent of the Bank. and will not permit any
lien, security interest or other encumbrance to attach to the Collateral, or
any part thereof, other than those in favor of the Bank or those permitted by
the Bank in writing. except that the Grantor may, in the ordinary course of its
business, and in the absence of a default hereunder, collect its accounts and
chattel paper and sell its inventory; or (o) take by consignment any goods or
property of the same type as the Collateral with an aggregate cost greater than
$100,000.
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<PAGE> 8
8. Insurance. The Grantor will at all times maintain insurance
with responsible insurance companies on such of its assets and properties, in
such amounts and against such risks as is reasonable and customary for like
companies with similar assets and which is satisfactory to the Bank, and will
furnish to the Bank promptly upon the Bank's request certificates evidencing
such insurance. Without limitation of the foregoing, the Grantor will insure
such of the Collateral as specified by the Bank against such casualties and
risks and in such form and amounts as may from time to time be required by the
Bank. Within thirty (30) days after notice in writing from the Bank, the
Borrower will obtain, or will cause each Obligor to obtain, such additional
insurance as the Bank may reasonably require. The Bank is authorized, but under
no duty, to obtain any insurance upon failure of the Grantor to do so, and,
upon demand, the Borrower or any other Obligor shall promptly reimburse the
Bank for the cost of obtaining such insurance. All insurance proceeds shall be
payable to the Bank and all policies or certificates of insurance shall be
furnished to the Bank evidencing among other things (a) a standard lender's
loss payee clause for Collateral consisting of personal property, and a
standard mortgagee's clause for Collateral consisting of improved real
property, in either case in favor of the Bank, and (b) such policy(ies) shall
provide expressly for at least thirty (30) days' prior written notice of
cancellation be provided to the Bank. The Grantor will pay all premiums due or
to become due for such insurance and hereby assigns to the Bank any returned or
unearned premiums which may be due upon cancellation of insurance coverage. The
Bank is hereby irrevocably (a) appointed the Grantor's attorney-in-fact to
endorse any draft or check which may be payable to the Grantor in order to
collect such returned or unearned premiums or the proceeds of insurance, and
(b) authorized to apply such insurance proceeds in the same manner and order as
the proceeds of sale or other disposition of the Collateral are to be applied
as provided herein.
Rights of Bank and Duties of Grantor. If all or any part of the
Collateral at any time consists of contract rights, inventory, accounts or
chattel paper: (a) the Bank may at any time and from time to time, and the
Grantor hereby irrevocably appoints the Bank as its attorney-in-fact, with
power of substitution, in the name of the Bank or in the name of the Grantor or
otherwise, for the use and benefit of the Bank, but at the cost and expense of
the Grantor and without notice to the Grantor to (i) notify the account debtors
obligated on any of the Collateral to make payments thereon directly to the
Bank, and to take control of the cash and non-cash proceeds of any such
Collateral, which right the Bank may exercise at any time whether or not the
Grantor is then in default hereunder or was theretofore making collections
thereon; (ii) charge to any banking account of the Grantor with the Bank any
item of payment credited to the Collateral Account (as hereinafter defined)
which is dishonored by the drawee or maker thereof; (iii) compromise, extend,
or renew any of the Collateral or deal with the same as it may deem advisable;
(iv) release, make exchanges, substitutions, or surrender, all or any part of
the Collateral; (v) remove from the Grantor's place of business all books,
records, ledger sheets, correspondence, invoices and documents relating to or
evidencing any of the Collateral or, without cost or expense to the Bank, make
such use of the Grantor's place(s) of business as may be reasonably necessary
to administer, control and collect the Collateral; (vi) repair, alter or supply
goods, if any, necessary to fulfill in whole or in part the purchase order of
any account debtor; (vii) demand, collect, give receipt for and renewals,
extensions, discharges and releases of any of the Collateral; (viii) institute
and prosecute legal and equitable proceedings to enforce collection of, or
realize upon, any of the Collateral; (ix) settle, renew, extend, compromise,
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compound, exchange or adjust claims with respect to any of the Collateral or
any legal proceedings brought with respect thereto; (x) endorse the name of the
Grantor upon any items of payment relating to the Collateral or upon any Proof
of Claim in Bankruptcy against an account debtor; and (xi) receive and open all
mail addressed to the Grantor and, if a default exists hereunder, notify the
Post Office authorities to change the address for the delivery of mail to the
Grantor to such address as the Bank may designate; and (b) the Grantor will (i)
make no material change to the terms of any sale or lease of inventory or of
any contract right, account or chattel paper without the prior written
permission of the Bank; (ii) on demand, make available in form acceptable to
the Bank shipping documents and delivery receipts evidencing the shipment of
goods which gave rise to the sale or lease of inventory or of an account,
contract right or chattel paper, completion certificates or other proof of the
satisfactory performance of services which gave rise to the sale or lease of
inventory or of an account, contract right or chattel paper, copies of the
invoices arising out of the sale or lease of inventory or of a contract right
or for an account, and the Grantor's copy of any written contract or order from
which a sale or lease of inventory, an account, contract right or chattel paper
arose; (iii) when requested, regularly advise the Bank whenever an account
debtor returns or refuses to retain any goods, the sale or lease of which gave
rise to an account or chattel paper, and of any delay in delivery or
performance, or claims made, in regard to any sale or lease of inventory,
account, contract right or chattel paper, and will comply with any instructions
which the Bank may give regarding the sale or other disposition of such
returns; and (iv) upon the request of the Bank at any time and from time to
time, deposit or cause to be deposited to a bank account designated by the Bank
and from which the Bank alone has power of access and withdrawal (the
"Collateral Account") all checks, drafts, cash and other remittances in payment
or on account of payment of such contract rights, inventory, accounts or
chattel paper and the cash proceeds of any returned goods, the sale or lease of
which gave rise to an account, contract right or chattel paper (all of the
foregoing herein collectively referred to as "items of payment"). The Grantor
shall deposit such items of payment for credit to the Collateral Account within
two (2) banking days of the receipt thereof, and in precisely the form
received, except for the endorsement of the Grantor where necessary to permit
the collection of such payment, which endorsement the Grantor hereby agrees to
make. Pending such deposit, the Grantor will not commingle any such items of
payment with any of its other funds or property but will hold them separate and
apart. The Bank will at least once a week apply the whole or any part of the
collected funds credited to the Collateral Account against the Obligations or
credit such collected funds to a banking account of the Grantor with the Bank,
the order and method of such applications to be in the sole discretion of the
Bank.
