<PAGE>
As filed with the Securities and Exchange Commission on February 11, 1999
Registration No. ___________
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
__________________
Litronic Inc.
(Exact name of registrant as specified in its Charter)
<TABLE>
<S> <C> <C>
Delaware 3577 33-0757190
(State or other jurisdiction of (Primary Standard Industrial Classification Number) (I.R.S. Employer Identification Number)
incorporation or organization)
</TABLE>
Litronic Inc.
2030 Main Street, Suite 1250
Irvine, California 92614
(949) 851-1085
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
__________________
Kris Shah
Chief Executive Officer and Chairman of the Board
Litronic Inc.
2030 Main Street, Suite 1250
Irvine, California 92614
(949) 851-1085
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
________________
Copies to:
ARENT FOX KINTNER PLOTKIN & KAHN, PLLC TENZER GREENBLATT LLP
1050 Connecticut Avenue, N.W. 405 Lexington Avenue
Washington, D.C. 20036-5339 New York, New York 10017
Attention: Gerald P. McCartin, Esq. Attention: Robert J. Mittman, Esq.
Telephone No.: (202) 857-6090 Telephone No.: (212) 885-5000
Facsimile No.: (202) 857-6395 Facsimile No.: (212) 885-5001
__________________
Approximate date of commencement of proposed sale to 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, 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 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. [_] _______________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
___________________
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Title of each class of Number of shares to Proposed maximum offering Proposed maximum aggregate Amount of registration
shares to be registered be registered (1) price per share (2) offering price (2) fee
- ------------------------ -------------------- ------------------------- -------------------------- -----------------------
<S> <C> <C> <C> <C>
Common Stock $.01 par 3,450,000 shares $11.00 $37,950,000 $10,550.10
value
</TABLE>
_________________
(1) Includes 450,000 shares subject to an option granted to the Underwriters to
cover over-allotments, if any.
(2) Estimated solely for the purpose of determining the registration fee
pursuant to Rule 457(a).
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
[The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.]
SUBJECT TO COMPLETION
DATED FEBRUARY 11, 1999
LITRONIC INC.
3,000,000 Shares of Common Stock
$ per Share
This is an initial public offering of 3,000,000 shares of the common stock
of Litronic Inc. There is currently no public market for our common stock. We
expect that the initial public offering price will be between $9.00 and $11.00
per share. The offering price may not reflect the market price of our shares
after the offering.
We anticipate that our common stock will be listed on the Nasdaq National
Market under the symbol "LTNX."
-------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS BEGINNING ON
PAGE 12."
-------------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public offering price............................ $ $
Underwriting discounts and commissions........... $ $
Proceeds to company.............................. $ $
</TABLE>
-------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED
UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRE-
SENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
We have granted the representative of the underwriters a 45-day option to
purchase up to 450,000 additional shares of our common stock to cover over-
allotments, if any. The underwriters expect that delivery of the shares of
common stock will be made to the purchasers in this offering on or about
, 1999.
-------------
BLUESTONE CAPITAL PARTNERS, L.P.
, 1999
<PAGE>
We own or otherwise have rights to trademarks and trade names that we use
in conjunction with the sale and licensing of our products. The following
trademarks mentioned in this prospectus are registered trademarks of our
company: ProFile Manager, NetSign, NetSign Pro, CryptOS, CryptOS SDK, CryptOS
SDK+, ARGUS, Moniker, CryptoCard, CipherServer and Forte. We also own the trade
names Litronic, Pulsar, Pulsar Data and Pulsar Data Systems, Inc. We have
applied for the trademarks FortePKIcard and Maestro. All other trademarks or
trade names referred to in this prospectus are the property of their respective
owners.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. To understand this offering fully, you should read the entire
prospectus, especially the risk factors and financial statements. Except as
otherwise indicated, the information in this prospectus assumes no exercise of
the Representative's over-allotment option to purchase up to 450,000 additional
shares of our common stock. See "Underwriting."
As of the date of this prospectus, all of the stockholders of Litronic
Industries, Inc., a California corporation ("LIT"), will exchange all of the
issued and outstanding common stock of LIT for all of the issued and outstanding
common stock of Litronic Inc., a Delaware corporation, making LIT a wholly-owned
subsidiary of Litronic Inc. (the "Reorganization"). As used in this prospectus,
unless the context indicates otherwise, the term "Litronic" refers to Litronic
Inc. after giving effect to the Reorganization, and the historical consolidated
financial statements for Litronic included in this prospectus have been
retroactively adjusted to reflect the Reorganization. Since Litronic Inc. has
had no operations of its own, the information presented in Litronic's historical
consolidated financial statements, other than the capital structure, relates
solely to LIT.
Simultaneously with the closing of this offering, Litronic will acquire all
of the outstanding common stock of Pulsar Data Systems, Inc. ("Pulsar"). In this
prospectus, unless the context requires otherwise, the terms "we," "our" or "our
company" refer to Litronic and its subsidiaries, after giving effect to the
acquisition of Pulsar. The pro forma financial data presented in this prospectus
is based on data derived from the historical consolidated financial statements
of Litronic and has been prepared to illustrate the effect of the Pulsar
acquisition and this offering on such data. See "- The Pulsar Acquisition."
OUR COMPANY
We provide professional Internet data security services and develop and
market software and microprocessor-based products needed to secure electronic
commerce and communications over the Internet, intranets, extranets and other
Internet-based communication networks ("Internet Protocol Networks"). Our
primary technology offerings utilize an advanced form of cryptography referred
to as public key infrastructure or PKI, which is the standard technology for
securing Internet-based commerce and communications. PKI helps ensure the
integrity and privacy of information being transmitted in an electronic
transaction or communication and verifies the identity, authenticity and
authority of the sender and the recipient of that information. We have
established relationships with industry leaders who have adopted PKI as a core
feature of their secure product offerings, including Netscape Communications
Corporation, Microsoft Corporation, VeriSign, Inc., International Business
Machines Corp., RSA Data Security, Inc., SCM Microsystems, Inc., Atmel
Corporation and the U.S. National Security Agency.
Our security software and microprocessor-based products can be used with
world-wide-web browsers such as Netscape Communicator and Microsoft Internet
Explorer to provide secure E-mail or other data communications and facilitate
secure electronic commerce transactions. Additionally, by using our Internet
data security products, our customers can integrate PKI security into their
Internet Protocol Networks, existing database applications and customized
software applications such as those used in the finance, healthcare,
telecommunications, electronic commerce and government industries. Our customers
are diverse and include: Bank of America, VeriSign, Inc., Lucent Technologies
Inc., Lockheed Martin Corporation, Deloitte & Touche LLP, Netscape
Communications Corporation, Nippon Telegraph and Telecommunications Data
Corporation, Schlumberger Limited, the National Security Agency and the U.S.
Army Corps of Engineers.
Consumers, government agencies and corporations are increasingly relying
upon the Internet, intranets, extranets and other communication networks to
conduct electronic commerce and communications. International Data Corporation
estimates that the number of Internet users will grow from 97 million in 1998 to
320 million in 2002, with electronic commerce growing from $32 billion to $426
billion over the same period. The increasing proliferation of, and reliance
upon, Internet communications and transactions has now caused data security to
become a paramount concern. Demand for information security products is forecast
by Datamonitor, an independent research firm, to increase from $1.6 billion in
1997 to almost $7.0 billion by 2001, a growth rate of 44% per annum. In
addition, Datamonitor forecasts the Internet-security PKI segment to be the
fastest growing segment of this market, increasing from $75 million in 1997 to
approximately $1.9 billion by 2001, a growth rate of 124% per annum.
-3-
<PAGE>
Our Internet data security, PKI-based products are used to enhance the
security of world-wide-web browsers by "digitally signing" messages in hardware
tokens (such as PKI cards, PCMCIA cards, and secure-keys) using digital
certificate technology. Digital certificates are advanced electronic
identification files which uniquely identify the sender of an electronic
communication. The use of digital certificates is expanding rapidly across the
Internet. In fact, several states now consider digital signatures contractually
binding, and there is a growing acceptance within the federal government to
effectuate transactions through the use of digital certificates. Our data
security products support numerous types of operating systems and facilitate the
process of issuing, managing and recovering digital certificates throughout a
customer's enterprise.
Given the increasing demand for PKI security, we believe significant market
opportunities exist for the development of PKI products that provide security
tailored to the more advanced security levels required in certain environments.
We are currently developing PKI cards capable of integrating multiple digital
certificates and which will provide for greater processing power, multiple
algorithm suites and greater storage capacity than today's conventional PKI
cards, yet remain credit card sized and competitively priced. In addition,
working with Atmel Corporation, a leading semi-conductor manufacturer, we are
leading the development of the Forte microprocessor pursuant to a task order
issued under a contract with the National Security Agency. We are designing
Forte, a 32-bit RISC microprocessor, to embed in an advanced PKI card. Our
Forte PKIcard is expected to be the fastest, most versatile and most
cryptographically advanced PKI card available.
To capitalize on opportunities in the rapidly growing Internet security
market, we are acquiring Pulsar, a network integration solutions company that
deploys large-scale network solutions to organizations in the commercial and
government sectors that have significant information processing requirements.
Pulsar had revenues of approximately $62.0 million for the nine months ended
September 30, 1998 and, following this offering, we intend to roll out our
enterprise-wide Internet data security products to its significant client base.
This client base includes over 100 federal agencies, such as The Executive
Offices of the President of the United States, the Federal Bureau of
Investigation, the Federal Communications Commission, and over 40 commercial,
state and local customers. We believe that our newly acquired Pulsar network
integration solutions expertise will provide us with significant competitive
advantages with respect to our Internet data security offerings, as the
implementation of Internet Protocol Network security solutions and
infrastructure requires specialized skills which are typically limited in
corporate information technology departments. We also intend to leverage the
direct sales force, distribution channels and partners of our new Pulsar
operations, including electronic commerce companies, Internet service providers,
value-added resellers, systems integrators and original equipment manufacturers,
to aggressively expand our distribution capabilities. These partners include
Network Associates, Inc., Dell Computers Corp., International Business Machines
Corp., Lucent Technologies Inc. and Compaq Computer Corporation.
Our company is led by an experienced management team and key employees with
substantial experience in, and knowledge of, the Internet, Internet data
security, computer networking and semi-conductor industries, as well as
extensive expertise in the sale and implementation of large-scale networking
systems. We intend to exploit our technological expertise and significant market
access to capitalize on the expanding market opportunities in the information
security market.
THE PULSAR ACQUISITION
On February 9, 1999, we entered into an agreement with William W. Davis,
Sr. and Lillian A. Davis, the sole stockholders of Pulsar, to acquire all of the
issued and outstanding capital stock of Pulsar in exchange for 2,169,938 shares
of our common stock. The acquisition of Pulsar will close simultaneously with
the closing of this offering, at which time Pulsar will be one of our wholly-
owned subsidiaries. Pulsar is a provider of network-based information technology
consulting services to commercial corporate accounts and federal, state and
local governmental agencies. Additionally, Pulsar has an established product
reseller business, which focuses on resales to federal government agencies,
large corporate accounts and state and local governments.
______________
Litronic was incorporated under the laws of the State of Delaware in 1997
but has conducted no operations to date. LIT, which will become a wholly-owned
subsidiary of Litronic as a result of the Reorganization, was incorporated under
the laws of the State of California in 1970. Our principal executive offices are
located at 2030 Main Street, Suite 1250, Irvine, California 92614, and our
telephone number is (949) 851-1085. We also maintain executive offices in
Lanham, Maryland. Our website is located at "www.litronic.com." Information
contained in our website is not part of this prospectus.
-4-
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by Litronic................ 3,000,000 shares
Common stock to be outstanding after
this offering................................. 9,040,631 shares (1)(2)
Use of proceeds................................. We intend to use the net proceeds of this offering for
reduction of debt, sales and marketing, product development
and working capital and general corporate purposes. See
"Use of Proceeds."
Risk Factors.................................... Investing in our common stock involves a high degree of
risk and immediate and substantial dilution. See "Risk
Factors" and "Dilution."
Proposed Nasdaq National Market symbol.......... "LTNX"
</TABLE>
_______________
(1) Includes 2,169,938 shares to be issued in connection with the acquisition
of Pulsar.
(2) Does not include (a) 281,419 shares of common stock reserved for issuance
upon exercise of options granted under our 1998 stock option plan, (b) an
aggregate of 600,000 shares of common stock reserved for issuance upon
exercise of options available for future grant under our 1999 stock option
plan, and (c) 300,000 shares of common stock reserved for issuance upon
exercise of warrants to be issued to the Representative upon the closing of
this offering. See "Management - Stock Option Plans" and "Underwriting."
-5-
<PAGE>
SUMMARY PRO FORMA FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Set forth below is certain unaudited summary pro forma financial
information for our company for the periods, and as of the dates, indicated.
This information is based on data derived from the historical financial
statements of Litronic and has been prepared to illustrate the effects of the
Pulsar acquisition and this offering on such historical financial data, as if
they had occurred as of January 1, 1997, with respect to the statements of
operations information, and as of September 30, 1998, with respect to the
balance sheet information. This summary pro forma financial information is
provided for comparative purposes only and does not purport to be indicative of
the results that actually would have been obtained if the acquisition and this
offering had been effected on the dates indicated. The information presented
below is qualified in its entirety by, and should be read in conjunction with,
"Pro Forma Financial Data," "Selected Historical Financial Data-Litronic,"
"Selected Historical Financial Data-Pulsar," "Management's Discussion and
Analysis of Financial Condition and Result of Operations" and the financial
statements and notes thereto included elsewhere in this prospectus.
<TABLE>
<CAPTION>
PRO FORMA STATEMENTS OF OPERATIONS INFORMATION:
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------- -----------------
<S> <C> <C>
Net product revenue.............................. $ 151,329 $ 62,636
License and service revenue...................... 10,357 3,693
------------- ---------------
Total revenue.................................... 161,686 66,329
------------- ---------------
Product cost of revenue.......................... 141,297 56,942
License and service cost of revenue.............. 4,758 2,173
------------- ---------------
Total cost of revenue............................ 146,055 59,115
------------- ---------------
Gross margin..................................... 15,631 7,214
Selling, general, and
administrative expenses..................... 20,639 10,972
Research and development expenses................ 1,172 738
Amortization of goodwill......................... 1,907 1,430
------------- ---------------
Operating loss................................... (8,087) (5,926)
Interest expense................................. 3,499 1,154
Interest income.................................. 457 373
------------- ---------------
Loss from continuing operations before
income taxes................................ (11,129) (6,707)
Benefit from income taxes........................ - -
------------- ---------------
Loss from continuing operations.................. $ (11,129) $ (6,707)
============= ===============
Loss per share from continuing operations -
basic and diluted........................... $ (1.23) $ (0.74)
============= ===============
Shares used in per-share computations -
basic and diluted........................... 9,040,631 9,040,631
============= ===============
</TABLE>
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<PAGE>
PRO FORMA BALANCE SHEET INFORMATION:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
-----------------------------
<S> <C>
Cash and cash equivalents...................... $15,784
Working capital................................ 12,947
Total assets................................... 66,085
Short-term debt................................ 14,538
Long-term debt, less current installments...... 365
Total liabilities.............................. 22,355
Net stockholders' equity....................... 43,730
</TABLE>
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<PAGE>
SUMMARY FINANCIAL INFORMATION
LITRONIC
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Set forth below is certain summary financial information for Litronic for
the periods, and as of the dates, indicated. The data is derived from, and
should be read in conjunction with, the consolidated financial statements of
Litronic, including the notes thereto, appearing elsewhere in this prospectus.
The information presented below is qualified in its entirety by, and should be
read in conjunction with, "Selected Data-Litronic," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements of Litronic and notes thereto included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------- --------------------
1995 1996 1997 1997 1998
---------- -------- ------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
INFORMATION:
Net product revenue............................ $ 1,525 $ 7,855 $ 8,627 $7,177 $ 3,886
License and service revenue.................... 1,181 1,541 1,539 1,416 925
--------- ------- ------- ------- ---------
Total revenue.................................. 2,706 9,396 10,166 8,593 4,811
--------- ------- ------- ------- ---------
Product cost of revenue........................ 793 4,098 3,211 2,607 2,051
License and service cost of revenue............ 465 581 643 424 583
--------- ------- ------- ------- ---------
Total cost of revenue.......................... 1,258 4,679 3,854 3,031 2,634
--------- ------- ------- ------- ---------
Gross margin................................... 1,448 4,717 6,312 5,562 2,177
Selling, general, and
administrative expenses................... 977 2,052 3,487 1,865 2,046
Research and development expenses.............. 341 725 1,172 926 738
--------- ------- ------- ------- ---------
Operating income (loss)........................ 130 1,940 1,653 2,771 (607)
Interest expense, net.......................... 38 19 42 5 322
--------- ------- ------- ------- ---------
Earnings (loss) from continuing
operations before income taxes............ 92 1,921 1,611 2,766 (929)
Provision for (benefit from) income
taxes..................................... 1 29 22 42 (61)
--------- ------- ------- ------- ---------
Earnings (loss) from continuing
operations................................ $ 91 $ 1,892 $ 1,589 $2,724 $ (868)
========= ======= ======= ======= =========
OTHER FINANCIAL INFORMATION:
Gross margin percentage........................ 53.5% 50.2% 62.1% 64.7% 45.3%
========= ======= ======= ======== =========
</TABLE>
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<PAGE>
BALANCE SHEET INFORMATION:
<TABLE>
<CAPTION>
DECEMBER 31 SEPTEMBER 30, 1998
--------------------------------
1995 1996 1997
---------- -------- --------- --------------
<S> <C> <C> <C> <C>
Cash and cash equivalents......................... $ 95 $ 862 $ 490 $ 1,177
Working capital................................... (372) 1,662 385 1,287
Total assets...................................... 5,476 7,409 2,347 3,248
Short-term debt................................... 472 545 -- 481
Long-term debt, less current installments......... 4,313 4,997 3,506 5,200
Total liabilities................................. 6,483 7,510 5,148 6,917
Net stockholders' deficiency...................... (1,007) (101) (2,801) (3,669)
</TABLE>
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<PAGE>
SUMMARY FINANCIAL INFORMATION
PULSAR
(DOLLARS IN THOUSANDS)
Set forth below is certain summary financial information for Pulsar for the
periods, and as of the dates, indicated. The data is derived from, and should
be read in conjunction with, the financial statements of Pulsar, including the
notes thereto, appearing elsewhere in this prospectus. The information
presented below is qualified in its entirety by, and should be read in
conjunction with, "Selected Financial Data-Pulsar," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements of Pulsar and notes thereto included elsewhere in this prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- ---------------------
1995 1996 1997 1997 1998
------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
INFORMATION:
Service revenue............... $ * $ 10,253 $ 8,818 $ 7,388 $ 2,768
Product revenue............... * 155,705 142,702 98,186 58,750
--------- --------- --------- --------- --------
Total revenue................. 163,991 165,958 151,520 105,574 61,518
--------- --------- --------- --------- --------
Cost of service revenue....... * 4,870 4,115 3,440 1,590
Cost of product revenue....... * 144,494 138,086 96,748 54,891
--------- --------- --------- --------- --------
Total cost of revenue......... 146,682 149,364 142,201 100,188 56,481
--------- --------- --------- --------- --------
Gross margin.................. 17,309 16,594 9,319 5,386 5,037
Selling, general, and
administrative expense..... 10,410 13,545 17,152 9,559 8,926
--------- --------- --------- --------- --------
Operating income (loss)....... 6,899 3,049 (7,833) (4,173) (3,889)
Interest income............... 392 639 457 408 373
Interest expense.............. 2,412 3,564 3,640 2,106 1,424
--------- --------- --------- --------- --------
Net earnings (loss)........... $ 4,879 $ 124 $ (11,016) $ (5,871) $ (4,940)
========= ========= ========= ========= ========
OTHER FINANCIAL
INFORMATION:
Gross margin percentage....... 10.6% 10.0% 6.2% 5.1% 8.2%
========= ========= ========= ========= ========
</TABLE>
_______________________
* The breakdown of revenue and cost of revenue between services and products
was not readily available for the year ended December 31, 1995.
-10-
<PAGE>
BALANCE SHEET INFORMATION:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1995 1996 1997 September 30, 1998
------------------------------ --------------------
<S>.................................. <C> <C> <C> <C>
Cash and cash equivalents............ $ 2,144 $ 2,451 $ 2,236 $ 407
Working capital (deficit)............ 8,090 1,553 (2,436) (5,586)
Total assets......................... 82,930 59,785 40,871 20,035
Short-term debt...................... 61,970 41,352 28,982 17,103
Long-term debt, less current
installments...................... 84 53 4,203 3,619
Total liabilities.................... 73,862 52,077 42,681 26,938
Net stockholders' equity (deficit)... 9,068 7,708 (1,810) (6,903)
</TABLE>
-11-
<PAGE>
RISK FACTORS
An investment in the shares of our common stock is speculative and involves
a high degree of risk. In addition to the other information in this prospectus,
you should carefully consider the following risk factors in evaluating our
company and our prospects before purchasing shares of our common stock.
This prospectus contains certain forward-looking statements that involve
risks and uncertainties. These statements relate to our future plans,
objectives, expectations and intentions. These statements may be identified by
the use of words such as "expects," "anticipates," "intends," and "plans" and
other similar expressions. Our actual results could differ materially from
those discussed in these statements. Factors that could contribute to such
differences include, but are not limited to, those discussed in this "Risk
Factors" section and elsewhere in this prospectus. You are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date the statement is made.
LOSSES; EXPLANATORY PARAGRAPH IN PULSAR'S INDEPENDENT AUDITORS' REPORT
Litronic incurred a net loss of $868,000 for the nine months ended
September 30, 1998. Pulsar incurred net losses of $11.0 million and $4.9
million for the year ended December 31, 1997 and nine months ended September 30,
1998, respectively. Our pro forma combined statements of operations reflect a
net loss of $7.3 million for the nine months ended September 30, 1998 and we
expect to incur losses for the year ended December 31, 1998. There is a risk
that we may continue to experience losses in the future. Even with the proceeds
of this offering, we may not be profitable or able to significantly increase our
revenue. Continued losses in the future would adversely affect our business.
For the year ended December 31, 1997, Pulsar's independent auditors noted in
their opinion that as a result of Pulsar's loss, its working capital deficit and
its default on certain financing agreement debt covenants, there was a
substantial doubt about Pulsar's ability to continue as a going concern. After
this offering, we will have positive working capital and be in compliance with
all financing debt agreements. We believe working capital and available
borrowings under credit facilities will be sufficient to satisfy our cash flow
requirements for at least the 12 months following this offering. See "Pro Forma
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Financial Statements.
RISKS RELATING TO THE ACQUISITION OF PULSAR; RISKS RELATING TO FUTURE
ACQUISITIONS
We pursued the acquisition of Pulsar, and may pursue other acquisitions in
the future to expand our product and service offerings, vertically integrate our
business, add new customers and increase market penetration for our products and
services. Integration of the Pulsar acquisition and future acquisitions may
place strain on our managerial and financial resources. The full benefits of
the Pulsar acquisition will require (a) integration of administrative, financial
and engineering resources, (b) coordination of marketing and sales efforts, and
(c) implementation of appropriate operational, financial and management systems
and controls. We may not be able to successfully integrate these operations.
Failure to integrate the Pulsar acquisition or any future acquisition, could
adversely affect our business. In addition, we are acquiring Pulsar assuming
that we can roll out our enterprise-wide data security products to Pulsar's
existing client base, successfully complete the implementation of Pulsar's
recent shift in product reselling focus, expand Pulsar's professional service
offerings and increase sales of Pulsar's products and professional services to
commercial customers and state and local governments. There is a risk that any
or all of our assumptions may prove incorrect. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Business -
Strategy" and "Business - Product Reselling."
RISKS RELATED TO INTANGIBLE ASSETS
Approximately $28.6 million, or 43%, of our pro forma combined, as
adjusted, assets as of September 30, 1998 consisted of intangible assets arising
from the acquisition of Pulsar. This amount represents goodwill, which will be
amortized over 15 years. Goodwill is an intangible asset that represents the
excess of the aggregate purchase price paid in connection with an acquisition
over the fair value of net assets acquired. The amount of goodwill amortized in
a particular period constitutes a non-cash expense that reduces net income or
increases net loss for that period. The reduction in our net earnings or an
increase in our net loss resulting from the amortization of goodwill may have an
adverse impact upon the market price of our common stock. There is also a risk
that we may never realize the value of our intangible assets. See "Pro Forma
Financial Data."
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DEFAULTS UNDER SECURED LINES OF CREDIT
As of September 30, 1998, Litronic had $5.7 million and Pulsar had $18.0
million in borrowings outstanding under financial line of credit facilities.
All of our assets are pledged to the providers of these lines as collateral, and
we are substantially prohibited from incurring additional indebtedness. These
terms could, under certain circumstances, limit our ability to implement our
strategy. In addition to limited net worth and other financial covenants, our
loan agreements with these creditors will limit or prohibit our company, subject
to certain exceptions, from declaring or paying cash dividends, making capital
distributions or other payments to stockholders, merging or consolidating with
another corporation or selling all or substantially all of our assets. From
time to time we have been in violation of certain financial covenants under our
credit facilities and have received waivers for these violations through the
date of this prospectus. Although we expect to be in compliance with all of our
financial covenants upon the closing of this offering, if we fail to comply with
our loan covenants or otherwise default on our obligations in the future without
obtaining waivers for such violations, our indebtedness could become immediately
due and payable and the providers of these credit facilities could foreclose on
our assets. Although we intend to use the proceeds of this offering to repay a
portion of our outstanding borrowings, we expect to utilize the resulting
increased borrowing availability under our credit facilities to fund our
operations, and we will obtain an additional line of credit for borrowings up to
$20 million to be effective upon the closing of this offering. We may not be
able to comply with the terms of our loan agreements with our credit facility
providers. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Financial Statements.
SUBSTANTIAL PORTION OF REVENUE DERIVED FROM A LIMITED NUMBER OF CUSTOMERS
We have been dependent on a limited number of customers for a substantial
portion of our revenue. On a pro forma combined basis one of our customers, the
U.S. Immigration and Naturalization Service, accounted for more than 10% of
revenues (14%) during the nine months ended September 30, 1998. For the year
ended December 31, 1997, Litronic derived 45%, 20% and 19% of its revenue from
sales to the U.S. Army Corps of Engineers, Lockheed Martin Corporation and the
National Security Agency, respectively. For the nine months ended September 30,
1998, Litronic derived 44%, 23% and 19% of its revenue from sales to Lockheed
Martin Corporation, the National Security Agency and the U.S. Army Corps of
Engineers, respectively. For the nine months ended September 30, 1998, Pulsar
derived 22% of its revenue from sales to the U.S. Immigration and Naturalization
Service. We expect to continue to be dependent upon a limited number of large
customers for a substantial portion of our revenue. Certain of our contracts are
short-term contracts, including our contract with the National Security Agency,
which has a one-year term, subject to annual renewals each September. If sales
to any of these customers were to decrease substantially or significant
contracts were not renewed upon expiration, and we were not able to replace the
revenue we received from these customers, our business would be adversely
affected. See "Pro Forma Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Results of
Operations."
RISKS OF DOING BUSINESS WITH THE U.S. GOVERNMENT
Sales to the U.S. government accounted for approximately 61% of our pro
forma combined revenue for the year ended December 31, 1997 and approximately
80% of our pro forma combined revenue for the nine months ended September 30,
1998. Our sales to the U.S. government are subject to risks, including reduced
federal funding available for government agencies to purchase our products and
services, decisions to terminate our contracts, disallowance of costs upon
audit, changes in the procurement process and the necessity to participate in
competitive bidding and proposal processes. A decrease in sales to the U.S.
government could adversely affect our business.
Under the terms of any future federal government contracts, the government
may be in a position to obtain greater rights with respect to our intellectual
property than we would grant to other entities. Government agencies also have
the power, based on financial difficulties or investigations of its contractors,
to deem contractors unsuitable for new contract awards. Because we engage in
the government contracting business, we have been and will be subject to audits
and may be subject to investigation by governmental entities. Failure to comply
with the terms of any of our governmental contracts could result in substantial
civil and criminal fines and penalties or in our suspension from future
government contracts for a significant period of time. Fines and penalties that
could result from non-compliance with appropriate standards and regulations, or
our suspension or debarment, could adversely affect our business.
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DEPENDENCE ON CONTINUED GROWTH OF THE INTERNET, INTRANETS AND EXTRANETS
Successful implementation of our strategy depends in large part on the
continued growth of the Internet, intranets and extranets and the widespread
acceptance and use of these mediums for electronic commerce and communications.
Because electronic commerce and communications over the Internet, intranets and
extranets is evolving, we cannot predict the size of the market and its
sustainable growth rate.
The use of electronic commerce and communication may not increase, or may
increase more slowly than we expect, as a result of the cost of the
infrastructure required to support its widespread use. The Internet may
continue to experience significant growth both in the number of users and the
level of use. However, the Internet infrastructure may not be able to continue
to support the demands placed on it by continued growth. Continued growth may
also affect the Internet's performance and reliability. In addition, the growth
and reliability of electronic commerce and communications could be harmed by
delays in development or adoption of new standards and protocols to handle
increased levels of activity or by increased governmental regulation. Changes
in, or insufficient availability of, communications services to support
electronic commerce and communication could result in poor performance and also
adversely affect usage. Any of these factors could adversely affect our
business. See "Industry Information."
LENGTHY SALES AND IMPLEMENTATION CYCLE
Evaluating customers' data security needs and designing and implementing
custom networks typically requires significant expenditure of time, capital and
other resources. Customers' purchasing decisions for our products and systems
may be subject to delay due to many factors which are not within our control,
such as the significant expense of many data security products and network
systems, customers' internal budgeting process, year 2000 concerns and the other
procedures customers may require for the approval of large purchases. Further,
the implementation process is subject to delays resulting from administrative
concerns associated with incorporating new technologies into existing networks,
deployment of a new network system and data migration to the new system. As a
result of these factors, the sales and implementation cycles associated with
certain of our product sales and network design and implementation activities
can be lengthy, potentially lasting from 45 to 90 days. Our quarterly and
annual operating results could be adversely affected if sales forecasted for a
particular quarter from a particular customer are delayed.
PKI TECHNOLOGY IS SUBJECT TO CERTAIN RISKS
Many of our products are based on PKI technology. With PKI technology, a
user is given a public key and a private key, both of which are required to
encrypt and decrypt messages. The security afforded by this technology depends
on the integrity of a user's private key. The integrity of private keys depends
in part on the application of algorithms, which are advanced mathematical
factoring equations. This integrity is predicated on the assumption that the
factoring of large numbers into their prime number components is difficult.
Should an easy factoring method be developed, then the security of encryption
products utilizing PKI technology would be reduced or eliminated. Furthermore,
any significant advance in techniques for attacking PKI systems could also
render some or all of our existing products that are based on cryptographic
technology obsolete or unmarketable. Even if there is no breakthrough in
factoring or other methods of attacking PKI systems, factoring problems can
theoretically be solved by computer systems significantly faster and more
powerful than those presently available. In the past there have been public
announcements of the successful decoding of certain cryptographic messages and
of the potential misappropriation of private keys. Such publicity could
adversely affect public perception as to the safety of PKI technology. Current
or future government regulation regarding the use, scope and strength of PKI
could also limit our ability to develop and sell products with encryption
technology strong enough to maintain the integrity of a user's private key
against factoring by more powerful computer systems. Any of the foregoing could
result in a decline in demand for our data security products, which would
adversely affect our business. See "Industry Information."
POTENTIAL PRODUCT OBSOLESCENCE DUE TO TECHNOLOGICAL CHANGES
To be competitive in our market, we must continually modify and adapt our
products and improve the performance features and reliability of our products in
response to advances and changes in technology. The
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introduction of products embodying new technologies and the emergence of new
industry standards may render existing products obsolete or less marketable.
Moreover, if new Internet, networking or telecommunications technologies or
standards become widely adopted or if other technological changes occur, we may
need to adapt our products. Our future operating results will depend upon our
ability on a timely basis to enhance our current products and to develop and
introduce new products that address the increasingly sophisticated needs of the
marketplace and that keep pace with technological developments, new competitive
product offerings and emerging industry standards. The process of developing our
products and services is extremely complex and requires significant continuing
development efforts. If we do not respond adequately and in a timely manner, our
business could be adversely affected.
NEED TO ESTABLISH AND MAINTAIN STRATEGIC RELATIONSHIPS
Part of our business strategy is to enter into additional strategic
alliances and cooperative efforts with respect to products and services with
other companies in our industry. We currently are involved in cooperative
efforts with respect to incorporation of our products into products of others,
joint development of certain products and services, joint research and
development efforts, joint proposals and presentations with respect to products
and services and reseller arrangements. We depend upon our partners to develop
and market these products and to fund and otherwise perform their obligations as
contemplated by our agreements with them. We do not control the time and
resources devoted by our partners to such activities. These relationships may
not continue or may require our expenditure of significant financial, personnel
and administrative resources from time to time. We may not have the resources
available to satisfy our commitments, which may adversely affect our strategic
relationships. The loss of these strategic relationships, or our inability to
create new strategic relationships in the future, could adversely affect our
business. Further, certain of our products and services compete with the
products and services of our strategic partners. This competition may adversely
affect our relationships with our strategic partners, which could adversely
affect our business. See "Business - Sales and Marketing - Strategic
Alliances."
DEPENDENCE ON KEY MANAGEMENT PERSONNEL
Our success will depend largely on the continuing efforts of our executive
officers and senior management, especially those of Kris Shah, our Chairman of
the Board and Chief Executive Officer, and William W. Davis, Sr., our President
and Chief Operating Officer. Our business may be adversely affected if the
services of any of our key personnel become unavailable to our company. We have
not entered into employment agreements with any employees other than Messrs.
Shah and Davis, and even with such agreements there is a risk that these
individuals will not continue to serve for any particular period of time. While
we intend to obtain key person life insurance policies on the lives of Messrs.
Shah and Davis, each in the amount of $3.0 million, such amounts may not be
sufficient to offset the loss of their services. In addition, we may need to
add members to our management team and our failure to attract and retain such
additional members could adversely affect our business. See "Management."
NEED TO ATTRACT AND RETAIN TECHNICAL PERSONNEL
Our success depends in part on the availability of qualified technical
personnel, including personnel trained in software and hardware applications
within specialized fields. The data security and networking solution industries
are characterized by a high level of employee mobility, and the market for such
individuals in certain regions is extremely competitive. Competition for highly
qualified individuals in the computer-related fields is intense and many of our
competitors have significantly greater resources than we have. This competition
means there are fewer highly qualified employees available to hire, the costs of
hiring and retaining such individuals are high and such personnel may not remain
with our company once hired. Furthermore, there is increasing pressure to
provide technical employees with stock options and other equity interests in the
company, which may dilute earnings per share. We may not be able to
successfully attract or retain highly skilled employees. Our inability to hire
or retain highly qualified individuals may impede our ability to develop,
install, implement and otherwise service our software and hardware systems,
customers and potential customers or otherwise efficiently conduct our
operations, all of which may adversely affect our business.
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POTENTIAL PRODUCT DEFECTS
Products as complex as those we offer may contain undetected errors or
result in failures when first introduced or when new versions are released.
Despite our product testing efforts and testing by current and potential
customers, it is possible that errors will be found in new products or
enhancements after commencement of commercial shipments. The occurrence of
these errors could result in adverse publicity, delay in product introduction,
diversion of resources to remedy defects, loss of or a delay in market
acceptance or claims by customers against our company, or could cause us to
incur additional costs, any of which could adversely affect our business.
POTENTIAL LIABILITY EXPOSURE; PROJECT RISKS
Our data security products are used to prevent unauthorized access to and
attacks on critical enterprise information. Because our customers rely on our
products for critical security applications, we may be exposed to potential
liability claims for damage caused to an enterprise as a result of an actual or
perceived failure of our products. An actual or perceived breach of enterprise
network or data security systems of one of our customers, regardless of whether
the breach is attributable to our products or solutions, could adversely affect
the market's perception of our company, products and solutions and therefore our
business. Furthermore, the nature of many of our professional services exposes
us to a variety of risks. Many of our professional service engagements involve
projects that are critical to the operations of our customers' businesses. Our
failure or inability to meet a customer's expectations in the performance of our
services, or to do so in the time frame required by the customer, could result
in a claim for substantial damages against us by the customer, regardless of our
responsibility for the failure, discourage customers from engaging us for such
services or damage our business reputation.
In addition, as a professional services provider, a portion of our business
involves employing people and placing them in the workplace of other businesses.
Therefore, we are also exposed to liability with respect to actions taken by our
employees while on assignment, such as damages caused by employee errors and
omissions, misuse of customer proprietary information, misappropriation of
funds, discrimination and harassment, theft of customer property, other criminal
activity or torts and other claims.
Although we maintain general liability insurance coverage, that insurance
may not continue to be available to us on reasonable terms or in sufficient
amounts to cover one or more large claims, or the insurer may disclaim coverage
as to any future claim. The successful assertion of one or more large claims
against us that exceed available insurance coverage, or changes in our insurance
policies, including premium increases or the imposition of large deductibles or
co-insurance requirements, could adversely affect our business.
YEAR 2000 ISSUES
An issue affecting our company and others is the inability of many computer
systems and applications to process the year 2000 ("Y2K") date change, the date
9/9/99 and the leap year 2000. We have established a plan to complete the
upgrade of our computer systems to become Y2K compliant. At this time we do not
expect the cost of these upgrades to be material to our business. We are in the
process of surveying our major vendors. Until we complete our survey we cannot
fully assess the Y2K status of any of our vendors or suppliers. The failure of
our significant vendors and customers to make their products and systems Y2K
compliant may adversely affect the performance of our products, which may in
turn adversely affect our business. It is possible that customers or third
parties might seek indemnification or damages from us as a result of Y2K issue-
related errors caused by or not prevented by our products of services. We
cannot predict the extent to which we might be liable for such costs, but it is
conceivable in general that Y2K errors could result in substantial judgments
against providers of information technology such as our company. If we were to
suffer an adverse judgment as a result of prior Y2K noncompliance of our
products, it may have an adverse impact on our business.
Customers' purchasing decisions could be affected by the Y2K issue as they
may need to expend significant resources to correct their existing systems.
This situation may result in reduced funds available to implement the
infrastructure needed to conduct trusted and secure electronic commerce and
communications over the Internet, intranets and extranets. These factors could
lead to a decline in sales of our products and services, which could, in turn,
adversely affect our business.
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The extent of the potential impact of the Y2K issue generally is not known,
and we cannot predict the likelihood that the Y2K issue will cause a significant
disruption in the economy as a whole. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Year 2000 Issues."
RISKS RELATING TO COMPETITIVE BIDDING
We expect to generate a portion of our revenue from contracts and purchase
orders awarded through the competitive bidding process. Our bids may not be
accepted or, if accepted, awarded contracts may not generate sufficient revenue
to result in profitable operations. The competitive bidding process is
typically lengthy and often results in the expenditure of financial and other
resources in connection with bids that are not accepted. Additionally, inherent
in the competitive bidding process is the risk that our costs may exceed
projected costs upon which a submitted bid or contract price is based. See
"Business - Sales and Marketing -- Sales to Government Internet Information
Technology Market."
COMPETITION
We compete in numerous markets including data security, access control,
token authentication, smartcard-based security applications, electronic commerce
applications, systems integration and product reselling. The markets for our
products and services are intensely competitive and are characterized by rapidly
changing technology and industry standards, evolving user needs and the frequent
introduction of new products. We believe that the principal factors affecting
competition in our markets include product functionality, performance,
flexibility and features, use of open standards technology, quality of service
and support, reputation and price.
We face significant competition from a number of different sources. Many
of our competitors are more established, benefit from greater name recognition
and have substantially greater financial, technical and marketing resources than
we have. In addition, there are several smaller and start-up companies with
which we compete from time to time. We also expect that competition will
increase as a result of consolidation in the information security technology and
product reseller industries. We may be unable to compete successfully in the
future with our competitors, which may adversely affect our business. See
"Business - Competition."
LIMITED PROTECTION OF PROPRIETARY RIGHTS; RISKS ASSOCIATED WITH CLAIMS
OF INFRINGEMENT AND PROPRIETARY RIGHTS
We depend substantially on our proprietary information and technologies.
We rely on a combination of trademark, patent, copyright and trade secret laws
and license agreements to establish and protect our rights in software products
and other proprietary technology. We also require third-party consultants and
contractors to enter into non-disclosure agreements to limit use of, access to
and distribution of our proprietary information. In addition, we require
employees to enter into non-disclosure agreements and customers with access to
source code versions of our software to enter into license agreements.
Our means of protecting our proprietary rights may not be adequate to
prevent misappropriation or provide meaningful protection in the event of any
misappropriation. Any inability to protect our proprietary technologies could
adversely affect our business.
There is a risk that our products infringe the proprietary rights of third
parties. While we do not believe that our products do infringe on proprietary
rights of third parties, infringement or invalidity claims may nevertheless be
asserted or prosecuted against us and our products may be found to have
infringed the rights of third parties. If any claims or actions are asserted
against us, we may be required to modify our products or may seek to obtain a
license for such intellectual property rights in a timely manner. We may not be
able to modify our products or obtain a license on commercially reasonable
terms, or at all. Our failure to do so could adversely affect our business.
See "Business-Intellectual Property."
GOVERNMENT REGULATION
Because we sell our products internationally, we must comply with federal
laws regulating the export of, and applicable foreign government laws regulating
the import of, our products. Although we have obtained
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approval to export our NetSign and ProFile Manager products, the federal
government may rescind such approval at any time. Additionally, we have applied
for export approval, on a specific criteria basis, for certain of our other
products. We may not receive approval to export such products on a timely basis,
on the basis we have requested or at all. As a result of government regulation
of our products, we may be at a disadvantage in competing for international
sales compared to foreign companies that are not subject to such restrictions
which could adversely affect our business. See "Business-Government Regulation."
Many companies conducting electronic commerce do not collect sales or other
similar taxes with respect to shipments of goods into other states or foreign
countries. It is possible that federal, state or foreign governments may seek
to impose sales taxes on companies that engage in electronic commerce. Due to
the increasing popularity of the Internet, intranets and extranets, it is
possible that laws and regulations may be enacted covering issues such as user
privacy, pricing, content and quality of products and services. Widespread
adoption of such laws and regulations or the imposition of sales or other taxes
on electronic commerce could slow substantially the growth of the Internet,
intranets and extranets, which could result in decreased demand for our products
and adversely affect our business.
RISKS OF SUBSTANTIAL FLUCTUATION IN QUARTERLY OPERATING RESULTS
Our quarterly operating results may fluctuate significantly as a result of
a variety of factors, many of which are outside our control. These factors
include, among other things, the short-term nature of certain customer
commitments, the lengthy sales and implementation cycle for certain of our
products and services, patterns of information technology spending by customers,
the timing, size, mix and customer acceptance of our product and service product
offerings and those of our competitors, the timing and magnitude of required
capital expenditures, the need to use contract personnel to complete certain
assignments and general economic conditions. Accordingly, comparisons of
quarterly results may not be meaningful and should not be relied upon, nor will
they necessarily reflect on future performance. Because of the foregoing
factors, it is likely that in some future quarters our operating results will be
below the expectations of public market analysts and investors. In such event,
the price of our common stock would likely be adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
RISKS ASSOCIATED WITH INTERNATIONAL SALES
We are seeking to increase our marketing efforts to foreign customers.
While we believe our current products and services are designed to meet the
regulatory standards of foreign markets, our inability to maintain or to obtain
foreign regulatory approvals on a timely basis in the future could adversely
affect our business. Additionally, our international operations could be subject
to a number of risks, including establishing or maintaining international
distribution channels, increased collection risks, trade restrictions, export
duties and tariffs and uncertain political, regulatory and economic
developments, any of which could adversely affect our business. All
international sales are denominated in U.S. dollars, and we do not expect that
we will begin denominating our international sales in local currencies.
DEPENDENCE ON ATMEL
We are designing the Forte microprocessor jointly with Atmel Corporation.
The Forte card is being designed with a computer chip specially designed by
Atmel Corporation for Forte. We do not anticipate maintaining a supply
agreement with Atmel Corporation. If Atmel were to be unable to deliver
computer chips to our company for a lengthy period of time or terminate its
relationship with our company, we would be unable to produce the Forte PKIcard
until we could redesign the Forte microprocessor. We anticipate this would take
substantial time and resources to complete. Any inability to receive adequate
supplies of Atmel Corporation's specially designed computer chip would adversely
affect our ability to sell the Forte PKIcard.
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CONTROL BY CERTAIN STOCKHOLDERS
Upon the closing of this offering, Kris Shah and members of his family,
William W. Davis, Sr. and Lillian A. Davis will beneficially own, in the
aggregate, approximately 66.8% of our outstanding common stock. These
stockholders, if acting together, would have the ability to elect our directors
and to determine the outcome of corporate actions requiring stockholder
approval, irrespective of how other stockholders may vote. This concentration
of ownership may also have the effect of delaying or preventing a change in
control. See "Principal Stockholders."
USE OF PROCEEDS TO REPAY INDEBTEDNESS AND TRADE PAYABLES; BENEFITS TO RELATED
PARTIES
We have allocated $12,000,000 (46.7%) of the net proceeds of this offering
to repay outstanding indebtedness, including approximately $5.9 million of
indebtedness assumed in connection with the acquisition of Pulsar. All of such
indebtedness is personally guaranteed by, and/or secured by pledges of assets
of, certain officers, directors and principal stockholders of our company.
These persons will receive a benefit from the release of such guarantees and
security pledges. See "Use of Proceeds," "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Certain Transactions."
NO PRIOR PUBLIC MARKET; ARBITRARY DETERMINATION OF OFFERING PRICE
Prior to the offering there has been no public market for our common stock.
There may not be an active trading market for our common stock after the
offering, and the market price of our common stock may decline below the initial
public offering price. The initial public offering price has been determined by
negotiations among our management and the Representative and is not necessarily
reflective of the assets, book value or potential earnings of our company or any
other recognized criteria of value. Additionally, the initial public offering
price may not be indicative of the market price of our common stock after this
offering. See "Underwriting."
POSSIBLE VOLATILITY OF STOCK PRICE
The trading price of our common stock may be highly volatile as a result of
factors specific to our company or applicable to the market and industry in
general, including the following:
. variations in our annual or quarterly financial results or those of
our competitors;
. changes by financial research analysts in their recommendations or
estimates of our earnings;
. conditions in the economy in general or in the information technology
service sector in particular;
. announcements of technological innovations or new products or services
by us or our competitors; and
. unfavorable publicity or changes in applicable laws and regulations
(or judicial or administrative interpretations thereof) affecting us
or the information technology service sectors.
In addition, the stock market has recently been subject to extreme price
and volume fluctuations. This volatility has had a significant effect on the
market prices of securities issued by many companies for reasons unrelated to
the operating performance of these companies. In the past, following periods of
volatility in the market price of a company's securities, some companies have
been sued by their stockholders. If we were sued, it could result in
substantial costs and a diversion of management's attention and resources, which
could adversely affect our business.
ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER AND BYLAW PROVISIONS
Our certificate of incorporation and bylaws contain the following
provisions that may deter a takeover or a change in control not approved by our
board of directors, including:
. authority of our board of directors to issue common stock and
preferred stock and to determine the price, rights (including voting
rights), preferences, privileges and restrictions of each series of
preferred stock, without any vote or action by our stockholders;
. the existence of large amounts of authorized but unissued common stock
and preferred stock;
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. staggered, three-year terms for our board of directors;
. limitations on who may call special meetings of stockholders;
. prohibition of stockholders' action by written consent; and
. advance notice requirements for board of directors nominating and
stockholder proposals.
The rights and preferences of any series of preferred stock could include a
preference over our common stock on the distribution of the assets upon a
liquidation or sale of our company, preferential dividends, redemption rights,
the right to elect one or more directors and other voting rights. The rights of
the holders of any series of preferred stock that may be issued in the future
may adversely affect the rights of the holders of the common stock. We have no
current plans to issue preferred stock. In addition, certain provisions of
Delaware law may discourage, delay or prevent a change in control of the company
or unsolicited acquisition proposals. See "Description of Securities - Delaware
Law and Certain Charter and Bylaw Provisions."
IMMEDIATE AND SUBSTANTIAL DILUTION
This offering involves an immediate and substantial dilution of $8.33 per
share (83.3%) between the adjusted net tangible book value per share of our
common stock after this offering and the initial public offering price based on
an assumed price of $10.00 per share, the midpoint of the currently anticipated
range of the initial public offering price. See "Dilution."
PAYMENT OF DIVIDENDS UNLIKELY
We do not currently anticipate paying cash dividends in the foreseeable
future. The declaration and payment of dividends or other distributions is
currently prohibited by the terms of certain financing agreements and is likely
to be so restricted for the foreseeable future. See "Dividend Policy."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
No prediction can be made as to the effect, if any, that future sales of
our common stock or the availability of such shares for future sales will have
on the market price of our common stock prevailing from time to time. Sales of
substantial amounts of our common stock, or the perception that such sales could
occur, could adversely affect prevailing market prices for our common stock.
Upon the closing of this offering, we will have 9,040,631 shares of common stock
issued and outstanding, of which the 3,000,000 shares sold in this offering will
be freely tradeable without restrictions or further registration under the
Securities Act of 1933 unless such shares are acquired by one of our
"affiliates" as that term is defined under Rule 144 under the Securities Act.
The remaining 6,040,631 shares of common stock will not have been registered
under the Securities Act and may not be sold unless they are registered or
unless an exemption from registration, such as the exemption provided by Rule
144, is available. These unregistered shares of common stock will become
eligible for sale pursuant to Rule 144, subject to the volume and manner of sale
limitations prescribed by Rule 144 and/or to the contractual restriction of a
"lock-up" agreement with the Representative, at various times commencing 90 days
following the date of this prospectus. In addition, the Representative has been
granted certain demand and "piggyback" registration rights commencing one year
from the date of this prospectus with respect to the registration under the
Securities Act of the securities issuable upon exercise of the Representative's
warrants. The exercise of these rights could result in substantial expense to
our company. Furthermore, if the Representative exercises its registration
rights, the Representative will be unable to make a market in our securities for
up to nine days prior to the initial sales of the warrants until the
discontinuation of sales. If the Representative ceases making a market, the
market and market prices for the securities may be adversely affected and the
holders of these securities may be unable to sell them. See "Shares Eligible
for Future Sale" and "Underwriting."
LIMITED LEAD UNDERWRITING EXPERIENCE
Although BlueStone Capital Partners, L.P. ("BlueStone") has engaged in
the investment banking business since its formation as a broker-dealer in March
1996, and its principals have had extensive experience in the underwriting of
securities in their capacities with other broker-dealers, this offering
constitutes one of the first public offerings for which BlueStone has acted as
the lead underwriter. See "Underwriting."
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USE OF PROCEEDS
The net proceeds we will receive from the sale of common stock in this
offering are estimated to be approximately $25.7 million ($29.8 million if the
Representative's over-allotment option is exercised in full), assuming an
initial public offering price of $10.00 per share (the midpoint of the currently
anticipated range of the initial public offering price) and after deducting
underwriting discounts and estimated offering expenses. We expect to use the
net proceeds approximately as follows:
<TABLE>
<CAPTION>
Approximate
Approximate percentage of
Anticipated use of net proceeds dollar amount net proceeds
- ------------------------------- ------------- -------------
<S> <C> <C>
Reduction of debt (1)(2).............................. $12,000,000 46.7%
Sales and marketing (3)............................... 6,000,000 23.3%
Product development (4)............................... 5,000,000 19.5%
Working capital and general corporate purposes (5).... 2,700,000 10.5%
----------- -----
Total............................................ $25,700,000 100.0%
=========== =====
</TABLE>
_____________________________
(1) We will obtain a revolving credit facility for borrowings up to $20.0
million to be effective upon the closing of this offering. We expect to
draw from this line of credit when needed to finance our operations and
working capital requirements. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
(2) Represents (a) $5.7 million to repay BYL Bank Group for anticipated
borrowings through the date of this prospectus, (b) $4.2 million to repay
in full the principal amount of notes to Wilmington Trust Company, (c) $1.0
million to IBM Global Finance Corporation ("IGFC") to reduce the amount
outstanding under an asset-based Inventory and Working Capital Financing
Agreement, (d) $650,000 under Pulsar's forbearance agreement with IGFC
which becomes payable upon closing of this offering, and (e) $450,000 to
repay in full a line of credit from Fidelity Funding, Inc. The debt to BYL
Bank Group bears interest at the rate of 6.6% per annum and matures on
February 28, 2000, except that it is required to be repaid upon a change of
control of LIT. The BYL Bank Group debt is guaranteed by Kris Shah, our
Chief Executive Officer and Chairman of the Board, and is secured by a
pledge of certain personal assets of Mr. Shah. The Wilmington Trust
Company debt bears interest at the prime rate as in effect from time to
time and matures in October 2002. The Wilmington Trust Company debt is
personally guaranteed by William W. Davis, Sr., our President and Chief
Operating Officer, and Lillian A. Davis, a principal stockholder of our
company, and secured by a pledge of certain property belonging to a family
member of Mr. Davis. The Fidelity Funding, Inc. debt currently bears
interest at an annual rate of prime plus 1.5%, is due on February 28, 2000,
and is personally guaranteed by Mr. Shah. The IGFC financing line bears
interest at the prime rate plus 2.375% per annum and is guaranteed by
Mr. Davis and Ms. Davis and secured by certain assets pledged by Mr. Davis.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources" and "Certain
Transactions."
(3) Represents estimated costs to (a) expand our sales and marketing efforts,
primarily to commercial markets, including hiring approximately 20
additional sales and marketing personnel, (b) open additional sales and
support offices, (c) expand our Internet and other advertising efforts, (d)
improve our web site, and (e) expand strategic alliances. See "Business-
Sales and Marketing."
(4) Represents estimated costs associated with software and product
development, including compensation and benefits payable to additional
software and hardware engineers and developers. See "Business-Research and
Development."
(5) A portion of such funds may be used in connection with potential
acquisitions of technologies, product lines and businesses and to upgrade
our existing management information systems and supporting
-21-
<PAGE>
information technology equipment. We currently have no commitments,
understandings or arrangements with respect to any future acquisitions.
If the Representative exercises its over-allotment option in full, we will
realize additional net proceeds of approximately $4.1 million. These proceeds,
if received, will be used for working capital and general corporate purposes.
Pending the uses set forth above, we intend to invest the net proceeds of this
offering in U.S. government securities, short-term certificates of deposit or
other short-term, investment grade, interest-bearing securities.
The allocation of the net proceeds of this offering represents our best
estimate based upon our currently proposed plans relating to our operations and
assumptions regarding the progress of research and development and other
factors, such as general economic conditions and industry factors. If any of
these factors change, we may find it necessary or advisable to reallocate a
portion of the proceeds within the above-described categories or use these
proceeds for other purposes. We believe that the net proceeds of this offering,
together with anticipated cash flow from operations, availability under our bank
lines of credit, including our new $20.0 million asset-based credit facility to
be effective upon the closing of this offering, and existing cash and cash
equivalents will be sufficient to satisfy our contemplated cash requirements for
at least 12 months following the closing of this offering. If (a) our plans
change due to changes in market conditions, competitive factors, progress of our
research and development efforts or new opportunities that may become available
in the future, (b) our assumptions change or prove to be inaccurate or (c) the
net proceeds of this offering or our cash flows prove to be insufficient to
finance our growth strategy, we could be required to seek additional financing.
DIVIDEND POLICY
Prior to the date of this prospectus, LIT was an S corporation for federal
and California state income tax purposes. As an S corporation, LIT made cash
distributions of approximately $18.0 million to its stockholders during the year
ended December 31, 1997. We do not anticipate paying cash dividends in the
foreseeable future. We intend to retain future earnings for the development and
expansion of our business. The declaration and payment of dividends or other
distributions is currently prohibited by the terms of certain financing
agreements and is likely to be so restricted for the foreseeable future. See
"Certain Transactions."
DILUTION
The difference between the initial public offering price per share of
common stock and the net tangible book value per share of common stock after the
offering constitutes the dilution to investors in the offering. Net tangible
book value per share on any given date is determined by dividing the net
tangible book value of our company (total tangible assets less total
liabilities) on such date by the number of then outstanding shares of common
stock.
At September 30, 1998, the net tangible book value (deficit) of Litronic
was $(3.7 million), or $(.95) per share. After giving retroactive effect to (a)
the acquisition of Pulsar and (b) the sale of 3,000,000 shares of our common
stock in this offering at an assumed price of $10.00 per share and the receipt
and anticipated application of the estimated net proceeds from this sale, the as
adjusted net tangible book value of Litronic at September 30, 1998 would have
been $15.1 million or $1.67 per share, representing an immediate increase in net
tangible book value of $2.62 per share to existing stockholders and an immediate
dilution of $8.33 (83.3%) per share to investors in this offering.
-22-
<PAGE>
The following table illustrates the foregoing information with respect to
dilution to new investors on a per share basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price...................... $ 10.00
Net tangible book value before the offering........... $(0.95)
Increase attributable to investors in the offering.... 2.62
---------
Adjusted net tangible book value after the offering........ 1.67
---------
Dilution to investors in the offering...................... $ 8.33
=========
</TABLE>
_____________
The following table sets forth, with respect to existing stockholders
(giving retroactive effect to the Pulsar acquisition) and with respect to the
investors in this offering, a comparison of the number of shares of common stock
purchased from our company, the percentage ownership of these shares, the
aggregate consideration paid, the percentage of total consideration paid and the
average price paid per share.
<TABLE>
<CAPTION>
Shares Acquired Total Consideration Average
------------------------- --------------------------------
Price
Number Percent Amount Percent Per Share
------------ ----------- -------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Existing stockholders 6,040,631 66.8% $ 28,641,000 (1) 48.8% $ 4.74
Investors in this offering 3,000,000 33.2% 30,000,000 51.2 $ 10.00 (2)
------------ -------- -------------- -----------
9,040,631 100.0% $ 58,641,000 100.0%
============ ======== ============== ============
</TABLE>
_________________________
(1) Represents the historical common stock of Litronic and the fair value of
the common stock issued in connection with the Pulsar acquisition.
(2) Based on the midpoint of the currently anticipated range of the initial
public offering price.
The foregoing table assumes no exercise of the Representative's over-
allotment option. If this option is exercised in full, the new investors will
have paid $34.5 million (based on an assumed offering price of $10.00 per share)
for 3,450,000 shares of common stock, representing approximately 54.6% of the
total consideration for 36.4% of the total number of shares outstanding. In
addition, the computations set forth in the above table exclude (a) 281,419
shares of common stock reserved for issuance upon the exercise of outstanding
options under our 1998 stock option plan, at an exercise price of $.70 per
share, and 600,000 shares of common stock reserved for issuance upon the
exercise of options available for future grant under our 1999 stock option plan
and (b) 300,000 shares of common stock reserved for issuance upon the exercise
of the Representative's warrants. See "Management - Stock Option Plans" and
"Underwriting."
-23-
<PAGE>
CAPITALIZATION
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
The following table sets forth the short-term debt and capitalization of
Litronic, as of September 30, 1998, on (a) a historical basis, (b) a pro forma
combined basis to reflect the acquisition of Pulsar, and (c) a pro forma
combined, as adjusted, basis to reflect the sale of 3,000,000 shares of our
common stock at an assumed price of $10.00 per share and the anticipated
application of the estimated net proceeds from. This table should be read in
conjunction with "Use of Proceeds," "Pro Forma Financial Data" and the financial
statements, including the notes thereto, appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
-----------------------------------
Pro Forma
Pro Forma Combined,
Historical Combined as Adjusted
---------- --------- -----------
<S> <C> <C> <C>
Short-term debt:
Financing arrangement - IGFC.............................. $ - $ 13,430 $ 11,780
Notes payable - vendors................................... - 2,727 2,727
Current installments of long-term debt.................... 481 1,427 31
---------- --------- -----------
Total short-term debt................................ $ 481 $ 17,584 $ 14,538
========== ========= ===========
Long-term debt:
Long-term debt............................................ $ 5,200 $ 5,200 $ -
Notes payable, net of current installments................ - 3,619 365
---------- --------- -----------
Total long-term debt................................. 5,200 8,819 365
---------- --------- -----------
Stockholders' equity(1):
Preferred stock, $.01 par value; authorized
5,000,000 shares; no shares issued or outstanding
(historical, pro forma combined and pro forma
combined, as adjusted)................................... - - -
Common stock, $.01 par value: 20,000,000
shares authorized; 3,870,693 shares issued and
outstanding (historical), 6,040,631 shares issued
and outstanding (pro forma combined), and
9,040,631 shares issued and outstanding (pro forma
combined, as adjusted)................................... 39 61 91
Additional paid-in capital................................ - 17,969 43,639
Accumulated deficit....................................... (3,708) - -
---------- --------- -----------
Total stockholders' equity (deficit)................. (3,669) 18,030 43,730
---------- --------- -----------
Total capitalization................................. $ 1,531 $ 26,849 $ 44,095
========== ========= ===========
</TABLE>
___________________________
(1) Does not include (a) 600,000 shares of common stock reserved for issuance
upon exercise of options available for future grant under our 1999 stock
option plan, (b) 281,419 shares of common stock reserved for issuance upon
exercise of options granted under our 1998 stock option plan and (c)
300,000 shares of common stock reserved for issuance upon exercise of the
Representative's warrants. See "Management - Stock Option Plans" and
"Underwriting."
-24-
<PAGE>
PRO FORMA FINANCIAL DATA
The following pro forma financial data is based upon data derived from the
historical consolidated financial statements of Litronic and has been prepared
to illustrate the effects on such data of the Pulsar acquisition and this
offering. The Unaudited Pro Forma Statements of Operations for the year ended
December 31, 1997 and the nine months ended September 30, 1998 give effect to
the acquisition and the closing of this offering as if these transactions had
occurred as of January 1, 1997. The Unaudited Pro Forma Balance Sheets as of
September 30, 1998 give effect to the acquisition and this offering as if these
transactions had occurred as of September 30, 1998. We will effectuate the
Pulsar acquisition simultaneously with, and as a condition to, the closing of
this offering. The acquisition will be recorded using the purchase method of
accounting.
The pro forma adjustments are based upon preliminary estimates, currently
available information and certain assumptions that management deems appropriate.
The preliminary estimates regarding allocation of the purchase price are subject
to uncertainties, including, among others, the final offering price per share
and final determination of the fair value of the net assets acquired. In
management's opinion, the preliminary estimates regarding allocation of the
purchase price of Pulsar are not expected to differ materially from the final
allocation. The purchase price allocation will be finalized after the closing of
the acquisition. The pro forma financial data presented herein are not
necessarily indicative of the results we would have obtained had such events
occurred at the beginning of the period, as assumed, or of our future results as
a combined entity.
-25-
<PAGE>
UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
---------------------------------------------------------------------------------------
Pro Forma
Acquisition Offering Combined,
Adjustments Pro Forma Proceeds As
Litronic Pulsar (AA) Combined Adjustments Adjusted
----------- --------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net product revenue $ 8,627 $ 142,702 $ $ 151,329 $ $ 151,329
License and service revenue 1,539 8,818 10,357 10,357
---------- --------- ------------ ------------ ------------- ------------
Total revenue 10,166 151,520 161,686 161,686
---------- --------- ------------ ------------ ------------- ------------
Product cost of revenue 3,211 138,086 141,297 141,297
License and service cost of
revenue 643 4,115 4,758 4,758
---------- --------- ------------ ------------ ------------- ------------
Total cost of revenue 3,854 142,201 146,055 146,055
---------- --------- ------------ ------------ ------------- ------------
Gross margin 6,312 9,319 15,631 15,631
Selling, general, and
administrative expenses 3,487 17,152 20,639 20,639
Research and development
expenses 1,172 - 1,172 1,172
Amortization of goodwill - - 1,907 (BB) 1,907 1,907
---------- --------- ------------ ------------ ------------- ------------
Operating income (loss) 1,653 (7,833) (1,907) (8,087) (8,087)
Interest expense 42 3,640 3,682 183 (CC) 3,499
Interest income - 457 457 457
---------- --------- ------------ ------------ ------------- ------------
Earnings (loss) from continuing
operations before income
taxes 1,611 (11,016) (1,907) (11,312) 183 (11,129)
Provision for income taxes 22 - (22) (DD) - -
---------- --------- ------------ ------------ ------------- ------------
Earnings (loss) from continuing
operations $ 1,589 $ (11,016) $ (1,885) $ (11,312) $ 183 $ (11,129)
========== ========= ============ ============ ============= ============
Loss per share from continuing
operations -
Basic and diluted $ (1.23)
============
Shares used in per-share
computations -
Basic and diluted 9,040,631
============
</TABLE>
______________________
(AA) Includes adjustments directly attributable to the acquisition of Pulsar.
(BB) Reflects the amortization of goodwill of $28.6 million attributable to the
acquisition, amortized on a straight line basis over a 15-year period.
(CC) Reflects the reduction of interest expense which would result from the
repayment of $5.9 million of debt as set forth in "Use of Proceeds."
(DD) Reflects the income tax effect of the change from an S corporation to a C
corporation.
-26-
<PAGE>
UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1998
--------------------------------------------------------------------------------------
Pro Forma
Acquisition Offering Combined,
Adjustments Pro Forma Proceeds As
Litronic Pulsar (AA) Combined Adjustments Adjusted
---------- -------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Net product revenue $ 3,886 $ 58,750 $ $ 62,636 $ $ 62,636
License and service revenue 925 2,768 3,693 3,693
---------- -------- ------------ ------------ ------------ -------------
Total revenue 4,811 61,518 66,329 66,329
--------- -------- ------------ ------------ ------------ -------------
Product cost of revenue 2,051 54,891 56,942 56,942
License and service cost of
revenue 583 1,590 2,173 2,173
--------- -------- ------------ ------------ ------------ -------------
Total cost of revenue 2,634 56,481 59,115 59,115
--------- -------- ------------ ------------ ------------ -------------
Gross margin 2,177 5,037 7,214 7,214
Selling, general, and
administrative expenses 2,046 8,926 10,972 10,972
Research and development
expenses 738 738 738
Amortization of goodwill - - 1,430 (BB) 1,430 1,430
--------- -------- ------------ ------------ ------------ -------------
Operating loss (607) (3,889) (1,430) (5,926) (5,926)
Interest expense 322 1,424 1,746 592 (CC) 1,154
Interest income - 373 373 373
--------- -------- ------------ ------------ ------------ -------------
Loss from continuing operations
before income taxes (929) (4,940) (1,430) (7,299) 592 (6,707)
Benefit from income taxes (61) - 61 (DD) - -
--------- -------- ------------ ------------ ------------ -------------
Loss from continuing operations $ (868) $ (4,940) $ (1,491) $ (7,299) $ 592 $ (6,707)
========= ======== ============ ============ ============ =============
Loss per share from
continuing operations -
Basic and diluted $ (0.74)
=============
Shares used in per-share
computations -
Basic and diluted 9,040,631
=============
</TABLE>
___________________
(AA) Includes adjustments directly attributable to the acquisition of Pulsar.
(BB) Reflects the amortization of goodwill of $28.6 million attributable to the
acquisition, amortized on a straight line basis over a 15-year period.
(CC) Reflects the reduction of interest expense which would result from the
repayment of $12.0 million of debt as set forth in "Use of Proceeds."
(DD) Reflects the income tax effect of the change from an S corporation to a C
corporation.
-27-
<PAGE>
UNAUDITED PRO FORMA BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
--------------------------------------------------------------------------------------
Offering Pro Forma
Acquisition Pro Forma Proceeds Combined,
Litronic Pulsar Adjustments Combined Adjustments (D) As Adjusted
---------- ---------- ------------- ---------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents $ 1,177 $ 407 $ $ 1,584 $ 14,200 (B) $ 15,784
Accounts receivable, net 1,171 14,722 15,893 15,893
Inventories 509 2,473 2,982 2,982
Other current assets 147 131 278 278
---------- --------- ------------- ---------- -------------- -----------
Total current assets 3,004 17,733 20,737 14,200 34,937
Property and equipment, net 244 793 1,037 1,037
Notes receivable - related parties --- 1,329 1,329 1,329
Goodwill --- --- 28,602 (A) 28,602 28,602
Other assets --- 180 180 180
---------- --------- ------------- ---------- -------------- -----------
Total assets $ 3,248 $ 20,035 $ 28,602 $ 51,885 $ 14,200 66,085
========== ========= ============= ========== ============== ===========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIENCY):
Financing arrangement - IGCF $ -- $ 13,430 $ $13,430 (1,650)(C) $ 11,780
Current installments of
long-term debt 481 946 1,427 (1,396)(C) 31
Notes payable - vendors --- 2,727 2,727 2,727
Accounts payable 608 4,934 5,542 5,542
Accrued liabilities 628 1,282 1,910 1,910
---------- --------- ------------- ---------- -------------- -----------
Total current liabilities 1,717 23,319 25,036 (3,046) 21,990
Long-term debt 5,200 --- 5,200 (5,200)(B)(C) ---
Notes payable, net of
current maturities --- 3,619 3,619 (3,254)(C) 365
Stockholders' equity (deficiency):
Common stock 39 1 22 (A) 61 30 91
(1)(A)
Additional paid-in capital --- 1,663 21,677 (A) 17,969 25,670 43,639
(1,663)(A)
(3,708)(E)
Accumulated deficit (3,708) (8,567) 8,567 (A) -- --
3,708 (E)
---------- --------- ------------- ---------- -------------- -----------
Net stockholders' equity (deficiency) (3,669) (6,903) 28,602 18,030 25,700 43,730
---------- --------- ------------- ---------- -------------- -----------
$ 3,248 $ 20,035 $ 28,602 $ 51,885 $ 14,200 $ 66,085
========== ========= ============= ========== ============== ===========
</TABLE>
_______________
(A) The adjustment reflects the acquisition of Pulsar under the purchase method
of accounting through the issuance of 2,169,938 shares of common stock with
a fair value of $21.7 million and the assumption of net liabilities of
$6.9 million. The allocation of fair value is preliminary.
(B) The adjustment reflects anticipated additional borrowings of $500 subsequent
to September 30, 1998, as well as the repayment of debt in the amount of
$2.0 million from the use of proceeds.
(C) Reflects the repayment of debt from the proceeds of this offering.
(D) Reflects the net proceeds from the sale of 3,000,000 shares of our common
stock, at an assumed price of $10.00 per share.
(E) The adjustment gives effect to the change from an S corporation to a
C corporation.
-28-
<PAGE>
SELECTED FINANCIAL DATA
LITRONIC
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected financial data presented below under the captions "Selected
Statements of Operations Data" and "Selected Balance Sheet Data" as of and for
each of the years in the five-year period ended, December 31, 1997, are derived
from the consolidated financial statements of Litronic, which consolidated
financial statements as of December 31, 1996 and 1997 and for each of the years
in the three-year period ended December 31, 1997 have been audited by KPMG LLP,
independent certified public accountants. The consolidated financial statements
of Litronic as of December 31, 1996 and 1997, and for each of the years in the
three-year period ended December 31, 1997, and the report thereon, are included
elsewhere in this prospectus.
The selected data presented below for the nine-month periods ended
September 30, 1997 and 1998, and as of September 30, 1998, are derived from the
unaudited condensed consolidated financial statements of Litronic included
elsewhere in this prospectus.
The selected data should be read in conjunction with the consolidated
financial statements of Litronic for the three-year period ended December 31,
1997, the related notes and the independent auditors' report, appearing
elsewhere in this prospectus.
SELECTED STATEMENTS OF OPERATIONS DATA:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------------ ----------------------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- ---------- --------- --------- --------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net product revenue $ 576 $ 1,447 $ 1,525 $ 7,855 $ 8,627 $ 7,177 $ 3,886
License and service revenue 16 487 1,181 1,541 1,539 1,416 925
-------- --------- ---------- --------- --------- --------- -----------------
Total revenue 592 1,934 2,706 9,396 10,166 8,593 4,811
-------- --------- ---------- --------- --------- --------- -----------------
Product cost of revenue 474 486 793 4,098 3,211 2,607 2,051
License and service cost of
revenue 6 169 465 581 643 424 583
-------- -------- ---------- --------- --------- --------- -----------------
Total cost of revenue 480 655 1,258 4,679 3,854 3,031 2,634
-------- -------- ---------- --------- --------- --------- -----------------
Gross margin 112 1,279 1,448 4,717 6,312 5,562 2,177
Selling, general, and
administrative expenses 384 773 977 2,052 3,487 1,865 2,046
Research and development
expenses 218 226 341 725 1,172 926 738
-------- -------- ---------- --------- --------- --------- -----------------
Operating income (loss) (490) 280 130 1,940 1,653 2,771 (607)
Interest expense, net 12 12 38 19 42 5 322
-------- -------- ---------- --------- --------- --------- -----------------
Earnings (loss) from continuing
operations before income taxes (502) 268 92 1,921 1,611 2,766 (929)
Provision for (benefit from)
income taxes 1 4 1 29 22 42 (61)
-------- -------- ---------- --------- --------- --------- -----------------
Earnings (loss) from continuing
operations $ (503) $ 264 91 $ 1,892 $ 1,589 $ 2,724 $ (868)
======== ======== =========== ========== ========== ========== =================
</TABLE>
-29-
<PAGE>
SELECTED BALANCE SHEET
DATA:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------
1993 1994 1995 1996 1997 SEPTEMBER 30, 1998
--------- --------- ----------- --------- -------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 52 $ 6 $ 95 $ 862 $ 490 $ 1,177
Working capital (289) 87 (372) 1,662 385 1,287
Total assets 2,961 3,827 5,476 7,409 2,347 3,248
Short-term debt 290 421 472 545 - 481
Long-term debt, less
current installments 3,113 3,718 4,313 4,997 3,506 5,200
Total liabilities 4,235 5,045 6,483 7,510 5,148 6,917
Net stockholders'
deficiency (1,274) (1,218) (1,007) (101) (2,801) (3,669)
</TABLE>
- ----------
(1) During the year ended December 31, 1997, Litronic paid a cash dividend of
$9,534 to its shareholders. No other dividends have been paid during the
periods presented.
-30-
<PAGE>
SELECTED FINANCIAL DATA
PULSAR
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected financial data presented below under the captions "Selected
Statement of Operations Data" and "Selected Balance Sheet Data" as of and for
each of the years in the three-year period ended, December 31, 1997, are derived
from the financial statements of Pulsar, which financial statements have been
audited by Keller Bruner & Company, L.L.C., independent certified public
accountants. The financial statements of Pulsar as of December 31, 1996 and
1997, and for each of the years in the three-year period ended December 31,
1997, and the report thereon, are included elsewhere in this prospectus.
The selected data presented below for the nine-month periods ended
September 30, 1998 and 1997, and as of September 30, 1998, are derived from the
unaudited financial statements of Pulsar included elsewhere in this prospectus.
The selected data should be read in conjunction with the financial
statements of Pulsar for the three-year period, the related notes and the
independent auditor's report, which contains an explanatory paragraph that
states that Pulsar's recurring losses from operations, violation of certain debt
covenants and net capital deficiency raise substantial doubt about the entity's
ability to continue as a going concern. The financial statements and the
selected data do not include any adjustments that might result from the outcome
of this uncertainty.
<TABLE>
<CAPTION>
SELECTED STATEMENT OF OPERATIONS DATA:
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998
--------- ----------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Service revenue $ * $ * $ * $ 10,253 $ 8,818 $ 7,388 $ 2,768
Product revenue * * * 155,705 142,702 98,186 58,750
--------- ----------- -------- -------- -------- -------- --------
Total revenue 70,726 118,739 163,991 165,958 151,520 105,574 61,518
--------- ----------- -------- -------- -------- -------- --------
Cost of service revenue * * * 4,870 4,115 3,440 1,590
Cost of product revenue * * * 144,494 138,086 96,748 54,891
--------- ----------- -------- -------- -------- -------- --------
Total cost of revenue 62,694 104,416 146,682 149,364 142,201 100,188 56,481
--------- ----------- -------- -------- -------- -------- --------
Gross margin 8,032 14,323 17,309 16,594 9,319 5,386 5,037
Selling, general, and
administrative expense 6,664 8,580 10,410 13,545 17,152 9,559 8,926
--------- ----------- -------- -------- -------- -------- --------
Operating income (loss) 1,368 5,743 6,899 3,049 (7,833) (4,173) (3,889)
Other income 1,319 325 - - - - -
Interest income 132 276 392 639 457 408 373
Interest expense 639 1,377 2,412 3,564 3,640 2,106 1,424
--------- ----------- -------- -------- -------- -------- --------
Net earnings (loss) $ 2,180 (AA) $ 4,967 $ 4,879 $ 124 $(11,016) $ (5,871) $ (4,940)
========= =========== ======== ======== ======== ======== ========
</TABLE>
____________
* The breakdown of revenue and cost of revenue between services and products
was not readily available for the years ended December 31, 1993, 1994 and
1995.
(AA) The 1993 net earnings amount reflects the net earnings before the
cumulative effect of a change in accounting principles of $422,000.
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<PAGE>
SELECTED BALANCE SHEET
DATA:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------
1993 1994 1995 1996 1997 SEPTEMBER 30, 1998
-------------------------------------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents...... $ 4,445 $ 2,895 $ 2,144 $ 2,451 $ 2,236 $ 407
Working capital (deficit)...... 5,059 8,145 8,090 1,553 (2,436) (5,586)
Total assets................... 45,173 60,820 82,930 59,785 40,871 20,035
Short-term debt................ 21,794 35,139 61,970 41,352 28,982 17,103
Long-term debt, less current
installments................. -- 41 84 53 4,203 3,619
Total liabilities.............. 39,642 52,070 73,862 52,077 42,681 26,938
Net stockholders' equity
(deficit).................... 5,531 8,750 9,068 7,708 (1,810) (6,903)
</TABLE>
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Pro Forma
Financial Data, the Selected Financial Data of Litronic and Pulsar, and the
financial statements and related notes appearing elsewhere in this prospectus.
GENERAL
We provide professional Internet data security services and develop and
market software and microprocessor-based products needed to secure electronic
commerce and communications over the Internet, intranets, extranets and other
Internet-based communication networks ("Internet Protocol Networks"). Our
primary technology offerings utilize public key infrastructure ("PKI"), which is
the standard technology for securing Internet-based commerce and communications.
We formed our data security division in 1990, which engaged primarily in
research and development until 1993 when it began to generate meaningful
revenue. In September 1997, we sold the assets relating to all portions of our
business other than our data security division. Except for senior management,
these operations were operated independently from our data security operations.
We charged direct costs to the division incurring them, and indirect or shared
costs such as senior management compensation and benefits, rent, utilities and
costs of tax, legal and other advisory services were allocated on actual usage,
head count and other bases. Our financial statements have been restated to
reflect the portion of the business other than the data security division as
discontinued operations. See Note 2 to Notes to Consolidated Financial
Statements of Litronic.
PRO FORMA INFORMATION AND FUTURE TRENDS
Upon the closing of this offering, we are acquiring Pulsar, a provider of
network-based information technology consulting services to commercial accounts
and federal, state and local government agencies. Pulsar also has an
established product reseller business, which focuses on resales to government
agencies, large corporate accounts and state and local governments.
Following this offering, we intend to roll out our enterprise-wide data
security products to Pulsar's existing significant client base. We believe that
Pulsar's custom-designed secure PCs will provide us with another type of data
security product offering, thereby broadening the scope of our offerings and
enabling us to provide our customers with a comprehensive data security
solution. Our strategy also involves continuing Pulsar's recent shift in
product reselling focus to higher margin products, expanding Pulsar's
professional service offerings and increasing sales of Pulsar's products and
professional services to commercial customers and state and local governments.
We also intend to leverage Pulsar's direct sales force and distribution channels
and partners to expand our marketing of our Internet data security products.
During the year ended December 31, 1997 and nine months ended September 30,
1998, sales of Internet data security products, including NetSign, ProFile
Manager and CryptOS, accounted for 5% and 6% of our revenue on a pro forma
combined basis. We are currently experiencing increased demand for these
products from commercial customers for such products. Further, our recently
released Internet related products such as NetSign, NetSign Pro, CipherServer,
and developer toolkits such as CryptOS SDK have experienced favorable market
acceptance. See "Business-Internet Data Security Products." We expect to
continue to experience significant increases in sales of these products as a
result of the expected continued growth in electronic commerce and
communications over the Internet and our plan to roll out our data security
products to Pulsar's existing and significant client base. During the year
ended December 31, 1997 and nine months ended September 30, 1998, product
reselling accounted for 88% and 89% of our revenue on a pro forma combined
basis. During the year ended December 31, 1997 and nine months ended September
30, 1998, license and service revenue accounted for 6% and 6% of our revenue on
a pro forma combined basis. As we expand our
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<PAGE>
professional service offerings and grow our sales of Internet data security
products, we expect license and service revenue to increase as a percentage of
revenue and product reselling to account for a decreasing portion of our
revenue.
Litronic's Internet data security products had gross margins of 63% and 47%
during the year ended December 31, 1997 and nine months ended September 30,
1998. Pulsar's product reselling activities have historically provided gross
margins of 3% and 7% from such products during the year ended December 31, 1997
and nine months ended September 30, 1998. Pulsar recently shifted its product
reselling focus towards higher margin computer and network security products,
including intrusion detection software and firewalls, and we intend to continue
to focus our product reselling efforts towards such products. As a result, we
expect product reselling gross margin to increase as a percentage of
corresponding revenue. Our license and service revenue are relatively high
gross margin activities, with gross margins of 54% and 41% for the year ended
December 31, 1997 and nine months ended September 30, 1998 on a pro forma
combined basis. Because we expect our higher gross margin sources of revenue
to increase as a percentage of revenue and our gross margin from product
reselling to increase, we expect our gross margin to increase as a percentage of
total revenue.
Pulsar has taken cost cutting measures during 1998 to significantly reduce
the expenses associated with selling, general and administrative activities.
Pulsar has decreased its administrative staff by automating administrative job
functions and outsourcing its sales administrative functions, including
purchasing, order entry, billing and collection. Its staff has been reduced
from 74 persons at December 31, 1997 to 52 persons at February 1, 1999. Pulsar
recorded significant bad debt expense during the year ended December 31, 1997
and nine months ended September 30, 1998. We expect our bad debt experience to
improve significantly due to our enhanced credit procedures and changed customer
profile. Additionally, Pulsar has relocated to less expensive office space,
decreasing rent expense by 73% on an annual basis. As a combined entity, we
expect to further decrease our rent expense through the consolidation of
Litronic's Washington area offices into Pulsar's offices in Lanham, Maryland.
We have recently begun to focus our marketing efforts on commercial
customers. The commercial markets for PKI security products are expected to be
intensely competitive. In addition, as we intensify our focus on the commercial
markets and to expand marketing of our Internet data security products, we
anticipate increasing expenditures for sales and marketing, in particular those
associated with opening additional marketing channel support offices, adding
commercial sales personnel and for research and development both to adapt
government products to commercial markets, where necessary, and to continually
introduce and refine products in response to market demands.