10. Intentionally deleted.
11. Intentionally deleted
12. Intentionally deleted.
1 3. Care and Value of Collateral. The Grantor will maintain the
Collateral in good condition and will not do or permit anything to be done to
the Collateral that may impair its value or that may violate the terms of any
insurance covering the Collateral or any part thereof. The Bank shall be
entitled at reasonable times and from time to time to appraise or cause to be
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<PAGE> 10
appraised (or otherwise independently valuated), the Collateral at Grantor's
sole cost and expense. Should any appraisal or valuation of the Collateral
indicate that the Collateral has depreciated in value and the Bank determines
that the Obligations are undersecured, the Grantor upon notice from the Bank,
shall, on demand, grant a security interest in or pledge to the Bank such
additional collateral as the Bank may request to fully secure the Obligations,
which shall become part of the Collateral hereunder. The Bank shall have no
duty to, and the Grantor hereby releases the Bank from all claims of loss or
damage caused by the failure or delay to collect or enforce any account,
contract right or chattel paper, or to preserve rights against prior parties to
the Collateral.
1.4. Performance by Bank. If the Grantor fails to perform,
observe, or comply with any of the conditions, terms or covenants contained in
this Agreement or in any of the Loan Documents, the Bank, without notice to or
demand upon the Grantor and without waiving or releasing any of the Obligations
or any default, may (but shall be under no obligation to) at any time
thereafter perform such conditions, terms or covenants for the account and at
the expense of the Grantor, and may enter upon any place of business or other
premises of the Grantor for that purpose and take all such action thereon as
the Bank may consider as necessary or appropriate for such purpose. All sums
paid or advanced by the Bank in connection with the foregoing and all costs and
expenses ax calculated and determined by the Bank (including, without
limitation, attorneys' fees and expenses) incurred in connection therewith
(collectively, the "Expense Payments") together with interest thereon at a per
annum rate of interest which is equal to the then highest rate of interest
charged on the principal of any of the Obligations giving effect to any default
rates thereon, from the date incurred by the Bank until repaid in full, shall
be paid by the Grantor to the Bank on demand and shall constitute and become a
part of the Obligations secured hereby.
1 5. Default. The occurrence of any one or more of the following
events shall constitute a default under this Agreement. (a) failure of the
Grantor or any other Obligor to pay any of the Obligations as and when due and
payable (whether by acceleration, declaration, extension or otherwise); (b)
failure of Grantor or any other Obligor to perform, observe or comply with any
agreement, covenant or promise made under this Agreement or any of the Loan
Documents; (c) if any information contained in any financial statement,
application, schedule, report or any other document given by Grantor, any other
Obligor or by any other person in connection with the Obligations, with the
Collateral, or with any of any Loan Documents is not in all respects true and
accurate or if Grantor, any other Obligor or such other person omitted to state
any material fact or any fact necessary to make such information not
misleading; (d) the occurrence of a default under any of the Loan Documents;
(e) the occurrence of any default under any other borrowing if the result of
such default would permit the acceleration of the maturity of any note, loan or
other agreement between the Grantor or any other Obligor and any person other
than the Bank; (f) the filing of any petition of relief under the United States
Bankruptcy Code or any similar federal or state statute by or against the
Grantor or any other Obligor or the failure of the Grantor or any other Obligor
to generally pay its debts as such debts become due: (g) the making of any
application for the appointment of a receiver for, or of a general assignment
for the benefit of creditors by, or the insolvency of, the Grantor or any other
Obligor; (h) the determination in good faith by the Bank that a material
adverse change has
10
<PAGE> 11
occurred in the financial condition of the Grantor or any other Obligor from
the condition set forth in the most recent financial statement heretofore
furnished to the Bank, or from the financial condition as heretofore most
recently disclosed to the Bank in any other manner; (i) the determination in
good faith by the Bank that the security for the Obligations is or has become
inadequate; (j) the dissolution, merger, consolidation, or reorganization of
the Grantor or any other Obligor; (k) the determination in good faith by the
Bank that the prospect of payment of any of the Obligations is impaired for any
reason; or (l) the death of the Grantor or any other Obligor who is a natural
person. The occurrence or non-occurrence of a default under this Agreement
shall in no way affect or condition the right of the Bank to demand payment at
any time of any Obligations which are payable on demand.
16. Rights and Remedies Upon Default. In the event of a default
hereunder, the Bank may, at its option and without notice to the Grantor or any
other Obligor: (a) declare all or part of the unpaid balance of the
Obligations, together with all accrued and unpaid interest thereon, to be
immediately due and payable without presentment, demand or notice which are
hereby expressly waived; (b) exercise its right of setoff against any money,
funds, credits or other property of any nature whatsoever of the Grantor or any
other Obligor now or at any time hereafter in the possession of, in transit to
or from, under the control or custody of, or on deposit with, the Bank or any
affiliate of the Bank in any capacity whatsoever, including without limitation,
any balance of any deposit account and any credits with the Bank or any
affiliate of the Bank; (c) terminate any outstanding commitments of the Bank to
the Grantor or any other Obligor; (d) exercise any or all rights, powers, and
remedies provided for in any Loan Documents, now or hereafter existing at law,
in equity, by statute or otherwise including, but not limited to, exercising
all rights and remedies of a secured party under the applicable Uniform
Commercial Code; (e) require the Grantor to assemble the Collateral and make it
available to the Bank at a place designated by the Bank; and (f) exercise
self-help efforts, such as to enter upon the Grantor's premises to take
possession of the Collateral, to remove it, to render it unusable or to sell or
otherwise dispose of it
17. Notice. Any notice, demand, request or other
communication which the Bank or any Obligor or Grantor may be required to give
hereunder shall be in writing, and shall be given: (a) by hand-delivery; (b) by
facsimile transmission: (c) by commercial overnight courier: or (d) by United
States regular mail, postage prepaid. Such notice, demand, request or other
communication shall be addressed as follows, or to such other addresses as the
parties may designate by like notice:
If to the Grantor:
FileTek. Inc & FileTek UK Limited
Attention: William C. Thompson, CEO
cc: William P. Loomis. CFO
9400 Key West Ave.
Rockville. MD 20850
Fax: (301) 251-1991
11
<PAGE> 12
If to the Bank:
NationsBank, N.A.