Our sales and marketing expenses are generally incurred in advance of
associated revenue and are expected to increase in the near term as a percentage
of revenue as well as in amount and could adversely affect our operating income.
As a result of the foregoing we expect a net reduction in selling, general and
administrative expenses.
We intend to increase our research and development activities and have
allocated $5.0 million of the net proceeds of this offering for such activities
for the next 12 months. Therefore, we expect related expenses to increase
significantly. See "Business-Research and Development."
The acquisition of Pulsar will result in a significant increase in our
intangible assets. Approximately $28.6 million, or 43%, of our pro forma
combined, as adjusted, assets as of September 30, 1998, consisted of intangible
assets arising from the acquisition. This amount represents goodwill, which
will be amortized over 15 years and represents the excess of the aggregate
purchase price paid in connection with the acquisition over the fair value of
net assets acquired. The amount of goodwill amortized in a particular period
constitutes a non-cash expense that reduces our net earnings or increases our
net loss.
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<PAGE>
RESULTS OF OPERATIONS
LITRONIC
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
REVENUE. Total revenue declined by 44% from $8.6 million during the nine
months ended September 30, 1997 to $4.8 million during the nine months ended
September 30, 1998. Product revenue declined by 46% from $7.2 million during
the nine months ended September 30, 1997 to $3.9 million during the nine months
ended September 30, 1998. This decrease was attributable primarily to reduced
sales of ARGUS 300 data encryption products to the U.S. Army Corps of Engineers,
which decreased $3.4 million during the nine months ended September 30, 1998
from the comparable period during 1997. License and service revenue declined by
35% from $1.4 million during the nine months ended September 30, 1997 to
approximately $925,000 during the nine months ended September 30, 1998. This
decline is attributable primarily to reduced service revenue from our supported
software contract with the National Security Agency, which declined
approximately $500,000 during the nine months ended September 30, 1998 from the
comparable period during 1997. This decline is a result of the National
Security Agency's determination that it will no longer pay for Litronic provided
support services for the Defense Messaging System (the "DMS") and the subsequent
decline in such support requests from users of Litronic's support services. Our
revenue from the U.S. Army Corps of Engineers declined as a result of reduced
sales of our ARGUS 300 products towards the expiration of the Corp of Engineers
Financial Management Services contract (the "CEFMS Contract"). We expect to
continue to have future sales to the U.S. Army Corps of Engineers at a
substantially reduced level; however, we anticipate that future sales may
increase as the U.S. Army Corps of Engineers has recently begun its technology
refresh program. The technology refresh program is the government's program to
upgrade its information technology systems periodically. Based on our prior
experience with the U.S. Army Corps of Engineers, we expect to participate in
the program through sales of the ARGUS 300 and other products.
During the nine months ended September 30, 1998, Litronic derived 44%, 23%
and 19% of its total revenue from sales to Lockheed Martin Corporation, the
National Security Agency and the U.S. Army Corps of Engineers. During the nine
months ended September 30, 1997, Litronic derived 50%, 20% and 18% of its
revenue from sales to the U.S. Army Corps of Engineers, the National Security
Agency and Lockheed Martin Corporation. Sales to Federal government agencies
accounted for approximately 88% and 87% of Litronic's sales during the nine
months ended September 30, 1997 and 1998. The CEFMS contract expired September
30, 1998. The DMS contract expires in November 1999, however, it may be renewed
by the National Security Agency for up to four one-year periods.
GROSS MARGIN. Gross margin declined as a percentage of revenue from 65%
during the nine months ended September 30, 1997 to 45% during the nine months
ended September 30, 1998. Product gross margin declined as a percentage of
product revenue from 64% during the nine months ended September 30, 1997 to 47%
during the nine months ended September 30, 1998. This decline is attributable
primarily to reduced sales under the CEFMS contract and sales of low margin
pass-through products to the National Security Agency. License and service
gross margin declined as a percentage of revenue from 70% during the nine months
ended September 30, 1997 to 37% during the nine months ended September 30, 1998
due primarily to higher compensation costs associated with the reduction of
support services revenue under the DMS contract.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 10% from $1.9 million during the nine months
ended September 30, 1997 to $2.0 million during the nine months ended September
30, 1998, reflecting increased compensation as a result of increases in sales
and marketing staff. Selling, general and administrative expenses increased as
a percentage of revenue from 22% during the nine months ended September 30, 1997
to 43% during the nine months ended September 30, 1998. This increase is a
result of increased compensation costs discussed above, coupled with the
reduction in revenue discussed above.
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<PAGE>
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
declined 20% from $926,000 during the nine months ended September 30, 1997 to
$738,000 during the nine months ended September 30, 1998. This decrease is a
result of reduced utilization of outside vendors for research and development
and receipt of partial reimbursement of expenses related to development of the
Forte microprocessor, which we are designing to be embedded in our Forte
PKIcard, our next generation PKI card. Research and development expenses
increased as a percentage of revenue from 11% during the nine months ended
September 30, 1997 to 15% during the nine months ended September 30, 1998,
primarily due to the decrease in revenue during the nine months ended
September 30, 1998.
INTEREST EXPENSE, NET. Interest expense, net, increased from $5,000 during
the nine months ended September 30, 1997 to $322,000 during the nine months
ended September 30, 1998 as a result of increased borrowings.
INCOME TAXES. Prior to this offering, Litronic elected to be treated as an
S corporation under the provisions of Section 1362 of the Internal Revenue Code
of 1986, as amended, and used the accrual basis of reporting for income tax
purposes. Accordingly, Litronic did not provide for Federal income taxes at the
corporate level. Litronic was subject to state taxes on earnings before taxes.
The provision for state income taxes was $42,000 for the nine months ended
September 30, 1997, and was a benefit of $61,000 for the nine months ended
September 30, 1998 as a result of Litronic's loss from continuing operations
before income taxes of $929,000.
BACKLOG. At September 30, 1998, Litronic had total backlog of $1.8
million, including $220,000 attributable to the U.S. Army Corps of Engineers
CEFMS contract, $860,000 attributable to Lockheed Martin Corporation and
$740,000 attributable to the National Security Agency. Backlog represents
signed purchase orders received but not filled and, in the case of the $740,000
attributable to the National Security Agency, reimbursements for funding of
future research and development expense. At December 31, 1997, we had total
backlog of $1.1 million, including $470,000 attributable to Lockheed Martin
Corporation and $580,000 attributable to the National Security Agency.
COMPARISON OF YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
REVENUE. Total revenue increased 247% from $2.7 million during the year
ended December 31, 1995 to $9.4 million during the year ended December 31, 1996
and increased 8% from 1996 to $10.2 million during the year ended December 31,
1997. These increases were primarily attributable to increased sales of the
ARGUS 300 products to the U.S. Army Corps of Engineers from 1995 to 1997 and
increased sales to Lockheed Martin Corporation from 1995 to 1996. License and
service revenue increased 30% from $1.2 million during the year ended December
31, 1995 to $1.5 million during the year ended December 31, 1996 and was $1.5
million for the year ended December 31, 1997. The increase from 1995 to 1996
was primarily attributable to increased service revenue from our supported
software contract with the National Security Agency.
During the year ended December 31, 1996, Litronic derived 39%, 29%, and 18%
of its revenue from sales to Lockheed Martin Corporation, U.S. Army Corps of
Engineers and the National Security Agency. During the year ended December 31,
1997, Litronic derived 45%, 20% and 19% of its revenue from sales to U.S. Army
Corps of Engineers, Lockheed Martin Corporation and the National Security
Agency.
GROSS MARGIN. Gross margin decreased as a percentage of revenue from 54%
during the year ended December 31, 1995 to 50% during the year ended December
31, 1996 and increased as a percentage of revenue to 62% during the year ended
December 31, 1997. The decrease from 1995 to 1996 was due primarily to higher
percentage of sales of lower margin products to Lockheed Martin Corporation in
1996. The increase from 1996 to 1997 was due primarily to a change in product
mix comprised of increased sales of the ARGUS 300 products to the U.S. Army
Corps of Engineers and sales of higher margin software products. Product gross
margins were 48% as a percentage of net product revenue during each of the years
ended December 31, 1995 and 1996, and increased to 63% during the year ended
December 31, 1997. The increase in 1997 resulted primarily from increased sales
of ARGUS data encryption products to the U.S. Army Corps of Engineers. License
and service gross margin increased as a percentage of its revenue from 61%
during the year ended December 31, 1995 to 62% during the year ended December
31, 1996 and
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<PAGE>
decreased to 58% during the year ended December 31, 1997. The decrease from 1996
to 1997 was due to additional head count and higher per employee costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 110% from $977,000 during the year ended
December 31, 1995 to $2.1 million during the year ended December 31, 1996 and
increased 70% from 1996 to $3.5 million during the year ended December 31, 1997.
As a percentage of revenue, selling, general and administrative expenses
decreased from 36% during the year ended December 31, 1995 to 22% during the
year ended December 31, 1996 and increased to 34% during the year ended December
31, 1997. Selling, general and administrative expenses increased as a
percentage of revenue due to increased staffing and increased levels of
compensation following the sale of the Intercon division.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased 113% from $341,000 during the year ended December 31, 1995 to $725,000
during the year ended December 31, 1996 and increased 62% to $1.2 million during
the year ended December 31, 1997. The increases were primarily attributable to
increased costs associated with increased new product development efforts. As a
percentage of revenue, research and development expenses decreased from 13%
during the year ended December 31, 1995 to 8% during the year ended December 31,
1996 but increased to 12% during the year ended December 31, 1997. The decrease
from 1995 to 1996 was due to increased product development efforts while revenue
more than tripled. The increase in 1997 reflected our continued investment in
research and development of future products and services.
INTEREST EXPENSE, NET. Interest expense, net, decreased by 50% from
$38,000 during the year ended December 31, 1995 to $19,000 during the year ended
December 31, 1996 and increased 121% to $42,000 during the year ended December
31, 1997. The fluctuating interest expense from 1995 to 1997 was attributable
to varying levels of borrowings required for operations.
INCOME TAXES. During this period we were taxed as an S corporation and,
accordingly, did not provide for Federal income taxes. The provision for state
income taxes was $1,000, $29,000 and $22,000 for the years ended December 31,
1995, 1996 and 1997, respectively.
PULSAR
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
REVENUE. In 1997, Pulsar made a strategic business decision to eliminate
its high-volume, low-margin Federal Systems Integration ("FSI") program
activities, which accounted for 31% of its revenue during 1997. This decision
is reflected in the decrease in revenue from September 30, 1997 to September 30,
1998. Total revenue decreased 42% from $105.6 million during the nine months
ended September 30, 1997 to $61.5 million during the nine months ended September
30, 1998. Product revenue declined 40% from $98.2 million during the nine
months ended September 30, 1997 to $58.8 million during the nine months ended
September 30, 1998. This decrease is attributable primarily to phasing out
sales under our Federal Systems Integration program and Section 8(a) programs,
and a decrease in General Service Administration ("GSA") schedule sales. FSI
revenue decreased 92% from approximately $32.7 million during the nine months
ended September 30, 1997 to approximately $2.7 million during the nine months
ended September 30, 1998. Pulsar began phasing out sales under the FSI program
due to the diminishing margins produced by these sales. Section 8(a) product
revenue decreased 81% from approximately $9.7 million during the nine months
ended September 30, 1997 to approximately $1.8 million during the nine months
ended September 30, 1998, due to Pulsar's voluntary withdrawal from the Section
8(a) program in anticipation of its graduation in November 1997. GSA schedule
revenues declined 11% from $46.8 million during the nine months ended September
30, 1997 to approximately $41.5 million during the nine months ended September
30, 1998. Total revenues from Federal government agencies decreased 23% from
$56.5 million during the nine months ended September 30, 1997 to $43.3 million
during the nine months ended September 30, 1998. This decrease was due
primarily to the government's reallocation of budget dollars from hardware and
software procurements toward resolving Y2K issues. Commercial, state and local
government sales
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<PAGE>
increased 50% from $9.0 million during the nine months ended September 30, 1997
to $13.5 million during the nine months ended September 30, 1998, due to
increased sales effort and the award of equipment supply contracts by the State
of Maryland, the State of Georgia and Prince George's County Schools. Service
revenue decreased 63%, from approximately $7.4 million during the nine months
ended September 30, 1997 to $2.8 million during the nine months ended September
30, 1998. This decrease is attributable primarily to a reduction in service
revenue from expiring Section 8(a) contracts with the U.S. Department of
Education and the Naval Research Lab contract.
GROSS MARGIN. The total gross margin increased as a percentage of revenue
from 5% during the nine months ended September 30, 1997 to 8% during the nine
months ended September 30, 1998. The gross margin declined from $5.4 million
for the nine months ended September 30, 1997 to $5.0 million for the nine months
ended September 30, 1998. This decrease is due primarily to the reduction in
total revenue, partially offset by an increase in gross margin percentage.
Product gross margin increased as a percentage of revenue from 1% during the
nine months ended September 30, 1997 to 7% during the nine months ended
September 30, 1998. Consistent with Pulsar's business plan, this increase is
attributable primarily to reduced FSI sales, and Pulsar's successful bidding for
higher margin products contracts. Gross margin on service revenue declined as a
percentage of revenue from 53% during the nine months ended September 30, 1997
to 43% during the nine months ended September 30, 1998, due primarily to higher
compensation costs associated with contracts that have since expired which did
not permit such costs to be passed through to the customer.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased 7%, from $9.6 million during the nine months
ended September 30, 1997 to $8.9 million during the nine months ended September
30, 1998, primarily due to a reduction in the amount of bad debt expenses.
However, selling, general and administrative expense increased as a percentage
of revenue from 9% during the nine months ended September 30, 1997 to 15% during
the nine months ended September 30, 1998, due principally to a greater portion
of bad debt expenses recognized as a percentage of revenue. Pulsar has
subsequently implemented several cost cutting procedures.
INTEREST EXPENSE. Interest expense decreased by 32%, from $2.1 million
during the nine months ended September 30, 1997 to $1.4 million during the nine
months ended September 30, 1998 due to a significant decrease in borrowings.
INTEREST INCOME. Interest income decreased by 9%, from $408,000 during the
nine months ended September 30, 1997 to $373,000 during the nine months ended
September 30, 1998 due to a reduction in the outstanding notes receivable.
BACKLOG. At September 30, 1998, Pulsar had backlog totaling $14.1 million
representing signed purchased orders received but not filled and signed service
contracts for which services have not yet been provided.
COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1997
REVENUE. Total revenue decreased 9%, from $166.0 million during the year
ended December 31, 1996 to $151.5 million during the year ended December 31,
1997. Product revenue declined 9%, from $155.7 million during the year ended
December 31, 1996 to $142.7 million during the year ended December 31, 1997.
This decrease was attributable primarily to Pulsar's voluntary withdrawal from
the Section 8(a) program in June 1997 in anticipation of its scheduled
graduation from the program in November 1997. The Section 8(a) contract revenue
decreased by 72% from $50.1 million during the year ended December 31, 1996 to
$14.1 million during the year ended December 31, 1997. Revenue derived from
commercial, state and local government decreased by 49%, from $25.5 million
during the year ended December 31, 1996 to $13.0 million during the year ended
December 31, 1997. This decrease was primarily attributed to a shift in sales
focus to GSA sales and FSI sales. Product revenue from the GSA schedule
increased 58%, from $43.0 million during the year ended December 31, 1996 to
$67.9 million during the year ended December 31, 1997. This was attributable
primarily to Pulsar's shift in sales focus to GSA schedule sales. This shift in
focus is a result of the Federal Streamline Act of 1996 which encourages all
agencies to utilize the GSA Schedule to procure products and services in support
of the information technology requirements in lieu of traditional time-
restrictive
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<PAGE>
contracting methods. Total revenue to Federal government agencies decreased 12%
from $93.1 million during the year ended December 31, 1996 to $82.0 million for
the year ended December 31, 1997. This decrease is attributable primarily to a
greater decrease in 8(a) revenue opposed to GSA schedule revenue. FSI revenue
also increased by 28%, from $37.1 million during the year ended December 31,
1996 to $47.4 million during the year ended December 31, 1997. This was
attributable primarily to an expanded sales effort in the area. Service revenue
declined by 14%, from $10.3 million during the year ended December 31, 1996 to
$8.8 million during the year ended December 31, 1997. This decrease was
attributable primarily to the completion of the Samsung contract, which
accounted for over $1.5 million in service revenue in 1996.
GROSS MARGIN. The gross margin declined from $16.6 million for the year
ended December 31, 1996 to $9.3 million for the year ended December 31, 1997.
The decrease is attributable primarily to the reduction in total revenue
combined with a decrease in gross margin percentage. Pulsar's gross margin
decreased as a percentage of revenue from 10% during the year ended December 31,
1996 to 6% during the year ended December 31, 1997. Product gross margins
declined as a percentage of revenue from 7% during the year ended December 31,
1996 to 3% during the year ended December 31, 1997, due to a substantial
increase in FSI revenue, which are lower margin product. Additional decreases
in product margins were attributable to industry competition. Service gross
margins remained unchanged at 53% during the year ended December 31, 1996 and
during the year ended December 31, 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expense increased 27% from $13.5 million during the year ended
December 31, 1996 to $17.2 million during the year ended December 31, 1997. The
increase was attributable primarily to bad debt expenses associated with
accounts receivables and notes receivables, and the write-off of obsolete
inventory. Expense associated with the bad debt write-offs exceeded $4.9
million during the year ended December 31, 1997, compared to a nominal amount
during the year ended December 31, 1996. Selling, general and administrative
expenses increased as a percentage of revenues from 8% during the year ended
December 31, 1996 to 11% during the year ended December 31, 1997.
INTEREST EXPENSE. Interest expense increased by 2%, from $3.6 million
during the year ended December 31, 1996 to $3.6 million during the year ended
December 31, 1997. Pulsar's average daily borrowings decreased during the year,
however, additional interest expense was recognized due to a new agreement
Pulsar entered into with IGFC . During 1997, Pulsar entered into a Forbearance
Agreement with IGFC whereby IGFC would receive the lesser of 4% stock warrants
or $650,000 upon the sale of Pulsar's assets. Pulsar's intention is to pay the
$650,000 upon the closing of this offering.
INTEREST INCOME. Interest income decreased by 28%, from $639,000 during
the year ended December 31, 1996 to $457,000 during the year ended December 31,
1997, due to a reduction in the outstanding notes receivable balances.
COMPARISON OF YEARS ENDED DECEMBER 31, 1995 AND 1996
REVENUE. Revenue slightly increased by 1%, from $164.0 million during the
year ended December 31, 1995 to $166.0 million during the year ended December
31, 1996. A breakout among product and service revenue could not be obtained
for the year ending December 31, 1995, therefore, no analysis could be
performed. Revenue from GSA schedule contracts increased by 59%, from $28.8
million during the year ended December 31, 1995 to $45.7 million during the year
ended December 31, 1996. This increase is attributable primarily to the Federal
government's requirement of agencies to utilize GSA contract vehicles and
Pulsar's efforts to increase GSA schedule contract sales by devoting additional
resources. Section 8(a) sales decreased by 13%, from $64.1 million during the
year ended December 31, 1995 to $55.6 million during the year ended December 31,
1996. This decrease was attributable primarily to our change in focus from
utilizing the Section 8(a) vehicle to placing a greater emphasis on GSA schedule
sales coupled with the government placing a greater emphasis on GSA
procurements. Total revenue from federal government agencies increased 9% from
$92.9 million during the year ended December 31, 1995 to $101.3 million during
the year ended December 31, 1996. FSI revenue increased by 11%, from $33.3
million during the year ended December 31, 1995 to $37.1 million during the year
ended December 31, 1996. This increase was attributable primarily to an
increased focus in sales in this area. Commercial, state and local government
sales decreased 26%,
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<PAGE>
from $37.0 million during the year ended December 31, 1995 to $27.5 million
during the year ended December 31, 1996, due to a reallocation of resources away
from that area of the business to FSI sales.
GROSS MARGIN. The gross margin declined from $17.3 million for the year
ended December 31, 1995 to $16.6 million for the year ended December 31, 1996.
This slight decline is attributable primarily to a slight increase in cost of
products as a percentage of corresponding revenue.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense increased 30%, from $10.4 million during the year ended
December 31, 1995 to $13.5 million during the year ended December 31, 1996.
This increase was attributable to a significant increase in Pulsar's sales force
and administrative staff as Pulsar hired an experienced staff to increase sales
in the areas of the GSA schedule, FSI and the information technology division.
Selling, general and administrative expense as a percentage of sales increased
from 6% to 8% during the year ended December 31, 1996.
INTEREST EXPENSE. Interest expense increased by 48%, from $2.4 million
during the year ended December 31, 1995 to $3.6 million during the year ended
December 31, 1996. This increase is attributable primarily to an increase in
the interest rate charged to Pulsar by IGFC. Pulsar's average outstanding line
of credit balance was also greater for the year ending December 31, 1996
compared to the year ending December 31, 1995.
INTEREST INCOME. Interest income increased by 63%, from $392,000 during
the year ended December 31, 1995 to $639,000 during the year ended December 31,
1996. This increase is attributable primarily to the issuance of $800,000 new
notes receivable in excess of $1.5 million, and a full year of interest income
on the notes previously issued in 1995.
LIQUIDITY AND CAPITAL RESOURCES
On a pro forma combined, as adjusted, basis we had working capital of $12.9
million as of September 30, 1998. We expect that this working capital and
available borrowings under our $20.0 million asset-based credit facility, which
will be obtained upon the closing of this offering, will be sufficient to
satisfy our cash flow requirements for at least the next 12 months.
Historically, Litronic's cash requirements have been financed through a
combination of cash flow from operations, bank financing and loans from its
principal shareholders and affiliates. See "Certain Transactions."
During the year ended December 31, 1997, cash provided by operations for
Litronic was $3.2 million, primarily due to earnings from continuing operations
of $1.6 million and a decrease in accounts receivable of $1.0 million and a
decrease in inventory of $715,000. Cash used by Litronic in operations during
the nine months ended September 30, 1998 was $1.4 million, resulting primarily
from a loss from continuing operations of $868,000 and other changes in working
capital of $696,000, partially offset by non-cash expenses of $153,000.
During the year ended December 31, 1997, cash used in financing activities
was $17.4 million, consisting primarily of a cash dividend of $9.5 million and a
cash contribution to an affiliate of $8.5 million, partially offset by net
borrowings of 670,000.
Litronic's capital expenditures, including purchases of computer equipment,
test equipment and furniture and fixtures, were $172,000 and $230,000 during the
years ended December 31, 1996 and 1997, respectively, and $77,000 during the
nine months ended September 30, 1998. Litronic's expenditures were funded
through cash generated from operations and through its secured revolving credit
line and borrowing from its principal shareholders.
Pulsar's capital requirements have been and will continue to be
significant. To date, its cash requirements have exceeded its cash flow from
operations. Pulsar historically has satisfied cash requirements through
borrowings. Pulsar's financial statements include an explanatory paragraph in
the independent auditors' report that states that Pulsar's
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losses from operations, violation of certain debt covenants and working capital
deficiency raise substantial doubt about Pulsar's ability to continue as a going
concern. Pulsar expects that the proceeds raised through the issuance of stock
through this public offering and available borrowings under the $20 million
asset-based credit facility will satisfy current cash requirements.
Pulsar's cash provided from operations for the nine months ended September
30, 1998, was $12.2 million, primarily resulting from collections of accounts
receivable of $15.4 million offset by a net loss of $4.9 million. Cash used in
financing activities for the nine months ended September 30, 1998, was $15.3
million, resulting primarily from $14.6 million in payments made to decrease
indebtedness outstanding under our financing arrangement with IGFC, a portion of
which was funded by borrowings of $1.5 million against the cash surrender value
of life insurance policies. Total cash used for the nine months ended September
30, 1998 was $1.8 million. Pulsar's capital expenditures, including purchases
of computer equipment, warehouse equipment, and furniture and fixtures were
$942,000 during the year ended December 31, 1996, $364,000 during the year ended
December 31, 1997 and $54,000 for the nine months ended September 30, 1998.
These expenditures were funded through borrowing from IGFC. See "Certain
Transactions."
Pulsar funded its operations during the year ended December 31, 1997 and
the nine months ended September 30, 1998 through an Inventory and Working
Capital Financing Agreement, with IGFC, whereby Pulsar purchases hardware and
software from authorized suppliers and finances the purchases through IGFC. The
agreement provides for a credit line up to $18 million, which was decreased to
$15 million as of January 6, 1999 and to $8 million as of February 2, 1999. The
facility allows Pulsar to finance up to 85% of Pulsar's eligible accounts
receivable and 100% of the value of Pulsar's on-hand inventory. The credit line
is secured by substantially all assets of Pulsar and is personally guaranteed by
William W. Davis, Sr. and Lillian A. Davis.
Pulsar has negotiated eight promissory notes, payable to various vendors,
accruing interest ranging from 10% to 18%. The original combined principal
balance on these notes was $5.8 million. As of February 1, 1999, the balance on
these notes was $3.6 million. Payments on these notes are due on a monthly
basis. Three of these notes contain balloon payments which are due as follows:
on May 31, 1999 for $724,000; November 1, 1999 for $980,000; October 1, 1999 for
$350,000. Pulsar has also negotiated payout agreements with ten accounts
payable vendors for $608,000. These payments are due on a monthly basis and are
payable over various time periods. Pulsar also has approximately $1.2 million
of accounts payable balances over 90 days due. To the extent we are not able
to negotiate extended payment arrangements, we expect to utilize our newly
acquired line of credit and cash from operations to fund these payments.
We have allocated $12 million of the net proceeds of this offering to repay
outstanding indebtedness, including $5.9 million of indebtedness assumed in the
acquisition. All of the indebtedness being repaid is required to be paid upon
the closing of this offering, as a result of certain change of control
provisions or to effect the release of personal guarantees.
We believe that the net proceeds of this offering, together with
anticipated cash flow from operations, availability under our bank lines of
credit, including our new $20.0 million asset-based facility to be effective
upon the closing of this offering, and existing cash and cash equivalents, will
be sufficient to satisfy our contemplated cash requirements for at least 12
months following the closing of this offering, including planned capital
expenditures of approximately $1.0 million. If our plans change due to changes
in market conditions, competitive factors, progress of our research and
development efforts or new opportunities that may become available in the
future, if our assumptions change or prove to be inaccurate or if the net
proceeds of this offering or our cash flows prove to be insufficient to finance
our growth strategy, we could be required to seek additional financing.
YEAR 2000 ISSUES
An issue affecting our company and others is the inability of many computer
systems and applications to process the year 2000 date change, the date 9/9/99
and the leap year 2000. Many currently installed computer systems
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and software applications are coded to accept only two digit entries in the date
code field. These date code fields will need to accept entries to distinguish
21st century dates from 20th century dates. The inability to recognize or
properly treat the Y2K issue may cause Litronic's systems and applications to
process critical financial and operational information incorrectly.
We have established a committee to determine the extent to which we may be
vulnerable to the Y2K issue. The committee is responsible for the ongoing
assessment, renovation of, testing, and certification of all business-critical
infrastructure systems and applications software. In the process of its
evaluation of the Y2K issue, the committee has developed potential business
disruption scenarios and is developing a contingency plan, which we anticipate
will be completed by July 1999. The following is a description of how we have
categorized and are addressing the Y2K issue.
INTERNAL SYSTEMS
We have evaluated our internal computer systems in an effort to determine
the actions, if any, necessary to make them Y2K compliant. Our evaluation has
involved testing our systems to ensure that they are Y2K compliant. Based on its
present review of our systems, the committee has determined that we do not have
a high risk of computer-related internal systems problems from the Y2K issue.
EMBEDDED SYSTEMS
We also recognize that there are risks with respect to embedded systems
that are not necessarily part of our information technology systems but contain
microprocessor chips which may not function properly with the change of date to
the year 2000. The majority of the embedded systems on which we rely in our
day-to-day operations are owned and managed by the lessors of the buildings in
which our offices are located, or by agents of such lessors. We are sending
letters to our lessors and, as applicable, their agents requesting
certifications of Y2K compliance of the embedded systems by the end of first
quarter of 1999. Upon receipt of these responses to these letters, we intend to
prioritize such systems and develop a test plan to address any Y2K compliance
issues.
Because we believe that our information technology and embedded systems
will be substantially Y2K compliant in advance of the year 2000 date change, we
have no contingency plan to address non-compliance. We expect that, as we
complete testing of information technology and embedded systems, we will develop
contingency plans if we determine that any business critical systems will not be
Y2K compliant.
OUTSIDE VENDORS AND CUSTOMERS
Disruptions with respect to the computer systems of vendors or customers,
which are outside our control, could impair our ability to obtain services or
conduct business with our customers. Disruptions of our utilities or
telecommunications systems could have a material adverse effect upon our
financial condition and results of operations. We believe that no other
providers are material to our business. Disruptions of customers' computer
systems could interfere with customers' ability to make timely payments on
accounts, could disrupt our customers' ability to manage the installation
process of our products, which could adversely affect our ability to reach our
milestones, and thus to recognize revenue, and could disrupt other
administrative activities.
The committee is in the process of sending Y2K issue questionnaires to our
vendors, suppliers and customers. Until we have received responses from these
entities, we cannot fully assess the readiness of our customers and suppliers
for the Y2K issue. However, we do not have any assurances that all of our
significant vendors, suppliers and customers have taken steps to ensure that
their respective systems are protected against the Y2K issue or that even if
such steps have been taken, that they will be successful. As we assess the risk
of our significant vendors', customers' and suppliers' systems, we will develop
and implement curative plans and contingency plans to address any Y2K compliance
issues.
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OUR PRODUCTS
We have determined that our products, to the extent that underlying
hardware platforms, operating systems and databases will accommodate the year
2000 date change, are Y2K compliant and will accommodate the Year 2000 date
change.
We anticipate that virtually all of our customers and potential customers
will be required to evaluate their information technology systems with respect
to the Year 2000 date change and that some of our customers and potential
customers may incur material costs in connection with this evaluation and any
necessary repairs and replacements. Customers and potential customers may be
required to devote material portions of their information technology budgets to
such evaluations, repairs and replacements, which could materially reduce their
other information technology purchases in 1999, including their purchases of
Litronic's products, particularly as the Year 2000 date change draws closer. We
do not have any information as to the degree to which this issue will affect our
customers or potential customers.
There can be no assurance that any Y2K issue-related precautions with
respect to our internal information technology systems, embedded systems or our
products will eliminate the numerous and varied risks associated with the year
2000 date change. Further, there is a risk that we will be adversely affected
by the Y2K Issue or related difficulties encountered by vendors or customers or
by any downturn in information technology purchases or in the economy in general
as the year 2000 date change draws nearer. Any of these risks could adversely
affect our business.
Management believes that the most likely worst case scenario related to the
Y2K issues that we may experience would be either an inability to obtain
inventory components from suppliers or delays in receiving orders or payments
from customers due to Y2K problems experienced by these third parties. These
events, if experienced, could have a material adverse effect on our business,
results of operations, financial and/or liquidity.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
Our quarterly operating results may fluctuate significantly as result of a
variety of factors, many of which are outside our control. These factors
include, among other things, the short-term nature of certain customer
commitments, the lengthy sales and implementation cycle for certain of our
products and projects, patterns of information technology spending by customers,
the timing, size, mix and customer acceptance of our product and service product
offerings and those of our competitors, the timing and magnitude of required
capital expenditures, the need to use contract personnel to complete certain
assignments, and general economic conditions. Accordingly, comparisons of
quarterly results may not be meaningful and should not be relied upon, nor will
they necessarily reflect on future performance.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement 131, "Disclosure about Segments of an Enterprise and Related
Information." The new statement is effective for fiscal years beginning after
December 15, 1997.
In June 1998, the FASB issued Statement 133 "Accounting for Derivative
Instruments and Hedging Activities." The new statement established accounting
and reporting standards for derivative instruments and for hedging activities
and is effective for all fiscal quarters of fiscal years beginning after
June 15, 1999.
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SOP 98-1 provides
guidance on accounting for the costs of computer software developed or obtained
for internal use, and is effective for fiscal years beginning after December 15,
1998.
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In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-
Up Activities." SOP 98-5 provides guidance on the financial reporting of start-
up costs and organization costs, and requires such costs to be expensed as
incurred. SOP 98-5 is effective for fiscal years beginning after December 15,
1998.
In December 1998, the AICPA issued SOP 98-9. SOP 98-9 amends certain
paragraphs of SOP 97-2 to require recognition of revenue using the "residual
method" under certain circumstances, and is effective for fiscal years beginning
after March 15, 1999.
The adoption of these new standards is not expected to have a material
impact on the consolidated financial statements.
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INDUSTRY INFORMATION
INTERNET DATA SECURITY INDUSTRY
THE INTERNET DATA SECURITY MARKET
Consumers, government agencies and corporations are increasingly relying
upon Internet Protocol Networks to conduct electronic commerce and
communications. International Data Corporation estimates that the number of
growing Internet users will grow from 97 million in 1998 to 320 million in 2002,
with electronic commerce from $32 billion to $426 billion over the same period.
The increasing proliferation of, and reliance upon, shared electronic data has
caused data security to become a paramount concern of businesses, government,
educational institutions and consumers. Demand for information security
products is forecast by Datamonitor, an independent research firm, to increase
from $1.6 billion in 1997 to almost $7.0 billion by 2001, a growth rate of 44%
per annum. In addition, Datamonitor forecasts the Internet-security PKI segment
to be the fastest growing segment of this market, increasing from $75 million in
1997 to approximately $1.9 billion by 2001, a growth rate of 124% per annum.
The market for encryption technology is estimated by Datamonitor to be the
second fastest growing segment of the market increasing from $168 million in
1997 to more than $1 billion in 2001. We believe our data security products
provide the solution for entities and consumers seeking to provide protection
for their proprietary data.
INCREASING NEED FOR INTERNET DATA SECURITY
In addition to protecting against unauthorized access to proprietary
information, data security affects an enterprise's ability to conduct electronic
commerce. Companies such as Amazon.com, Inc., Bank of America, Cisco Systems,
Inc., Dell Computer Corp., eBay and E*Trade Group, Inc. have enjoyed dramatic
growth in their online customer base and revenue as consumers execute an
increasing number of transactions over the Internet. The Internet's ease of
use, 24-hour availability, speed of delivery, global reach and ability to
simplify product and vendor comparisons are fueling this growth. However,
consumer concerns about the trustworthiness and security of the Internet have
been one of the main impediments to even faster growth of electronic commerce
and other communications. Hacking tools, such as password guessing and address
spoofing (or impersonation) programs, are freely available on the Internet and
bulletin board systems. Merchants and consumers need assurances that consumers
making electronic purchases are correctly identified and confirmed and that the
confidentiality of information such as credit card and bank account numbers are
maintained.
We believe that continued expansion of electronic commerce will require the
implementation of improved PKI security measures which will irrefutably verify
the identity of a party over the Internet and ensure that the information being
transmitted between that party and the other party is kept private. We also
believe the security required to fuel this continued expansion of electronic
commerce and communication will be provided through the continued advancement in
PKI mathematical formulas referred to as algorithms. Algorithms enable digital
document signing and encryption of proprietary data.
As enterprises place an increasing reliance on electronic commerce and
communication the need to protect confidential data from unauthorized intrusion
has become paramount. According to the Computer Security Institute ("CSI"),
although 78% of respondents to its 1998 CSI/FBI Computer Crime and Security
Survey reported that they are connected to the Internet, 39% of the respondents
did not have a first line of defense against unauthorized intrusion into their
networks. Unauthorized use of computer systems within the previous 12 months
was reported by 64% of these respondents, representing a 16% increase from the
prior year.
The consequences of unauthorized access, which is often undetected, can
range from theft of proprietary information or other assets to the alteration or
destruction of stored data. The CSI survey reports that approximately 72% of
respondent companies experienced a financial loss related to information
security and disaster recovery in the past two years. According to estimates by
the Federal Bureau of Investigation, U.S. companies experience estimated losses
of $5 to $10 billion per year as a result of unauthorized access to information
and data. The Yankee Group, an independent research firm, estimates that
network security breaches cost corporations in the U.S. over $5.0 billion per
year in business losses, including productivity, customer confidence and
competitive advantage.
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REQUIREMENTS FOR TRUSTED END-TO-END DATA SECURITY
Today's client operating systems and Internet Protocol Networks lack basic
security and key Internet security features such as data privacy and integrity,
identification, authentication and auditing.
End-to-end data security concerns can be addressed by a variety of means.
Traditionally, enterprises relied heavily on passwords to restrict access to
proprietary information and materials. However, because of the risk of loss or
theft, more advanced protective measures have been developed to include
combinations of passwords and tokens with message encryption and personal
identification devices. Regardless of the form of the data security device, the
level of security provided is evaluated based on a set of fundamental
principles, which include the following:
. IDENTIFICATION AND AUTHENTICATION. Verifies the identity of the
authorized users to prevent unauthorized access to proprietary
information and resources.
. CONFIDENTIALITY. Involves the encryption of data transmissions so that
only the intended recipient can access the information to ensure
privacy.
. DATA INTEGRITY. Ensures that data is not compromised or manipulated.
. NON-REPUDIATION. Prevents the sender of data transmissions from
disclaiming or "repudiating" authorship so that the sender cannot deny
the occurrence of the transaction.
. AUDIT CONTROL. Retraces information access and facilities use over a
particular time period at a systems administration level so an
enterprise can monitor and record authorized and unauthorized user
activity.
. SECURED SYSTEM ADMINISTRATION. Maintains and controls corporate
intranets centrally through file encryption, password maintenance,
audit control, certificate and cryptographic key management and device
accessibility control.
The process of implementing Internet Protocol Network solutions requires
specialized skills lacking in most corporate information technology departments.
We provide the technology, products and services necessary for most companies to
implement or manage their data security infrastructure.
CRYPTOGRAPHIC TECHNOLOGIES
Cryptography is the process of encoding and decoding electronic messages
using mathematical algorithms, or ciphers, to enable the confidential
transmission of electronic messages to authorized persons. Digital cryptography
is performed using a combination of symmetric ciphers (commonly referred to as
symmetric-key or secret-key cryptography) and asymmetric ciphers (commonly
referred to as asymmetric key or public-key cryptography), to achieve each of
the basic data security elements of identification and authentication,
confidentiality, integrity and non-repudiation.
Both symmetric-key and asymmetric-key cryptography use an encrypting and a
decrypting key. The "key" refers to the user's unique number that is input to
the mathematical algorithm, or the cipher, used to encrypt or decrypt the
message. In symmetric-key cryptography, the encrypting key and the decrypting
key, which is secret, are identical. Thus, to transmit a message, a secure key
exchange must be performed so that the key can be shared with the recipient of
the message. In asymmetric-key cryptography, the encrypting key (a public key)
and the decrypting key (a secret key) are different and thus the public key can
be distributed to authorized recipients without risk of security breach.
Because asymmetric cryptography allows for wide distribution of the encrypting
key, it permits secure communication among a large group of people without
requiring manual distribution of the key. Additionally, asymmetric-key
cryptography relies on the generation of digital certificates which can be used
to provide the user authentication, data integrity and non-repudiation elements
of the information security system. However, public-key cryptography requires
the use of extremely complicated ciphers, so that encryption of large messages
is relatively slow when compared to encryption using secret-key cryptography.
Thus, asymmetric-key
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cryptography is commonly used to protect symmetric keys and symmetric key
cryptography is commonly used for bulk encryption.
IDENTIFICATION AND AUTHENTICATION
Authentication of a user's identity is generally accomplished by passwords.
Because passwords are vulnerable to decoding or observation and subsequent use
by unauthorized persons, they are less secure than if used with tokens. Tokens
are small devices ranging from simple credit card-like objects, rings, proximity
cards and plastic keys to more advanced "secure tokens," including smartcards,
PKI cards and PCMCIA cards. For greater protection, two-factor identification
and authentication is implemented by combining tokens with a password or
personal identification number to verify authentication of the user. For added
security, three factor authentication can be implemented which consists of
token, password and biometric comparisons.
PKI cards are credit card-sized semiconductor plastic cards that contain an
embedded microprocessor, memory, a secure operating system and the user's secret
key, password and digital certificates. PKI cards have significant advantages
because of their ability to perform basic cryptographic functions on the card
itself rather than on the computer, thus reducing the risk that a breach of
security on the computer will lead to the unauthorized release of proprietary
information. Through the use of PKI cards, E-mail messages, purchase orders,
credit card numbers, videoclips, data inquiries and other confidential
transmissions are secured as they are sent and therefore can be opened only by
the intended recipient.
PCMCIA cards are parallel computer peripherals similar in size to a credit
card, though thicker, which contain multiple microprocessor chips. PCMCIA cards
have greater storage capacity, higher data exchange rate and greater processing
power than conventional smartcards and therefore are capable of performing
advanced cryptographic functions that cannot be performed on a conventional
smartcard. These advanced functions allow for use of more powerful algorithms
and thus provide for a greater overall level of security through the use of
PCMCIA cards.
We are currently leading a joint effort with Atmel Corporation pursuant to
a task order with the National Security Agency to develop Forte, an ultra fast
32-bit RISC microprocessor. We are embedding the Forte chip into our new Forte
PKIcard, which we expect will be the world's fastest and most cryptographically
advanced PKI card. We expect that Forte will provide PCMCIA level performance at
a price competitive with advanced smartcards. Further, Forte is being designed
to be International Standards Organization ("ISO") compliant and therefore able
to be used in conventional reader/writers.
PKI DIGITAL CERTIFICATES
The basic element of PKI, a cutting-edge development in the information
security field, is the digital certificate. Digital certificate technology
provides a highly advanced form of authentication and secure key exchange. PKI
digital certificates are specially prepared software files through which the
sender can "digitally sign" a message with a unique identification code. The
recipient of the message can authenticate the identity of the sender and verify
the integrity of the data through the use of a trusted third party known as a
certificate authority by obtaining the sender's public key from the certificate
digitally signed by the certificate authority. Furthermore, the uniqueness of
the certificates provides for non-repudiation, which prevents the sender from
denying that it sent the message and which is not available with less
sophisticated techniques. With the development of secure-token technology,
digital certificates can now be incorporated into smartcards, PKI cards and
PCMCIA cards to provide an information security system that provides two-factor
identification and authentication or three-factor identification and
authentication with the incorporation of biometric technology. Biometric
technology utilizes fingerprints or other unique characteristics of an
individual to serve as a digital identification. The use of digital certificates
is expanding rapidly across the Internet. In fact, several states now consider
digital signatures contractually binding and there is a growing acceptance
within the Federal government to effectuate transactions through the use of
digital certificates.
SYSTEMS INTEGRATION AND NETWORKING SOLUTIONS INDUSTRY
In recent years, there has been an increasing demand for open system
approaches designed to create interoperability among commercial off-the-shelf
computer software and hardware products manufactured by different suppliers. In
addition, excessive development costs and the rapid pace of technological change
have led
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both governmental and commercial customers to demand more flexible systems
created by adapting readily-available commercial off-the-shelf software and
hardware.
The emergence of the rapidly developing Internet Protocol Network
technologies in the 1990s has further fueled the demand for network computer
systems. Although information technologies, secure data transmissions, and data
encryption have long been in use in the military intelligence arena, recent
technological advancements in computer hardware and software have now made such
applications economically viable for use by private companies. This has given
rise to the need for specialized expertise in the areas of local and wide area
network design and installation, network management and operation and network
security, using new and complex information technology hardware and software
products. Typically, the design and implementation of these systems in both
commercial enterprises and government agencies also involves the resale of the
hardware and software required for the system to the customer.
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BUSINESS
OVERVIEW
We provide professional Internet data security services and develop and
market software and microprocessor-based products needed to secure electronic
commerce and communications over the Internet, intranets, extranets and other
Internet-based communication networks ("Internet Protocol Networks"). Our
primary technology offerings utilize PKI, which is the standard technology for
securing Internet-based commerce and communications. PKI helps ensure the
integrity and privacy of information being transmitted and verifies the
identity, authenticity and authority of the sender and the recipient of that
information. We have established relationships with industry leaders who have
adopted PKI as a core feature of their secure product offerings, including
Netscape Communications Corporation, Microsoft Corporation, VeriSign, Inc.,
International Business Machines Corp., RSA Data Security, Inc., SCM
Microsystems, Inc., Atmel Corporation and the National Security Agency. To
capitalize on opportunities in the rapidly growing Internet security market,
simultaneously with the closing of this offering, we are acquiring Pulsar, a
network integration solutions company that specializes in deploying large-scale
network solutions to organizations in the commercial and government sectors that
have significant information processing requirements.
STRATEGY
We believe that significant market opportunities exist due to the
increasing prevalence of electronic communication resulting from advancements in
Internet and electronic commerce technologies. These opportunities are expected
to create a primary need for PKI. Thus, we intend to pursue a strategy of
growth which is designed to capitalize on such market opportunities and the
competitive advantages we believe will result from the Acquisition. Key elements
of our strategy include:
. INCREASING INTERNET MARKET PENETRATION. We intend to capitalize on
Pulsar's existing and significant client base and sales and marketing
infrastructure to broaden and accelerate the market penetration of our
comprehensive data security product offerings. In our experience,
large commercial accounts frequently seek to secure total integrated
network security solutions from a limited number of suppliers. We
intend to utilize our brand recognition in the Internet Protocol
Network security market and Pulsar's network implementation expertise
and integration capabilities to support our efforts to gain greater
market penetration.
. INCREASING MARKETING OPPORTUNITIES. The creation of a larger marketing
and service organization, a higher market profile and greater
financial strength is expected to generate greater opportunities for
marketing our products in the U.S. and internationally.
. MAINTAINING TECHNOLOGICAL LEADERSHIP IN INTERNET PROTOCOL NETWORK
SECURITY. Through our industry-recognized research and development
capabilities, we intend to upgrade and enhance our existing security
products and develop new products to meet the expanding market's
continually evolving requirements, technologies and standards. We
believe that our research and development capabilities and the
combined expertise of our technical staff position our company to
respond quickly and effectively to technological change, increased
competition and market demands.
. EXPANDING PROFESSIONAL INTERNET PROTOCOL NETWORK SECURITY SERVICES. We
intend to provide our customers with a full range of Internet Protocol
Network-related security services, including security policy
assessments and evaluations, custom software development, integration
and maintenance.
. EXPANDING AND LEVERAGING STRATEGIC ALLIANCES. We intend to maintain
and leverage existing strategic alliances and develop new strategic
alliances with vendors with complementary technologies, products and
services to maximize sales and market development opportunities.
. STRATEGIC ACQUISITIONS. To the extent opportunities arise, we will
seek to acquire other technologies, product lines and businesses which
complement our products.
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. INCREASING SALES PER CUSTOMER. We will seek to increase average sales
per customer based on our enhanced ability to offer system integration
services in addition to our suite of data security products.
. MINIMIZING RISK OF SALES AND SERVICE DELAYS. The unavailability of
skilled professionals in the information technology and Internet
security solution outsourcing and integration sectors has in the past
caused companies with advanced proprietary technologies to experience
sales and service delays. By bringing together our research and
development staff and Pulsar's existing sales and technical personnel
and procedures, we aim to minimize the risk of such delays.
. INCREASING INTERNATIONAL SALES. We will seek to generate additional
sales in foreign markets by establishing a network of international
distribution and sales channels for our products.
In addition, we expect to experience the following synergistic benefits as a
result of our acquisition of Pulsar:
. EXPERIENCE OF MANAGEMENT, KEY PERSONNEL AND CONSULTANTS. We believe
the added depth, breadth and experience of Pulsar's management team,
key employees and consultants enhances our ability to successfully
implement our business strategy.
. COMPREHENSIVE DATA SECURITY PRODUCTS AND SERVICES OFFERING. We believe
we can satisfy the comprehensive requirements of enterprises through
the combination of our open-architecture, open-platform, open-token
and algorithm-independent technologies and products and Pulsar's
networking solution services. We believe our ability to offer
synergistic products and services distinguishes us from other public
key infrastructure information technology solution providers by
enabling us to provide comprehensive information security systems
rather than addressing only selected aspects of customers' data
security needs.
. SOLUTIONS ADDRESSING THE KEY ELEMENTS OF INTERNET DATA SECURITY.
Unlike other integrators that rely on reselling of products produced
by other vendors to respond to the needs of an enterprise, we develop,
manufacture and market many of the applications, software,
cryptographic libraries, readers/writers and tokens that are required
to create comprehensive token-based PKI security solutions that
address the key data security elements of identification and
authentication, confidentiality, data integrity, non-repudiation,
audit control and system administration. Additionally, because our
applications are open standards, we can integrate products and
services of other vendors into our products to enhance our solutions
capability.
INTERNET DATA SECURITY PRODUCTS
GENERAL
Our Internet data security products provide the highest level of
commercially-available security for secure E-mail, secure file transport, file
protection, remote access, authentication and authorization in an open multi-
platform standards-based framework. The foundation of our Internet data
security products is our extensive cryptographic library and device drivers
supporting numerous different operating system platforms and token management
systems which enable users to seamlessly integrate token-based security
enhancements into existing networking environments or into newly designed and
implemented networks. Our cryptographic APIs can also be used by software
developers to add token-based information security to applications such as
browsers, firewalls, E-mail systems, database management systems and other
client/server applications.
Our data security products are designed with an open architecture, so they
are algorithm, platform, application and token independent. As a result, such
products are compatible with virtually all commonly used network hardware.
Algorithm independence allows our products to be tailored to numerous encryption
algorithms through software selection. As a result, our libraries, drivers and
security devices are compatible with a variety of encryption algorithms, and
popular software applications and operating systems. We develop and embed these
cryptographic technologies in a multitude of devices and tokens, including
smartcards, PKI cards, PCMCIA cards, embedded ISA and PCI bus cards. We are
also working with other companies to implement use of PCMCIA cards,
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PKI cards and smartcards to support biometric technologies such as fingerprint
and voice recognition. These products provide the added protection of a security
token utilizing public key cryptography, key exchange techniques and electronic
signatures on most popular operating systems and hardware platforms. In
addition, our technologies permit functions to be scaled as performance and
pricing requirements dictate.
INTERNET APPLICATION SOFTWARE
NETSIGN AND NETSIGN PRO. These products are software adapters that
integrate smartcards and digital certificate technology to enhance security in
software systems designed to provide electronic commerce, E-mail, Internet
access, file access and world-wide-web browsers such as Netscape Communicator
and Microsoft Explorer. NetSign and NetSign PRO software products are bundled
with a smartcard reader/writer and smartcards. NetSign PRO has the added
security feature of file encryption capabilities and other security utilities.
PROFILE MANAGER. ProFile Manager is a complete, stand-alone, PKI solution
for the management of token-based security systems from initialization to secure
backup and recovery. For the recovery of token-based information, ProFile
Manager provides an optional integration with a secured database of private keys
and other user identification information and the use of a third-party
certificate authorities. ProFile Manager integrates with NetSign, NetSign PRO
and other token-enabled products to provide a complete solution for an
enterprise's security needs, including secure Internet access, digitally signed
and encrypted E-mail, desk-top file encryption and secure remote network access.
INTERNET CRYPTOGRAPHIC API (CRYPTOGRAPHIC LIBRARY) DEVELOPER TOOLKITS
CRYPTOS SDK AND CRYPTOS SDK+. CryptOS SDK products are cryptographic APIs
that allow application developers to use off-the-shelf or custom application
software to integrate smartcard technology into existing systems, thus adding
hardware-strength security to software-only systems. CryptOS SDK is bundled
with a smartcard reader/writer and smartcards. CryptOS SDK+ has additional
tools for Java programming.
MAESTRO. Maestro, a product we have only recently introduced to the
market, is a multi-protocol cryptographic library that enables software
developers to incorporate secure token-based, symmetric and asymmetric key
cryptography into their application software. Maestro is a multi/concurrent
access, cross-platform system that supports multiple types of tokens
(smartcards, PCMCIA cards, etc.) and cryptographic algorithms. Coupled with
token reader/writers, Maestro supports devices over commonly-used interfaces,
including keyboard, serial, SCSI, parallel port and USB. Maestro currently
supports two commonly used cryptographic interface protocols. We are developing
additional protocol adapters to expand the functionality of Maestro. Maestro is
compatible with Windows 95, 98 and NT operating systems as well as all popular
UNIX platforms.
TOKENS
ISO SMARTCARDS. We offer a family of off-the-shelf International Standard
Organization ("ISO") standard smartcards ranging from storage-only cards to
cards containing cryptographic capabilities.
MONIKER, PC-CRYPTOCARD. We also offer Moniker, a FORTEZZA standard PCMCIA
card. The Fortezza standard PCMCIA cards are commonly used by the Department of
Defense, as well as by other governmental and commercial entities.
FORTE PKICARD. We are in the process of developing a next generation PKI
card, the Forte PKIcard, in cooperation with Atmel Corporation. Forte is a 32-
bit RISC microprocessor which is being designed with a high speed Universal
Serial Bus (USB) interface in addition to the ISO interface. Forte is also to
be designed with a larger storage capacity and processing speed than existing
smartcards. The Forte PKIcard is expected to be manufactured in the U.S. and we
anticipate shipments to begin in late 1999. See "--Research and Development."
OTHER TOKENS. Because our products are open-architecture, open-platform,
open-token, algorithms and API-independent, we offer third-party tokens such as
PCMCIA cards, smartcards, rings, proximity cards and plastic keys (and other
commercially available tokens) for use with our reader/writers and application
software.
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TOKEN READER/WRITERS
Token reader/writer are a hardware component that electronically read the
content of a smartcard, PCMCIA card, or PKI card. We manufacture several
different types of reader/writers. Following is a brief description of their
features.
SERIAL AND KEYBOARD PORT SMARTCARD AND PKI CARD READER/WRITERS. We sell
our reader/writers as a security product component or bundled with other
products such as ProFile Manager, NetSign and/or CryptOS SDK to provide token-
based data security solutions.
We manufacture and sell compact, hand-held smartcard reader/writers that
interface through the RS-232 serial port of a PC or workstations. The Series
215 and 220 reader/writers are compatible with Windows 95, 98, NT and UNIX and
MacIntosh operating systems. The Series 220 reader/writer can optionally be
connected through the keyboard port which provides the added security of a
protected PIN path. With a protected PIN path, the password authentication is
intercepted by the reader/writer thus preventing a hacker from implanting an
unauthorized "trojan horse" program in the PC to intercept the password. We
offer a Series 230 reader/writer which is integrated into a keyboard, and also
offer a Series 410 reader/writer which connects to a computer through its PCMCIA
slot.
ARGUS 300. The ARGUS 300 consists of a tamper-resistant ISA board and
external reader/writer and is connected to the keyboard. The ARGUS 300
incorporates DES encryption technologies and offers additional security features
such as boot protection, electronic commerce security and protected PIN path
directly through the board (rather than through an external device that might be
tampered with by an unauthorized user). The ARGUS 300 is validated for
electronic signature by the National Institute of Standards and Technology, the
U.S. Treasury and General Accounting Office.
PCMCIA CLIENT READER/WRITER. We offer a series of single-and dual-socket
PCMCIA card reader/writers that interface via various ports such as SCSI
(internal and external), ISA bus (internal), PCI bus (internal), Universal
Serial Bus (USB) and parallel port (external). These reader/writers incorporate
our proprietary device drivers which provide the interface between the
reader/writer and its application software such as Maestro and third-party
application software.
CIPHERSERVER. We offer a reader/writer that contains sockets for up to
eight PCMCIA cards, is used on the enterprise's server side and incorporates the
device drivers and other technologies of our other PCMCIA readers. CipherServer
interfaces with the host server to enable the host server to provide
rapid/simultaneous processing of cryptographic functions received from numerous
clients.
OTHER CUSTOM-DESIGNED SECURITY PRODUCTS
SECURE PCS
We offer a family of secure, year 2000 compliant, servers which are based
on a two-state workstation technology that operate in either the secured state
or the public state. A transition between the two states causes all temporary
data in the volatile memory to be fully erased. This process prevents object
reuse, which precludes an unauthorized subsequent user from accessing the
classified information that would otherwise be resident in the system's memory.
MANAGED FIREWALL AND VIRTUAL PRIVATE NETWORKS SOLUTIONS
We offer secure architecture based firewall and virtual private networks
gateway technology using intrusion detection software for high data capacity and
scaleable security solutions. These software and hardware systems provide for
multi-user remote administration, and integrated management of multiple security
policies and firewalls.
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NETWORK SECURITY AND MANAGEMENT TOOLS
Our network security and management tools are a scalable, comprehensive
collection of network security and management solutions assembled into an
integrated security suite of hardware and software. The tools include a multi-
tiered approach to virus protection covering the client, server and Internet
gateway through a combination of encryption, firewall and virtual private
networks technologies. Such tools protect networking systems against attacks,
and compromise and loss, while maintaining the integrity of business functions
and data. These products ensure full network performance with a proactive
approach by fixing problems, planning growth and optimizing functionality and
reliability.
PROFESSIONAL DATA SECURITY SERVICES
We offer comprehensive networking solutions with a particular emphasis on
designing, developing, implementing, supporting and maintaining networks that
provide for a high level of data security. We develop and implement complete
turn-key networks or enhance or expand existing networks, as the customer
requires.
Our services include:
. strategic consulting, including site risk and requirements analysis
and design;
. custom design and development;
. project management;
. construction, installation and implementation;
. on-site or remote system support, maintenance and repair; and
. on-site system management.
We take a "needs analysis" approach to the design and development of our
solutions for our customers by evaluating their existing infrastructure,
architecture and technologies to optimize the performance of their existing
system and augment their systems as necessary to meet their changing
requirements. Project responsibilities typically require the integration of
access control, intrusion detection and biometric validation.
Because of our expertise designing and implementing systems providing for
robust security, our solutions address the networking and data security needs of
our customers, including:
. Internet access and security;
. secured intranet/extranet capabilities;
. enterprise security procedures and administration;
. secured critical private network and remote dial-in network
capabilities;
. secured distributive applications;
. open-systems migration of data;
. information security communication services; and
. artificial intelligence technologies.
We provide our network solutions through the implementation of the latest
technologies, including high speed baseband and broadband media, fiber optics,
hard wired connect systems, and wireless and satellite transmission systems. We
also provide information technology outsourcing services for our customers,
including ongoing management of network systems. We deliver our professional
services on either fixed-price delivery or time-based delivery modes through two
divisions. Our Data Security Division provides consulting and integration
services and our Enterprise Information Division provides network design,
implementation and management, legacy systems migration, and systems
configuration and evaluation.
Our staff has specific expertise in the following areas of networking
systems:
. INTERNET ENTERPRISE NETWORK CONSULTING: As LAN-based systems become
more complex the assistance of knowledgeable network professionals is
critical for maximum performance. Our network consulting staff that
can help organizations realize their business goals and objectives.
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. NETWORK MANAGEMENT: Today's network managers must cope with a maze of
network protocols, configuration options and computing platforms. Our
network management staff supports information systems departments in
their effort to manage these diverse networking platforms by assisting
with the training, configuration and implementation of network
management systems and products.
. REMOTE COMPUTING: As companies increasingly decentralize their
business functions, they must consider connectivity options for remote
users. Our remote computing team can effectively deliver the most
cost-effective and reliable methods to allow users access to corporate
systems. Whether a business requires dial-in dial-out capability or
Internet access, we can provide a complete solution that incorporates
training and implementation.
PRODUCT RESELLING
Historically, a substantial portion of our product resell revenues were
derived from sales of low-end, low-margin computer and network security
products. We are increasingly shifting our focus in the reseller market,
primarily in the government information technology segment, to sales of high-
end, high-margin specialized computer and network security products and
customized configurations of such resell products. See "- Sales and Marketing
- - Sales to the Government Internet Information Technology Market."
Examples of these high-end, high-margin computer and network security
products include:
. INTRUSION DETECTION SOFTWARE - used to detect unauthorized access, and
identify the source of such access, within a network. Such products
include Net Ranger and PIX.
. FIREWALLS - custom designed software and hardware configurations
installed into a network to prevent unauthorized access from outside
the network. We offer high-end firewall solutions from leading
vendors, including Lucent Technologies, Inc., Network Associates,
Inc., Cyberguard Corporation, Cisco Systems, Inc., and Bay Networks,
Inc.
. NETWORK HARDWARE COMPONENTS - servers, routers, hubs and switches
configured to the customer's networking requirements. We offer
components manufactured by leading vendors, including Cisco Systems,
Inc., Bay Networks, Inc., Hewlett-Packard Company, Bell Computers,
International Business Machine Corp., Lucent Technologies, Inc. and
Sun MicroSystems, Inc.
. ANTI-VIRUS SOFTWARE - high-end software programs installed at server
level to prevent viruses from entering the network, and client-level
software programs to prevent virus corruption to client-server
applications.
. VIRTUAL PRIVATE NETWORKS - a secure pont-to-point connection over the
Internet through which encrypted messages can be transmitted to
protect communications between remote locations.
. DATA SECURITY PRODUCTS - access control products, including our own
and third-party APIs, device drivers, token reader/writers and tokens.
We believe that focusing on these high-end, high-margin products will lead
to higher rates of customer retention. This is because of the complex nature of
the product configurations, which results in customers' making purchasing
decisions based on factors other than simply the lowest price. Further, because
the products are highly customized, we are not required to make substantial
investments in inventory.
Following the offering, we will, where appropriate, include within our
product configuration solutions, our own data security products.
CUSTOMERS
Our customers represent a wide range of commercial enterprises, including
financial, telecommunications, healthcare and information service companies,
airlines, automobile manufacturers, as well as Federal, state, local
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and foreign government agencies. We believe significant cross-marketing
opportunities exist with the integration of Pulsar's customer base.
Our customers include:
. Netscape Communications . American Express Company
Corporation
. Walt Disney Company . S.W.I.F.T.
. Nippon Telephone and . Bank of America, N.A.
Telecommunications Data
Corporation
. Federal National Mortgage . U.S. Army Corps of Engineers
Association
. Executive Offices of the President . Lockheed Martin Corporation
of the United States
. National Security Agency . Federal Communications
Commission
. Booz Allen & Hamilton Inc. . Other U.S. Government
departments and agencies
. Deloitte & Touche LLP
CUSTOMER SERVICE AND SUPPORT
We believe that customer service and support is critical to retaining
existing customers and attracting prospective customers. Our customer service
and support staff consists of 16 persons, including engineers and technical
support personnel, and works closely with customers and prospective customers to
provide comprehensive service and support for our products and systems.
We provide enhanced customer support by maintaining a toll-free customer
service line, and a two-tier support system. The first tier consists of help
desk support personnel responding to phone and mail requests for service and
accessing customer information and a problem database for solutions. For more
sophisticated problems, second tier support is provided by systems technical
support staff.
SALES AND MARKETING
We market our products and services through the Internet, our direct sales
forces, third-party distribution channels, including systems-integrators, value-
added resellers and original equipment manufacturers, strategic alliances and
international distributors. We intend to devote significant resources to
marketing and business development activities in order to expand our business to
additional distribution channels.
DIRECT MARKETING EFFORT
As of January 31, 1999, we employed a direct sales and marketing force of
37 individuals located in offices in California, the Washington, D.C. area and
Atlanta, Georgia to market our products and services to industry and vertical
market segments, including e-commerce, financial, telecommunications, healthcare
and information services companies and Federal, state, local and foreign
government agencies. Our sales force is responsible for soliciting prospective
customers and providing technical advice and support with respect to our
products and services. Additionally, we utilize telemarketing efforts to target
certain commercial accounts and Federal government agencies. We seek to achieve
greater vertical market penetration by utilizing direct sales personnel with
significant market expertise, as well as consultants with established
relationships in the commercial marketplace.
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Following the closing of this offering, we intend to expand our direct
sales force to increase the number of representatives located in California,
Georgia and Washington, D.C., and other strategic geographic areas.
INDIRECT MARKETING EFFORT
An important component of our sales strategy is the development of indirect
sales channels such as systems integrators, value-added network service
providers and original equipment manufacturers. Currently, we utilize these
indirect sales channels to augment the efforts of our direct sales forces.
We also utilize the services of third-party consultants with established
relationships and contacts with prospective customers to which we would not
otherwise have access. As part of our expansion strategy, we will seek to
develop relationships with additional third-party sales channels.
STRATEGIC ALLIANCES
We plan to increase our vertical market penetration by continuing to
develop strategic alliances with other companies in the data security and
network integration industries. We have developed significant strategic
alliances with respect to incorporation of our products into third-parties'
products, joint development of certain products and services, joint research and
development efforts, joint proposals and presentations with respect to products
and services and reseller arrangements. These alliances assist us in expanding
our marketing and technical capabilities and are intended to increase the
distribution and market acceptance of our Internet, intranet and extranet
security products and services.
We believe that strategic alliances allow us to cost-effectively integrate
third-party products into our product offerings to provide our clients with
customized information technology solutions. Our strategic alliances currently
include the following:
. Netscape and Microsoft - we provide enhanced E-mail security features
to their browser programs through integration of our NetSign product
lines.
. VeriSign - we have a marketing agreement with VeriSign pursuant to
which we are VeriSign's recommended PKI card partner.
. Atmel Corporation - we have an alliance with Atmel Corporation in
which we are jointly developing Forte, an advanced microprocessor,
which we are embedding in our next generation PKI cards, the Forte
PKIcard.
. Keytronic - Keytronic and our company sell versions of NetSign bundled
with the Keytronic keyboard, which incorporates an integrated Forte
PKIcard reader.
. RSA Data Security - we have a distribution license agreement with RSA
which allows us to incorporate RSA technology into our products.
. Datacard - Datacard serves as an official distributor of our PKI card
products and integrates our NetSign and ProFile Manager and CryptOS
products into our PKI card printers.
. SCM Microsystems, Inc. - we engage in cooperative marketing and
selling of certain SCM hardware produced with our software.
Additionally, Pulsar has formed alliances with a number of equipment
manufacturers to generate leads for its technology product sales, including
Lucent Technologies, Inc., Photon Vision Systems LLC, Northern Computers, Inc.,
Hewlett-Packard Company and International Business Machines Corp. We expect
such alliances to generate qualified leads for our sales force to contract and
close.
SALES TO THE GOVERNMENT INFORMATION TECHNOLOGY MARKET
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The government information technology market is generally characterized by
highly-structured procurement rules and procedures, large contracts, a
relatively long sales cycle, significant barriers to entry and low collection
risks. In response to these characteristics and requirements, a number of
avenues, such as General Service Administration ("GSA") schedule contracts,
blanket purchase agreements ("BPAs") and bidding procedures, have been developed
to access this market.
The GSA, which is the central procurement agency for the U.S. government,
negotiates schedule contracts. Government agencies and other authorized
purchasers, although not required to do so, may purchase goods and professional
services under GSA schedule contracts at predetermined price ceilings, terms and
conditions. GSA schedule contracts are awarded on the basis of a number of
factors, the most important of which are compliance with applicable government
regulations and the prices of the products to be sold. A BPA is a simplified
but non-mandatory, fixed-price indefinite delivery-indefinite quantity, contract
for the government to purchase products, at pre-negotiated terms and conditions.
Purchases made under BPAs are often paid for with a government-issued credit
card. Federal government agencies are authorized to enter into BPAs with GSA
schedule holders. The GSA-authorized BPAs incorporate many terms and conditions
of GSA schedule contracts, often at lower prices than available on the GSA
schedules.
A significant portion of the purchases of computer products and services by
the Federal government are made under contracts or purchase orders awarded
through formal competitive bids and negotiated procurements. Substantially all
of these bids are awarded on the basis of "best value" to the government, which,
depending on the bid, can be a combination of price, technical expertise, past
performance on other government contracts and other factors. Major procurements
can exceed millions of dollars in total revenue for a reseller, span many years,
and provide a purchasing vehicle for many agencies. In addition, networking
products are purchased by the federal government through open market
procurements. These procurements are separate and apart from GSA schedules for
formal competitive bids, and include simplified acquisition procedures, requests
for quotes, invitations for bids and requests for proposals. Most purchases in
the state and local government market are made through individual competitive
procurements. State and local procurements typically require formal responses
and the posting of "bid bonds" or "performance bonds" to ensure complete and
proper service by a prospective bidder. Each state maintains a separate code of
procurement regulations that must be understood and complied with by entities
selling products to the state.
We are on most government bid lists relevant to our product offerings and
respond with proposals to hundreds of such bid solicitations each year. In
addition, our marketing employees actively prepare bids for federal, state and
local government agencies pursuant to open market procurements. After the
closing of this offering, we intend to expand our bid proposal unit to compete
and capture additional projects submitted for proposal.
ADVERTISING
Our marketing efforts include maintaining a web site, Internet advertising,
including "hot links" with other web sites, direct mail, public relations,
events, sales tools, broadcast messaging, telemarketing and corporate marketing
materials. We believe that our future business activity depends in part on our
marketing and sales through the Internet. Our website describes our business,
products and services. We are currently in the process of integrating Pulsar's
website material and upgrading our site to allow for automated on-line
purchases.
Our public relation efforts are designed to target the appropriate press
coverage and consist of press kits, targeted media lists and press releases.
Such efforts are designed to complement our sales and marketing efforts.
TRADE SHOWS AND PRESENTATIONS
We attend and exhibit our products and services at trade shows in the U.S.
and internationally each year in an effort to increase our market exposure. We
intend to continue to attend trade shows as well as to make joint presentations
with strategic partners to prospective customers relating to products and
services.
SUPPLIERS
Some of the components incorporated into our Internet data security
products are produced by other vendors. We also integrate third-party products
and components into the networks we design and develop for our
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customers. To maintain quality control and enhance working relationships, we
generally rely on multiple vendors for these products. However, certain of these
products are produced or sold only by single supplier, thus presenting a risk
that such products may not be available on commercially reasonable terms in the
future or at all. While we believe that alternative sources of supply could be
obtained, our inability to develop alternative sources if, and as required, in
the future could result in delays or reductions in product shipments that could
adversely affect our business.
RESEARCH AND DEVELOPMENT
We conduct extensive research and development efforts which focus on the
development of cryptographic PKI software and hardware products that can be
readily integrated and adapted to the expanding requirements of the Internet,
intranets and extranets. After the closing of this offering, we expect to
devote substantial additional research and development resources to enhance our
data security product line.
Our current research and development efforts include:
. Expanding Maestro to offer additional application program interfaces,
including Microsoft's CAPI (a cryptographic API) for Windows 95/98 and
Windows NT. Further, expand the suite of tokens supported by Maestro;
. Expanding the capabilities of ProFile Manager to provide certificate
exchange with additional third-party certificate authorities and
increased capability for the PKI enterprise manager;
. Developing Forte, an advanced 32-bit RISC microprocessor which we are
embedding in our Forte PKIcard. We expect the Forte PKIcard will be
an ISO standard smartcard with greater flexibility and a higher degree
of processing power than existing PKIcards, due in part to the
inclusion of a USB interface on-board the microprocessor chip. Given
that Forte is an advanced security chip, we expect to be able to embed
it in a variety of devices, including PC mother boards;
. Developing series of universal serial bus interface reader/writers
(the USB interface is a very high speed interface being included in
most new PCs);
. Developing technologies to incorporate biometric technologies into
Litronic PKI products to provide further advanced identification and
authentication protection;
. Expanding the security features of applications programs such as
NetSign and NetSign PRO; and
. Developing a version of the ARGUS 300 for the PCI bus while retaining
its validation by the National Institute for Standards and Technology.
The process of developing our products and services is extremely complex
and requires significant continuing development efforts. There is a risk that we
will not successfully develop and market new products or product enhancements
that respond to technological change and evolving industry standards and
customer requirements in a timely manner.
As of January 31, 1999, our research and development staff consisted of 24
employees, of whom 20 were engineers. Approximately 90% of such engineers were
engaged principally in the development of software, including cryptographic
libraries and device drivers. Our retention rate for our research and
development staff over the past three years is 80%. We believe that our ability
to attract and retain qualified development personnel is essential to the
continued success of our development programs. The market for such personnel is
highly competitive and our development activities could be adversely affected if
we are unsuccessful in attracting and retaining skilled technical personnel.
During the years ended December 31, 1996 and 1997 and nine months ended
September 30, 1998, our net expenses for research and development were $725,000,
$1.2 million and $738,000, respectively. We have allocated $5.0 million of the
proceeds of this offering for research and development activities.
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COMPETITION
We compete in numerous markets, including Internet and intranet electronic
security and access control, token authentication, smartcard-based security
applications, electronic commerce applications, systems integration, product
reselling and the government information technology markets. The markets for
our products and services are intensely competitive and are characterized by
rapidly changing technology and industry standards, evolving user needs and the
frequent introduction of new products. We believe that the principal factors
affecting competition in our markets include product functionality, performance,
flexibility and features, use of open standards technology, quality of service
and support, company reputation and price.
We will face significant competition from a number of different sources.
Many of our competitors are more established, benefit from greater name
recognition and have substantially greater financial, technical and marketing
resources than we have. One of our significant competitors is Microsoft
Corporation, which has recently announced its intention to begin making
smartcards. Some of our other significant data security competitors are
International Business Machines Corp., Motorola, Inc., RSA Data Security, Inc.,
Network Associates, Inc., Secure Computing Corporation and Rainbow Technologies,
Inc. Some of our competitors for systems integration and product reselling are
BTG, Inc., Inacom Corporation and Government Technology Services, Inc. In
addition there are several smaller or start-up companies with which we compete
from time to time. We also expect that competition will increase as a result of
consolidation in the information security technology and product reseller
industries. We may be unable to compete successfully in the future with our
competitors, which may adversely affect our business.
INTELLECTUAL PROPERTY
We depend substantially on our proprietary information and technologies.
We rely on a combination of trademark, patent, copyright and trade secret laws,
employee and third-party non-disclosure agreements, technical measures and other
methods to protect our software products and other proprietary technologies and
know-how. We also rely on "shrink wrap" license agreements that are not signed
by the end user to license our products and, therefore, may be unenforceable
under the laws of certain jurisdictions. We currently have two patents
registered with the U.S. Patent and Trademark Office and three patent
applications pending with the U.S. Patent and Trademark Office that cover
certain aspects of data security technology. Prosecution of these patent
applications and any other patent applications that we may subsequently
determine to file may require the expenditure of substantial resources. The
issuance of a patent from the filing of a patent application is a lengthy
process. Our technology may become obsolete while our applications for patents
are pending. Further, any pending or future patent may not be granted, and any
future patents may be challenged, invalidated or circumvented and the scope of
any patents may be reduced. The rights granted to us through our patents may
not provide us with any advantages. We have not pursued any patent protection
outside the U.S. for any technology.
Our technical measures and non-disclosure agreements may not be adequate to
prevent misappropriation or provide any meaningful protection for our
proprietary technology in the event of misappropriation. Further, others may
independently develop substantially equivalent or superior technologies or
duplicate any technology we develop, or our technology may infringe on the
patents, copyrights or other intellectual property rights owned by others.
We may also be at risk when we enter into transactions in countries where
intellectual property laws are not well developed or are poorly enforced. Legal
protection of our rights may be ineffective in foreign markets, and technology
manufactured or sold abroad may not be protectable in jurisdictions in
circumstances where protection is ordinarily available in the U.S.
We believe that, due to the rapid pace of technological innovation for
network security products, our ability to establish, and if established,
maintain a position of technological leadership in the industry, is dependent
more upon the skills of our development personnel than upon legal protections
afforded our existing or future technology.
Because our products are designed with an open architecture and are
algorithm-independent, they can be utilized with a variety of encryption
algorithms. Some algorithms, such as DES, are in the public domain and can be
incorporated into our products at no charge. To the extent that one of our
customers desires to incorporate a proprietary algorithm into a security
solution, we or the customer must obtain a license from the algorithm owner.
Depending on the algorithm and its owner, the license fee may be a flat fee, a
per unit royalty or a combination of the two.
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<PAGE>
We are developing Forte under a task order issued under a contract with
National Security Agency. The contract incorporates the Department of Defense's
standard licenses for technical data and computer software, commonly known as
the data rights clauses. Data rights clauses are only applicable to data or
software actually delivered to the Federal government under a contract. If the
data rights clauses were applicable to our agreement with the National Security
Agency to develop Forte, one of the data rights licenses, commonly called a
Government purpose rights ("GPR") license, would permit the Federal government
to create second sources of supply of the Forte technical data and source code
for itself without paying us royalties. The GPR license clause would not
authorize the Federal government to create competitors to us in the commercial
market. We do not believe the data rights clauses generally, or the GPR
license specifically, apply to Forte because our contract with the National
Security Agency does not provide for the delivery of Forte to the federal
government. The task order provides that the National Security Agency will
obtain detailed design information about Forte.
GOVERNMENT REGULATION
Because we sell our products internationally, we must comply with Federal
laws regulating the export of, and applicable foreign government laws regulating
the import of, our products. Although we have obtained approval to export our
NetSign and ProFile Manager products, the Federal government may rescind such
approval at any time. Additionally, we have applied for export approval, on a
specific criteria basis, for certain of our other products. We may not receive
approval to export such products on a timely basis, on the basis we have
requested or at all. As a result of government regulation of our products, we
may be at a disadvantage in competing for international sales compared to
foreign companies that are not subject to such restrictions which could
adversely affect our business.
EMPLOYEES
As of January 31, 1999, Litronic employed 61 full-time and two part-time
people, including 24 in product management, research, development and support,
two in professional services, 25 in field operations including sales, marketing
and customer management, and 12 in finance, human resources, business
development, legal and administration. As of January 31, 1999, Pulsar employed
67 people, including seven in product management, 23 in professional services,
29 in field operations including sales, marketing and customer management, and
eight in finance, human resources, business development, legal and
administration. After the closing of this offering, we expect to integrate
Pulsar's workforce.
Our employees are not represented by labor unions. We do not expect that
any of our employees will be represented by any labor unions after the closing
of this offering. We consider our relations with our employees to be good.
FACILITIES
After the closing of this offering we will be headquartered in Irvine,
California where we currently lease approximately 12,000 square feet of office
space for our executive offices with a lease expiring in September 2001 and
approximately 1,800 square feet of space in a production and warehouse facility
and which has a lease expiring in June 1999. In addition, after the closing of
this offering, we will conduct a significant portion of our operations at
Pulsar's offices in our Lanham, Maryland facility, which has approximately
12,700 square feet of which is used as office space for our executive offices
and as warehouse space, pursuant to a lease that expires in 2003.
LEGAL PROCEEDINGS
We are involved from time to time in routine litigation that arises in the
ordinary course of business. We are not currently involved in any litigation
which we believe will have a material impact on our results of operations,
financial condition or liquidity.
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<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The following table sets forth certain information concerning our
directors, director nominees, officers and persons who have agreed to serve as
executive officers upon the closing of this offering and other key employees,
their respective ages as of February 1, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Kris Shah......................... 59 Chairman of the Board and Chief
Executive Officer
William W. Davis, Sr.............. 48 President, Chief Operating Officer
and Director
Thomas W. Seykora................. 55 Chief Financial Officer
Robert J. Brich................... 55 Vice President Sales and Marketing
Eastern Region
Robert J. Gray.................... 62 Vice President Product Development
Tony Giraudo...................... 47 Director Nominee
Matthew Medeiros.................. 42 Director Nominee
</TABLE>
Kris Shah is our Chairman of the Board and Chief Executive Officer. Mr.
Shah has been Litronic's President and Chief Executive Officer since he founded
the company in 1970. Mr. Shah's career has involved every major aspect of
circuit design and chip packaging technology, including research and
development, manufacturing, engineering, marketing and strategic planning.
Prior to forming Litronic, Mr. Shah held management level positions at Hughes
Aircraft Co., Fiberite Inc. and Bell Industries, Inc. Mr. Shah earned his B.S.
and M.S. degrees in Mechanical Engineering from the University of Southern
California in 1962 and 1964, respectively.
William W. Davis, Sr. is our President and Chief Operating Officer. Mr.
Davis served as Pulsar's President and Chief Executive Officer since he founded
the company in 1982. Mr. Davis sits on the advisory boards of IBM, Ingram Micro
and Pinacor Corporation. Over the past 16 years, Mr. Davis grew Pulsar into a
diversified technology company, specializing in providing network-based
information technology services and customized products to Fortune 1000 and
government accounts. Prior to founding Pulsar, Mr. Davis held various
management positions with several Fortune 1000 companies, including DuPont,
Chevron and Occidental Petroleum Corporation. He is the recipient of numerous
industry awards, including awards for outstanding leadership and performance
from the Government Computer News (1994-1997), Lockheed Martin Corporation and
various industry associations. Mr. Davis has a B.S. Degree Agronomy from
Southern University in 1972 and completed advanced executive management programs
at Dartmouth University in 1994 and the University of Miami in 1995.
Robert J. Brich has agreed to serve as our Vice President Sales and
Marketing - Eastern Region. Mr. Brich will be responsible for the development,
management and performance of Litronic's networking and data security solutions
and services. Mr. Brich has served as Executive Vice President of Technical
Services of Pulsar since September 1998. From January 1998 to September 1998,
Mr. Brich served as President of Infotex Ltd., a developer of data security
products. From September 1997 to December 1997, Mr. Brich served as Director of
Business Development for SFA, Inc., an engineering services company. Mr. Brich
served as Executive Vice President of Management Systems Applications, Inc., a
worldwide information and electronic security provider, from June 1994 to
September 1997. Mr. Brich served as Senior Vice President of SEACOR, an
engineering consulting firm from January 1990 to June 1994. Mr. Brich retired as
a Commander in the U.S. Navy after 22 years of service. Mr. Brich serves as
Chairman of the Board of Directors for the Tidewater Center for Technology
Access, a community charitable organization. Mr. Brich holds a B.S. in
Education from East Stroudsburg University, an M.S. from the Naval War College
and an MBA from Marymount College. He also attended strategic management
curriculums at Wharton School of Business. Mr. Brich is currently a Ph.D.
candidate in Business/Education at Old Dominion University.
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<PAGE>
Robert J. Gray has agreed to serve as our Vice President, Product
Development upon the closing of this offering. Mr. Gray joined Litronic in May
1990. Mr. Gray served as president of Cyphernet, Inc., a division of Codercard,
Inc., a data security company, from January 1985 to May 1990. Mr. Gray has also
served as President of Genisco Technology Corp., a leading manufacturer of
computer graphics and imaging hardware for the computer aided design, image
processing and simulation markets. After obtaining his education in meteorology,
oceanography and computer sciences from various military schools including the
Naval postgraduate School in Monterey, California, Mr. Gray served as an officer
in the U.S. Navy for 22 years, specializing in meteorology and computer
sciences. During his Naval career, Mr. Gray completed numerous assignments
within the Department of Defense, the National Security Agency and the Naval
Security Service.
Thomas W. Seykora is our Chief Financial Officer. Mr. Seykora joined
Litronic in July 1995 as its Chief Financial Officer. Prior to joining
Litronic, Mr. Seykora was an independent management consultant to companies and
financial institutions from 1986 to July 1995. From 1982 to 1986, he served as
Chief Financial Officer and Senior Vice President - Finance and Operations for
Curley Bates Co., a closely held distribution company. Prior to that, Mr.
Seykora worked for KPMG LLP (then known as Peat, Marwick, Mitchell & Co.), most
recently as an Audit Manager. Mr. Seykora also served as an officer, achieving
the rank of Captain, in the U.S. Marine Corps. He received a B.A. degree in
accounting from Minnesota State University.