1501 Pennsylvania Avenue, N.W.
Washington, DC 20006
Attention: Brent H . Donnell, Vice President
Location Code: MD2-600-03-08
with copy to:
NationsBank, N.A.
100 south Charles Street
6th Floor
Baltimore, MD 21201
Attention: Loan Administration
Location Code: MD4-325-06-03
Any communication hereunder will be deemed given and effective: (e)
when actually received, in the case of hand delivery; (f) when deposited in the
United States mail or with such courier, in the case of first class mail or
overnight courier; or (g) when completely sent and received, as evidenced
by a transmission report from sender's facsimile machine, in the case of
facsimile transmission.
18. Collection. The Grantor shall pay all costs and
expenses, including, without limitation, attorneys' fees and expenses, incurred
by or on behalf of the Bank, (a) in enforcing the Obligations, and (b) in
connection with the taking, holding, preparing for sale or other disposition,
selling, managing, collecting or otherwise disposing of, the Collateral. All
such costs and expenses as calculated and determined by the Bank (collectively,
the "Liquidation Costs") together with interest thereon at a per annum rate of
interest which is equal to the then highest rate of interest charged on the
principal of any of the Obligations giving effect to any default rate thereon,
from the date incurred until repaid in full, shall be paid by the Grantor to
the Bank on demand and shall constitute and become a part of the Obligations
secured hereby. Any proceeds of sale or other disposition of the Collateral
will be applied by the Bank to the payment of the Obligations in such order and
manner of application as the Bank may from time to time in its sole discretion
determine.
19. Deficiency, If the sale or other disposition of the
Collateral fails to fully satisfy the Obligations, the Grantor shall remain
liable to the Bank for any deficiency.
20. Remedies Cumulative; Forbearance is not a Waiver.
Each right and remedy of the Bank under the Loan Documents, at law or in equity
shall be cumulative and concurrent, and the exercise of any of them shall not
preclude the exercise by the Bank of any or all other rights or remedies. No
failure or delay by the Bank to insist upon the strict performance of the Loan
Documents or to exercise any right or remedy upon a default shall constitute a
waiver thereof, or preclude the Bank from exercising any such right or remedy.
By accepting
12
<PAGE> 13
payment after the due date of any Obligations, the Bank shall not have waived
the right either to require payment when due of any other Obligations or to
declare a default for failure to effect such payment of any such Obligations.
21. Waiver. The Grantor waives presentment, notice of
dishonor and notice of non-payment with respect to accounts, contract rights
and chattel paper.
22. Invalidity of Any Part. In the event that any one or
more of the provisions of this Agreement shall for any reason be held to be
invalid, illegal or unenforceable, in whole or in part or in any respect, or in
the event that any one or more of the provisions of this Agreement operate or
would prospectively operate to invalidate this Agreement, then and in any of
those events, the following shall occur: (a) the provision(s) shall be enforced
to the fullest extent of its validity, legality and enforceability; or (b) if
such provision(s) would operate so as to invalidate this entire Agreement, only
such provision(s) shall be void as though not herein contained, and the
remainder of the clauses and provisions of this Agreement will remain in full
force and effect. In any event, if any such provision pertains to the repayment
of the indebtedness evidenced by this Agreement, then and in such event, at the
Bank's option, all of the Obligations of the Grantor to the Bank shall become
immediately due and payable. In no event shall this Agreement or the Loan
Documents operate to cause the payment to the Bank by the Grantor or any
Obligor of any amounts whether for the use, forbearance or retention of money
or for any other matter governed by the Loan Documents, exceeding the permitted
maximum amounts therefor under applicable law. If, for any circumstance
whatsoever, fulfillment of such provisions shall be proscribed by law, then the
obligation to be fulfilled shall be reduced the limit of such validity.
23. Transfers of Rights by the Bank. In addition to all other
rights available to the Bank under this Agreement and the other Loan Documents
and applicable laws or under principles of equity, the Bank shall have the
right at any time, without notice to or consent of the Grantor, to sell,
assign, pledge or transfer this Agreement and any renewals, extensions or
modifications hereof or thereof, to any person. The Bank shall also have the
right at anytime, without notice to or consent of the Grantor, to sell, assign,
transfer or grant participation in the Bank's rights in any of the Collateral,
and any such assignee, transferee or participant shall have the rights of the
Bank hereunder with respect to the Collateral so assigned, transferred or
participated, and the Bank shall be thereafter relieved from all duties with
respect to any such Collateral. In connection with any such sale, assignment,
transfer or participation, the Grantor consents to the Bank's divulgence to any
actual or potential assignee, transferee or participant, of all information,
reports, financial statements and documents obtained in connection with this
Agreement and any other Loan Documents or otherwise.
24. Choice of Law. This Agreement shall be governed by,
construed and interpreted in accordance with the laws of the District of
Columbia (excluding the choice of law rules thereof).
25. Not a Novation. This Security Agreement shall
substitute and replace that certain Security Agreement from the Grantor to the
Bank, dated January 27,1992, as modified, and shall not cause novation or be
deemed as a Security Agreement for a new loan. The security
13
<PAGE> 14
interest granted hereunder shall confirm the security interest previously
granted to the Bank under the aforementioned Security Agreement unless the
security interest previously granted to the Bank is specifically modified
herein and, in such event, the security interest previously granted to the Bank
shall be modified only to the extend expressly modified herein.
26. Acknowledgments and Waivers. To induce the Bank to
enter into this Amended and Restated Security Agreement, the Grantor and any
Guarantors listed below: (a) hereby acknowledge and agree that the Bank has
fully and properly discharged all covenants and other provisions of the
Security Agreement and the Loan Documents prior to the date hereof; (b) hereby
waive any breach of the Security Agreement and Loan Documents by the Bank prior
to the date hereof; and (c) hereby release, remise, acquit and forever
discharge the Bank and each of its employees, agents, successors and assigns
from any and all matters, claims, actions, causes of action, suits, debts,
agreements and demands whatsoever, whether presently known or unknown, which
the Grantor and any Guarantors ever had, now has, or shall have against the
Bank by reason of any act, cause, matter or thing whatsoever to the date
hereof.