Tony Giraudo has agreed to serve as a director of our company upon the
closing of this offering. Since 1986, Mr. Giraudo has worked for Atmel
Corporation (and its predecessor, Honeywell), most recently as Vice President
and General Manager. Prior to joining Honeywell, Inc., Mr. Giraudo worked for
NCR Corporation in various positions from 1980 through 1986, his most recent
position being Director of Research and Development. Mr. Giraudo served as
Analog I.C. Designer for International Business Machines from 1977 to 1980. Mr.
Giraudo received his B.S. in Electrical Engineering in 1972 and his M.S. in
Electrical Engineering in 1976, both from the University of New Mexico. He also
completed the Cooperative Electrical Engineering Program from 1970 to 1974.
Matthew Medeiros has agreed to serve as a director of our company upon the
closing of this offering. Since 1998, Mr. Medeiros has served as Chairman and
Chief Executive Officer of Phillips Flat Display Systems. Prior to joining
Phillips, Mr. Medeiros served as Vice President and General Manager for the
Optical Polymers Group, and as Vice President of Business Development for the
Electronic Materials Division of AlliedSignal, Inc. from 1995 to 1997. Mr.
Medeiros also previously served in executive positions with Radius, Inc., NeXT
Computer and Apple Computer, Inc. in which positions he developed an extensive
background in personal computer manufacturing, operations and materials
management. Mr. Medeiros received his B.S. in Business Administration,
Management Science and Finance from the University of San Francisco.
Our Board of Directors consists of three classes of directors. Class I, II
and III directors serve until our 2000, 2001 and 2002 annual meeting of our
stockholders, respectively, and, after such initial terms, directors serve until
the third annual meeting of stockholders following their election or until a
successor is duly elected and qualified. Executive officers are duly elected by
the Board of Directors to serve until their respective successors are elected
and qualified. Mr. Medeiros serves as a Class I director, Mr. Giraudo serves as
a Class II director, and Messrs. Shah and Davis serve as Class III directors.
We have agreed, for a period of three years from the date of this
Prospectus, if so requested by the Representative, to nominate and use our best
efforts to elect two designees of the Representative as directors of our company
or, at the Representative's option, as non-voting advisors to our Board of
Directors. Our officers, directors and stockholders have agreed to vote their
shares of common stock in favor of such designee. The Representative has not
yet exercised its right to designate such persons.
KEY EMPLOYEE
William S. Holmes, Vice President Sales and Marketing Western Region. Mr.
Holmes has over thirty years experience in the computer industry. Mr. Holmes
joined Litronic in October 1998 as Vice President Marketing and Sales. From
September 1996 to September 1998, Mr. Holmes served as Vice President Sales and
Marketing for Gigatron Software Corporation, a private information management
company. From April 1996 to September 1996, Mr. Holmes served as Consultant to
Novaquest Infosystems Inc., a computer reseller. From October 1985 to April
1996, Mr. Holmes served as Vice President, Managing Director of California
Software Products, Inc. From June 1984 to October 1985, Mr. Holmes served as
Sales Manager of Data Logic Ltd. (a subsidiary of Raytheon Corporation). From
February
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<PAGE>
1971 to June 1984, Mr. Holmes served in Project Management for International
Computer Limited (England and South Africa). Mr. Holmes attended Watford College
of Technology (England).
DIRECTORS COMPENSATION
Except for grants of stock options, directors will not receive any cash
compensation for their services as board members although they are reimbursed
for their expenses in attending board and committee meetings.
COMMITTEES OF THE BOARD OF DIRECTORS
Upon the closing of this offering, the Board of Directors will establish a
Compensation Committee and an Audit Committee. The initial members of each of
the committees shall be independent directors. The principal function of the
Compensation Committee will be to review and make recommendations to the Board
on all compensation and hiring issues relating to officers and senior staff
members and to administer the 1999 Stock Option Plan. The principal function of
the Audit Committee will be to make recommendations to the Board regarding the
selection of our independent accountants, to consult with our independent
accountants and financial and accounting staff and to review and report to the
Board with respect to the scope of audit procedures, accounting practices and
internal accounting and financial controls.
EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid or accrued for
the year ended December 31, 1998 for our Chief Executive Officer and for other
executive officers whose compensation was over $100,000 during the fiscal year
ended December 31, 1998.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
NAME AND PRINCIPAL POSITION YEAR ANNUAL COMPENSATION ALL OTHER COMPENSATION
- --------------------------- ---- ------------------- -----------------------
SALARY BONUS
------ -----
<S> <C> <C> <C>
Kris Shah 1998 $231,998 -- (1)
Chief Executive Officer
and Chairman of the Board
Robert Gray 1998 $ 95,046 $1,850 (1)
Vice President Product
Development
</TABLE>
______________
(1) The benefits paid to each of the named officers in the year ended December
31,1998 was less than $50,000.
We anticipate that during the fiscal year ending December 31, 1999 our most
highly compensated executive officers will be Messrs. Shah, Davis and Gray.
<TABLE>
<CAPTION>
AGGREGATE FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE-MONEY
UNEXERCISED OPTIONS AT FISCAL YEAR END OPTIONS AT FISCAL YEAR END (1)
----------------------------------------------------------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C>
Robert Gray 27,097 50,322 $143,614 $266,707
- -----------------------------------------------------------------------------------------------
</TABLE>
_______________
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<PAGE>
(1) The value of the options is based upon the difference between the exercise
price per share and the estimated fair market value per share at December
31, 1998, as determined by the Board of Directors, multiplied by the number
of shares subject to the options.
EMPLOYMENT AGREEMENTS
Kris Shah and William Davis have each entered into a three-year employment
agreement with Litronic, effective as of the date of the offering, with
automatic one-year renewal periods, unless either party provides written notice
90 days prior to the expiration of the initial term or renewal term of notice
not to renew the agreement. Pursuant to the agreements, Messrs. Shah and Davis
will each receive an annual salary of $175,000, during the first twelve months,
subject to increase thereafter at the discretion of our Compensation Committee.
Messrs. Shah and Davis are entitled to receive annual bonus awards equal to
$100,000 if our company achieves earnings before interest and taxes (after
adding back the amortization of goodwill from the Pulsar acquisition) of at
least $2.5 million and an additional $37,500 for each additional $1 million of
earnings before interest and taxes (after adding back the amortization of
goodwill from the Pulsar acquisition) in excess thereof. Each agreement
provides that it may be terminated (i) by the employee at any time for good
reason as defined in the agreement, (ii) by us with cause (as defined in the
agreement) or (iii) upon the death or disability of the employee. If the
agreement is terminated by the employee upon proper notice, by us for cause or
by the employee in breach of the agreement, all compensation shall cease as of
the termination date other than certain employee benefits, accrued but unpaid
salary and vested stock options. If the agreement is terminated by the employee
for good cause as defined in the agreements or by the occurrence of certain
events resulting in a constructive termination, we will pay the employee's
annual salary through the latter of the end of the term of the employment
agreement or two years, a pro rata bonus for the fiscal year in which
termination occurs, and certain continued medical and life benefits for a period
up to six months after the date of termination. Each of the agreements contains
noncompete, confidentiality and nondisclosure clauses, as well as provisions
related to our rights to any products or technologies developed by the employee
either during his employment or during a two-year period following his
termination.
STOCK OPTION PLANS
1998 Stock Option Plan
Our 1998 Stock Option Plan was established to provide directors, officers
and employees with an opportunity to invest in our company and to advance the
interest of it and our stockholders by enabling our company to attract and
retain qualified personnel. Under the plan our Board of Directors had authority
to grant incentive stock options intended to qualify under Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code") to our employees and non-
qualified stock options to our employees, officers and directors or to such
other individuals as the Board determined. Further, subject to certain limited
restrictions, the Board of Directors may amend, suspend or terminate the plan
from time to time in its discretion. Administration of the plan may be
delegated to a committee to be appointed by the Board of Directors. The option
period and provisions for exercise of each option granted shall be determined by
the committee at the time of each such grant. Unless terminated earlier the
plan will terminate on April 1, 2008.
Options to purchase an aggregate of 281,419 shares of common stock have
been granted under the 1998 Stock Option Plan at an exercise price of $.70 per
share, of which options to purchase 145,119 shares are vested as of the date of
this Prospectus. Of such options, (i) options to purchase 77,419 shares have
been granted to Mr. Gray; all of which have vested and (ii) options to purchase
11,613 shares have been granted to Mr. Seykora, of which options to purchase
2,540 shares have vested, and the balance of such options vest as to 2,323
shares on December 31, 1999 and each year thereafter. No additional options
will be granted under the 1998 Stock Option Plan.
1999 Stock Option Plan
Our 1999 Stock Option Plan is intended to provide directors, officers and
employees with an opportunity to invest in our company and to advance the
interest of it and our stockholders by enabling our company to attract and
retain qualified personnel. Under the plan our Board of Directors has authority
to grant incentive stock options intended to qualify under Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code") to our employees and non-
qualified stock options to our employees, officers and directors or to such
other individuals as the Board may determine. Further, subject to certain
limited restrictions, the Board of Directors may amend, suspend or terminate the
plan from time to time in its discretion. Administration of the plan may be
delegated to a committee to be appointed by the Board
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<PAGE>
of Directors. The option period and provisions for exercise of each option
granted shall be determined by the committee at the time of each such grant. A
total of 600,000 shares of common stock have been reserved for issuance in the
aggregate under the plan. No options have been granted under the 1999 Stock
Option Plan. Unless terminated earlier the plan will terminate on March 31,
2009. Options or other awards that are granted under the plan but which expire
unexercised are available for future grants.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth as of the date of this Prospectus (i) giving
effect to the Acquisition and (ii) as adjusted to reflect the sale of the
3,000,000 shares offered hereby, certain information known to us regarding the
beneficial ownership of our common stock by each person or entity known to us to
own beneficially more than 5% of the common stock, each of our directors, each
of the named executive officers and all directors and executive officers as a
group.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF NUMBER OF SHARES PERCENTAGE OF OUTSTANDING
BENEFICIAL OWNER (1) BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED (2)
- ------------------------------------- ------------------------ ------------------------------
BEFORE AFTER
OFFERING OFFERING
------------- --------------
<S> <C> <C> <C>
Kris Shah....................................... 3,220,479 (3) 53.3% 35.6%
William W. Davis, Sr............................ 1,084,969 18.0 12.0
Lillian Davis................................... 1,084,969 18.0 12.0
Ramesh R. Shah
Patricia L. Shah.......................... 463,657 (4) 7.7 5.1
Robert J. Gray.................................. 77,419 (5) 1.3 *
Tony Giraudo.................................... 0 0 0
Matthew Medeiros................................ 0 0 0
All directors and executive officers as a
group (5 persons) 4,355,407 (6) 71.7 48.1
</TABLE>
________________
* Less than 1%
(1) The address of each beneficial owner listed is the address of the company.
(2) Except as indicated in the footnotes to this table, we believe that all the
persons named in the table have sole voting and investment power with
respect to all shares shown as beneficially owned by them, subject to
community property laws where applicable. In accordance with the rules of
the Securities and Exchange Commission, a person or entity is deemed to be
the beneficial owner of securities that can be acquired by such person or
entity within 60 days from the date of this Prospectus upon the exercise of
options. Each beneficial owner's percentage ownership is determined by
assuming that options that are held by such person (but not those held by
any other person) and which are exercisable within 60 days of the date of
this Prospectus have been exercised. The inclusion herein of such shares
listed as beneficially owned does not constitute an admission of beneficial
ownership. Percentages herein assume a base of 6,040,631 shares of common
stock outstanding as of the date of this Prospectus and a base of 9,040,631
shares of common stock outstanding immediately after the consummation of
this offering.
(3) Represents (i) 435,301 shares of common stock held by the Chandra L. Shah
Trust, of which Mr. Shah is the trustee, (ii) 435,301 shares of common
stock held by the Leena Shah Trust, of which Mr. Shah is the trustee and
(iii) 2,349,877 shares of common stock held by the Kris and Geraldine Shah
Family Trust, of which Mr. Shah and his wife are the trustees and
beneficiaries.
(4) Represents shares of common stock held by the Ramesh R. Shah and Patricia
L. Shah Living Trust, of which Ramesh R. Shah and Patricia L. Shah are
trustees and beneficiaries. Ramesh Shah is the brother of Kris Shah and
Patricia Shah is the sister-in-law of Kris Shah.
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<PAGE>
(5) Represents shares of common stock issuable upon exercise of currently
exercisable options.
(6) Includes an aggregate 79,959 shares of common stock issuable upon exercise
of currently exercisable options. Does not include an aggregate of 59,395
shares of common stock issuable upon exercise of options which become
exercisable at various times commencing December 31, 1999.
CERTAIN TRANSACTIONS
THE PULSAR ACQUISITION
Litronic entered into a stock exchange agreement with Pulsar and William W.
Davis, Sr., our President and Chief Operating Officer, and Lillian Davis, the
former stockholders of Pulsar (the "Pulsar Stockholders"), pursuant to which the
Pulsar Stockholders exchanged all of the outstanding capital stock of Pulsar for
an aggregate of 2,169,938 shares of our common stock. The shares of our common
stock received by the Pulsar Stockholders is valued at approximately $21.6
million (based on an assumed price of $10 per share, the midpoint of the initial
public offering price). As a result of the Acquisition, Pulsar will become a
wholly-owned subsidiary of our company and William Davis and Lillian Davis will
become principal stockholders of our company. The common stock issued in the
Acquisition will be issued on a "tax free" basis under Section 351(b) of the
Internal Revenue Code of 1986, as amended.
OTHER TRANSACTIONS WITH RELATED PARTIES
We had obligations aggregating approximately $211,000 to Kris Shah, our
Chief Executive Officer and Chairman of the Board, for accrued compensation at
December 31, 1994. On January 2, 1995, this obligation was converted into an
unsecured note, bearing interest at an annual rate of 8%, which was due on
December 31, 1998. On October 29, 1997, the aggregate principal and interest
amounting to approximately $48,000 due on the note was repaid.
Since 1995, in the ordinary course of business, we have financed equipment
for our operations in the aggregate amount of $2.39 million. These obligations
were personally guaranteed by Kris Shah, and were satisfied in full during 1997.
In June 1995, Davis Holding, Inc., a privately held corporation, the sole
stockholder of which is the son of William W. Davis, Sr., purchased a building
in Atlanta, Georgia. This purchase was financed through loans to Davis Holding,
Inc. from Wilmington Trust Company in the amount of $2.4 million and were
guaranteed by Pulsar and personally guaranteed by William W. Davis, Sr. and
Lillian Davis.
Between July 1995 and June 1996, Pulsar made a series of eight loans
aggregating $2.8 million to Davis Holding, Inc. These loans bear interest at
annual rates varying from 7.5% to 10.0% and are due on demand. Two of these
loans were in the form of assignment of notes receivable to Pulsar from third
parties in the aggregate principal amount of $630,000, which were assigned back
to Pulsar in December 1997.
In October 1995, Davis Holding, Inc. and Mr. Davis' son purchased Palmer
III Limited Partnership. At the time of the purchase, the principal asset of
Palmer was a building in Lanham, Maryland. This purchase was financed through a
loan to Davis Holding, Inc. from Wilmington Trust Company in the amount of $2.8
million which was guaranteed by Pulsar and personally guaranteed by William W.
Davis, Sr. and Lillian Davis. Following the acquisition of the building, Davis
Holding, Inc. leased a portion of the Lanham, Maryland building to Pulsar at
fair market rate rents. Payments of rent under the lease were $1,042,000,
$955,500 and $409,500 during the years ended December 31, 1996 and 1997 and nine
months ended September 30, 1998. A portion of such payments were offset against
interest and principal owing under the notes evidencing the eight loans from
Pulsar to Davis Holding, Inc. In addition, the principal amount under the notes
was reduced by $750,000 as payment of a fee for terminating the lease as of
September 30, 1998. As of January 1, 1999, the approximately $1.3 million
outstanding under such loans was converted into a $543,000 promissory note and a
$804,000 promissory note, bearing interest at the rate of 7.5% per annum,
payable monthly, and maturing upon the sales of the Lanham, Maryland and
Atlanta, Georgia properties, respectively.
In May 1996, Pulsar entered into a line of credit with Wilmington Trust
Corp. which was personally guaranteed by William W. Davis, Sr., and Lillian
Davis. Under the line of credit, Pulsar could borrow up to the lesser of its
accounts receivable or $22 million secured by a pledge of eligible accounts
receivable, inventory, machinery and
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<PAGE>
equipment. Interest on the outstanding line of credit accrues at a variable rate
of interest. In October 1997, the line of credit was converted to a term loan of
$5.20 million which is guaranteed by William W. Davis, Sr., Lillian Davis,
Palmer III Limited Partnership and Davis Holding, Inc., and is secured by an
indemnity mortgage and security deed from Palmer III Limited Partnership on its
Lanham, Maryland property and a security deed from Davis Holding, Inc. on its
Atlanta, Georgia property.
We had an unsecured revolving line of credit up to $1 million from Kris
Shah which accrued interest at an annual rate of 8%. All unpaid principal and
interest under this line was repaid during 1996. During the year ended December
31, 1996, $30,000 of the interest under this line was paid to Mr. Shah. The
line of credit expired on January 31, 1997 and was not renewed.
In June 1996, we entered into a one-year loan and security agreement with
Fidelity Funding, Inc., ("Fidelity"), which was personally guaranteed by Kris
Shah. Under the agreement, Fidelity extended a variable rate credit line of up
to $5.95 million, of which $1.0 million was collateralized by fixed assets,
$2.2 million was collateralized by real estate, $2.5 million was collateralized
by accounts receivable and inventory and $250,000 in the form of a standby line
of credit. In September 1997, we sold the building securing the $2.2 million
real estate line and repaid such line. In March 1998, the $2.5 million revolving
credit facility was extended to February 2000. As of September 30, 1998,
$481,000 is outstanding under this facility. We intend to repay the outstanding
indebtedness under this credit facility out of the proceeds from this offering,
at which time Mr. Shah's guarantee will be released.
In December 1996, we entered into a line of credit at a fixed annual rate
of interest of 6.6% with the Bank of Yorba Linda for up to $1.04 million, which
was personally guaranteed by Kris Shah and his wife Geraldine Shah and secured
by a pledge of their personal assets. This line was repaid in June 1997.
In January 1997, we formed KRDS, Inc. as a wholly owned subsidiary in
connection with the acquisition of certain real estate. Following the
acquisition KRDS leased to us a portion of the property to use in our former
Intercon division at market. In December 1997, we made a capital contribution
in the amount of $8.5 million to KRDS, Inc. and a cash distribution of the bulk
of the remaining proceeds of the sale of the Intercon division to our
stockholders. Subsequently, we distributed the capital stock of KRDS (discussed
below) to our stockholders. As a result of the KRDS distribution, we removed the
property and the corresponding mortgage and other liabilities from our
consolidated balance sheet. Following the distribution, we borrowed $2.9 million
from KRDS which was evidenced by an unsecured promissory note. In February 1998,
we borrowed an additional $600,000 from KRDS which borrowing was evidenced by an
unsecured promissory note. Each of these notes bore interest at an annual rate
of 10% and were paid in full in September 1998 with the proceeds of our loan
from BYL Bank Group.
In October 1997, Pulsar entered into an Inventory and Working Capital
Financing Agreement with IBM Global Finance Corporation ("IGFC") which provides
that Pulsar can finance purchases of products through IGFC. As amended on
February 2, 1999, the agreement provides for a credit line up to the lesser of
$8 million, a specified percentage of Pulsar's eligible accounts receivable or a
specified percentage of Pulsar's on-hand inventory. The credit line is secured
by substantially all Pulsar's assets and certain personal assets of Mr. Davis
and is personally guaranteed by William W. Davis, Sr. and Lillian Davis. We
intend to repay a portion of the indebtedness outstanding under this financing
agreement using proceeds from this offering, at which time Mr. Davis' guarantee
and the assets pledged by Mr. Davis will be released.
During the year ended December 31, 1997 we made distributions to our
stockholders of (a) $9.5 million in cash, (b) the rights to the contingent
payment relating to the sale of our Intercon division, (c) the rights to a
gross-up payment for expected tax liability resulting from the gain on the sale
of our Intercon division and (d) the capital stock of KRDS following a
contribution of $8.5 million to KRDS.
In September 1998, we executed two promissory notes aggregating $5.2
million in favor of BYL Bank Group at a fixed rate of interest of 6.6%. Both
notes were personally guaranteed by Kris Shah and secured by a pledge of
personal assets of Mr. Shah. We intend to use a portion of the proceeds of this
offering to repay the indebtedness under this loan, at which time Mr. Shah's
guarantee and the assets pledged by Mr. Shah will be released.
Mr. Davis loaned to Pulsar $120,000 on November 23, 1998 and $222,000 on
January 5, 1999. Such loans bear interest at the rate of 6% per annum beginning
April 1, 1999, and will be repaid prior to the date of this Prospectus.
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<PAGE>
DESCRIPTION OF SECURITIES
Upon the closing of the offering, our authorized capital stock will consist
of 25,000,000 shares of common stock, $0.01 par value per share and 5,000,000
shares of preferred stock, $0.01 par value per share. As of the date of this
Prospectus, there are 3,870,693 shares of our common stock held of record by
five stockholders, and, after giving effect to the Acquisition, there will be
6,040,631 shares of our common stock outstanding held of record by seven
stockholders.
The following summary of certain provisions of the common stock, the
Certificate of Incorporation, and the By-laws is not intended to be complete and
is qualified by reference to the provisions of applicable law and to the
Certificate of Incorporation and the By-laws included as exhibits to the
registration statement of which this Prospectus is a part.
COMMON STOCK
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 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 to pay such individuals. Upon
our liquidation, dissolution or winding up, the holders of common stock are
entitled to receive ratably our net assets available after the payment of all
debts and other liabilities. Holders of common stock have no preemptive,
subscription or redemption rights. The outstanding shares of common stock are,
and the shares we are offering in this offering will be when issued and paid
for, fully paid and non-assessable. Certain holders of common stock have the
right to require us to effect the registration of their shares of common stock
in certain circumstances.
PREFERRED STOCK
Pursuant to the Certificate of Incorporation the board of directors is
authorized to issue up to 5,000,000 shares of preferred stock with a par value
of $0.01 per share. The board may issue such stock in one or more series and
may fix the rights, voting process and preferences of such stock. As of the
date of this Prospectus, no shares of preferred stock have been issued.
REGISTRATION RIGHTS
Pursuant to a Registration Rights Agreement dated February 8, 1999 with our
stockholders, we have granted our stockholders piggyback registration rights in
the event of an underwritten offering following this offering. All of such
stockholders have agreed not to exercise such rights for two years following the
closing of this offering, without the prior written consent of the
Representative.
DELAWARE LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS
We are subject to the provisions of Section 203 of the General Corporation
Law of Delaware. Section 203 prohibits a publicly held Delaware corporation
from engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved in
a prescribed manner. A "business combination" include mergers, asset sales and
other transactions resulting in a financial benefit to the interested
stockholder. Subject to certain exceptions, an "interested stockholder" is a
person who, together with affiliates and associates, owns, or within three years
did own, 15% or more of the corporation's voting stock.
Pursuant to Delaware General Corporation Law the affirmative vote of a
majority of the shares entitled to vote on any matter is required to amend our
certificate of incorporation or by-laws.
The Certificate of Incorporation contains certain provisions permitted
under the Delaware General Corporation Law relating to the liability of
directors. The provisions eliminate a director's liability for monetary damages
for a breach of fiduciary duty, except in certain circumstances involving
wrongful acts, such as the breach of a director's duty of loyalty, or acts or
omissions which involve intentional misconduct or a knowing violation of law.
Further, the Certificate of Incorporation contains provisions to indemnify our
directors and officers to the fullest extent permitted by
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<PAGE>
the Delaware General Corporation Law. We believe these provisions will assist us
in attracting and retaining qualified individuals to serve as directors.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is Continental Stock
Transfer & Trust Company, Two Broadway, New York, New York 10004.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our securities.
Upon completion of the offering, (assuming no exercise of the Representative's
over-allotment option or outstanding options) there will be 9,040,631 shares of
our common stock outstanding. Of these shares, the 3,000,000 shares sold in the
offering will be freely tradeable without restriction or further registration
under the Securities Act, except that any shares purchased by our "affiliates,"
as that term is defined in Rule 144 under the Securities Act ("Affiliates"), may
generally only be sold in compliance with the limitations of Rule 144 described
below.
The remaining 6,040,631 shares of common stock are deemed "restricted
securities" under Rule 144 and are subject to a lock-up agreement with the
Representative. All of our officers, directors and securityholders have agreed
not to sell, offer for sale, transfer, pledge or otherwise dispose of any of
their shares of our common stock, or securities convertible, exchangeable or
exercisable for shares of our common stock, for a period of 24 months from the
date of this Prospectus, provided that, after the first six months of such
period, this restriction can be waived by BlueStone, in its sole discretion, and
provided further that, after the first 12 months of such period, sales may be
made, without BlueStone's consent, as long as the number of shares (or share
equivalents) sold by any of such holders does not exceed, during any 90-day
period, the greater of (i) 1% of the then outstanding shares of our common stock
and (ii) the average weekly trading volume of our common stock during the four
calendar weeks preceding the holder's sale. Subject to the lock-up agreement,
3,870,693 shares of common stock will be available for sale in the public market
commencing six months following the date of this Prospectus, and an additional
2,169,938 shares of common stock will be available for sale in the public market
commencing twelve months following the date of this Prospectus, in each case
subject to the provisions of Rule 144 under the Securities Act ("Rule 144").
See "Underwriting."
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 us, 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 one percent of the then outstanding shares of common stock
(approximately 90,400 shares immediately after the 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
restricted securities were acquired from us, or (if applicable) the date they
were acquired from our Affiliate, a stockholder who is not our Affiliate at the
time of sale and has not been our Affiliate 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.
Subject to the restrictions under the applicable lock-up agreement,
securities issued in reliance on Rule 701 (such as shares of common stock
acquired pursuant to the exercise of certain options granted under our stock
plans) are also restricted securities and, beginning 90 days after the effective
date of the registration statement of which this Prospectus is a part, may be
sold by stockholders other than our Affiliates 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.
Prior to the offering, there has been no public market for the common
stock, 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 our
future ability to raise capital through an offering of our equity securities.
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<PAGE>
UNDERWRITING
BlueStone Capital Partners, L.P. ("BlueStone" and/or the "Representative")
is acting as representative of the several underwriters named below. The
underwriters have agreed, severally and not jointly, subject to the terms and
conditions contained in the underwriting agreement relating to this offering, to
purchase the 3,000,000 shares of common stock offered by our company. The
number of shares of common stock that each underwriter has agreed to purchase is
set forth opposite its name below:
Underwriter Number of Shares
- ----------- ----------------
BlueStone Capital Partners, L.P.
---------
Total 3,000,000
=========
The underwriters are committed on a "firm commitment" basis to purchase and
pay for all of the shares of common stock offered hereby (other than shares
offered pursuant to the over-allotment option) if any shares are purchased.
The underwriting agreement provides that the obligations of the
underwriters thereunder are subject to approval of certain legal matters by
counsel and to various other conditions. The nature of the underwriters'
obligations is such that they are committed to purchase and pay for all of the
shares of common stock (other than the shares offered pursuant to the over-
allotment option) if any are purchased.
The Representative has advised us that the underwriters propose to offer
the shares of common stock to the public at the public offering price set forth
on the cover page of this Prospectus. The underwriters may allow to certain
dealers who are members of the National Association of Securities Dealers, Inc.
(the "NASD") concessions, not in excess of $ . per share, of which not in
excess of $ . per share may be reallowed to other dealers who are members of
the NASD.
We have granted to the Representative an option, exercisable not later than
45 days after the date of this prospectus, to purchase up to 450,000 additional
shares of our common stock at the public offering price set forth on the cover
page of this prospectus, less underwriting discounts and commissions. The
Representative may exercise this option only to cover over-allotments, if any,
made in connection with the sale of the shares of common stock offered hereby.
If the Representative exercises the over-allotment in full, the total price to
public would be $ , the total underwriting discounts and commissions
would be $ and the total proceeds (before payment of the
expenses of this offering) to our company would be $ . We
estimate the expenses of this offering, including those payable to or on behalf
of the Representative and/or the underwriters described below, to be $2.2
million, or $2.3 million if the Representative's over-allotment option is
completely exercised.
We have agreed to reimburse the Representative for its accountable out-of-
pocket expenses incurred in connection with this offering, up to a maximum
amount equal to 1-1/2% of the gross proceeds derived from the sale of the shares
offered hereby, including shares sold, if any, as a result of the
Representative's exercise of all or part of its over-allotment option. We have
also agreed to pay all expenses in connection with qualifying the shares offered
under the laws of such states as the Representative may designate, including
expenses of counsel retained for such purpose by the Representative.
At the closing of this offering, we will sell to the Representative and its
designees, for an aggregate of $300, the Representative's warrants to purchase
up to 300,000 shares of our common stock. The Representative's warrants will be
exercisable at any time, in whole or in part, during the four-year period
commencing one year from the date of this prospectus, at an exercise price of
$ per share (165% of the public offering price per share). The Representative's
warrants are assignable or transferable only to the officers and partners of the
Representative or the underwriters or members of the selling group during the
one- year period following the date of this prospectus. During the exercise
period, the holders of the Representative's warrants will have the opportunity
to profit from a rise in the
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<PAGE>
market price of the common stock, which will dilute the interests of our
stockholders. We expect that the Representative's warrants will be exercised
when we would, in all likelihood, be able to obtain any capital we need on terms
more favorable than those provided by the Representative's warrants. Any profit
realized by the Representative on the sale of the Representative's warrants or
the underlying shares of common stock may be deemed additional underwriting
compensation. The Representative's warrants contain a cashless exercise
provision. We have agreed that, upon the request of the holders of a majority of
the Representative's warrants, we will (at our own expense), on one occasion
during the exercise period, register the Representative's warrants and the
shares of common stock underlying the Representative's warrants under the
Securities Act. We have also agreed to include the Representative's warrants and
all such underlying shares of common stock in any appropriate registration
statement which is filed by us under the Securities Act during the seven years
following the date of this prospectus.
In connection with the acquisition of Pulsar, BlueStone has served as our
financial advisor and will receive a fee of $500,000 for such services upon
closing of this offering.
All of our officers, directors and securityholders have agreed not to sell,
offer for sale, transfer, pledge or otherwise dispose of any of their shares of
our common stock, or securities convertible, exchangeable or exercisable for
shares of our common stock, for a period of 24 months from the date of this
Prospectus, provided that, after the first six months of such period, this
restriction can be waived by BlueStone, in its sole discretion, and provided
further that, after the first 12 months of such period, sales may be made,
without BlueStone's consent, as long as the number of shares (or share
equivalents) sold by any of such holders does not exceed, during any 90-day
period, the greater of (i) 1% of the then outstanding shares of our common stock
and (ii) the average weekly trading volume of our common stock during the four
calendar weeks preceding the holder's sale.
The Representative has informed us that it does not expect sales of the
securities offered to discretionary accounts to exceed 3% of the shares offered
hereby.
We have agreed to indemnify the underwriters against certain civil
liabilities, including liabilities under the Securities Act.
Prior to this offering there has been no public market for our common
stock. Accordingly, the initial public offering price of the common stock will
be determined by negotiation between us and the Representative and may not
necessarily be related to our asset value, net worth or other established
criteria of value. Factors to be considered in determining such price include
our financial condition and prospects, an assessment of our management, market
prices of similar securities of comparable publicly-traded companies, certain
financial and operating information of companies engaged in activities similar
to those of our company and the general condition of the securities market.
In connection with this offering, the underwriters may engage in passive
market making transactions in the shares on Nasdaq in accordance with Rule 103
of Regulation M promulgated under the Securities Act.
In connection with this offering, the underwriters may purchase and sell
the common stock in the open market. These transactions may include over-
allotment and stabilizing transactions. Stabilizing transactions consist of
certain bids or purchases for the purpose of preventing or retarding a decline
in the market price of the common stock. The underwriters may also place bids
or purchase shares to reduce a short position created in connection with the
offering. Short positions are created by persons who sell shares which they do
not own in anticipation of purchasing shares at a lower price in the market to
deliver in connection with the earlier sale. Short positions tend to place
downward pressure on the market price of a stock. In addition, the
Representative and/or the underwriters may impose a penalty bid by reclaiming
the selling concession to be paid to an underwriter or selected dealer when the
securities sold by the underwriter or selected dealer are purchased to reduce a
short position created in connection with this offering. These activities may
stabilize, maintain or otherwise affect the market price of the common stock,
which may be higher than the price that might otherwise prevail in the open
market, and these activities, if commenced, may be discontinued at any time.
These transactions may be effected on Nasdaq, the over-the-counter market or
otherwise.
Tony Giraudo, a director nominee of our company, is a limited partner of
BlueStone.
BlueStone was organized and registered as a broker-dealer with the
Securities and Exchange Commission and the NASD in March 1996. Although, since
its organization, BlueStone has been extensively engaged in the investment
banking business and its principals have had significant prior experience in the
underwriting of securities in their capacities with other broker-dealers, this
offering constitutes one of the first public offerings for which BlueStone has
acted as lead manager.
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LEGAL MATTERS
The validity of the shares of our common stock offered by this Prospectus
will be passed upon for us by Arent Fox Kintner Plotkin & Kahn, PLLC,
Washington, D.C. Certain legal matters in connection with this offering will be
passed upon for the underwriters by Tenzer Greenblatt LLP, New York, New York.
EXPERTS
The consolidated financial statements of Litronic Industries, Inc. as of
December 31, 1997 and 1996, and for each of the years in the three-year period
ended December 31, 1997, have been included herein and in the registration
statement in reliance upon the report of KPMG LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
The financial statements and schedules of Pulsar Data Systems, Inc. as of
December 31, 1997 and 1996, and for each of the years in the three-year period
ended December 31, 1997, have been included herein and in the registration
statement in reliance upon the report of Keller Bruner & Company, L.L.C.,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing. The report of
Keller Bruner & Company, L.L.C. covering the December 31, 1997, financial
statements contains an explanatory paragraph that states that the Company's
recurring losses from operations and net capital deficiency raise substantial
doubt about the entity's ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome of
that uncertainty.
ADDITIONAL INFORMATION
We intend to furnish to our stockholders annual reports containing audited
consolidated financial statements examined by an independent accounting firm and
quarterly reports for the first three quarters of each fiscal year containing
interim unaudited consolidated financial information.
We have filed with the Securities and Exchange Commission a registration
statement (including this Prospectus and certain exhibits) on Form S-1 under the
Securities Act for the common stock offered by this Prospectus. This Prospectus
does not contain all of the information contained in the registration statement.
References in this Prospectus to any contract, agreement or other document are
not necessarily complete. For a more complete description of any such contract,
agreement or other document, you should refer to the registration statement and
the exhibits attached to the registration statement, which may be obtained for a
fee from the Securities and Exchange Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549 or at its regional offices
located at Seven World Trade Center, 13th Floor, New York, New York 10048 and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Also, we have filed electronic versions of this registration statement
(including its exhibits and this Prospectus) with the Securities and Exchange
Commission through its Electronic Data Gathering, Analysis, and Retrieval
(EDGAR) system. The Securities and Exchange Commission maintains a worldwide web
site at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Securities and Exchange Commission.
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<PAGE>
LITRONIC INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997
and September 30,1998 (unaudited) and September 30, 1998 Pro
Forma (unaudited) F-3
Consolidated Statements of Operations for the years ended
December 31, 1995, 1996 and 1997 and the nine months ended
September 30, 1997 and 1998 (unaudited) F-4
Consolidated Statements of Shareholders' Deficiency for
the years ended December 31, 1995, 1996 and 1997 and the
nine months ended September 30, 1998 (unaudited) F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997 and the nine months ended
September 30, 1997 and 1998 (unaudited) F-7
Notes to Consolidated Financial Statements F-10
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
(WHEN THE REORGANIZATION AS DESCRIBED IN NOTE 1 OF THE ACCOMPANYING CONSOLIDATED
FINANCIAL STATEMENTS HAS BEEN CONSUMMATED, WE WILL BE IN A POSITION TO RENDER
THE FOLLOWING OPINION.)
KPMG LLP
The Board of Directors
Litronic Inc.:
We have audited the accompanying consolidated financial statements of Litronic
Inc. and subsidiary as of December 31, 1996 and 1997 and for each of the years
in the three-year period ended December 31,1997 as listed in the accompanying
index. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Litronic Inc. and
subsidiary as of December 31, 1996 and 1997 and the results of their operations
and their cash flows for each of the years in the three-year period ended
December 31, 1997, in conformity with generally accepted accounting principles.
Orange County, California
March 20, 1998 except as to the
first paragraph of note 5 which
is as of March 31, 1998
F-2
<PAGE>
LITRONIC INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31 SEPTEMBER 30
-------------------- ----------------------
1998
1996 1997 1998 PRO FORMA
--------- -------- --------- ----------
ASSETS (NOTE 5) (unaudited) (unaudited)
(Note 1)
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 862 490 1,177 1,177
Accounts receivable (note 8) 2,044 996 1,171 1,171
Inventories (note 3) 1,120 405 509 509
Other current assets 149 136 147 147
--------- -------- --------- ---------
Total current assets 4,175 2,027 3,004 3,004
--------- -------- --------- ---------
Property and equipment, net (note 4) 3,234 320 244 244
--------- -------- --------- ---------
$7,409 2,347 3,248 3,248
========== ========= ========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current installments of long-term debt (note 5) $ 545 -- 481 481
Accounts payable 833 415 608 608
Accrued liabilities (notes 6 and 7) 1,135 1,227 628 628
---------- --------- --------- ----------
Total current liabilities 2,513 1,642 1,717 1,717
Long-term debt, less current installments (note 5) 4,749 606 5,200 5,200
Notes payable to related parties (note 7) 248 2,900 -- --
---------- --------- --------- -----------
Total liabilities 7,510 5,148 6,917 6,917
Shareholders' deficiency (note 5):
Preferred stock, no par value.
Authorized 5,000,000 shares; no shares
issued or outstanding -- -- -- --
Common stock, $0.01 par value.
Authorized 20,000,000 shares;
issued and outstanding 3,870,693
shares 39 39 39 39
Additional paid-in capital -- -- -- (3,708)
Accumulated deficit (140) (2,840) (3,708) --
---------- --------- ---------- ----------
Net shareholders' deficiency (101) (2,801) (3,669) (3,669)
Commitments and contingencies (notes 2,8
and 9)
Subsequent events (notes 5 and 11)
---------- --------- ---------- ----------
$7,409 2,347 3,248 3,248
========== ========= ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
LITRONIC INC.
AND SUBSIDIARY
Consolidated Statements of Operations
(in thousands except share and per share data)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------ -----------------------------
1995 1996 1997 1997 1998
------------ ------------- ----------- -------------- ------------
(UNAUDITED)
<S> <C>
Net product revenue (note 8) $1,525 7,855 8,627 7,177 3,886
License and service revenue (note 8) 1,181 1,541 1,539 1,416 925
------ ------ ------ ------ ------
Total revenue 2,706 9,396 10,166 8,593 4,811
------ ------ ------ ------ ------
Product cost of revenue 793 4,098 3,211 2,607 2,051
License and service cost of revenue 465 581 643 424 583
------ ------ ------ ------ ------
Total cost of revenue 1,258 4,679 3,854 3,031 2,634
------ ------ ------ ------ ------
Gross margin 1,448 4,717 6,312 5,562 2,177
Selling, general and
administrative expenses 977 2,052 3,487 1,865 2,046
Research and development
expenses 341 725 1,172 926 738
------ ------ ------ ------ ------
Operating income (loss) 130 1,940 1,653 2,771 (607)
Interest expense, net (notes 5
and 7) 38 19 42 5 322
------ ------ ------ ------ ------
Earnings (loss) from continuing
operations before income taxes 92 1,921 1,611 2,766 (929)
Provision for (benefit from)
income taxes 1 29 22 42 (61)
------ ------ ------ ------- ------
Earnings (loss) from continuing
operations 91 1,892 1,589 2,724 (868)
Discontinued operations (note 2):
Income (loss) from
discontinued operations, net of
applicable income tax benefit
of $0 in 1995, $13 in 1996
and $23 in 1997 119 (986) (1,278) 69 --
Gain on disposal of discontinued
operations, net of income tax
expense of $241 -- -- 15,023 -- --
------ ------ ------ ------ ------
Net earnings (loss) $ 210 906 15,334 2,793 (868)
====== ====== ====== ====== ======
</TABLE>
(continued)
F-4
<PAGE>
LITRONIC INC.
AND SUBSIDIARY
Consolidated Statements of Operations (continued)
(in thousands except share and per share data)
<TABLE>
<S> <C> <C> <C> <C> <C>
Pro forma net earnings (loss) (unaudited):
Historical earnings (loss) from
continuing operations before
income taxes $ 92 1,921 1,611 2,766 (929)
Pro forma provision for (benefit
from) income taxes (90) 672 547 939 (401)
---------- ---------- ---------- ---------- ----------
Pro forma earnings (loss) from
continuing operations 182 1,249 1,064 1,827 (528)
Discontinued operations, net of
applicable pro forma income tax
effect 71 (599) 8,377 41 --
---------- ---------- ---------- ---------- ----------
Pro forma net earnings (loss) $ 253 650 9,441 1,868 (528)
========== ========== ========== ========== ==========
Pro forma earnings (loss) from
continuing operations per share -
basic and diluted $ 0.05 0.32 0.28 0.47 (0.14)
Discontinued operations, net of
applicable pro forma income tax
effect, per share - basic and diluted 0.02 (0.15) 2.16 0.01 --
---------- ---------- ---------- ---------- ----------
Pro forma net earnings (loss) per share -
basic and diluted $ 0.07 0.17 2.44 0.48 (0.14)
========== ========== ========== ========== ==========
Pro forma common shares outstanding 3,870,693 3,870,693 3,870,693 3,870,693 3,870,693
=========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
LITRONIC INC.