27. Commercial Purposes. The Grantor acknowledges and
warrants that: (a) "Obligations", as used herein are incurred for the purpose
of acquiring an interest in or carrying on a business or commercial enterprise
and that such Obligations represent "commercial loans" within the meaning of
Title 12 of the Commercial Law Article of the Annotated Code of Maryland (1990
Rep. Vol.), as amended; and (b) all proceeds arising from the Obligations will
be used solely in connection with such business or commercial enterprise.
28. Service of Process.
(a) The Grantor hereby irrevocably designates and
appoints Elliott H. Cole of Patton Boggs & Blow at 2550 M Street NW.,
Washington DC 20037, as the Grantor's authorized agent to accept and
acknowledge on the Grantor's behalf service of any and all process that may be
served in any suit, action or proceeding instituted in connection with this
Agreement in any state or federal court sitting in the State of Maryland. If
such agent shall cease so to act, the Grantor shall irrevocably designate and
appoint without delay another such agent in the State of Maryland satisfactory
to the Bank and shall promptly deliver to the Bank evidence in writing of such
agent's acceptance and appointment and its agreement that such appointment will
be irrevocable.
(b) The Grantor hereby consents to process being served in
any suit, action or proceeding instituted in connection with this Agreement by
(i) the mailing of a copy thereof by certified mail, postage prepaid, return
receipt requested, to the Grantor and (ii) serving a copy thereon upon the
agent, if any, hereinabove designated and appointed by the Grantor as the
Grantor's agent for service of process. The Grantor hereby irrevocably agrees
that such service shall be deemed to be service of process upon the Grantor in
any such suit, action or proceeding. Nothing in this Agreement shall affect the
right of the Bank to serve process in any other manner otherwise permitted by
law and nothing in this Agreement will limit the right of the Bank otherwise to
bring proceedings against the Grantor in the courts of any other jurisdiction
or jurisdictions.
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<PAGE> 15
29. WAIVER OF JURY TRIAL THE GRANTOR HEREBY WAIVES TRIAL
BY JURY IN ANY LITIGATION BETWEEN THE BANK AND THE GRANTOR ARISING OUT OF THIS
AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY.
30. Miscellaneous. The paragraph headings of this
Agreement are for convenience only, and shall not limit or otherwise affect any
of the terms hereof. This Agreement and related Loan Documents, if any,
constitutes the entire agreement between the parties with respect to its
subject matter and supersedes all prior letters, representations, or
agreements, oral or written, with respect thereto, If this Agreement is a
renewal, extension or modification of the terms of any existing obligation of
the Grantor to the Bank, this Agreement is not intended as a novation, but
rather is intended only to renew, extend or modify the obligation to the extent
applicable. No modification, change, waiver or amendment of this Agreement
shall be deemed to be made by the Bank unless in writing signed by the Bank.
and each such waiver, if any, shall apply only with respect to the specific
instance involved.
31. Intentionally deleted.
IN WITNESS WHEREOF, and intending to create an instrument executed
under seal, the Grantor has duly executed this Agreement under seal as of the
day and year first written above.
<TABLE>
<S> <C>
WITNESS OR ATTEST: GRANTOR:
FileTek, Inc.:
By: /s/ William C. Thompson [SEAL]
----------------------------------------------
Name: William C. Thompson
----------------------------------------------
Title: CEO
----------------------------------------------
FileTek UK Limited:
By: /s/ William C. Thompson [SEAL]
----------------------------------------------
Name: William C. Thompson
----------------------------------------------
Title:
----------------------------------------------
Previous legal and/or trade name)s, (if any) Address(es) where Collateral is or is to be located:
of the Grantor:
(1) 9400 Key West Avenue
- --------------------------------------------- ----------------------------------------------
Rockville, MD 20850
(2) 12136 Nebel Street
- --------------------------------------------- ----------------------------------------------
Rockville, MD
(3)
- --------------------------------------------- ----------------------------------------------
</TABLE>
15
<PAGE> 1
EXHIBIT 10.11
NationsBank, N.A. SUBORDINATION
AGREEMENT 4293718
1501 Pennsylvania Ave. N.W.
Washington DC 20005
THIS SUBORDINATION AGREEMENT (the "Subordination Agreement") is made this 31st
day of August, 1994, by and between William C. Thompson Revocable Trust, Patsy
A. Thompson Revocable Trust, William A. Thompson, Individual, and/or Patsy A.
Thompson, individual (individually or collectively, the "Creditor"), FileTek,
Inc. and/or FileTek UK Limited (individually or collectively, the "Borrower"),
and NATIONSBANK, N.A., (the "Bank").
RECITALS
1. The Borrower has requested and/or obtained certain loans or other
credit accommodations from the Bank to the Borrower which are or may be from
time to time secured by assets and property of the Borrower.
2. The Creditor has extended loans or other credit accommodations to the
Borrower, and/or may extend loans or other credit accommodations to the
Borrower from time to time.
3. In order to induce the Bank to extend credit to the Borrower, the
Creditor is willing to subordinate all of the Borrowers indebtedness and
obligations to the Creditor to all indebtedness and obligations of the Borrower
to the Bank.
4. This Subordination Agreement sets forth the relative rights,
obligations, and priorities of the Bank and the Creditor with respect to the
payment and collection of the Senior Obligations and Junior Obligations.
NOW, THEREFORE, in consideration of the premises and the agreements
and covenants contained herein and of the Bank's agreement to extend credit to
the Borrower, and for other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the Creditor, the Borrower and the
Bank, intending to be legally bound, agree as follows:
TERMS AND CONDITIONS
1. Construction of Agreement and Definitions. Unless varied by this
Subordination Agreement, all of the terms used herein without definition which
are defined by the District of Columbia Uniform Commercial Code shall have the
meanings assigned to them by the District of Columbia Uniform Commercial Code.
Whenever used herein, the words "Borrower," "Creditor," and "Bank" shall be
deemed to include their respective heirs, legal representatives, successors and
assigns. All words used herein shall be deemed to refer to the singular,
plural, masculine, feminine or neuter as the identity of the person or entity
or the context may require.
1.1 INTENTIONALLY DELETED.
1.2 "COLLATERAL" shall mean all of the assets and property of the Borrower
securing the Senior Obligations, whether presently existing or as may be
acquired or created in the future, and wherever located and any replacements,
additions, accessories, or substitutions thereof, and the proceeds and products
thereof and where applicable, the proceeds of insurance concerning any such
assets and property.
1.3 INTENTIONALLY DELETED.
1.4 "JUNIOR OBLIGATIONS" shall mean all liabilities, indebtedness, and
obligations of the Borrower to the Creditor, whether presently existing or
arising in the future, direct or indirect, contingent or non-contingent,
secured or unsecured, liquidated or unliquidated, due or not due, primary or
secondary,
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<PAGE> 2
jointly and/or severally, and whether arising or contracted directly between
the Borrower and the Creditor or acquired by the Creditor outright,
conditionally, or as collateral security from another, and all claims, demands,
actions, and causes of action, arising therefrom. Junior Obligations shall
include, without limitation, all indebtedness of the Borrower to the Creditor
evidenced by any promissory notes or other instruments, copies of which are
attached to and incorporated in this Subordination Agreement.
1.5 "LOAN" shall mean the loan and other credit accommodations made or to
be made by the Bank to the Borrower.
1.6 "LOAN DOCUMENTS" shall mean any loan agreement, security agreement,
promissory note, guaranty, mortgage, deed of trust, indemnity deed of trust,
collateral pledge agreement, guaranty security agreement, indemnity agreement,
assignment, letter of credit application, letter of credit, commitment letter,
commitment, opinion of counsel, subordination agreement, financing statement,
certifications, or any other agreement, document, or instrument made or to be
made by the Borrower, the Bank, or any other person as evidence of, security
for, guarantee of, or in connection with the Loan.
1.7 "SENIOR OBLIGATIONS" shall mean all liabilities, indebtedness, and
obligations of the Borrower to the Bank, whether presently existing or arising
in the future, direct or indirect, contingent or non-contingent, secured or
unsecured, liquidated or unliquidated, due or not due, primary or secondary,
jointly and/or severally, and whether arising or contracted directly between
the Borrower and the Bank or acquired by the Bank outright, conditionally, or
as collateral security from another and all claims, demands, actions, and
causes of action arising therefrom. Senior Obligations shall include,
without limitation, all indebtedness of the Borrower to the Bank evidenced by
the Loan Documents.
2. Subordination. The Creditor subordinates, to the extent and in the
manner provided in this Subordination Agreement, payment of the Junior
Obligations to the full and absolute payment of all of the Senior Obligations.
The Borrower consents to the subordination provided for in this Section.
3. Warranties, Representations and Covenants of the Creditor. The
Creditor represents and warrants that: (a) it has not relied and will not rely
on any representation or information of any nature made by or received from the
Bank relative to the Borrower in deciding to execute this Subordination
Agreement or to permit it to continue in effect; (b) the Creditor is the lawful
owner of the Junior Obligations and no part of the Junior Obligations is
subject to any defense, offset, or counterclaim; (c) the Creditor has not
previously assigned or transferred any of the Junior Obligations, or any
interest therein; (d) the Creditor has not previously given any subordination
in respect to the Junior Obligations; and (e) it holds no security interest in
any property or assets of the Borrower for payment of the Junior Obligations.
Until all of the Senior Obligations have been paid in full: (a) the Creditor
shall not commence or join with any other creditors of the Borrower in
commencing any bankruptcy, reorganization, receivership or insolvency
proceeding against the Borrower; (b) the Creditor shall not take or permit any
action prejudicial to or inconsistent with the Bank's priority position over
the Creditor that is created by this Subordination Agreement; and (c) except
for the limited payments expressly permitted under Section 4 of this
Subordination Agreement, the Creditor shall not demand, take, or receive, by
setoff or in any other manner, any payments upon the Junior Obligations unless
and until all of the Senior Obligations shall have been satisfied in full and
no commitment by the Bank to extend credit, make loans, or otherwise extend
financial accommodations to or for the Borrower is outstanding.
4. Exercise by the Creditor of Rights Under the Junior Obligations.
Without the Bank's prior written consent, the Creditor (a) will take no action
to assert, sue upon, set off against, collect, or enforce all or any part of
the Junior Obligations, including principal and interest; and (b) will take no
enforcement actions against the Borrower with respect to the Junior
Obligations, unless and until all of the Senior Obligations shall have been
satisfied in full and no commitment by the Bank to extend credit, make loans,
or otherwise extend financial accommodations to or for the Borrower is
outstanding. Except as provided in this Section of this Subordination
Agreement, the Borrower will not, without the Bank's prior written consent,
pay, by setoff or in any other manner, all or any part of the Junior
Obligations or grant any security for the Junior Obligations unless and until
all of the Senior Obligations shall have been satisfied in full and no
2
<PAGE> 3
commitment by the Bank to extend credit, make loans, or otherwise extend
financial accommodations to or for the Borrower is outstanding.
Notwithstanding any other provision of this Subordination Agreement, so long as
the Borrower is in compliance with all of the Loan Documents and no event of
Default under the Loan Documents exists and is continuing, the Borrower may pay
and the Creditor may receive, in the ordinary course of business, payments of
principal and current accrued interest on account of the Junior Obligations
provided the payments do not cause an event of default to occur after giving
effect to such payments. Upon and after the occurrence of non-compliance or an
event of default under the Loan Documents, the Borrower shall not pay and the
Creditor shall not receive, whether directly or indirectly or by way of setoff
or otherwise, any of the Junior Obligations unless the Bank shall consent in
writing. The Bank shall use reasonable efforts to notify the Creditor of the
occurrence of non-compliance or an event of default under the Loan Documents,
but any failure of the Bank to give the Creditor any such notice shall not in
any way impair, diminish, or affect the rights and remedies of the Bank under
the Loan Documents or this Subordination Agreement.