AND SUBSIDIARY
Consolidated Statements of Shareholders' Deficiency
(in thousands)
<TABLE>
<CAPTION>
COMMON STOCK
----------------------------- NET
ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT DEFICIT DEFICIENCY
------------ -------------- ------------- ---------------
<S> <C> <C> <C> <C>
Balance, December 31, 1994 3,871 $ 39 (1,256) (1,217)
Net earnings -- -- 210 210
------------ -------------- ------------- ---------------
Balance, December 31, 1995 3,871 39 (1,046) (1,007)
Net earnings -- -- 906 906
------------ -------------- ------------- ---------------
Balance, December 31, 1996 3,871 39 (140) (101)
Net earnings -- -- 15,334 15,334
Cash dividends to shareholders (note 7) -- -- (9,534) (9,534)
Cash contribution to former affiliate (note 7) -- -- (8,500) (8,500)
------------ -------------- ------------- ---------------
Balance, December 31, 1997 3,871 39 (2,840) (2,801)
Net loss (unaudited) -- -- (868) (868)
------------ -------------- ------------- ---------------
Balance, September 30, 1998 (unaudited) 3,871 $ 39 (3,708) (3,669)
============ ============== ============= ===============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
LITRONIC INC.
AND SUBSIDIARY
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------- ---------------------
1995 1996 1997 1997 1998
---------- --------- --------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Earnings (loss) from continuing
operations $ 91 1,892 1,589 2,724 (868)
Adjustments to reconcile earnings
(loss) from continuing
operations to net cash provided by
(used in) operating activities:
Depreciation and amortization 19 61 129 90 153
Changes in assets and
liabilities:
Accounts receivable (391) (896) 1,048 (1,379) (175)
Inventories 73 (586) 715 93 (104)
Other current assets 22 (126) 13 (313) (11)
Accounts payable 482 (305) (418) (121) 193
Accrued liabilities 311 574 92 373 (599)
---------- --------- --------- --------- ----------
Net cash provided by (used in) operating
activities 607 614 3,168 1,467 (1,411)
---------- --------- --------- --------- ----------
Cash flows from investing activities -
purchases of property and equipment (109) (172) (230) (173) (77)
---------- --------- --------- --------- ----------
Cash flows from financing activities:
Proceeds from revolving note
payable to bank -- 11,049 18,649 12,799 4,205
Proceeds from related party
revolving line of credit 1,050 190 -- -- --
Proceeds from related party note
payable -- -- 2,900 -- 600
Proceeds from long-term debt -- 4,645 3,038 3,038 5,200
Principal payments on revolving notes
payable to bank -- (11,122) (18,445) (13,201) --
</TABLE>
F-7
<PAGE>
LITRONIC INC.
AND SUBSIDIARY
Consolidated Statements of Cash Flows, continued
(in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ -----------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Repayment of related party revolving
line of credit $(296) (944) -- -- --
Repayment of related party note
payable -- -- (248) -- (3,500)
Principal payments on long-term debt (445) (3,061) (5,224) (403) (4,330)
Cash dividends to shareholders -- -- (9,534) -- --
Cash contribution to former affiliate -- -- (8,500) -- --
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in) financing
activities 309 757 (17,364) 2,233 2,175
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in)
continuing operations 807 1,199 (14,426) 3,527 687
Net cash provided by (used in)
discontinued operations (718) (432) 14,054 (3,591) ---
---------- ---------- ---------- ---------- ----------
Net increase (decrease) in cash 89 767 (372) (64) 687
---------- ---------- ---------- ---------- ----------
Cash and cash equivalents at beginning
of year 6 95 862 862 490
---------- ---------- ---------- ---------- ----------
Cash and cash equivalents at end of year $ 95 862 490 798 1,177
========== ========== ========== ========== ==========
Supplemental disclosures of cash
flow information:
Cash paid during the year for:
Interest $ 420 589 119 600 323
Income taxes 1 1 204 -- --
========== ========== ========== ========== ==========
</TABLE>
(Continued)
F-8
<PAGE>
LITRONIC INC.
AND SUBSIDIARY
Consolidated Statements of Cash Flows, continued
(in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------- ---------------------
1995 1996 1997 1997 1998
-------- -------- -------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Supplemental disclosure of noncash
investing and financing activities:
Liabilities transferred in
connection with sale of Intercon
division (note 2) $ -- -- (366) -- --
Mortgage transferred in
connection with distribution of
KRDS, Inc. (note 7) -- -- (3,038) -- --
Property and equipment acquired
under capital leases 337 -- -- -- --
======== ======== ======== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
LITRONIC INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(in thousands)
(1) GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
Litronic Inc. (through a reorganization with Litronic Industries, Inc., as
described further below) (the Company) designs and produces high grade
information security solutions. In addition, the Company also provides
engineering and other services to various government agencies on a time and
material basis. Through its Intercon division (Intercon), which was
discontinued during 1997 (see note 2), Litronic Industries, Inc. provided
state-of-the-art electronic interconnect products for both government and
commercial entities.
In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (which are normal
recurring accruals) necessary to present fairly the financial position as
of September 30, 1998, and the consolidated statements of operations,
shareholders' deficiency and cash flows for the nine months ended September
30, 1997 and 1998. The results of operations for the nine months ended
September 30, 1998 are not necessarily indicative of the results to be
expected for the entire fiscal year.
PROPOSED PUBLIC OFFERING AND REORGANIZATION
During 1998, Litronic Industries, Inc. engaged attorneys and investment
bankers to assist in the effectuation of an initial public offering of
common stock of Litronic Inc., a newly formed corporation with no
operations (the "Offering"). Litronic Industries, Inc. has also initiated
certain events (the "Reorganization") in connection with the Offering which
will result in it becoming a wholly-owned subsidiary of Litronic Inc. as of
the effective date of the Offering. The Reorganization will be accomplished
through a stock-for-stock exchange between Litronic Inc. and Litronic
Industries, Inc.
All of the outstanding shares of Litronic Industries, Inc. will be
exchanged for 3,870,693 shares of the Company's common stock. Consequently,
upon the effective date of the Offering and the related Reorganization, the
consolidated group will include the operations of Litronic Inc. and its
wholly-owned subsidiary, Litronic Industries, Inc.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements and related notes presented herein
have been retroactively adjusted to reflect the Reorganization. The capital
structure presented in these financial statements is that of Litronic Inc.,
but all other information presented relates to the historical and pro forma
operations of Litronic Industries, Inc., as Litronic Inc. had no operations
during the periods presented and will have no operations until the
consummation of the Reorganization. All references herein to "the Company"
refer to Litronic Inc. as consolidated with Litronic Industries, Inc.
PRO FORMA PRESENTATION
Concurrently with the Reorganization, Litronic Industries, Inc. will
terminate its Subchapter S corporation status and will become subject to
federal and state income taxes. The accompanying pro forma consolidated
financial statements of operations include a pro forma presentation to
reflect a provision for income taxes in accordance with Statement of
Financial Accounting Standards No. (Statement) 109, "Accounting for Income
Taxes." Statement
F-10
<PAGE>
LITRONIC INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
109 is an asset and liability approach that requires the recognition of
deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in the Company's financial
statements or tax returns. Measurement of deferred income tax is based on
enacted tax laws including tax rates, with the measurement of deferred
income tax assets being reduced by available tax benefits not expected to
be realized. The Company has not recorded any deferred tax assets in the
accompanying unaudited consolidated pro forma balance sheet as management
believes it is not more likely than not that the Company will realize the
benefit of such deferred tax assets.
Unaudited pro forma earnings (loss) for the years ended December 31, 1995,
1996 and 1997 and for the nine months ended September 30, 1997 and 1998
reflect a provision for (benefit from) income taxes as if the Company had
been subject to federal and state income taxes at an estimated effective
tax rate of approximately 40%. The difference between the federal statutory
rate of 34% and the estimated effective tax rate is due to state income
taxes and nondeductible expenses.
PRO FORMA EARNINGS (LOSS) PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement 128,
Earnings Per Share. Statement 128 provides for the calculation of basic and
diluted earnings per share. Basic earnings per share includes no dilution
and is computed by dividing earnings (loss) available to common
shareholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per share reflects the potential dilution
of securities that could share in the earnings of an entity. Such shares
are not included when there is a loss as the effect would be anti-dilutive.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Litronic
Inc., its wholly-owned subsidiary Litronic Industries, Inc. and, in 1997,
Litronic Industries, Inc.'s wholly owned subsidiary, KRDS, Inc., which was
formed as a corporation on January 30, 1997. All significant intercompany
balances and transactions have been eliminated in consolidation. On
December 31, 1997, the Company distributed KRDS, Inc. to the Company's
primary shareholders (note 7).
REVENUE RECOGNITION
Revenue from product sales, including embedded software, is recognized upon
shipment unless contract terms call for a later date, net of an allowance
to cover estimated warranty costs. The costs of providing postcontract
customer support are not significant. Revenue under service and development
contracts is recorded as services are rendered. Reimbursements under
consortium agreements were recorded as revenue as they became payable to
the Company upon completion of related milestones.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market
(net realizable value).
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation of property and
equipment is computed on a straight-line basis over the estimated useful
lives of 2 to 7 years, except building and improvements, which were
depreciated over estimated useful lives of up to 18 years (see note 2).
Equipment held under capital leases was amortized over the lesser of the
lease term or the estimated useful life of the related asset (see note 2).
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by comparison of the carrying amount
of an asset to future net cash flows expected to be generated by the asset.
If such assets are considered to be impaired, the impairment to be
recognized is
F-11
<PAGE>
LITRONIC INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
measured by the amount by which the carrying amount of the assets exceed
the fair value of the assets. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell.
ACCOUNTING FOR STOCK OPTIONS
The Company applies the provisions of Statement 123, "Accounting for Stock-
Based Compensation," which requires entities to recognize as expense over
the vesting period the fair value as of the date of grant of all stock
based awards. Alternatively, Statement 123 allows entities to apply the
provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations, and to provide
pro forma net income and pro forma net income per share disclosures for
employee stock option grants made in 1996 and future years as if the fair-
value-based method defined in Statement 123 had been applied. The Company
has elected to apply the provisions of APB Opinion No. 25, under which
compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price,
and provide the pro forma disclosure provisions of Statement 123 in its
annual financial statements (see note 10).
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company applies the provisions of Statement 107, "Disclosures about
Fair Value of Financial Instruments." Statement 107 requires all entities
to disclose the fair value of financial instruments, both assets and
liabilities recognized and not recognized on the balance sheet, for which
it is practicable to estimate fair value. Statement 107 defines fair value
of a financial instrument as the amount at which the instrument could be
exchanged in a current transaction between willing parties. As of December
31, 1996 and 1997, and September 30, 1998 (unaudited), management believes
the fair value of all financial instruments approximated carrying value.
INCOME TAXES
The Company has elected to be taxed as an S Corporation under the
provisions of Section 1362 of the Internal Revenue Code and uses the
accrual basis of reporting for income tax purposes. Accordingly, the
Company has not provided for Federal income taxes since the liability is
that of the shareholders. The Company is subject to state income taxes on
earnings before taxes. The provision (benefit) for state income taxes was
$1 for continuing operations and $0 for discontinued operations for the
year ended December 31, 1995. The provision (benefit) for state income
taxes was $29 for continuing operations and $(13) for discontinued
operations for the year ended December 31, 1996. The provision (benefit)
for state income taxes was $22 for continuing operations, $(23) for
discontinued operations, and $241 for the gain on disposal of discontinued
operations for the year ended December 31, 1997. The provision (benefit)
for state income taxes was $42 and $(61) for continuing operations for the
nine months ended September 30, 1997 and 1998, respectively (unaudited).
ESTIMATES
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as
of the dates of the balance sheets and revenues and expenses for the
periods. Actual results could differ from those estimates.
NEW ACCOUNTING STANDARDS
In October 1997, the American Institute of Certified Public Accountants
(AICPA) released Statement of Position 97-2, "Software Revenue Recognition"
(SOP 97-2). Among other things, SOP 97-2 eliminates the distinction between
significant and insignificant vendor obligations promulgated by SOP 91-1
and requires each element of a software arrangement to meet certain
criteria in order to recognize revenue allocated to that element.
Additionally, SOP 97-2 requires that total fees under an arrangement be
allocated to each element in the arrangement based upon vendor specific
objective evidence, as defined. SOP 97-2 is effective for software
transactions entered into by the Company in fiscal 1998 and subsequent
periods.
F-12
<PAGE>
LITRONIC INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
In December 1998, the AICPA issued Statement of Position (SOP) 98-9. SOP
98-9 amends certain paragraphs of SOP 97-2 to require recognition of
revenue using the "residual method" under certain circumstances. The
"residual method" established by SOP 98-9 is effective for fiscal years
beginning after March 15, 1999.
The Company believes the adoption of SOP 97-2 and SOP 98-9 will not have a
significant impact on its financial position or results of operations.
(2) DISCONTINUED OPERATIONS
The Company sold its Intercon division on September 30, 1997 for cash. The
gain on sale was $15,023, net of tax expense of $241. The results of the
Intercon division have been classified as discontinued operations in the
accompanying consolidated financial statements. For the years ended
December 31, 1995 and 1996, Intercon revenues were $5,853 and $8,175,
respectively. Intercon's 1997 revenues through the sale date were $7,653.
In addition to the cash proceeds received upon the close of the
transaction, the agreement provided for the right to receive a contingent
purchase price as well as a "gross-up" payment based upon the approximate
expected tax benefit related to the assets transferred. Effective November
30, 1997, this right was distributed to the Company's shareholders.
On December 31, 1997, the Company spun-off its subsidiary, KRDS, Inc., to
the Company's shareholders. The results of KRDS, Inc. have been classified
as discontinued operations in the accompanying consolidated financial
statements. For the year ended December 31, 1997, KRDS, Inc. revenues were
$380.
(3) INVENTORIES
A summary of inventories follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
---------------------------
1996 1997 1998
------------- ------------ ---------------
(unaudited)
<S> <C> <C> <C>
Raw materials $ 520 230 253
Work-in-process 235 45 21
Finished goods 365 130 235
------------- ------------ ---------------
$ 1,120 405 509
============= ============ ===============
</TABLE>
F-13
<PAGE>
LITRONIC INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
(4) PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
-----------------------
1996 1997 1998
---------- --------- -------------
(unaudited)
<S> <C> <C> <C>
Land $ 546 -- --
Building and improvements 3,063 -- --
Machinery and equipment 3,703 68 68
Furniture and fixtures 529 458 536
Equipment held under capital
lease obligations 510 -- --
---------- --------- -------------
8,351 526 604
Less accumulated depreciation
and amortization 5,117 206 360
---------- --------- -------------
$ 3,234 320 244
========== ========= =============
</TABLE>
Included in accumulated depreciation and amortization is $288 of
amortization related to equipment held under capital lease obligations as
of December 31, 1996.
F-14
<PAGE>
LITRONIC INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
(5) LONG-TERM DEBT
A summary of long-term debt follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
-------------------------
1996 1997 1998
-----------------------------------------------
(unaudited)
<S> <C> <C> <C>
Note payable to bank secured by substantially all assets of the
Company, personal assets of, and a guarantee by, the
Company's president and majority shareholder, bearing
interest at 6.6% payable monthly, maturing February 28,
2000 $ -- -- 3,800
Note payable to bank secured by substantially all assets of the
Company, personal assets of, and a guarantee by, the
Company's president and majority shareholder, bearing
interest at 6.6% payable monthly, maturing February 28,
2000 -- -- 1,400
Revolving note payable to bank (the Revolver) and standby
facility of up to $2,750, bearing interest at prime plus 2%
(10.5% at December 31, 1997) for the Revolver and prime
plus 3% (11.5% at December 31, 1997) for the standby
facility; payable in monthly interest-only payments for the
Revolver and variable monthly principal and interest
payments for the standby facility through maturity on
February 28, 2000; secured by substantially all assets of the
Company and by personal assets of, and a guarantee by, the
Company's president and majority shareholder; renewable at
the bank's option for additional one-year periods 402 606 481
Note payable to bank secured by certain personal assets of the
Company's president and majority shareholder, bearing
interest at 6.6%; paid in full during 1997 1,037 -- --
Mortgage note payable secured by deed of trust on land and
building, bearing interest at prime plus 3.5%; paid in full
during 1997 2,190 -- --
Term note payable to bank secured by specific equipment of the
Company, bearing interest at prime plus 3%; paid in full
during 1997 422 -- --
Note payable secured by specific equipment of the Company and
a guarantee by the Company's president and majority
shareholder, bearing interest at 9.76%; paid in full during
1997 564 -- --
Note payable secured by specific equipment of the Company;
paid in full during 1997 313 -- --
</TABLE>
F-15
<PAGE>
LITRONIC INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
<TABLE>
<S> <C> <C> <C>
Capital lease obligations; transferred in connection with sale of
Intercon division (see note 2) 366 -- --
------- ------ -------
5,294 606 5,681
Less current installments 545 -- 481
------- ------ -------
$ 4,749 606 5,200
======= ====== =======
</TABLE>
Principal maturities of long-term debt as of December 31, 1997 are as follows:
Year ending December 31:
1998 $ --
1999 --
2000 606
2001 --
Thereafter --
-------
$ 606
=======
The Revolver contains certain covenants and restrictions, including
maintenance of certain financial ratios and a restriction on future
borrowings. As of December 31, 1997, the Company was not in compliance with
certain of these covenants. Upon renewal of the Revolver effective March 1,
1998, the bank waived such debt covenants through March 31, 1998 and the
covenants were revised by the bank such that the Company was in compliance
with the revised covenants as of March 31, 1998. As of September 30, 1998,
the Company was in compliance with or had received waivers for these
covenants until January 1, 1999. As such, the debt has been classified as
current in the accompanying consolidated unaudited balance sheet as of
September 30, 1998.
As of September 30, 1998, the Company had available borrowings of $2,019,
$250 and $1,000 under the Revolver, the standby facility and an available
fixed asset line, respectively (unaudited).
(6) ACCRUED LIABILITIES
A summary of accrued liabilities follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
----------------------------
1996 1997 1998
---------------------------- ---------------
(unaudited)
<S> <C> <C> <C>
Professional fees $ 221 395 148
Deferred revenue 355 165 49
Accrued vacation 218 145 120
Accrued compensation 145 346 131
Other 196 176 180
------------- ----------- ----------------
$ 1,135 1,227 628
============= =========== ================
</TABLE>
(7) RELATED PARTY TRANSACTIONS
At December 31, 1994, the Company had an obligation of $248 to two of the
Company's executive officers for accrued compensation. On January 2, 1995,
such obligation was converted to two unsecured notes payable
F-16
<PAGE>
LITRONIC INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
bearing interest at 8%, which are due and payable on December 31, 1998. On
October 29, 1997, the principal and interest amounting to $305 due on the
notes was repaid. The Company incurred interest expense on these notes
aggregating $20, $20 and $18 in 1995, 1996 and 1997, respectively. As of
December 31, 1996, $40 of accrued interest relating to these notes is
included in accrued liabilities in the accompanying consolidated balance
sheets.
The Company had an unsecured revolving line of credit with the Company's
president and majority shareholder, which permitted borrowings of up to
$1,000. All unpaid principal and accrued interest at 8% per annum were due
and payable on January 31, 1997. The Company incurred interest expense
under this line of credit aggregating $13 and $30 in 1995 and 1996,
respectively. All outstanding borrowings and accrued interest under this
line of credit were repaid during 1996. The line was not renewed when it
expired on January 31, 1997.
The primary shareholders of Litronic Industries, Inc. formed KRDS, Inc.,
for the sole purpose of purchasing real estate property. The majority of
the property acquired was leased to the Intercon division and the acquirer
of the Intercon division has subsequently executed a continuing lease
arrangement with KRDS, Inc. KRDS's only operations consisted of a mortgage
obligation, interest, depreciation and rental income from the Company
related to the real estate property. The operations of KRDS, Inc. were
consolidated with the operations of Litronic Industries, Inc. through
December 31, 1997, when concurrent with the sale of the Intercon division,
the Company distributed KRDS, Inc. to the Company's primary shareholders.
As the operations of KRDS, Inc. are related to the Intercon operations, the
1997 net income for KRDS, Inc. of $2 (after intercompany eliminations) is
included in the loss from discontinued operations in the accompanying
consolidated statement of operations.
As a result of the sale of the Intercon division on September 30, 1997,
during the period October 1, 1997, through December 31, 1997, the Company
distributed $9,534 in cash dividends to its shareholders and contributed
$8,500 in cash to KRDS, Inc.
On December 31, 1997, the Company entered into two unsecured notes payable
with KRDS, Inc., under which the Company was extended $900 and $2,000 in
working capital funds and a total of $2,900 was outstanding under these
related party notes at December 31, 1997. In February 1998, the Company
entered into a third unsecured note payable with KRDS, Inc., under which
the Company was extended $600 in working capital funds. Interest was at 10%
for each of the unsecured notes payable and each of these unsecured notes
and accrued interest were paid in full during 1998 (unaudited).
(8) CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
Financial instruments that potentially subject the Company to concentration
of credit risk are trade receivables. Credit risk on trade receivables is
limited as a result of the Company's customer base and their dispersion
across different industries and geographic regions. As of December 31, 1996
and 1997, and September 30, 1998 accounts receivable included $770, $447,
and $234 (unaudited), respectively, due from the U.S. Government and
related agencies.
The Company had sales to two customers which represented 71% and 19% of
1995 total revenues, respectively. The Company had sales to three customers
which represented 39%, 29% and 18% of 1996 total revenue, respectively. The
Company had sales to three customers which represented 45%, 20% and 19% of
1997 total revenue, respectively. The Company had sales to three customers
which represented 44%, 23% and 19% of 1998 total revenue for the nine
months ended September 30, 1998, respectively (unaudited). No other
customers accounted for more than 10% of net revenues in 1995, 1996 or
1997. Trade accounts receivable aggregated $1,756, $996 and $1,009
(unaudited) from the aforementioned major customers as of December 31, 1996
and 1997, and September 30, 1998, respectively.
Because the Company engages in the government contracting business, it has
been and will be subject to audits and may be subject to investigation by
governmental entities. Failure to comply with the terms of any
F-17
<PAGE>
LITRONIC INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
governmental contracts could result in civil and criminal fines and
penalties or in suspension from future government contracts.
(9) COMMITMENTS
The Company leases office space under noncancelable operating leases. The
terms of the leases range up to four years. The following summarizes the
future minimum lease payments under all noncancelable operating lease
obligations:
Year ending December 31:
1998 $309
1999 257
2000 243
2001 162
------
$971
======
Rental expense under noncancelable operating leases was $215 for the year
ended December 31, 1997.
(10) STOCK OPTION PLANS (UNAUDITED)
Under the Company's Employee Stock Option Plan (the Plan), which was
established in April 1998, the exercise price of options granted will not
be less than the fair market value of the related common stock at the date
of grant. The total number of shares of common stock available for grant
under the Plan is 600. Unless otherwise provided by the Board of Directors
or a committee of the Board administering the Plan, each option granted
under the Plan shall vest on December 31, 1998 as to 10-15%, plus an
additional 2.5% for each year of service with the Company, and 20% each
December 31 thereafter until fully vested.
F-18
<PAGE>
LITRONIC INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
Following is a summary of stock option transactions:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE
OF EXERCISE PRICE
SHARES PER SHARE
---------- ----------------
<S> <C> <C>
Options outstanding at
December 31, 1997 --- $ --
Granted 285 0.70
Cancelled 4 0.70
----------
Options outstanding at
September 30, 1998 281 0.70
==========
</TABLE>
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock option plans. Accordingly, no compensation cost
has been recognized for its stock options in the consolidated financial
statements.
(11) EMPLOYEE RETIREMENT SAVINGS PLAN
Effective January 1, 1998, the Company established a retirement plan, which
is intended to qualify under Section 401(k) of the Internal Revenue Code.
Under the plan, eligible employees are able to contribute up to 20% of
their compensation not to exceed the maximum IRS deferral amount. The
Company may also match employee contributions at its discretion.
F-19
<PAGE>
PULSAR DATA SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report F- 21
Balance sheets F- 22
Statements of operations F- 23
Statements of stockholders' equity (deficit) F- 24
Statements of cash flows F- 25
Notes to financial statements F- 26
Schedule V - Valuation and qualifying accounts S- 1
F-20
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Pulsar Data Systems, Inc.
Lanham, Maryland
We have audited the accompanying balance sheets of Pulsar Data Systems, Inc. as
of December 31, 1996 and 1997, and the related statements of operations,
stockholders' equity (deficit), and cash flows for each of the years in the
three year 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 financial position of Pulsar Data Systems, Inc. as of
December 31, 1996 and 1997, and the results of its operations and its cash flows
for each of the years in the three year period ended December 31, 1997 in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial statements,
the Company incurred a net loss of approximately $11,016,000 during the year
ended December 31, 1997 and has a working capital deficit of approximately
$2,436,000 at December 31, 1997. In addition, as of December 31, 1997, the
Company is in violation of its financing agreement debt covenants. These
factors, among others, as discussed in Note 16 to the financial statements,
raise substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Bethesda, Maryland
April 27, 1998, except for Note 13 and the last paragraph
in Note 9 as to which the date is October 9, 1998, and Note 16
and the fourth paragraph of Note 17, as to which the date is
January 15, 1999.
F-21
<PAGE>
PULSAR DATA SYSTEMS, INC.
Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
ASSETS 1996 1997 1998
---------------- ------------ --------------------
(UNAUDITED)
<S> <C> <C> <C>
Cash and cash equivalents $ 2,451 $ 2,236 $ 407
Accounts receivable 44,365 31,213 14,722
Inventories 3,660 2,348 2,473
Notes receivable - current 720 --- ---
Deferred governmental agency contract
costs 817 --- ---
Other current assets 213 245 131
---------------- ------------ ------------------
Total current assets 52,226 36,042 17,733
---------------- ------------ ------------------
Property and Equipment, net of
accumulated depreciation of
$1,163 and $1,748 and $2,025,
respectively 1,322 1,100 793
Notes receivable, net of current
installments 753 --- ---
Notes receivable-related parties 4,016 2,218 1,329
Cash surrender value of life
insurance, net 1,351 1,416 62
Deposits and other assets 117 95 118
---------------- ------------ ------------------
7,559 4,829 2,302
---------------- ------------ ------------------
$59,785 $40,871 $20,035
================ ============ ==================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Line of credit $ 7,200 $ --- $ ---
Financing arrangement - IBM 34,125 28,067 13,430
Current installments of long-term debt 27 915 946
Notes payable - vendors --- --- 2,727
Accounts payable 4,506 7,267 4,934
Accrued liabilities 1,389 2,229 1,282
Deferred governmental agency contract revenue 1,327 --- ---
Customer deposit 2,099 --- ---
---------------- ------------ ------------------
Total current liabilities 50,673 38,478 23,319
---------------- ------------ ------------------
Notes payable, net of current
maturities 53 4,203 3,619
Deferred compensation 1,351 --- ---
---------------- ------------ ------------------
1,404 4,203 3,619
---------------- ------------ ------------------
Total liabilities 52,077 42,681 26,938
---------------- ------------ ------------------
Commitments and Contingencies
Stockholders' Equity (Deficit)
Common stock; par value $1;
authorized, issued and outstanding
1,000 shares 1 1 1
Additional paid-in capital 21 1,663 1,663
Accumulated earnings (deficit) 7,686 (3,474) (8,567)
---------------- ------------ ------------------
Net stockholders' equity (deficit) 7,708 (1,810) (6,903)
---------------- ------------ ------------------
$59,785 $40,871 $20,035
================ ============ ==================
</TABLE>
See accompanying notes to financial statements
F-22
<PAGE>
PULSAR DATA SYSTEMS, INC.
Statements of Operations
(in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------- -----------------------
1995 1996 1997 1997 1998
----------- --------- ---------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues $163,991 $165,958 $151,520 $105,574 $61,518
Cost of revenues 146,682 149,364 142,201 100,188 56,481
----------- --------- ---------- -------- --------
Gross margin 17,309 16,594 9,319 5,386 5,037
Selling, general and administrative expenses 10,410 13,545 17,152 9,559 8,926
----------- --------- ---------- -------- --------
Operating income (loss) 6,899 3,049 (7,833) (4,173) (3,889)
----------- --------- ---------- -------- --------
Other income (expense)
Interest expense (2,412) (3,564) (3,640) (2,106) (1,424)
Interest income 392 639 457 408 373
----------- --------- ---------- -------- --------
(2,020) (2,925) (3,183) (1,698) (1,051)
----------- --------- ---------- -------- --------
Net earnings (loss) $ 4,879 $ 124 $(11,016) $ (5,871) $(4,940)
=========== ========= ========== ======== ========
</TABLE>
See accompanying notes to financial statements
F-23
<PAGE>
PULSAR DATA SYSTEMS, INC.
Statement of Stockholders' Equity (Deficit)
(in thousands)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL ACCUMULATED
----------------
PAID IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
------ ------ ---------- ------------- --------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1995 1 $ 1 $ 21 $ 8,728 $ 8,750
Net earnings - - 4,879 4,879
Distributions to shareholders - - (4,562) (4,562)
------ ------ ---------- ------------- ---------
Balance, December 31, 1995 1 1 21 9,045 9,067
Net earnings - - 124 124
Distributions to shareholders - - (1,483) (1,483)
------ ------ ---------- ------------- --------
Balance, December 31, 1996 1 1 21 7,686 7,708
Additional paid-in capital
contributed by stockholder - 291 - 291
Forgiveness of stockholder deferred
compensation - 1,351 - 1,351
Net loss - - (11,016) (11,016)
Distributions to shareholders - - (144) (144)
------ ------ ---------- ------------- --------
Balance, December 31, 1997 1 1 1,663 (3,474) (1,810)
Net loss (unaudited) - - (4,940) (4,940)
Distributions to shareholders (unaudited) - - (153) (153)
------ ------ ---------- ------------- --------
Balance, September 30, 1998 (unaudited) 1 $ 1 $1,663 $(8,567) $ (6,903)
====== ====== ========== ============= ========
</TABLE>
See accompanying notes to financial statements.
F-24
<PAGE>
PULSAR DATA SYSTEMS, INC.
Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------- -----------------------
1995 1996 1997 1997 1998
------------- ------------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities: (UNAUDITED)
Net earnings (loss) $ 4,879 $ 124 $(11,016) $(5,871) $ (4,940)
Adjustments to reconcile earnings
(loss) from operations to net
cash provided by (used in) operating
activities:
Depreciation and amortization 332 467 585 415 313
Loss on disposal of assets 17 63 - - 47
Uncollectible notes receivable
and accounts receivable - 33 4,870 1,165 875
Rent and lease termination fee
paid through reduction of notes
receivable-related party - - - - 889
Deferred compensation 279 364 - - -
Provisions for doubtful accounts - 370 433 50 223
Deferred rent (38) (28) - - -
Changes in assets and liabilities
Accounts receivable (18,840) 11,743 10,236 8,820 15,392
Inventories (3,736) 11,789 1,312 (322) (125)
Other assets (197) 33 (11) (326) 92
Deferred governmental agency contract costs 4,451 1,833 817 817 -
Accounts payable 132 (2,184) 2,761 3,181 394
Accrued liabilities (20) 310 842 (1,435) (947)
Customer deposit - 2,098 (2,098) (2,098) -
Deferred governmental agency contract
revenue (5,434) (1,697) (1,327) (1,327) -
------------- ------------- ---------- -------- -----------
Net cash provided by (used in) operating
activities (18,175) 25,318 7,404 3,069 12,213
------------- ------------- ---------- -------- -----------
Cash Flows from Investing Activities:
Decrease (Increase) in cash surrender
value of life insurance (279) (355) (65) - 1,354
Net (borrowings) repayments on notes receivable 41 392 (291) 236 -
Net (borrowings) repayments on notes receivable-
related parties (3,908) (1,975) 1,175 - -
Purchase of equipment (742) (942) (364) (233) (54)
------------- ------------- ---------- -------- -----------
Net cash provided by (used in) investing activities (4,888) (2,880) 455 3 1,300
============= ============= ========== ======== ===========
Cash Flows from Financing Activities:
Net borrowings (repayments) on line of credit 14,800 (7,600) (2,000) (2,000) -
Net borrowings (repayments) on financing
arrangement - IBM 12,021 (13,023) (6,058) (1,981) (14,637)
Proceeds from long-term borrowing 85 - - - -
(Repayments of) long term borrowing (32) (25) (163) (17) (552)
Additional paid-in capital from stockholders - - 291 - -
Distributions to shareholders (4,562) (1,483) (144) (109) (153)
------------- ------------- ---------- -------- -----------
Net cash provided by (used in) financing
activities 22,312 (22,131) (8,074) (4,107) (15,342)
------------- ------------- ---------- -------- -----------
Net increase (decrease) in cash (751) 307 (215) (1,035) (1,829)
Cash and cash equivalents at beginning of
period 2,895 2,144 2,451 2,451 2,236
------------- ------------- ---------- -------- -----------
Cash and cash equivalents at end of period $ 2,144 $ 2,451 $ 2,236 $ 1,416 $ 407
============= ============= ========== ======== ===========
Supplemental Schedule of Non-cash Investing
and Financing Activities
Conversion of line of credit to term note
payable $ - $ - $ 5,200 $ - $ -
============= ============= ========== ======== ===========
Conversion of deferred compensation to
additional paid in capital $ - $ - $ 1,351 $ - $ -
============= ============= ========== ======== ===========
Conversion of accounts payable to notes payable
$ - $ - $ - $ - $ 2,727
============= ============= ========== ======== ===========
Supplemental Disclosures of Cash Flow
Information:
Cash paid during the year for:
Interest $ 1,962 $ 3,649 $ 2,812 $ 2,106 $ 1,842
============= ============= ========== ======== ===========
</TABLE>
See accompanying notes to financial statements
F-25
<PAGE>
PULSAR DATA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of business: Pulsar Data Systems, Inc. (the Company) was incorporated in
- ------------------
1984 under the laws of the State of Delaware. The Company is engaged primarily
in the sale of computer hardware, software, peripheral equipment, and support
services to governmental agencies and commercial enterprises throughout the
United States. The Company was certified by the Small Business Administration
under Section 8(a) of the Small Business Act and was therefore eligible to enter
into contracts with agencies of the Federal Government on a limited competitive
basis. The Company voluntarily withdrew in anticipation of graduation from the
8(a) program in June 1997.
A summary of the Company's significant accounting policies follows:
Revenue and cost recognition: Revenue is primarily derived from short-term
- ----------------------------
"firm-fixed price" delivery order type contracts. Revenue from these contracts
is recognized upon shipment of the product. The Company also has "cost-plus-
fixed-fee" and "time and material" contracts. Revenue from "cost-plus-fixed-
fee" contracts is recognized on the basis of reimbursable contract costs
incurred during the period increased by applicable overhead, material handling,
and general and administrative costs plus a percentage of the fixed fee.
Revenue from "time and material" contracts is recognized on the basis of
man-hours provided plus other reimbursable contract costs incurred during the
period.
Cash and cash equivalents: For the purpose of reporting cash flows, the Company
- -------------------------
considers all highly-liquid investments purchased with a maturity of three
months or less to be cash equivalents.
Inventory: Inventory consists primarily of computer hardware, purchased
- ---------
software and peripheral equipment. Inventory is stated at the lower of cost or
market using the first-in, first-out (FIFO) method.
Deferred governmental agency contract costs and revenue: Deferred costs and
- -------------------------------------------------------
revenue from contracts with governmental agencies represent cost incurred and
accounts receivable billed as of year end, for which an acceptance period has
not expired. The agencies involved have negotiated acceptance periods from
seven to thirty days from delivery of the product. All equipment subject to the
acceptance period at year end have subsequently been accepted by the government.
Property and equipment: Property and equipment are stated at cost. Depreciation
- ----------------------
and amortization is computed using straight-line and accelerated methods over
the estimated useful lives of the related assets.
Income taxes: The Company has elected to be treated as an "S" Corporation under
- ------------
Subchapter "S" of the Internal Revenue Code. Consequently, the Company is not
liable for Federal and state income taxes except to the extent that the Company
operates in state jurisdictions that do not recognize "S" corporations. For the
income related to activity in these states, the Company has provided for the
resulting income taxes. Otherwise the stockholders are liable individually for
income taxes on the Company's income.
F-26
<PAGE>
PULSAR DATA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. Nature of Business and Significant Accounting Policies (Continued)
Financial credit risk: The Company's accounts receivable are derived primarily
- ---------------------
from contracts with governmental agencies and commercial enterprises. All
accounts receivable are made on an unsecured basis.
Additionally, the Company maintains its cash in bank deposit accounts, which at
times may exceed Federally insured limits. The Company has not experienced any
losses in such accounts. The Company believes it is not exposed to any
significant credit risk on cash.
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 revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Self-insurance: For the year ended 1995, the Company was self-insured for
- --------------
general medical liabilities up to $28,000 per individual per plan year, and
dental liabilities up to $1,000 per individual per plan year. Any liability over
these amounts was covered under a stop loss insurance policy maintained by an
independent third party insurance company. Exposure to risk of these types was
to be accrued, by a charge to expense, in the period in which the loss relating
to that period or prior period became payable and the amount can be reasonably
estimated. The Company also paid for a reserve policy. Upon termination of the
self-funded insurance plan, the insurance policy was to cover any unpaid claims
submitted or incurred but not yet submitted. The Company terminated the plan
after 1995.
Reclassification: Certain reclassifications have been made to the December 31,
- ----------------
1995 and 1996 financial statements to conform with the December 31, 1997
presentation.
Interim financial statements: The interim financial information included in
- ----------------------------
these financial statements is unaudited but reflects all adjustments (consisting
of only normal recurring accruals) which are, in the opinion of management,
necessary for a fair presentation of the results for the interim periods
presented.
F-27
<PAGE>
PULSAR DATA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following as of December 31, 1996 and 1997
and September 30, 1998:
<TABLE>
<CAPTION>
(in thousands)
-----------------------------------
December 31,
--------------------
September 30,
1996 1997 1998
---------- -------- -------------
<S> <C> <C> <C>
(unaudited)
8(a) government receivables $15,909 $ 2,095 $ 1,234
GSA receivables 13,741 16,483 10,714
Commercial receivables 11,439 10,902 3,116
Recoverable costs and accrued profit on
progress completed-not billed 2,318 497 -
Other receivables 1,778 2,489 1,134
---------- -------- -------------
45,185 32,466 16,198
Less allowance for doubtful accounts 820 1,253 1,476
---------- -------- -------------
$44,365 $31,213 $14,722
========== ======== =============
</TABLE>
F-28
<PAGE>
PULSAR DATA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of December 31, 1996 and 1997
and September 30, 1998:
<TABLE>
<CAPTION>
(in thousands)
------------------------------
December 31,
------------------
1996 1997
--------- ------- ----------
<S> <C> <C> <C>
(unaudited)
Furniture and fixtures $ 615 $ 628 $ 628
Office equipment 500 511 511
Computer equipment 532 706 752
Software 435 545 553
Vehicles 273 273 273
Leasehold improvements 107 162 78
Warehouse equipment 23 23 23
--------- ------- ----------
2,485 2,848 2,818
Less accumulated depreciation and
amortization 1,163 1,748 2,025
--------- ------- ----------
$1,322 $1,100 $ 793
========= ======= ==========
</TABLE>
F-29
<PAGE>
PULSAR DATA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4. DEPRECIATION AND AMORTIZATION
Depreciation and amortization charged to operations for the years ended December
31, 1995, 1996 and 1997, and for the nine months ended September 30, 1998 and
accumulated depreciation and amortization as of December 31, 1996 and 1997 and
September 30, 1998 are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
-------------- ---------------------------- ----------------------------
Estimated Depreciation/ Depreciation/ Accumulated Depreciation/ Accumulated
Useful Amortization Amortization Depreciation/ Amortization Depreciation/
Asset Category Lives Expense Expense Amortization Expense Amortization
- -------------- ---------- -------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Furniture and
fixtures 7 years $ 21 $ 82 $ 189 $127 $ 316
Office 5-7 years 84 82 277 101 375
equipment
Computer
equipment 5 years 62 104 228 165 393
Software 5 years 73 104 267 91 357
Vehicles 5 years 70 69 170 41 212
Leasehold
improvements 7 years 13 22 17 59 76
Warehouse 5-7 years
equipment 9 4 15 1 19
-------------- ------------- ------------- ------------- -------------
$ 332 $467 $1,163 $585 $1,748
============== ============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
Nine months ended
September 30, 1998
(in thousands)
(unaudited)
-----------------------------
Depreciation/ Accumulated
Estimated Amortization Depreciation/
Asset Category Useful Lives Expense Amortization
- ---------------------- -------------- ------------- --------------
<S> <C> <C> <C>
Furniture and fixtures 7 years $ 69 $ 387
Office equipment 5-7 years 46 427
Computer equipment 5 years 98 503
Software 5 years 58 419
Vehicles 5 years 22 234
Leasehold improvements 7 years 18 34
Warehouse equipment 5-7 years 2 21
-------------- --------------
$313 $2,025
============== ==============
</TABLE>
F-30
<PAGE>
PULSAR DATA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5. DEFERRED COMPENSATION AND LIFE INSURANCE
Through December 31, 1996 the Company had a deferred compensation agreement with
its President, whereby the Company was obligated to pay an amount equal to the
cash surrender value of certain life insurance policies. The Company was
funding this deferred compensation by providing life insurance policies. The
cash surrender value related to the deferred compensation agreement for the
years ended December 31, 1996 and 1997, were $1,406,000 and $1,351,000,
respectively. The Company had accrued an amount equal to the cash surrender
value at December 31, 1996 as a deferred compensation liability. The Company is
the beneficiary of the policies.
At December 31, 1997, the deferred compensation liability of $1,351,000 was
forgiven by the President of the Company, and the liability was removed from the
Company's balance sheet and included as additional paid-in capital.
In April 1998, the Company borrowed $1,494,000 against the cash surrender value
of the life insurance policies to reduce amounts owed under the financing
arrangement with IBM.
NOTE 6. NOTES RECEIVABLE
<TABLE>
<CAPTION>
(in thousands)
-------------------------------
December 31,
----------------
September 30,
1998
1996 1997 (unaudited)
---------- ------- ------------
<S> <C> <C> <C>
Mortgage receivable; interest at 8.5% per
annum; balance of $70,000 deemed
uncollectible at December 31, 1997 $ 71 $ - $ -
Note receivable; interest accrues at 12.25%
per annum; due in full December 1997*
152 - -
Note receivable from vendor; renegotiated
May 1997, $100,000 payment due upon
execution of note, balance due in quarterly
installments of $230,000 including interest at
Wilmington Trust's prime rate, due July 1998,
balance of $1,150,000 deemed uncollectible
at December 31, 1997. 1,250 - -
---------- ------- ------------
$1,473 $ - $ -
========== ======= ============
</TABLE>
* In April 1996, the Company entered into a line of credit agreement with an
independent third party, whereby, that party may borrow up to $300,000.
Interest on the unpaid balance on the line accrues at prime plus 4%. The line
of credit agreement expired April 3, 1997. A third party corporation and the
stockholders of the third party corporation personally guaranteed the line.
Consideration for the line is a right of first refusal to supply all equipment
that the third party corporation is required to supply for contract or order
fulfillment for the period of time that any monies are owed to the Company.
F-31
<PAGE>
PULSAR DATA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 7. NOTES RECEIVABLE - RELATED PARTIES
Notes receivable from related parties consist of the following as of December
31, 1996 and 1997 and September 30, 1998:
<TABLE>
<CAPTION>
(in thousands)
-------------------------------------
December 31, September 30,
-------------------
1996 1997 1998 (unaudited)
--------- -------- ----------------
<S> <C> <C> <C>
Note receivable, related party; accrues interest
at 7.5% to 8% per annum, due on demand,
$623,000 of which was deemed uncollectible
at December 31, 1997 $2,841 $2,218 $1,329
Note receivable from stockholder; interest
accrues at 5% per annum; due on demand 1,175 -- -
--------- -------- ----------------
$4,016 $2,218 $1,329
========= ======== ================
</TABLE>
The above notes have been classified as non-current in the accompanying balance
sheets.
NOTE 8. LINE OF CREDIT
In May 1996, the Company obtained a line of credit from a financial institution.
Under the line of credit, the Company may borrow up to the lessor of eligible
receivables or $22,000,000. Interest accrues on the outstanding balance at a
variable rate consistent with the bank's national commercial rate. The line is
collateralized by all eligible accounts receivable, inventory, machinery, and
equipment. The outstanding amount on this line of credit at December 31, 1996
was $7,200,000. In October 1997, the line of credit was converted to a term
loan of $5,200,000. (See Note 10)
F-32
<PAGE>
PULSAR DATA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 9. FINANCING ARRANGEMENT - IBM
The Company entered into an Inventory and Working Capital Financing Agreement,
with IBM Global Finance Corporation (IBM) whereby the Company purchases,
hardware and software from authorized suppliers and finances the purchases
through IBM. The agreement provides for a credit line up to $35,000,000, which
allows the Company to borrow up to 85% of the Company's eligible accounts
receivable, and up to 100% of the Company's on-hand inventory. The credit line
is secured by substantially all assets of the Company and is personally
guaranteed by the Company's stockholders.
At December 31, 1997 the interest rate was IBM prime plus 1.75% or 2.00%
depending on the nature of the borrowings. The effective interest rate at that
date was 10.25% or 10.5%. Effective February 1, 1998, the financing agreement
interest rate was increased to prime plus 2.375%; 10.625% at September 30, 1998.
For any amount that the outstanding advances exceed the formula borrowing base,
interest will be accrued at the rate of prime plus 6.5%.
The agreement provides for certain financial covenants to be met by the Company.
At December 31, 1997 the Company was in violation of these covenants.
Due to the Company's outstanding advances exceeding its borrowing base, the
Company has entered into two forbearance agreements with IBM. In an October
1997 forbearance agreement, the Company agreed to issue for $1, warrants to IBM
evidencing 4% ownership interest (fully diluted) of Company stock if the Company
defaults on its commitments set forth in the agreement, or does not obtain an
equity infusion of $2,000,000. In the event that the Company does not obtain
the equity infusion by January 31, 1998, then additional warrants for stock
representing .5% ownership interest, on a fully diluted basis, shall be issued
to IBM at the end of each month such equity infusion has not been obtained
beginning February 1998 until April 30, 1998. A February 1998 forbearance
agreement states that the Company may before May 31, 1998, in lieu of the 4%
ownership interest, pay to IBM the lesser of the 4% of the sales price upon the
sale of all or substantially all of its assets or $650,000. Additionally, in
lieu of the .5% ownership interest due to IBM, the Company may pay to IBM
$50,000 per month beginning February 1, 1998 and on the first of each month
until May 31, 1998. As of December 31, 1997, the Company has accrued $650,000
representing the value of the 4% warrants.
An October 1998 amendment to the forbearance agreement decreased the credit line
to $18,000,000 for the period through January 6, 1999, at which time the line
will be further reduced to $15,000,000. The amendment also states that the
Company may pay, in lieu of the distribution of the warrants representing the 4%
interest in the Company as noted above, the lesser of 4% of the sale price upon
the sale of all or substantially all of the Company's assets; or $650,000; or a
pro-rata share of $650,000 upon sale of less than all or substantially all of
the Company's assets. The Company paid the $50,000 per month fees to IBM in
lieu of issuing the additional .5% ownership interest or obtaining the
$2,000,000 equity infusion stipulated in the prior forbearance agreements. The
financing arrangement has a termination date of October 30, 1999. The Company
was in violation of the covenants of the agreement as of September 30, 1998.
F-33
<PAGE>
PULSAR DATA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10. NOTES PAYABLE
Long-term debt consists of the following notes payable as of December 31, 1996
and 1997 and September 30, 1998:
<TABLE>
<CAPTION>
(in thousands)
December 31, September 30,
-------------------------
1998
1996 1997 (unaudited)
---------- ------------- --------------
<S> <C> <C> <C>
Note payable - financing company;
secured by an automobile with a cost of
$71,000; bears interest at an effective
rate of 13.183%; liquidated by monthly
principal and interest payments of
$1,000; current maturities of $17,300 as
of December 31, 1997; due to mature
January 1999. $ 31 $ 17 $ 4
Note payable - financing company;
secured by an automobile with a cost of
$85,000; bears interest at an effective rate
of 10.460%; liquidated by monthly
principal and interest payments of
$2,000; current maturities of $15,000 as
of December 31, 1997; due to mature
May 2000. 49 39 26
Note payable - financial institution;
collateralized by inventory, accounts
receivable, machinery and equipment, the
mortgages on the assets of a related party
and the President of the Company; bears
interest at the financial institution's prime
lending rate; 8.5% at December 31, 1997,
8.25% at September 30, 1998 liquidated
by monthly principal and interest
payments of $107,000; current maturities
of $883,000 as of December 31, 1997;
due to mature October 2002. - 5,062 4,535
---------- ------------- --------------
$ 80 $5,118 $4,565
========== ============= ==============
</TABLE>
F-34
<PAGE>
PULSAR DATA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10. NOTES PAYABLE (CONTINUED)
Maturities on the notes payable as of December 31, 1997 due in future years are
as follows:
<TABLE>
<CAPTION>
Years ending December 31, (in thousands)
------------------------- ---------------
<S> <C>
1998 $ 915
1999 977
2000 1,054
2001 1,141
2002 1,031
---------------
$5,118
===============
</TABLE>
NOTE 11. NOTES PAYABLE - VENDORS (UNAUDITED)
Notes payable - vendors consist of notes payable to three vendors which were
entered into in August -September 1998 for a total of $3,658,000. The notes
accrue interest at rates ranging from 10% to 18%, and are due in full prior to
September 1999. The balance at September 30, 1998 was approximately $2,727,000
(unaudited).
NOTE 12. REVENUE AND COST OF REVENUE
The breakout of service and product revenue and cost of revenue are as follows
for the years ended December 31, 1996 and 1997 and the nine months ended
September 30, 1998.
<TABLE>
<CAPTION>
(in thousands)
----------------------------------------------
Nine months ended
Years ended December 31, September 30,
----------------------------------------------
(unaudited)
1996 1997 1997 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Service revenue $ 10,253 $ 8,818 $ 7,388 $ 2,768
Product revenue 155,705 142,702 98,186 58,750
-------- -------- -------- --------
TOTAL REVENUE $165,958 $151,520 $105,574 $61,518
======== ======== ======== ========
Cost of revenue
Cost of service revenue $ 4,870 $ 4,115 $ 3,440 $ 1,590
Cost of product revenue 144,494 138,086 96,748 54,891
-------- -------- -------- --------
TOTAL COST OF REVENUE $149,364 $142,201 $100,188 $56,481
======== ======== ======== ========
</TABLE>
The financial data with respect to the service and product revenue and cost of
revenue was unavailable for the year ended December 31, 1995.
F-35
<PAGE>
PULSAR DATA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 13. LEASING ARRANGEMENTS
In January 1996, the Company entered into a lease with a related party for
office space, which was due to expire in December 2000. The Company paid a
$750,000 termination fee to the related party. The fee was offset against notes
receivable owed from the related party and the commitment for further payments
was waived. Deposits and other assets includes a deposit to be refunded from
the related party of approximately $87,000. The Company has leased other office
and warehouse space under separate lease agreements expiring through September
2003. Rent expense was $521,000, $1,690,000 and $811,000 for the years ended
December 31, 1995, 1996 and 1997, respectively, and $444,000 (unaudited) for
the nine months ended September 30, 1998. Lease payments for the period ended
September 30, 1998 were offset with interest receivable and notes receivable
from the related party (see Note 7).
Future minimum rental payments required under these leasing arrangements as of
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Years ending December 31, (in thousands)
---------------
<S> <C>
1998 $ 487
1999 144
2000 125
2001 112
2002 115
2003 89
---------------
$ 1,072
===============
</TABLE>
NOTE 14. EMPLOYEE RETIREMENT PLAN
The Company has adopted a retirement plan under Section 401(k) of the Internal
Revenue Code. The plan provides retirement benefits to all employees who meet
certain age and service eligibility requirements. Under the terms of the plan,
the Company will match 50% of the first 6% of an employee's elective
contribution. Company contributions for the years ended December 31, 1995, 1996
and 1997 were $74,000, $71,000, and $66,000, respectively. The contribution for
the nine months ended September 30, 1998 was $27,000 (unaudited).
NOTE 15. MAJOR CUSTOMERS
During the years ended December 31, 1995, 1996 and 1997, and for the nine months
ended September 30, 1998, 72%, 61% and 60%, and 80% (unaudited), respectively,
of the Company's revenue was derived from contracts with the Federal Government.
The receivable balance for these contracts at December 31, 1996 and 1997 and
September 30, 1998 was $30,697,000, $19,075,000, and $11,948,000 (unaudited),
respectively.
F-36
<PAGE>
PULSAR DATA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 16. GOING CONCERN
As shown in the accompanying financial statements, the Company incurred a net
operating loss of approximately $11,016,000 for the year ended December 31, 1997
and has a working capital deficit of approximately $2,436,000 at December 31,
1997. At December 31, 1997, the Company is in violation of the financial
covenants related to its financing agreement. These factors create an
uncertainty about the Company's ability to continue as a going concern.
Management of the Company is developing a plan to reduce its liabilities through
the sales of assets and/or product lines and is taking action to reduce its
operating expenses and align its product mix to return to profitability. The
Company is in negotiations to be acquired by another company. The combined
company is in the process of preparing an initial public offering. The ability
of the Company to continue as a going concern is dependent upon the plan's
success. The financial statements do not include any adjustments that might be
necessary if the Company is unable to continue as a going concern.
NOTE 17. CONTINGENT LIABILITIES
The Company has cost reimbursable type contracts with the Federal Government.
Consequently, the Company is reimbursed based upon their direct expenses
attributable to the contract, plus a percentage based upon overhead, material
handling, and general and administrative expenses. The overhead, material
handling, and general and administrative rates are estimates. Accordingly, if
the actual rates as determined by the Defense Contract Audit Agency are below
the Company's estimates, a refund for the difference would be due to the Federal
Government. It is management's opinion that no material liability will result
from any cognizant audit agency audits.
The Company is involved in various routine legal actions arising in the normal
course of business. After taking into consideration legal counsel's evaluation
of such actions, management is of the opinion that any potential liability,
arising from these claims against the Company, not covered by insurance, would
be minimal.
The Company has guaranteed the mortgages on properties owned by a related party
of approximately $5,100,000.
As of January 15, 1999, the Company had not yet filed the Form 5500 Annual
Return/Report for 1997 for its Employee Retirement Plan. The Form 5500 along
with an audit report was due October 15, 1998. The Company may be assessed
penalties by both the Department of Labor and the Internal Revenue Service for
its late filing.
F-37
<PAGE>
================================================================================
We have not authorized any dealer, salesperson or any other person to give any
information or to represent anything not contained in this prospectus. You must
not rely on any unauthorized information. This prospectus does not offer to sell
or buy any shares in any jurisdiction where it is unlawful.
_________________
TABLE OF CONTENTS
Page
----
Prospectus Summary .................................................... 3
Risk Factors .......................................................... 12
Use of Proceeds ....................................................... 21
Dividend Policy ....................................................... 22
Dilution .............................................................. 22
Capitalization ........................................................ 24
Pro Forma Financial Data .............................................. 25
Selected Financial Data - Litronic .................................... 29
Selected Financial Data - Pulsar....................................... 31
Management's Discussion and Analysis of Financial
Condition and Results of Operations .......................... 33
Industry Information................................................... 45
Business .............................................................. 49
Management ............................................................ 61
Principal Stockholders ................................................ 66
Certain Transactions .................................................. 67
Description of Securities ............................................. 69
Shares Eligible for Future Sale ....................................... 70
Underwriting .......................................................... 71
Legal Matters ......................................................... 73
Experts ............................................................... 73
Additional Information ................................................ 73
Index to Consolidated Financial Statements
- Litronic ............................................. F-1
Index to Financial Statements - Pulsar
Data Systems, Inc............................................. F-20
Until ______, 1999, all dealers that effect transactions in the registered
securities, whether or not participating in these securities, whether or not
participating in this offering may be required to deliver a prospectus. This is
in addition to the dealers' obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
3,000,000 SHARES
LITRONIC INC.
COMMON STOCK
_________________
PROSPECTUS
_________________
BLUESTONE CAPITAL PARTNERS, L.P.
____________, 1999
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is a statement of expenses incurred by Registrant in
connection with the issuance and distribution of the securities being registered
hereunder, other than underwriting discounts. All amounts are estimated except
the Securities and Exchange Commission registration fee, the National
Association of Securities Dealers, Inc. filing fee and the NASDAQ/NMS quotation
fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee.................... $ 10,550
National Association of Securities Dealers, Inc. filing fee............ 4,295
NASDAQ/NMS quotation fee............................................... 17,500
Printing and engraving expenses........................................ *
Legal fees and expenses................................................ *
Accounting fees and expenses........................................... *
Transfer Agent and Registrar fees and expenses......................... *
Blue Sky fees and expenses (including legal fees)...................... *
Miscellaneous.......................................................... *
----------
Total............................................................... $1,250,000
==========
</TABLE>
* To be provided by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law, as amended, provides
that a corporation may indemnify any person who was or is a party to or is
threatened to be made a party to any threatened, pending or completed action or
proceeding, whether civil, criminal, administrative or investigative, 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 its request in such capacity in another
corporation or business association, against expenses (including attorney's
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if her 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.
Section 107(b)(7) of the Delaware General Corporation Law, as amended,
permits a corporation to provide in its certificate of incorporation that a
director of the corporation shall not be personally liable to the corporation or
its shareholders for monetary damages for breach of fiduciary duty as a
director, except for liability (a) for any breach of the director's duty of
loyalty to the corporation or its shareholders, (b) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (c) under Section 174 of the Delaware General Corporation Law, or (d) for
any transaction from which the director derived an improper personal benefit.
Article V of the Registrant's Amended and Restated Certificate of
Incorporation provides for the elimination of personal liability for a director
for breach of fiduciary duty as permitted by 102(b)(7) of the Delaware General
Corporation Law. Article VI of the Registrant's Amended and Restated By-Laws
provide that the Registrant shall indemnify its directors, officers and
employees to the full extent permitted by Section 145 of the Delaware General
Corporation Law.
II-1
<PAGE>
The Underwriting Agreement (filed as Exhibit 1 hereto) provides for
indemnification by the Underwriters of the Registrant and its directors,
officers and controlling persons for certain liabilities arising under the
Securities Act or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In February 1999 Registrant issued 100 shares of its common stock to Kris
Shah, its promoter, in connection with the organization of the Registrant and
this offering for $100. On the date of this prospectus, Registrant issued
3,870,593 shares of common stock to the shares of Litronic Industries, Inc. in
exchange for all the outstanding capital stock of Litronic Industries, Inc.
The issuance of the securities in the transactions described above were
deemed to be exempt from registration under the Securities Act in reliance on
(a) Section 4(2) of the Securities Act and Regulation D promulgated thereunder
as a transaction by an issuer not involving any public offering.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
<S> <C>
1 Form of Underwriting Agreement among the Registrant and the Underwriters
2 Stock Exchange Agreement and Plan of Reorganization
3.1 Certificate of Incorporation, as amended on February 5, 1999
3.2 By-Laws of the Registrant
3.3 Form of Amended and Restated Certificate of Incorporation
4.1 Registration Rights Agreement
4.2 Warrant Agreement
5 Form of Opinion of Arent Fox Kintner Plotkin & Kahn, PLLC re validity [to
be filed by amendment]
10.1 Employment Agreement with Kris Shah
10.2 Employment Agreement with William W. Davis, Sr.
10.3 Promissory Note from Dril-Tron, Inc. (Litronic Industries, Inc.) To Kris Shah
dated December 12, 1994 in the principal amount of $210,822
10.4 Commercial Guaranty from Pulsar Data Systems, Inc. to Wilmington Trust
Company dated June 23, 1995
10.5 Business Loan Agreement between Pulsar Data Systems, Inc. and
Wilmington Trust Company dated July 24, 1995
10.6 Commercial Security Agreement between Pulsar Data Systems, Inc. and
Wilmington Trust Company dated July 24, 1995
10.7 Commercial Guaranty from Pulsar Data Systems, Inc. to Wilmington Trust
Company dated October 23, 1995
10.8 Purchase Order between Loral Federal Systems Company and Litronic
Industries, Inc. dated November 17, 1995
10.9 Loan and Security Agreement between Litronic Industries, Inc. and Fidelity
Funding of California, Inc. dated June 27, 1996
10.10 First Amendment to Loan and Security Agreement between Litronic
Industries Inc. and Fidelity Funding, Inc. dated June 27, 1997
10.11 Award Contract between Maryland Procurement Office and Litronic
Industries, Inc. dated June 27, 1997
10.12 Forbearance Agreement between Pulsar Data Systems, Inc. and IBM Credit
Corporation dated August 8, 1997
10.13 Letter Agreement between Pulsar Data Systems, Inc. and IBM Credit
Corporation dated October 10, 1997
10.14 Sublease Agreement between Litronic Industries, Inc. and E. I. du Pont de
Nemours and Company dated October 27, 1997
</TABLE>
II-3
<PAGE>
<TABLE>
<S> <C>
10.15 Inventory Working Capital and Finance Agreement between Pulsar Data
Systems, Inc. and IBM Credit Corporation dated October 30, 1997
10.16 Lease and Service Agreement between Alliance Business Centers and
Litronic Industries, Inc. dated January 30, 1998
10.17 Lease Agreement between Airport Industrial Complex and Litronic
Industries, Inc. dated December 4, 1997
10.18 Promissory Note from Litronic Industries, Inc. to KRDS, Inc. dated
December 31, 1997 in the principal amount of $900,000
10.19 Revolving Promissory Note from Litronic Industries, Inc. to KRDS, Inc.
dated December 31, 1997 in the principal amount of $2,900,000
10.20 Revolving Promissory Note from Litronic Industries, Inc. to KRDS, Inc.
dated December 31, 1997 in the principal amount of $2,000,000
10.21 Letter Agreement between Pulsar Data Systems, Inc. and IBM Credit
Corporation dated February 4, 1998
10.22 Revolving Promissory Note from Litronic Industries, Inc. to KRDS, Inc.
dated February 24, 1998 in the principal amount of $ 600,000
10.23 Second Amendment to Loan and Security Agreement between Litronic
Industries, Inc. and Fidelity Funding, Inc. dated March 1, 1998
10.24 Litronic Industries, Inc. Stock Option Plan dated April 1, 1998
10.25 Litronic Industries, Inc. Stock Option Plan dated February __, 1999
10.26 Modification dated July 15, 1998 of Original GSA Contract GS-35F-4232D
dated May 3, 1996
10.27 Deed of Lease Agreement between Pulsar Data Systems, Inc. and
Massachusetts Mutual Life Insurance Company dated August 11, 1998
10.28 Forbearance Agreement between Pulsar Data Systems, Inc. and IBM Credit
Corporation dated August 31, 1998
10.29 Business Loan Agreement between Litronic Industries, Inc. and BYL Bank
Group dated September 29, 1998
10.30 Promissory Note from Litronic Industries, Inc. to BYL Bank Group dated
September 29, 1998 in the principal amount of $3,800,000
10.31 Promissory Note from Litronic Industries, Inc. to BYL Bank Group dated
September 29, 1998 in the principal amount of $1,400,000
10.32 Amendment to Forbearance Agreement between Pulsar Data Systems, Inc.
and IBM Credit Corporation dated October 9, 1998
10.33 Promissory Note from Davis Holding Company to Pulsar Data Systems, Inc.
dated January 1, 1999 in the principal amount of $804,342.08
10.34 Promissory Note from Davis Holding Company to Pulsar Data Systems, Inc.
dated January 1, 1999 in the principal amount of $543,017.40
10.35 Letter Agreement between Pulsar Data Systems, Inc. and Wilmington Trust
Company dated June 20, 1997
23.1 Form of Consent of KPMG LLP
23.2 Form of Consent of Keller Bruner LLP
27 Financial Data Schedule [To be filed by amendment]
</TABLE>
II-4
<PAGE>
<TABLE>
<S> <C>
23.2 Form of Consent of Keller Bruner & Company, LLC
23.3 Consent of Arent Fox Kintner Plotkin & Kahn, PLLC (See Exhibit No. 5)
</TABLE>
(b) Financial Statement Schedules.
The following financial statement schedules are filed herewith:
Report of Independent Public Accountants
Other schedules have been omitted because of the absence of conditions
under which they are required or because the required information is included in
the financial statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this registration statement as of the time it was
declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, hereunto duly authorized, in the District of Columbia, on the 8th
day of February, 1999.
Litronic Inc.
By: /s/ Kris Shah
------------------------------------
Kris Shah
Chief Executive Officer and Chairman
of the Board
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Kris
Shah and/or William W. Davis, Sr. his or her true and lawful attorney-in-fact
and agent, acting alone, with full power of substitution and resubstitition, for
him or her and in his or her name, place and stead, in any and all capacities,
to sign any or all amendments (including post-effective amendments) to this
registration statement, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent, acting alone, full
power and authority to do and perform each and every act and thing appropriate
or necessary to be done in and about the premises, as fully to all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent, acting alone, or his or her
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Kris Shah Chairman of the Board and Chief Executive Officer February 8, 1999
- ---------------------------
Kris Shah
/s/ Thomas W. Seykora Chief Financial Officer February 8, 1999
- ---------------------------
Thomas W. Seykora
/s/ William W. Davis, Sr. Director February 8, 1999
- ---------------------------
William W. Davis, Sr.
</TABLE>
[SIGNATURE PAGE OF FORM S-1 FOR LITRONIC INC.]
II-6
<PAGE>
PULSAR DATA SYSTEMS, INC.
SCHEDULE V
Valuation and Qualifying Accounts and Reserves
Year ended December 31, 1995, 1996 and 1997
(Amounts in thousands)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- ------------- ------------ ------------------- --------------- -----------------
Balance at Additions
Beginning Charged to Costs Amounts Balance at End
Classification of Period and Expenses Written Off of Period
------------ ------------------- --------------- -----------------
<S> <C> <C> <C> <C>
Year ended December 31, 1995
Allowance for doubtful accounts $ 150 $ 345 $ 45 $ 450
===== ===== ====== =====
Allowance for notes receivable 0 0 0 0
===== ===== ====== =====
Allowance for notes receivable-
related party 0 0 0 0
===== ===== ====== =====
Year ended December 31, 1996
Allowance for doubtful accounts 450 403 33 820
===== ===== ====== =====
Allowance for notes receivable 0 0 0 0
===== ===== ====== =====
Allowance for notes receivable-
related party 0 0 0 0
===== ===== ====== =====
Year ended December 31, 1997
Allowance for doubtful accounts 820 3,460 3,027 1,253
===== ===== ====== =====
Allowance for notes receivable 0 1,220 1,220 0
===== ===== ====== =====
Allowance for notes receivable-
related party 0 653 623 0
===== ===== ====== =====
</TABLE>
<PAGE>
Exhibit 1
LITRONIC INC.
3,000,000 Shares of Common Stock
(Par Value $.01 per share)
UNDERWRITING AGREEMENT
----------------------
New York, New York
_______, 1999
Blue Stone Capital Partners, L.P.
as Representative of the
Several Underwriters named
in Schedule A hereto
575 Fifth Avenue
New York, New York 10017
Dear Sirs:
Litronic Inc. a Delaware corporation (the "Company"), proposes to
issue and sell to the underwriters (the "Underwriters") named in Schedule A to
this Underwriting Agreement (the "Agreement"), for whom BlueStone Capital
Partners, L.P. ("BlueStone") is acting as representative (hereinafter referred
to as the "Representative" or "BlueStone"), three million (3,000,000) shares of
common stock, par value $.01 per share (the "Offered Shares"), which Offered
Shares are presently authorized but unissued shares of the common stock, par
value $.01 per share (individually a "Common Share" and collectively the "Common
Shares"), of the Company. In addition, the Representative, in order to cover
over-allotments in the sale of the Offered Shares, may purchase from the
Company, for its own account, up to an aggregate of four hundred fifty thousand
(450,000) Common Shares (the "Optional Shares"; the Offered Shares and the
Optional Shares are hereinafter sometimes collectively referred to as the
"Shares"). The Shares are described in the Registration Statement, as defined
below. The Company also proposes to issue and sell to the Representative for its
own account and/or the account of its designees, warrants to purchase an
aggregate of three hundred thousand (300,000) Common Shares (the "Warrant
Shares") at an exercise price of $____ [165% of the initial public offering
price per share] per Warrant Share (the "Representative's Warrants"), which sale
will be consummated in accordance with the terms and conditions of the form of
Representative's Warrant Agreement filed as an exhibit to the Registration
Statement.
The Representative hereby warrants to the Company that it has been
authorized by each of the Underwriters to enter into this Underwriting Agreement
on their behalf and to act for them in the manner herein provided. The Company
hereby confirms its respective
<PAGE>
agreements with the Representative and each of the Underwriters, on whose behalf
the Representative is signing this Agreement, as follows:
1. Purchase and Sale of Offered Shares. On the basis of the
-----------------------------------
representations and warranties herein contained, but subject to the terms and
conditions herein set forth, the Company hereby agrees to sell the Offered
Shares to the Underwriters, severally, and each Underwriter agrees severally and
not jointly, to purchase from the Company, at a purchase price of $______ [93%
of the initial public offering price] per share, the number of Offered Shares
set forth opposite the name of such Underwriter in Schedule A attached hereto,
plus any additional Offered Shares which such Underwriter may become obligated
to purchase pursuant to the provisions of Section 10 hereof. The Underwriters
plan to offer the Offered Shares to the public at a public offering price of
$_____ per share.
2. Payment and Delivery.
--------------------
(a) Payment for the Offered Shares will be made to the Company
by wire transfer against delivery of the Offered Shares to the Representative.
Such payment and delivery will be made at 10:00 A.M. New York City time, on the
third business day following the Effective Date (the fourth business day
following the Effective Date in the event that trading of the Offered Shares
commences on the day following the Effective Date), the date and time of such
payment and delivery being herein called the "Closing Date." The certificates
representing the Offered Shares to be delivered will be in such denominations
and registered in such names as the Representative may request not less than two
full business days prior to the Closing Date, and will be made available to the
Representative for inspection, checking and packaging at the offices of
___________________, the Company's transfer agent, at __________________________
not less than one full business day prior to the Closing Date.
(b) On the Closing Date, the Company will sell the
Representative's Warrants to the Representative or to its designees (limited to
officers and partners of the Representative and Underwriters). The
Representative's Warrants will be in the form of, and in accordance with, the
provisions of the Representative's Warrant Agreement attached as an exhibit to
the Registration Statement, with such changes as the Representative shall
approve. The aggregate purchase price for the Representative's Warrants is $300.
The Representative's Warrants will be restricted from sale, transfer, assignment
or hypothecation for a period of one year from the Effective Date, except to
officers or partners of the Representative and Underwriters and members of the
selling group and/or their officers or partners. Payment for the
Representative's Warrants will be made to the Company by check or checks payable
to its order on the Closing Date against delivery of the certificates
representing the Representative's Warrants. The
-2-
<PAGE>
certificates representing the Representative's Warrants will be in such
denominations and such names as the Representative may request prior to the
Closing Date.
3. Option to Purchase Optional Shares.
----------------------------------
(a) For the purposes of covering any overallotments in
connection with the distribution and sale of the Offered Shares as contemplated
by the Prospectus as defined below, the Representative is hereby granted an
option to purchase for its own accounts, and not as representative of the
Underwriters, all or any part of the Optional Shares from the Company. The
purchase price to be paid for the Optional Shares will be the same price per
Optional Share as the price per Offered Share set forth in Section 1 hereof. The
option granted hereby may be exercised by the Representative as to all or any
part of the Optional Shares at any time within 45 days after the Effective Date.
The Representative will not be under any obligation to purchase any Optional
Shares prior to the exercise of such option.
(b) The option granted hereby may be exercised by the
Representative by giving oral notice to the Company, which must be confirmed by
a letter, telex or telegraph setting forth the number of Optional Shares to be
purchased, the date and time for delivery of and payment for the Optional Shares
to be purchased and stating that the Optional Shares referred to therein are to
be used for the purpose of covering over-allotments in connection with the
distribution and sale of the Offered Shares. If such notice is given prior to
the Closing Date, the date set forth therein for such delivery and payment will
not be earlier than either two full business days thereafter or the Closing
Date, whichever occurs later. If such notice is given on or after the Closing
Date, the date set forth therein for such delivery and payment will not be
earlier than two (2) full business days thereafter. In either event, the date so
set forth will not be more than 15 full business days after the date of such
notice. The date and time set forth in such notice is herein called the "Option
Closing Date." Upon exercise of such option, the Company will become obligated
to convey to the Representative, and, subject to the terms and conditions set
forth in Section 3(d) hereof, the Representative will become obligated to
purchase, the number of Optional Shares specified in such notice.
(c) Payment for any Optional Shares purchased will be made to
the Company by wire transfer against delivery of the Optional Shares purchased
to the Representative. The certificates representing the Optional Shares to be
delivered will be in such denominations and registered in such names as the
Representative requests not less than two full business days prior to the Option
Closing Date, and will be made available to the Representative for inspection,
checking and packaging at the aforesaid office of the Company's transfer agent
or correspondent not less than one full business day prior to the Option Closing
Date.
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(d) The obligation of the Representative to purchase and pay for
any of the Optional Shares is subject to the accuracy and completeness (as of
the date hereof and as of the Option Closing Date) of and compliance in all
material respects with the representations and warranties of the Company herein,
to the accuracy and completeness of the statements of the Company or its
officers made in any certificate or other document to be delivered by the
Company pursuant to this Agreement, to the performance in all material respects
by the Company of its obligations hereunder, to the satisfaction by the Company
of the conditions, as of the date hereof and as of the Option Closing Date, set
forth in Section 3(b) hereof, and to the delivery to the Representative of
opinions, certificates and letters dated the Option Closing Date substantially
similar in scope to those specified in Sections 5 and 6(b), (c), (d) and (e)
hereof, but with each reference to "Offered Shares" and "Closing Date" to be,
respectively, to the Optional Shares and the Option Closing Date.
4. Representations and Warranties of the Company and Pulsar. The
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Company and Pulsar (defined hereinafter) each represents and warrants to, and
agrees with, the several Underwriters that:
(a) The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware, with full
power and authority, corporate and other, to own or lease, as the case may be,
and operate its properties and to conduct its business as described in the
Registration Statement and to execute, deliver and perform this Agreement and
the Representative's Warrant Agreement and to consummate the transactions
contemplated hereby and thereby. The Company has no Subsidiaries as of the date
hereof other than Litronic Industries, Inc., a corporation duly organized,
validly existing and in good standing under the laws of the State of California
("LIT"), and, as of the Closing Date, will have no Subsidiaries other than LIT
and Pulsar Data Systems, Inc., a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware ("Pulsar" and,
together with LIT, the "Subsidiaries"). The Company has no equity interest in
any entities other than the Subsidiaries. Unless the context otherwise requires,
all references to the "Company" in this Agreement shall include the
Subsidiaries.
(b) Each of the Company and the Subsidiaries is duly qualified
to do business as a foreign corporation and is in good standing in all
jurisdictions wherein such qualification is necessary and failure so to qualify
could have a material adverse effect on the financial condition, results of
operations, business or properties of the Company or any of the Subsidiaries.
Each of the Subsidiaries has full power and authority, corporate and other, and
all Permits (defined hereafter) necessary to own or lease, as the case may be,
and operate its properties and to conduct its business as described in the
Registration Statement. On the
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Closing Date, the Company will own all of the issued and outstanding shares of
capital stock of all of the Subsidiaries, free and clear of any security
interests, liens, encumbrances, claims and charges, and all of such shares have
been duly authorized and validly issued and are fully paid and non-assessable.
There are no options or warrants for the purchase of, or other rights to
purchase, or outstanding securities convertible into or exchangeable for, any
capital stock or other securities of the Subsidiary.
(c) This Agreement has been duly executed and delivered by the
Company and constitutes the valid and binding obligation of the Company, and the
Representative's Warrant Agreement, when executed and delivered by the Company
on the Closing Date, will be the valid and binding obligation of the Company,
enforceable against the Company in accordance with their respective terms. The
execution, delivery and performance of this Agreement and the Representative's
Warrant Agreement by the Company, the consummation by the Company of the
transactions herein and therein contemplated and the compliance by the Company
with the terms of this Agreement and the Representative's Warrant Agreement have
been duly authorized by all necessary corporate action and do not and will not,
with or without the giving of notice or the lapse of time, or both, (i) result
in any violation of the Company's or of any of the Subsidiaries' Certificate of
Incorporation or Articles of Incorporation, as the case may be, or By-Laws (or
similar charter documents); (ii) result in a breach of or conflict with any of
the terms or provisions of, or constitute a default under, or result in the
modification or termination of, or result in the creation or imposition of any
lien, security interest, charge or encumbrance upon any of the properties or
assets of the Company or any of the Subsidiaries pursuant to any indenture,
mortgage, note, contract, commitment or other agreement or instrument to which
the Company or any of the Subsidiaries is a party or by which the Company or any
of the Subsidiaries or any of their respective properties or assets is or may be
bound or affected; (iii) violate any existing applicable law, rule, regulation,
judgment, order or decree of any governmental agency or court, domestic or
foreign, having jurisdiction over the Company or any of the Subsidiaries or any
of their respective properties or business; or (iv) have any effect on any
permit, certification, registration, approval, consent, order, license,
franchise or other authorization (collectively, the "Permits") necessary for the
Company or any of the Subsidiaries to own or lease and operate their respective
properties or conduct their respective businesses or the ability of the Company
to make use thereof.
(d) No Permits of any court or governmental agency or body,
other than under the Securities Act of 1933, as amended (the "Act"), the
Regulations (as hereinafter defined) and applicable state securities or Blue Sky
laws, are required (i) for the valid authorization, issuance, sale and delivery
of the Shares to the Underwriters, and (ii) the consummation by the Company of
the
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<PAGE>
transactions contemplated by this Agreement and the Representative's Warrant
Agreement or, if so required, all such Permits have been duly obtained and are
in full force and effect.
(e) The conditions for use of a registration statement on Form
S-1 set forth in the General Instructions to Form S-1 have been satisfied with
respect to the Company, the transactions contemplated herein and in the
Registration Statement. The Company has prepared in conformity with the
requirements of the Act and the rules and regulations (the "Regulations") of the
Securities and Exchange Commission (the "Commission") and filed with the
Commission a registration statement (File No. 333-______) on Form S-1 and has
filed one or more amendments thereto, covering the registration of the Shares
under the Act, including the related preliminary prospectus or preliminary
prospectuses (each thereof being herein called a "Preliminary Prospectus") and a
proposed final prospectus. Each Preliminary Prospectus was endorsed with the
legend required by Item 501(b)(10) of Regulation S-K of the Regulations and, if
applicable, Rule 430A of the Regulations. Such registration statement including
any documents incorporated by reference therein and all financial schedules and
exhibits thereto, as amended at the time it becomes effective, and the final
prospectus included therein are herein, respectively, called the "Registration
Statement" and the "Prospectus," except that, (i) if the prospectus filed by the
Company pursuant to Rule 424(b) of the Regulations differs from the Prospectus,
the term "Prospectus" shall mean the prospectus filed pursuant to Rule 424(b),
and (ii) if the Registration Statement is amended or such Prospectus is
supplemented after the date the Registration Statement is declared effective by
the Commission (the "Effective Date") and prior to the Option Closing Date, the
terms "Registration Statement" and "Prospectus" shall include the Registration
Statement as amended or supplemented.
(f) Neither the Commission nor, to the best of the Company's
knowledge, any state regulatory authority has issued any order preventing or
suspending the use of any Preliminary Prospectus or has instituted or, to the
best of the Company's knowledge, threatened to institute any proceedings with
respect to such an order.
(g) The Registration Statement when it becomes effective, the
Prospectus (and any amendment or supplement thereto) when it is filed with the
Commission pursuant to Rule 424(b), and both documents as of the Closing Date
and the Option Closing Date referred to below, will contain all statements which
are required to be stated therein in accordance with the Act and the Regulations
and will in all material respects conform to the requirements of the Act and the
Regulations, and neither the Registration Statement nor the Prospectus, nor any
amendment or supplement thereto, on such dates, will contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in light of the
circum-
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<PAGE>
stances under which they were made, not misleading, except that this
representation and warranty does not apply to statements or omissions made in
reliance upon and in conformity with information furnished in writing to the
Company in connection with the Registration Statement or Prospectus or any
amendment or supplement thereto by the Representative, or by any Underwriter
through the Representative, expressly for use therein.
(h) The Company had at the date or dates indicated in the
Prospectus a duly authorized and outstanding capitalization as set forth in the
Registration Statement and the Prospectus. The Company will have on the Closing
Date the adjusted stock capitalization set forth therein. Except as set forth in
the Registration Statement or the Prospectus, on the Effective Date and on the
Closing Date, there will be no options to purchase, warrants or other rights to
subscribe for, or any securities or obligations convertible into, or any
contracts or commitments to issue or sell shares of the Company's capital stock
or any such warrants, convertible securities or obligations. Except as set forth
in the Prospectus, no holder of any of the Company's securities has any rights,
"demand," "piggyback" or otherwise, to have such securities registered under the
Act.
(i) The descriptions in the Registration Statement and the
Prospectus of contracts and other documents are accurate and present fairly the
information required to be disclosed, and there are no contracts or other
documents required to be described in the Registration Statement or Prospectus
or to be filed as exhibits to the Registration Statement under the Act or the
Regulations which have not been so described or filed as required.
(j) KPMG LLP, the accountants who have certified the consolidated
financial statements of the Company and certain of the financial statements of
Pulsar (collectively, the "Financial Statements") filed and to be filed with the
Commission as part of the Registration Statement and the Prospectus, are
independent public accountants within the meaning of the Act and Regulations.
The Financial Statements and schedules and the notes thereto filed as part of
the Registration Statement and included in the Prospectus are complete, correct
and present fairly the financial position of Pulsar and Litronic as of the dates
thereof, and the results of operations and changes in financial position of the
Company and Pulsar for the periods indicated therein, all in conformity with
generally accepted accounting principles applied on a consistent basis
throughout the periods involved, except as otherwise stated in the Registration
Statement and the Prospectus. The selected financial data set forth in the
Registration Statement and the Prospectus present fairly the information shown
therein and have been compiled on a basis consistent with that of the audited
and unaudited financial statements included in the Registration Statement and
the Prospectus.