In the event of any distribution or payment to the Creditor on or with respect
to the Junior Obligations, whether partial or complete, voluntary or
involuntary, by operation of law or otherwise, other than as permitted in this
Section of this Subordination Agreement, then, and in any such event, any such
payment or distribution of any kind or character, which shall be payable or
deliverable upon or with respect to any of the Junior Obligations, shall, until
all of the Senior Obligations have been fully paid and satisfied, be paid or
delivered directly to the Bank for application against such of the Senior
Obligations, whether due or not due and whether secured or unsecured, as the
Bank shall determine in its sole discretion. Such distribution or payment shall
be delivered in the form of its receipt (except for the addition of any
endorsement or assignment necessary to effect a transfer of all rights therein
to the Bank), and the Bank is irrevocably authorized to supply any endorsement
or assignment which may have been omitted or insufficient. Until so delivered,
any such distribution or payment shall be held in trust by the Creditor for the
Bank and shall not be commingled with other funds or property of the Creditor.
5. Intentionally deleted.
6. Authority to Act for the Creditor.
6.1 For so long as any of the Senior Obligations remain unpaid, the
Creditor irrevocably appoints the Bank as the Creditors attorney-in-fact, and
grants to the Bank a power of attorney with full power of substitution, in the
name of the Creditor or in the name of the Bank, for the use and benefit of the
Bank, without notice to the Creditor or any of its representatives, successors
or assigns, to perform at the Bank's option the following acts:
(a) At any meeting of creditors of the Borrower or in connection with any
case or proceeding, whether voluntary or involuntary, for the distribution,
division, or application of assets of the Borrower or the proceeds thereof,
regardless of whether such case or proceeding is for the liquidation,
dissolution, winding up of affairs, reorganization or arrangement of the
Borrower, or for the composition of the creditors of the Borrower, in
bankruptcy or in connection with a receivership, or under an assignment for the
benefit of creditors of the Borrower or otherwise: (i) to enforce claims
comprising the Junior Obligations, either in its own name or in the name of the
Creditor, by proof of debt, proof of claim, suit, or otherwise; (ii) to collect
any assets of the Borrower distributed, divided or applied by way of dividend
or payment, or any securities issued, on account of the Junior Obligations and
to apply the same, or the proceeds thereof, to the Senior Obligations until all
of the Senior Obligations (including, without limitation, collection expenses
and all interest accruing on the Senior Obligations after the commencement of
any bankruptcy case) have been paid in full, rendering any surplus to the
Creditor if and to the extent permitted by law; (iii) to vote claims comprising
the Junior Obligations to accept or reject any plan of partial or complete
liquidation, reorganization, arrangement, composition, or extension; and (iv)
to take generally any action in connection with any such meeting, case, or
proceeding that the Creditor would be authorized to take but for this
Subordination Agreement.
(b) To execute any endorsement, assignment, power of attorney, or
instruments provided for in this Subordination Agreement.
3
<PAGE> 4
6.2 In no event shall the Bank be liable to the Creditor for any
failure to prove the Junior Obligations or exercise any right with respect to
the Junior Obligations, or to collect any sums payable on the Junior
Obligations.
6.3 This power of attorney shall be deemed to be coupled with an interest
and shall survive the disability, if any, of the Creditor.
7. Consents, Waivers and Indulgences.
7.1 The Bank may, at any time and from time to time, with or
without consideration, and without further consent of or notice to the Creditor
and without in any manner affecting, impairing, lessening, discharging, or
releasing the Senior Obligations, or any Collateral, or the Creditor or the
Borrower from the terms of this Subordination Agreement: (a) renew, extend,
alter, change the manner, time, place, and terms of payment of, grant any
indulgence with respect to, sue for and collect upon, and otherwise deal with
the Senior Obligations; (b) sell, exchange, release, substitute, surrender,
realize upon, or otherwise dispose of or deal with any Collateral that may now
or hereafter come into the possession or control of the Bank; (c) grant any
indulgence to, release, or otherwise deal with any party primarily or
secondarily liable upon any of the Senior Obligations; and, (d) release any
balance of funds of the Borrower held by the Bank.
7.2 The Creditor waives notice of acceptance of this Subordination
Agreement and of the creation of the Senior Obligations.
7.3 To the fullest extent permitted by law, the Creditor waives
presentment, demand, notice of dishonor, protest, protest and demand, notice of
protest, and notice of payment or nonpayment or other default or dishonor with
respect to the Senior Obligations and documents evidencing, creating, or
securing the Senior Obligations. The Borrower and the Creditor waive notice of
default under this Subordination Agreement.
7.4 The Creditor waives any defense based on the adequacy of a remedy at
law which might be asserted in any action brought by the Bank. To the fullest
extent permitted by law, the Creditor further waives any and all notices and
demands of any kind in connection with all negotiable instruments evidencing
all or any portion of the Senior Obligations or the Junior Obligations to which
the Borrower or the Creditor may be a party and all other demands and notices
of every kind in connection with this Subordination Agreement, the Senior
Obligations or the Junior Obligations. The Creditor assents to any release,
renewal, extension, expansion, compromise or postponement of the time of
payment of the Senior Obligations, or any increase in the amount of the Senior
Obligations, and to any substitution, exchange, or release of the Collateral.
7.5 The Creditor consents and agrees that all of the Senior Obligations
shall be deemed to have been made or incurred at the request of the Creditor
and in reliance upon this Subordination Agreement.
8. Transfer or Assignment of Claims by the Creditor. The Creditor shall
not assign or transfer to others any claim that the Creditor has or may have
against the Borrower while any of the Senior Obligations remain unpaid or there
exists any commitment of the Bank which could give rise to any Senior
Obligations unless such assignment or transfer is expressly made subject to
this Subordination Agreement. The Creditor agrees to indemnify the Bank and
hold the Bank harmless from and against any loss sustained or incurred by the
Bank as a result of the Creditor's failure to comply with the provisions of
this Section.
9. Transfer or Assignment of the Senior Obligations by the Bank.
If any of the Senior Obligations are transferred or assigned by the Bank, this
Subordination Agreement will inure to the benefit of the Bank's transferee or
assignee to the extent of such transfer or assignment; provided, however, that
the Bank shall continue to have the unimpaired right to enforce this
Subordination Agreement as to any of the Senior Obligations not so transferred
or assigned.
4
<PAGE> 5
10. Validity of the Junior Obligations. The provisions of this
Subordination Agreement subordinating the Junior Obligations are solely for the
purpose of defining the relative rights of the Bank and the Creditor and shall
not impair the Junior Obligations or the obligation of the Borrower to pay the
Creditor. Nothing contained in this Subordination Agreement shall be deemed to
confer any rights upon the Borrower or to alter or modify any of the rights or
duties of the Borrower with respect to either the Senior Obligations or the
Junior Obligations.
11. Default on the Junior Obligations. The Creditor shall provide the Bank
with immediate notice of the occurrence of any defaults by the Borrower under
the documentation establishing the Junior Obligations.
12. Bank's Duties Limited. The rights granted to the Bank in this
Subordination Agreement are solely for its protection and nothing contained in
this Subordination Agreement imposes on the Bank any duties with respect to any
property either of the Borrower or of the Creditor, whether received earlier or
in the future by the Bank, beyond reasonable care in the custody and
preservation of such property while in the Bank's possession. The Bank has no
duty to preserve rights against prior parties on any instrument or chattel
paper received from the Borrower or the Creditor as collateral security for the
Senior Obligations or any portion thereof.
13. Duration. This Subordination Agreement shall constitute an absolute,
unconditional, and continuing agreement of subordination. The Bank may
continue, without notice to the Creditor, to lend monies, extend credit, and
make other accommodations to or for the account of the Borrower.
14. Remedies Cumulative. Each right, power and remedy of the Bank
hereunder or now or hereafter existing at law, in equity, by statute or
otherwise shall be cumulative and concurrent, and the exercise or beginning of
the exercise of any one or more of them shall not preclude the simultaneous or
later exercise by the Bank of any or all such other rights, powers or remedies.
No failure or delay by the Bank to insist upon the strict performance of any
one or more provisions of this Subordination Agreement or to exercise any
right, power or remedy consequent upon a breach thereof or default hereunder
shall constitute a waiver thereof, or preclude the Bank from exercising any
such right, power or remedy at any other time or times.
15. Legend Evidencing Subordination. All notes and other evidences
(including guarantees) of the Junior Obligations, whether presently existing or
arising in the future, delivered by the Borrower to the Creditor shall contain
a specific statement that the Junior Obligations are subordinated to the Senior
Obligations and are subject to provisions of this Subordination Agreement. The
Creditor shall deliver to the Bank a copy of all such instruments and documents
certified by the Creditor to be a true, accurate, and complete copy of the
original instrument or document.
16. Intentionally deleted.
17. Additional Documentation. The Creditor shall execute and deliver to
the Bank such further instruments and shall take such further action as the
Bank may at any time or times reasonably request in order to carry out the
provisions and intent of this Subordination Agreement.
18. Notice. Any notice, demand, request or other communication which
the Bank or any Creditor may be required to give hereunder shall be in writing,
and shall be given: (a) by hand-delivery; (b) by facsimile transmission; (c)
by commercial overnight courier; or (d) by United States regular mail, postage
prepaid. Such notice, demand, request or other communication shall be addressed
as follows, or to such other addresses as the parties may designate by like
notice:
IF TO ANY OF THE CREDITORS:
William C. Thompson Revocable Trust,
Patsy A. Thompson Revocable Trust, William A.
Thompson and/or Patsy A. Thompson
Attention: William C. Thompson, CEO
cc: William P. Loomis, CFO
5
<PAGE> 6
9400 Key West Ave.
Rockville, MID 20850
Fax: (301) 251-1991
IF TO THE BANK:
NationsBank, N.A.
1501 Pennsylvania Avenue, N.W.
Washington, DC 20005
Attention: Brent H. Donnell, Vice President
Location Code: MD2-600-03-08
WITH COPY TO:
NationsBank, N.A.
100 South Charles Street
6th Floor
Baltimore, MD 21201
Attention: Loan Administration
Location Code: MD4-325-06-03
Any communication hereunder will be deemed given and effective (e)
when actually received, in the case of hand delivery; (f) when deposited in the
United States mail or with such courier, in the case of first class mail or
overnight courier; or (g) when completely sent and received, as evidenced by a
transmission report from sender's facsimile machine, in the case of facsimile
transmission.
19. Choice of Law; Consent to Jurisdiction. This Subordination Agreement
shall be governed by, construed and interpreted in accordance with the laws of
the District of Columbia (excluding the choice of law rules thereof). The
Creditor and the Borrower hereby irrevocably submit to the non-exclusive
jurisdiction of any state or federal court sitting in the District of Columbia
in any action or proceeding arising out of or relating to this Subordination
Agreement, and hereby irrevocably waive any objection they may have to the
laying of venue of any such action or proceeding in any such court and any
claim they may have that any such action or proceeding has been brought in an
inconvenient forum. A final judgment in any such action or proceeding shall be
conclusive and may be enforced in any other jurisdiction by suit on the
judgment or in any other manner provided by law.
20. Assignment by the Creditor as Security. To secure the Senior
Obligations and the performance of the provisions of this Subordination
Agreement, the Creditor assigns, pledges, and grants to the Bank all of the
Creditors right, title and interest in and to the Junior Obligations, the
proceeds thereof, and all collateral now or hereafter securing all or any part
of the Junior Obligations. The Creditor shall execute and deliver to the Bank
such powers of attorney, assignments, or other instruments as may be requested
by the Bank in order to enable the Bank to enforce any and all claims upon or
with respect to any of the Junior Obligations and to collect and receive any
and all payments or distributions which may be payable or deliverable at any
time upon or with respect to the Junior Obligations.
21. Assignability. This Subordination Agreement shall inure to the
benefit of and be enforceable by the Bank and the Bank's successors and assigns
and any other person to whom the Bank may grant an interest in Senior
Obligations, and shall be binding and enforceable against the Creditor and the
Creditor's personal representatives, successors and assigns.
22. Counterparts. This Subordination Agreement may be executed in
duplicate originals or in several counterparts, each of which shall be deemed
an original but all of which together shall constitute one instrument.
23. Invalidity of Any Part. In the event that any of one or more of
the provisions of this Subordination Agreement shall for any reason be held to
be invalid, illegal or unenforceable, in whole or in part or in any respect, or
in the event that any one or more of the provisions of this Subordination
Agreement operate or would prospectively operate to invalidate this
Subordination Agreement, then and in any of those events, the following shall
occur: (a) the provision(s) shall be enforced to the fullest extent of
6
<PAGE> 7
its validity, legality and enforceability; or, (b) if such provision(s) would
operate so as to invalidate this entire Subordination Agreement, only such
provision(s) shall be void as though not herein contained, and the remainder of
the clauses and provisions of this Subordination Agreement will remain in full
force and effect.
24. Expenses. The Creditor agrees to pay to the Bank on demand
all expenses of any kind, including reasonable attorneys' fees, that the Bank
may incur in enforcing any of its rights under this Subordination Agreement.
All such costs and expenses as calculated or determined by the Bank shall bear
interest at a per annum rate of interest equal to the then highest rate of
interest charged on the principal of any of the Senior Obligations plus 2% per
annum, from the date incurred by the Bank until repaid in full.
25. WAIVER OF JURY TRIAL. THE CREDITOR AND THE BORROWER HEREBY (I)
COVENANT AND AGREE NOT TO ELECT A TRIAL BY JURY OF ANY ISSUE TRIABLE OF RIGHT
BY A JURY, AND (II) WAIVE TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO WHICH
THE BANK AND THE CREDITOR MAY BE PARTIES ARISING OUT OF, IN CONNECTION WITH OR
IN ANY WAY PERTAINING TO THIS SUBORDINATION AGREEMENT.
26. Miscellaneous. The paragraph headings of this Agreement are for
convenience only, and shall not limit or otherwise affect any of the terms
hereof. The term "Obligations" as used herein shall not include any loan
primarily for personal, family or household purposes. This Subordination
Agreement constitutes the entire agreement between the parties with respect to
their subject matter and supersedes all prior letters, representations, or
agreements, oral or written, with respect thereto. No modification, change,
waiver or amendment of this Subordination Agreement shall be deemed to be made
by the Bank unless in writing signed by the Bank, and each such waiver, if any,
shall apply only with respect to the specific instance involved. No course of
dealing or conduct shall be effective to amend, modify, waive, release or
change any provisions of this Subordination Agreement, and the Bank shall have
the right at all times to enforce the provisions of this Subordination
Agreement in strict accordance with the terms hereof and thereof,
notwithstanding any conduct or custom on the part of the Bank in refraining
from so doing at any time or times.
IN WITNESS WHEREOF, and intending to create an instrument executed under seal,
the parties to this Subordination Agreement have duly executed this
Subordination Agreement under seal as of the date and year first written above.
WITNESS/ATTEST: CREDITOR
William C. Thompson Revocable Trust
By: /s/ William C. Thompson [SEAL]
- ----------------------- -------------------------------------------------
William C. Thompson, Trustee
Patsy A. Thompson Revocable Trust
By: /s/ Patsy A. Thompson [SEAL]
- ----------------------- -------------------------------------------------
Patsy A. Thompson, Trustee
By: /s/ William C. Thompson [SEAL]
- ----------------------- -------------------------------------------------
William C. Thompson, Individually
By: /s/ Patsy A. Thompson [SEAL]
- ----------------------- -------------------------------------------------
Patsy A. Thompson, Individually
7
<PAGE> 8
BORROWER:
FileTek, Inc.
By: /s/ William C. Thompson [SEAL]
- -------------------------- -----------------------------------------
William C. Thompson, CEO
FileTek UK Limited
By: /s/ William C. Thompson [SEAL]
- -------------------------- -----------------------------------------
Name: William C. Thompson
Title:
BANK:
NationsBank, N.A.
By: /s/ Brent Donnell [SEAL]
- -------------------------- -----------------------------------------
Brent Donnell, Vice President
8
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF
FILETEK, INC.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NAME OWNERSHIP PLACE OF
INCORPORATION
- --------------------------------------------------------------------------------
<S> <C> <C>
FileTek UK Limited Wholly-owned UK
- --------------------------------------------------------------------------------
</TABLE>
<PAGE> 1
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated April 16, 1998, except as to Note 13, as to which the
date is June 18, 1998, in the Registration Statement (Form S-1 No. 333-____)
and related Prospectus of FileTek, Inc. for the registration of _________
shares of its common stock.
/s/ Ernst & Young LLP
Vienna, Virginia
July 1, 1998
<PAGE> 1
EXHIBIT 23.3
Patton Boggs LLP
2550 M Street N.W.
Washington, DC 20037
July ____, 1998
FileTek, Inc.
9400 Key West Avenue
Rockville, Maryland 20850
Gentlemen:
We have assisted in the preparation and filing with the Securities
and Exchange Commission of a Registration Statement on Form S-1, file
No. 333-____ (the "Registration Statement"), relating to ___________ shares of
Common Stock (including ____________ shares to cover over-allotments, if any),
$.01 par value per share, of FileTek, Inc., a Delaware corporation (the
"Company"), to be offered to the public.
We hereby consent to the use of our name in the Registration
Statement and under the caption "Legal Matters" in the related Prospectus and
consent to the filing of this opinion as an exhibit to the Registration
Statement.
Very truly yours,
John H. Vogel
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FILETEK,
INC. CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 1997 AND THE THREE MONTHS ENDED MARCH 31, 1998.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 MAR-31-1998
<CASH> 7,163,050 10,552,219
<SECURITIES> 0 0
<RECEIVABLES> 4,864,323 3,817,100
<ALLOWANCES> 75,000 32,392
<INVENTORY> 5,291,035 4,571,132
<CURRENT-ASSETS> 17,707,751 20,804,678
<PP&E> 10,587,196 10,703,556
<DEPRECIATION> 7,145,419 7,539,134
<TOTAL-ASSETS> 22,131,715 24,788,756
<CURRENT-LIABILITIES> 19,360,013 20,122,280
<BONDS> 0 0
0 0
58,130 58,130
<COMMON> 837 862
<OTHER-SE> 2,232,325 0
<TOTAL-LIABILITY-AND-EQUITY> 22,131,715 24,788,756
<SALES> 12,922,581 5,524,746
<TOTAL-REVENUES> 23,699,142 8,552,781
<CGS> 6,120,765 2,167,738
<TOTAL-COSTS> 11,676,527 3,937,350
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 590,123 20,123
<INCOME-PRETAX> 1,824,167 2,018,758
<INCOME-TAX> 315,000 0
<INCOME-CONTINUING> 1,509,167 2,018,758
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,509,167 2,018,758
<EPS-PRIMARY> 187.00 23.67
<EPS-DILUTED> 0.17 0.21
</TABLE>