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<PAGE>
(k) Each of the Company and the Subsidiaries has filed with the
appropriate federal, state and local governmental agencies, and all appropriate
foreign countries and political subdivisions thereof, all tax returns, including
franchise tax returns, which are required to be filed or has duly obtained
extensions of time for the filing thereof and has paid all taxes shown on such
returns and all assessments received by it to the extent that the same have
become due; and the provisions for income taxes payable, if any, shown on the
Financial Statements filed with or as part of the Registration Statement are
sufficient for all accrued and unpaid foreign and domestic taxes, whether or not
disputed, and for all periods to and including the dates of such Financial
Statements. Except as disclosed in writing to the Representative, neither the
Company nor any Subsidiary has executed or filed with any taxing authority,
foreign or domestic, any agreement extending the period for assessment or
collection of any income taxes and is not a party to any pending action or
proceeding by any foreign or domestic governmental agency for assessment or
collection of taxes; and no claims for assessment or collection of taxes have
been asserted against the Company or any Subsidiary.
(l) The outstanding Common Shares and outstanding options and
warrants to purchase Common Shares have been duly authorized and validly issued.
The outstanding Common Shares are fully paid and nonassessable. The outstanding
options and warrants to purchase Common Shares constitute the valid and binding
obligations of the Company, enforceable in accordance with their terms. None of
the outstanding Common Shares or options or warrants to purchase Common Shares
has been issued in violation of the preemptive rights of any shareholder of the
Company. None of the holders of the outstanding Common Shares is subject to
personal liability solely by reason of being such a holder. The offers and sales
of the outstanding Common Shares and outstanding options and warrants to
purchase Common Shares were at all relevant times either registered under the
Act and the applicable state securities or Blue Sky laws or exempt from such
registration requirements. The authorized Common Shares and outstanding options
and warrants to purchase Common Shares conform to the descriptions thereof
contained in the Registration Statement and Prospectus. Except as set forth in
the Registration Statement and the Prospectus, on the Effective Date and the
Closing Date, there will be no outstanding options or warrants for the purchase
of, or other outstanding rights to purchase, Common Shares or securities
convertible into Common Shares.
(m) No securities of the Company have been sold by the Company
or by or on behalf of, or for the benefit of, any person or persons controlling,
controlled by, or under common control with the Company within the three years
prior to the date hereof, except as disclosed in the Registration Statement.
(n) The issuance and sale of the Shares and the Warrant Shares
have been duly authorized and, when the Shares and
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<PAGE>
the Warrant Shares have been issued and duly delivered against payment therefor
as contemplated by this Agreement and the Representative's Warrant Agreement,
respectively, the Shares and the Warrant Shares will be validly issued, fully
paid and nonassessable, and the holders thereof will not be subject to personal
liability solely by reason of being such holders. Neither the Shares nor the
Warrant Shares will be subject to preemptive rights of any shareholder of the
Company.
(o) The issuance and sale of the Representative's Warrants have
been duly authorized and, when issued, paid for and delivered as contemplated by
the Representative's Warrant Agreement, the Representative's Warrants will
constitute valid and binding obligations of the Company, enforceable as to the
Company in accordance with their terms. The Representative's Warrants will not
be subject to preemptive rights of any shareholder of the Company. The Warrant
Shares have been duly reserved for issuance upon exercise of the
Representative's Warrants in accordance with the provisions of the
Representative's Warrant Agreement. The Representative's Warrants conform to the
description thereof contained in the Registration Statement and Prospectus.
(p) Neither the Company nor any Subsidiary is in violation of,
or in default under, (i) any term or provision of its Certificate of
Incorporation, Articles of Incorporation (as the case may be) or By-Laws (or
similar charter documents), each as amended; (ii) any material term or provision
or any financial covenants of any indenture, mortgage, contract, commitment or
other agreement or instrument to which it is a party or by which it or any of
its property or business is or may be bound or affected; or (iii) any existing
applicable law, rule, regulation, judgment, order or decree of any governmental
agency or court, domestic or foreign, having jurisdiction over the Company, any
Subsidiary or any of their respective properties or business. The Company and
each Subsidiary owns, possesses or has obtained all governmental and other
(including those obtainable from third parties) Permits necessary to own or
lease, as the case may be, and to operate its properties, whether tangible or
intangible, and to conduct the business and operations of the Company as
presently conducted, and all such Permits are outstanding and in good standing,
and there are no proceedings pending or to the best of the Company's and
Pulsar's knowledge, threatened (nor, to the best of the Company's and Pulsar's
knowledge, is there any basis therefor) which seek to cancel, terminate or limit
such Permits.
(q) Except as set forth in the Prospectus, there are no claims,
actions, suits, proceedings, arbitrations, investigations or inquiries before
any governmental agency, court or tribunal, domestic or foreign, or before any
private arbitration tribunal, pending, or, to the best of the Company's and
Pulsar's knowledge, threatened against the Company or any Subsidiary or
involving the Company's or any of the Subsidiaries' properties or business
which, if determined adversely to the Company or any of
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<PAGE>
the Subsidiaries would, individually or in the aggregate, result in any material
adverse change in the financial position, shareholders' equity, results of
operations, properties, business, management or affairs or business prospects of
the Company or any of the Subsidiaries or which question the validity of the
capital stock of the Company or this Agreement or of any action taken or to be
taken by the Company pursuant to, or in connection with, this Agreement; nor, to
the best of the Company's and Pulsar's knowledge, is there any basis for any
such claim, action, suit, proceeding, arbitration, investigation or inquiry.
There are no outstanding orders, judgments or decrees of any court, governmental
agency or other tribunal naming the Company or any of the Subsidiaries and
enjoining the Company or any of the Subsidiaries from taking, or requiring the
Company or any of the Subsidiaries to take, any action, or to which the Company
or any of the Subsidiaries or the Company's or any Subsidiaries' properties or
business is bound or subject.
(r) Neither the Company nor any of the Subsidiaries nor any of
their affiliates has incurred any liability for any finder's fees or similar
payments in connection with the transactions herein contemplated.
(s) Each of the Company and of the Subsidiaries owns or
possesses adequate and enforceable rights to use all patents, patent
applications, trademarks, service marks, copyrights, rights, trade secrets,
confidential information, processes and formulations used or proposed to be used
in the conduct of its business as described in the Prospectus (collectively the
"Intangibles"); to the best of the Company's and Pulsar's knowledge, neither the
Company nor any of the Subsidiaries has infringed or is infringing upon the
rights of others with respect to the Intangibles; and neither the Company nor
any of the Subsidiaries has received any notice of conflict with the asserted
rights of others with respect to the Intangibles which could, singly or in the
aggregate, materially adversely affect its business as presently conducted or
the prospects, financial condition or results of operations of the Company or
any Subsidiary and neither the Company nor Pulsar knows of any basis therefor;
and, to the best of the Company's and Pulsar's knowledge, no others have
infringed upon the Intangibles of the Company or any Subsidiary.
(t) Since the respective dates as of which information is given
in the Registration Statement and the Prospectus and the Financial Statements,
neither the Company nor any Subsidiary has incurred any material liability or
obligation, direct or contingent, or entered into any material transaction,
whether or not incurred in the ordinary course of business, or sustained any
material loss or interference with its business from fire, storm, explosion,
flood or other casualty, whether or not covered by insurance, or from any labor
dispute or court or governmental action, order or decree; and since the
respective dates as of which information is given in the Registration
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<PAGE>
Statement and the Prospectus, there have not been, and prior to the Closing Date
there will not be, any changes in the capital stock or any material increases in
the long-term debt of the Company or any Subsidiary or any material adverse
change in or affecting the general affairs, management, financial condition,
shareholders' equity, results of operations or prospects of the Company or any
Subsidiary, other than as set forth or contemplated in the Prospectus.
(u) Neither the Company nor any Subsidiary owns any real
property. Each of the Company and of the Subsidiaries has good title to all
personal property (tangible and intangible) owned by it, free and clear of all
security interests, charges, mortgages, liens, encumbrances and defects, except
such as are described in the Registration Statement and Prospectus or such as do
not materially affect the value or transferability of such property and do not
interfere with the use of such property made, or proposed to be made, by the
Company or any of the Subsidiaries. The leases, licenses or other contracts or
instruments under which the Company and the Subsidiaries lease, hold or are
entitled to use any property, real or personal, are valid, subsisting and
enforceable only with such exceptions as are not material and do not interfere
with the use of such property made, or proposed to be made, by the Company or
any Subsidiary, and all rentals, royalties or other payments, if any, accruing
thereunder which became due prior to the date of this Agreement have been duly
paid, and neither the Company nor any Subsidiary, nor, to the best of the
Company's and Pulsar's knowledge, any other party is in default thereunder and,
to the best of the Company's and Pulsar's knowledge, no event has occurred
which, with the passage of time or the giving of notice, or both, would
constitute a default thereunder. Neither the Company nor any Subsidiary has
received notice of any violation of any applicable law, ordinance, regulation,
order or requirement relating to its owned or leased properties. Each of the
Company and each of the Subsidiaries has adequately insured its properties
against loss or damage by fire or other casualty and maintains, in adequate
amounts, such other insurance as is usually maintained by companies engaged in
the same or similar businesses located in its geographic area.
(v) Each contract or other instrument (however characterized or
described) to which the Company or a Subsidiary is a party or by which their
respective properties or businesses are or may be bound or affected and to which
reference is made in the Prospectus has been duly and validly executed, is in
full force and effect in all material respects and is enforceable against the
parties thereto in accordance with its terms, and none of such contracts or
instruments has been assigned by the Company or any Subsidiary, and neither the
Company nor any Subsidiary, nor, to the best of the Company's and Pulsar's
knowledge, any other party is in default thereunder and, to the best of the
Company's and Pulsar's knowledge, no event has occurred which, with the lapse of
time or
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<PAGE>
the giving of notice, or both, would constitute a default thereunder.
None of the material provisions of such contracts or instruments
violates any existing applicable law, rule, regulation, judgment, order or
decree of any governmental agency or court having jurisdiction over the Company
or any Subsidiary or any of their respective assets or businesses.
(w) The employment, consulting, confidentiality and non-
competition agreements between the Company and its officers, employees and
consultants and between each of the Subsidiaries and its respective officers,
employees and consultants, described in the Registration Statement, are binding
and enforceable obligations upon the respective parties thereto in accordance
with their respective terms, except as such enforceability may be limited by
applicable bankruptcy, insolvency, moratorium or other similar laws or
arrangements affecting creditors' rights generally and subject to principles of
equity.
(x) Except as set forth in the Prospectus, neither the Company
nor any Subsidiary has any employee benefit plans (including, without
limitation, profit sharing and welfare benefit plans) or deferred compensation
arrangements that are subject to the provisions of the Employee Retirement
Income Security Act of 1974, as amended.
(y) To the best of the Company's and Pulsar's knowledge, no
labor problem exists with any of the Company's employees or any Subsidiary's
employees or is imminent which could adversely affect the Company or any
Subsidiary.
(z) Neither the Company nor any Subsidiary has, directly or
indirectly, at any time (i) made any contributions to any candidate for
political office, or failed to disclose fully any such contribution in violation
of law or (ii) made any payment to any state, federal or foreign governmental
officer or official, or other person charged with similar public or quasi-public
duties, other than, in each case, payments or contributions required or allowed
by applicable law. Each of the Company's and each of the Subsidiaries' internal
accounting controls and procedures are sufficient to cause the Company to comply
in all material respects with the Foreign Corrupt Practices Act of 1977, as
amended.
(aa) The Shares have been approved for listing on the Nasdaq
National Market ("Nasdaq").
(ab) The representations and warranties of each of LIT and Pulsar
and their respective stockholders and of the Company contained in the agreement
dated as of February ___, 1999, by and among the Company, LIT, Pulsar, William
W. Davis, Sr., Lillian A. Davis, Kris Shah and Geraldine M. Shah, as Trustees of
the Kris Shah and Geraldine M. Shah Living Trust dated October 9, 1997, Ramesh
R. Shah and Patricia L. Shah, as Trustees of the Ramesh R.
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Shah and Patricia L. Shah Living Trust dated March 22, 1982 as amended on
October 14, 1997, Dilip R. Shah and Shila D. Shah, as Trustees of the Shah
Living Trust dated November 14, 1995, Kris Shah as Trustee of the Leena Shah
Trust dated October 16, 1997 and Kris Shah, as Trustee of the Chandra L. Shah
Trust dated October 9, 1997, are true, accurate and complete in all material
respects as of the date hereof and all conditions to the consummation of the
Acquisition (as defined in the Prospectus) have been satisfied.
(ac) The Reorganization (as defined in the Prospectus) has been
completed on the terms described in the Prospectus.
(ad) The Company has provided to Tenzer Greenblatt LLP, counsel
to the several Underwriters ("Underwriters' Counsel"), all material agreements,
certificates, correspondence and other items, documents and information
requested by such counsel's Corporate Review Memorandum dated September __,
1998.
Any certificate signed by an officer of the Company or by an
officer of a Subsidiary and delivered to the Representative or to Underwriters'
Counsel shall be deemed to be a representation and warranty by the Company to
the Underwriters as to the matters covered thereby.
5. Certain Covenants of the Company and Pulsar. The Company and
-------------------------------------------
Pulsar covenant with the several Underwriters as follows:
(a) The Company will not at any time, whether before the
Effective Date or thereafter during such period as the Prospectus is required by
law to be delivered in connection with the sales of the Shares by the
Representative or a dealer, file or publish any amendment or supplement to the
Registration Statement or Prospectus of which the Representative has not been
previously advised and furnished a copy, or to which the Representative shall
object in writing.
(b) The Company will use its best efforts to cause the
Registration Statement to become effective and will advise the Representative
promptly, and, if requested by the Representative, confirm such advice in
writing, (i) when the Registration Statement, or any post-effective amendment to
the Registration Statement or any supplemented Prospectus is filed with the
Commission; (ii) of the receipt of any comments from the Commission; (iii) of
any request of the Commission for amendment or supplementation of the
Registration Statement or Prospectus or for additional information; and (iv) of
the issuance by the Commission of any stop order suspending the effectiveness of
the Registration Statement or of any order preventing or suspending the use of
any Preliminary Prospectus, or of the suspension of the qualification of the
Shares for offering or sale in any jurisdiction, or of the initiation of any
proceedings for any of such purposes. The Company will use its
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best efforts to prevent the issuance of any such stop order or of any order
preventing or suspending such use and to obtain as soon as possible the lifting
thereof, if any such order is issued.
(c) The Company will deliver to each Underwriter, without
charge, from time to time until the Effective Date, as many copies of each
Preliminary Prospectus as each Underwriter may reasonably request, and the
Company hereby consents to the use of such copies for purposes permitted by the
Act. The Company will deliver to each Underwriter, without charge, as soon as
the Registration Statement becomes effective, and thereafter from time to time
as requested, such number of copies of the Prospectus (as supplemented, if the
Company makes any supplements to the Prospectus) as each Underwriter may
reasonably request. The Company has furnished or will furnish to each of the
Representative a signed copy of the Registration Statement as originally filed
and of all amendments thereto, whether filed before or after the Registration
Statement becomes effective, a copy of all exhibits filed therewith and a signed
copy of all consents and certificates of experts.
(d) The Company will comply with the Act, the Regulations, the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules
and regulations thereunder so as to permit the continuance of sales of and
dealings in the Offered Shares and in any Optional Shares which may be issued
and sold. If, at any time when a prospectus relating to the Shares is required
to be delivered under the Act, any event occurs as a result of which the
Registration Statement and Prospectus as then amended or supplemented would
include an untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, or if it shall be necessary to amend or
supplement the Registration Statement and Prospectus to comply with the Act or
the regulations thereunder, the Company will promptly file with the Commission,
subject to Section 5(a) hereof, an amendment or supplement which will correct
such statement or omission or which will effect such compliance.
(e) The Company will furnish such proper information as may be
required and otherwise cooperate in qualifying the Shares for offering and sale
under the securities or Blue Sky laws relating to the offering in such
jurisdictions as the Representative may reasonably designate, provided that no
such qualification will be required in any jurisdiction where, solely as a
result thereof, the Company would be subject to service of general process or to
taxation or qualification as a foreign corporation doing business in such
jurisdiction.
(f) The Company will make generally available to its security
holders, in the manner specified in Rule 158(b) under the Act, and deliver to
the Representative and Underwriters' Counsel as soon as practicable and in any
event not later than 45
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days after the end of its fiscal quarter in which the first anniversary date of
the effective date of the Registration Statement occurs, an earning statement
meeting the requirements of Rule 158(a) under the Act covering a period of at
least 12 consecutive months beginning after the effective date of the
Registration Statement.
(g) For a period of three years from the Effective Date, the
Company will deliver to the Representative, on a timely basis (i) a copy of each
report or document, including, without limitation, reports on Forms 8-K, 10-C,
10-K and 10-Q and exhibits thereto, filed or furnished to the Commission, any
securities exchange or the National Association of Securities Dealers, Inc. (the
"NASD") on the date each such report or document is so filed or furnished; (ii)
as soon as practicable, copies of any reports or communications (financial or
other) of the Company mailed to its security holders; (iii) as soon as
practicable, a copy of any Schedule 13D, 13G, 14D-1 or 13E-3 received or
prepared by the Company from time to time; (iv) to the extent available,
quarterly statements setting forth such information regarding the Company's
results of operations and financial position (including balance sheet, profit
and loss statements and data regarding backlog) as is regularly prepared by
management of the Company; and (v) such additional information concerning the
business and financial condition of the Company as the Representative may from
time to time reasonably request and which can be prepared or obtained by the
Company without unreasonable effort or expense. The Company will furnish to its
stockholders annual reports containing audited financial statements and such
other periodic reports as it may determine to be appropriate or as may be
required by law.
(h) Neither the Company nor any person that controls, is
controlled by or is under common control with the Company will take any action
designed to or which might be reasonably expected to cause or result in the
stabilization or manipulation of the price of the Common Shares.
(i) If the transactions contemplated by this Agreement are
consummated, the Company will pay or cause to be paid the following: all costs
and expenses incident to the performance of the obligations of the Company under
this Agreement, including, but not limited to, the fees and expenses of
accountants and counsel for the Company; the preparation, printing, mailing and
filing of the Registration Statement (including financial statements and
exhibits), Preliminary Prospectuses and the Prospectus, and any amendments or
supplements thereto; the printing and mailing of the Selected Dealer Agreement;
the issuance and delivery of the Shares to the Representative; all taxes, if
any, on the issuance of the Shares; the fees, expenses and other costs of
listing the Shares on Nasdaq and of qualifying the Shares for sale under the
"Blue Sky" or securities laws of those states in which the Shares are to be
offered or sold, including the fees and disbursements of Underwriters' Counsel
incurred in connection
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therewith, and the cost of printing and mailing the "Blue Sky Survey"; the
filing fees incident to securing any required review by the NASD; the cost of
furnishing to the several Underwriters copies of the Registration Statement,
Preliminary Prospectuses and the Prospectus as herein provided; the costs of
placing "tombstone advertisements" in any publications which may be selected by
the Representative; and all other costs and expenses incident to the performance
of the Company's obligations hereunder which are not otherwise specifically
provided for in this Section 5(i).
In addition, at the Closing Date and the Option Closing Date, the
Representative will deduct from the payment for the Shares an amount equal to
the Representative's accountable out-of-pocket costs, fees and expenses (up to
an aggregate maximum of $_______ [1.5% of the gross proceeds from the sale of
the Shares]) incurred in connection with the registration process, which amount
will include the fees and expenses of Underwriters' Counsel (other than those
payable by the Company in connection with "Blue Sky" qualifications referred to
in the preceding paragraph) incurred in connection with the registration process
and all of the costs associated with the marketing and selling of the Shares.
(j) If the transactions contemplated by this Agreement or related
hereto are not consummated because the Company and/or Pulsar decides not to
proceed with the offering and/or the Acquisition for any reason or if the
Representative decides not to proceed with the offering because of a breach by
the Company and/or Pulsar of their representations, warranties or covenants in
this Agreement or as a result of adverse changes in the affairs of the Company,
the Company and Pulsar will reimburse the Representative for all of its
accountable expenses reasonably incurred in connection with the offering. In no
event, however, will the Representative, in the event the offering is
terminated, be entitled to receive more than an amount equal to its actual
accountable out-of-pocket expenses.
(k) The Company intends to apply the net proceeds from the sale of
the Shares for the purposes set forth in the Prospectus.
(l) During the period of twenty-four (24) months following the date
hereof, (i) neither the Company nor any of its officers, directors or
securityholders will offer for sale, sell, transfer, pledge or otherwise dispose
of, directly or indirectly, any securities of the Company, in any manner
whatsoever, whether pursuant to Rule 144 of the Regulations or otherwise,
provided that, after the first six (6) months of such period, this restriction
can be waived by the Representative, in its sole discretion, and provided
further that, after the first twelve (12) months of such period, sales may be
made, without the Representative's consent, as long as the number of shares (or
share equivalents) sold by all of such holders, in the aggregate, does not
exceed, during any 90-day period, the greater of (I) 1% of the
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then outstanding shares of Common Stock and (II) the average weekly trading
volume of the Common Stock during the four calendar weeks preceding the holder's
sale, and (ii) no holder of registration rights relating to securities of the
Company will execute any such registration rights without the prior written
consent of BlueStone. The Company will deliver to the Representative the
undertakings as of the date hereof of its officers, directors and
securityholders to this effect.
(m) The Company will not file any registration statement relating to
the offer or sale of any of the Company's securities, including any registration
statement on Form S-8, during the twenty-four (24) months following the date
hereof (the "Restriction Period") without BlueStone's prior written consent;
except that after the twelve month (12) anniversary of the date hereof, the
Company may file a registration statement on Form S-8, provided that no more
than 100,000 shares of Common Stock may be sold pursuant to such registration
statement during the Restriction Period by persons who are not officers or
directors of the Company or family members of an officer or director of the
Company.
(n) The Company maintains and will continue to maintain a system of
internal accounting controls sufficient to provide reasonable assurances that:
(i) transactions are executed in accordance with management's general or
specific authorization; (ii) transactions are recorded as necessary in order to
permit preparation of financial statements in accordance with generally accepted
accounting principles and to maintain accountability for assets; (iii) access to
assets is permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(o) The Company will use its best efforts to maintain the listing of
the Shares on Nasdaq or another exchange that is mutually agreed upon by the
Company and the Representative for so long as the Shares are qualified for such
listing.
(p) The Company will, concurrently with the Effective Date, register
the class of equity securities of which the Shares are a part under Section
12(g) of the Exchange Act and the Company will maintain the registration for a
minimum of five (5) years after the Effective Date.
(q) Subject to the sale of the Offered Shares, BlueStone and its
successors will have the right to designate up to two (2) nominees for election,
at its or their option, either as members of or non-voting advisors to the Board
of Directors of the Company, and the Company will use its best efforts to cause
such nominees to be elected and continued in office as a director of the Company
or as such advisor until the expiration of three (3) years from the Effective
Date. Each of the Company's current officers,
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directors and securityholders agrees to vote all of the Common Shares owned by
such person or entity so as to elect and continue in office such nominee(s) of
BlueStone. Following the election of such nominee(s) as a director(s) or
advisor(s), such persons shall receive no more or less compensation than is paid
to other non-officer directors of the Company for attendance at meetings of the
Board of Directors of the Company and shall be entitled to receive reimbursement
for all reasonable costs incurred in attending such meetings, including, but not
limited to, food, lodging and transportation. The Company agrees to indemnify
and hold each of such director(s) and/or advisor(s)harmless, to the maximum
extent permitted by law, against any and all claims, actions, awards and
judgments arising out of his service as a director or advisor and, in the event
the Company maintains a liability insurance policy affording coverage for the
acts of its officers and directors, to include such director(s) or advisor(s) as
an insured under such policy. The rights and benefits of such indemnification
and the benefits of such insurance shall, to the extent possible, extend to
BlueStone insofar as it may be or may be alleged to be responsible for such
director(s) or advisor(s).
If BlueStone does not exercise its option to designate members of or
advisors to the Company's Board of Directors, it shall nonetheless have the
right to send a representative (who need not be the same individual from meeting
to meeting) to observe each meeting of the Board of Directors. The Company
agrees to give BlueStone notice of each such meeting and to provide BlueStone
with an agenda and minutes of the meeting no later than it gives such notice and
provides such items to the directors.
(r) The Company shall retain a transfer agent for the Common Shares,
reasonably acceptable to BlueStone, for a period of three (3) years following
the Effective Date. In addition, for a period of three (3) years following the
Effective Date, the Company, at its own expense, shall cause its transfer agent
to provide BlueStone, if so requested in writing, with copies of the Company's
daily transfer sheets and when requested by BlueStone, a current list of the
Company's security holders, including a list of the beneficial owners of
securities held by a depository trust company and other nominees.
(s) The Company hereby agrees, at its sole cost and expense, to
supply and deliver to Underwriters' Counsel, within a reasonable period from the
date hereof, five bound volumes, including the Registration Statement, as
amended or supplemented, all exhibits to the Registration Statement, the
Prospectus and all other underwriting documents.
(t) The Company shall, within ten days of the date hereof, have
applied for listing in Standard & Poor's Corporation Records Service (including
annual report information) or Moody's Industrial Manual (Moody's OTC Industrial
Manual not being
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sufficient for these purposes) and shall use its best efforts to have the
Company listed in such manual at or prior to the Effective Date and shall
maintain such listing for a period of three (3) years following the Effective
Date.
(u) For a period of two (2) years from the Effective Date, the
Company shall provide BlueStone, on a not less than annual basis, with internal
forecasts setting forth projected results of operations for each annual period
in the two (2) fiscal years following the respective dates of such forecasts;
provided, however, that BlueStone shall keep confidential and shall not disclose
to any third party any material non-public information. Such forecasts shall be
provided to BlueStone more frequently than annually if prepared more frequently
by management, and revised forecasts shall be prepared and provided to BlueStone
when required to reflect more current information, revised assumptions or actual
results that differ materially from those set forth in the forecasts.
(v) For a period of three (3) years following the Effective Date, the
Company shall continue to retain KPMG Peat Marwick LLP (or such other nationally
recognized accounting firm as is acceptable to BlueStone) as the Company's
independent public accountants.
(w) For a period of three (3) years following the Effective Date, the
Company, at its expense, shall cause its independent certified public
accountants, as described in Section 5(u) above, to review (but not audit) the
Company's financial statements for each of the first three fiscal quarters prior
to the announcement of quarterly financial information, the filing of the
Company's 10-Q quarterly report and the mailing of quarterly financial
information to shareholders.
(x) For a period of twenty-five (25) days following the Effective
Date, the Company will not issue press releases or engage in any other publicity
without BlueStone's prior written consent, other than normal and customary
releases issued in the ordinary course of the Company's business or those
releases required by law.
(y) For a period of three (3) years following the Effective Date, the
Company will cause its Board of Directors to meet, either in person or
telephonically, a minimum of four (4) times per year and will hold a
shareholder's meeting at least once per annum.
(z) For a period of two (2) years following the Effective Date, the
Company will not offer or sell any of its securities (i) pursuant to Regulation
S of the Act, or (ii) at a discount from the then current market price, without
the prior written consent of BlueStone.
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(aa) On or prior to the Closing Date, the Company will complete
the Acquisitions (as defined in the Prospectus) on the terms described in the
Prospectus.
6. Conditions of the Underwriters' Obligation to Purchase Shares
--------------------------------------------- ---------------
from the Company. The obligation of the several Underwriters to purchase and
- ----------------
pay for the Offered Shares which they have agreed to purchase from the Company
is subject (as of the date hereof and the Closing Date) to the accuracy of, and
the Company's compliance in all material respects with, the representations and
warranties of the Company herein, to the accuracy of the statements of the
Company and its officers made pursuant hereto, to the performance in all
material respects by the Company or its Subsidiaries of their respective
obligations hereunder, and to the following additional conditions:
(a) The Registration Statement will have become effective not
later than 9:30 A.M., New York City time, on the day following the date of this
Agreement, or at such later time or on such later date as the Representative may
agree to in writing; prior to the Closing Date, no stop order suspending the
effectiveness of the Registration Statement will have been issued and no
proceedings for that purpose will have been initiated or will be pending or, to
the best of the Representative's or the Company's knowledge, will be
contemplated by the Commission; and any request on the part of the Commission
for additional information will have been complied with to the satisfaction of
Underwriters' Counsel.
(b) At the time that this Agreement is executed and at the
Closing Date, there will have been delivered to the Representative a signed
opinion of Arent Fox Kintner Plotkin & Kahn, PLLC, counsel for the Company
("Company Counsel"), dated as of the date hereof or the Closing Date, as the
case may be (and any other opinions of counsel referred to in such opinion of
Company Counsel or relied upon by Company Counsel in rendering their opinion),
reasonably satisfactory to Underwriters' Counsel to the effect that:
(i) The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware,
with full power and authority, corporate and other, and with all Permits
necessary to own or lease, as the case may be, and operate its properties,
whether tangible or intangible, and to conduct its business as described in the
Registration Statement. Other than LIT, the Company has no Subsidiaries as of
the date hereof and, as of the Closing Date, will have no Subsidiaries other
than LIT and Pulsar. The Company has no equity interest in any entities other
than the Subsidiaries. Each of the Subsidiaries is a corporation duly organized
and validly existing under the laws of its state of incorporation. Unless the
context otherwise requires, all references to the "Company" in this opinion
shall include the Subsidiaries. Each of the Company and of the Subsidiaries is
duly qualified to do business as a foreign
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<PAGE>
corporation and is in good standing in all jurisdictions wherein such
qualification is necessary and failure so to qualify could have a material
adverse effect on the financial condition, results of operations, business or
properties of the Company. Each of the Subsidiaries has full power and
authority, corporate and other, and all Permits necessary to own or lease, as
the case may be, and operate its properties, whether tangible or intangible, and
to conduct its business as described in the Registration Statement.
On the Closing Date, the Company will own all of the issued and
outstanding shares of capital stock of each of the Subsidiaries, free and clear
of any security interests, liens, encumbrances, claims and charges, and all of
such shares have been duly authorized and validly issued and are fully paid and
non-assessable. There are no options or warrants for the purchase of, or other
rights to purchase, or outstanding securities convertible into or exchangeable
for, any capital stock or other security of the Subsidiaries.
(ii) The Company has full power and authority, corporate and
other, to execute, deliver and perform this Agreement and the Representative's
Warrant Agreement and to consummate the transactions contemplated hereby and
thereby. The execution, delivery and performance of this Agreement and the
Representative's Warrant Agreement by the Company, the consummation by the
Company of the transactions herein and therein contemplated and the compliance
by the Company with the terms of this Agreement and the Representative's Warrant
Agreement have been duly authorized by all necessary corporate action. This
Agreement has been duly executed and delivered by the Company and constitutes
the valid and binding obligation of the Company, and the Representative's
Warrant Agreement, when executed and delivered by the Company on the Closing
Date, will be the valid and binding obligation of the Company, enforceable in
accordance with their respective terms, subject, as to enforcement of remedies,
to applicable bankruptcy, insolvency, reorganization, moratorium and other laws
affecting the rights of creditors generally and the discretion of courts in
granting equitable remedies and except that enforceability of the
indemnification provisions set forth in Section 7 and the contribution
provisions set forth in Section 8 of this Agreement may be limited by the
federal securities laws or public policy underlying such laws.
(iii) The execution, delivery and performance of this Agreement
and the Representative's Warrant Agreement by the Company, the consummation by
the Company of the transactions herein and therein contemplated and the
compliance by the Company with the terms of this Agreement and the
Representative's Warrant Agreement do not, and will not, with or without the
giving of notice or the lapse of time, or both, (A) result in a violation of the
Certificate of Incorporation or Articles of Incorporation, as the case may be,
or By-Laws (or similar charter documents), each as amended, of the Company or of
any Subsidiary, (B) result in a
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breach of or conflict with any terms or provisions of, or constitute a default
under, or result in the modification or termination of, or result in the
creation or imposition of any lien, security interest, charge or encumbrance
upon any of the properties or assets of the Company or any Subsidiary pursuant
to any indenture, mortgage, note, contract, commitment or other agreement or
instrument to which the Company or any Subsidiary is a party or by which the
Company or any Subsidiary or any of their respective properties or assets are or
may be bound or affected; (C) violate any existing applicable law, rule,
regulation, judgment, order or decree of any governmental agency or court,
domestic or foreign, having jurisdiction over the Company or any Subsidiary or
any of their respective properties or business; or (D) have any effect on any
Permit necessary for the Company or any Subsidiary to own or lease and operate
their respective properties or conduct their businesses or the ability of the
Company to make use thereof.
(iv) To the best of Company Counsel's knowledge, no Permits of
any court or governmental agency or body (other than under the Act, the
Regulations and applicable state securities or Blue Sky laws) are required for
the valid authorization, issuance, sale and delivery of the Shares or the
Representative's Warrants, and the consummation by the Company of the
transactions contemplated by this Agreement and the Representative's Warrant
Agreement.
(v) The Registration Statement has become effective under the
Act; to the best of Company Counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement has been issued; and no proceedings
for that purpose have been instituted or are pending, threatened or contemplated
under the Act or applicable state securities laws.
(vi) The Registration Statement and the Prospectus, as of the
Effective Date, and each amendment or supplement thereto as of its effective or
issue date (except for the financial statements and other financial data
included therein or omitted therefrom, as to which Company Counsel need not
express an opinion) comply as to form in all material respects with the
requirements of the Act and Regulations and the conditions for use of a
registration statement on Form S-1 have been satisfied by the Company.
(vii) The descriptions in the Registration Statement and the
Prospectus of statutes, regulations, government classifications, contracts and
other documents (including opinions of such counsel); and the response to Item
10 of Form S-1 have been reviewed by Company Counsel, and, based upon such
review, are accurate in all material respects and present fairly the information
required to be disclosed, and there are no material statutes, regulations or
government classifications, or, to the best of Company Counsel's knowledge,
material contracts or
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<PAGE>
documents, of a character required to be described in the Registration Statement
or the Prospectus or to be filed as exhibits to the Registration Statement,
which are not so described or filed as required.
None of the material provisions of the contracts or instruments
described above violates any existing applicable law, rule, regulation,
judgment, order or decree of any governmental agency or court having
jurisdiction over the Company or any Subsidiary or any of their assets or
businesses. To the best of Company counsel's knowledge, the Company is not in
default under any contract or agreement material to its business or under any
promissory note or other evidence of indebtedness for borrowed funds.
(viii) The outstanding Common Shares and outstanding options and
warrants to purchase Common Shares have been duly authorized and validly issued.
The outstanding Common Shares are fully paid and nonassessable. The outstanding
options and warrants to purchase Common Shares constitute the valid and binding
obligations of the Company, enforceable in accordance with their terms. None of
the outstanding Common Shares or options or warrants to purchase Common Shares
has been issued in violation of the preemptive rights of any shareholder of the
Company. None of the holders of the outstanding Common Shares is subject to
personal liability solely by reason of being such a holder. The offers and sales
of the outstanding Common Shares and outstanding options and warrants to
purchase Common Shares were at all relevant times either registered under the
Act and the applicable state securities or Blue Sky laws or exempt from such
registration requirements. The authorized Common Shares and outstanding options
and warrants to purchase Common Shares conform to the descriptions thereof
contained in the Registration Statement and Prospectus. To the best of Company
Counsel's knowledge, except as set forth in the Prospectus, no holders of any of
the Company's securities has any rights, "demand", "piggyback" or otherwise, to
have such securities registered under the Act.
(ix) The issuance and sale of the Shares and Warrant Shares
have been duly authorized and, when the Shares and Warrant Shares have been
issued and duly delivered against payment therefor as contemplated by this
Agreement and the Representative's Warrant Agreement, respectively, the Shares
and the Warrant Shares will be validly issued, fully paid and nonassessable, and
the holders thereof will not be subject to personal liability solely by reason
of being such holders. Neither the Shares nor the Warrant Shares are subject to
preemptive rights of any shareholder of the Company. The certificates
representing the Shares are in proper legal form.
(x) The issuance and sale of the Representative's Warrants
have been duly authorized and, when issued, paid for and delivered pursuant to
the terms of the
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Representative's Warrant Agreement, they will constitute the valid and binding
obligations of the Company, enforceable as to the Company in accordance with
their terms. The Warrant Shares have been duly reserved for issuance upon
exercise of the Representative's Warrants in accordance with the provisions of
the Representative's Warrant Agreement. The Representative's Warrants conform to
the descriptions thereof contained in the Registration Statement and the
Prospectus.
(xi) Upon delivery of the Offered Shares to the Underwriters
against payment therefor as provided in this Agreement, the Underwriters
(assuming they are bona fide purchasers within the meaning of the Uniform
Commercial Code) will acquire good title to the Offered Shares, free and clear
of all liens, encumbrances, equities, security interests and claims.
(xii) Assuming that the Representative exercises the over-
allotment option to purchase any of the Optional Shares and make payment
therefor in accordance with the terms of this Agreement, upon delivery of the
Optional Shares so purchased to the Representative hereunder, the Representative
(assuming it is a bona fide purchaser within the meaning of the Uniform
Commercial Code) will acquire good title to such Optional Shares, free and clear
of any liens, encumbrances, equities, security interests and claims.
(xiii) To the best of Company Counsel's knowledge, there are no
claims, actions, suits, proceedings, arbitrations, investigations or inquiries
before any governmental agency, court or tribunal, foreign or domestic, or
before any private arbitration tribunal, pending or threatened against the
Company or any Subsidiary, or involving the Company's or any Subsidiary's
properties or businesses, other than as described in the Prospectus, such
description being accurate, and other than litigation incident to the kind of
business conducted by the Company which, individually and in the aggregate, is
not material.
(xiv) Each of the Company and of the Subsidiaries owns or
possesses adequate and enforceable rights to use all patents, patent
applications, trademarks, service marks, copyrights, rights, trade secrets,
confidential information, processes and formulations used or proposed to be used
in the conduct of its business as described in the Prospectus (collectively the
"Intangibles"); to the best of Company Counsel's knowledge, neither the Company
nor any Subsidiary has infringed or is infringing upon the rights of others with
respect to the Intangibles; and, to the best of Company Counsel's knowledge,
neither the Company nor any Subsidiary has received any notice that it has or
may have infringed upon, is infringing upon or is conflicting with the asserted
rights of others with respect to the Intangibles which might, singly or in the
aggregate, materially adversely affect its business, results of operations or
financial condition and such counsel is not aware of any licenses with
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respect to the Intangibles which are required to be obtained by the Company or
any Subsidiary.
(xv) Company Counsel has participated in reviews and
discussions in connection with the preparation of the Registration Statement and
the Prospectus, and in the course of such reviews and discussions and such other
investigation as Company Counsel deemed necessary, no facts came to its
attention which lead it to believe that (A) the Registration Statement (except
as to the financial statements and other financial data contained therein, as to
which Company Counsel need not express an opinion), on the Effective Date,
contained any untrue statement of a material fact required to be stated therein
or omitted to state any material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading, or that (B) the Prospectus (except as to the
financial statements and other financial data contained therein, as to which
Company Counsel need not express an opinion) contains any untrue statement of a
material fact or omits to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
In rendering its opinion pursuant to this Section 6(b), Company
counsel may rely upon the certificates of government officials and officers of
the Company as to matters of fact, provided that Company shall state that they
have no reason to believe, and no not believe, that they are justified in
relying upon such opinions or such certificates of government officials and
officers of the Company as to matters of fact, as the case may be.
The opinion letters delivered pursuant to this Section 6(b) shall
state that any opinion given therein qualified by the phrase "to the best of our
knowledge" is being given by Company Counsel after due investigation of the
matters therein discussed.
(c) At the Closing Date, there will have been delivered to the
Representative a signed opinion of Underwriters' Counsel, dated as of the
Closing Date, to the effect that the opinions delivered pursuant to Section 6(b)
hereof appear on their face to be appropriately responsive to the requirements
of this Agreement, except to the extent waived by the Representative, specifying
the same, and with respect to such other related matters as the Representative
may require.
(d) At the Closing Date (i) the Registration Statement and the
Prospectus and any amendments or supplements thereto will contain all material
statements which are required to be stated therein in accordance with the Act
and the Regulations and will conform in all material respects to the
requirements of the Act and the Regulations, and neither the Registration
Statement nor
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the Prospectus nor any amendment or supplement thereto will contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; (ii) since the
respective dates as of which information is given in the Registration Statement
and the Prospectus, there will not have been any material adverse change in the
financial condition, results of operations or general affairs of the Company
from that set forth or contemplated in the Registration Statement and the
Prospectus, except changes which the Registration Statement and the Prospectus
indicate might occur after the Effective Date; (iii) since the respective dates
as of which information is given in the Registration Statement and the
Prospectus, there shall have been no material transaction, contract or agreement
entered into by the Company, other than in the ordinary course of business,
which would be required to be set forth in the Registration Statement and the
Prospectus, other than as set forth therein; and (iv) no action, suit or
proceeding at law or in equity will be pending or, to the best of the Company's
knowledge, threatened against the Company which is required to be set forth in
the Registration Statement and the Prospectus, other than as set forth therein,
and no proceedings will be pending or, to the best of the Company's knowledge,
threatened against the Company before or by any federal, state or other
commission, board or administrative agency wherein an unfavorable decision,
ruling or finding would materially adversely affect the business, property,
financial condition or results of operations of the Company, other than as set
forth in the Registration Statement and the Prospectus. At the Closing Date,
there will be delivered to the Representative a certificate signed by the
Chairman of the Board or the President or a Vice President of the Company, dated
the Closing Date, evidencing compliance with the provisions of this Section 6(d)
and stating that the representations and warranties of the Company set forth in
Section 4 hereof were accurate and complete in all material respects when made
on the date hereof and are accurate and complete in all material respects on the
Closing Date as if then made; that the Company has performed all covenants and
complied with all conditions required by this Agreement to be performed or
complied with by the Company prior to or as of the Closing Date; and that, as of
the Closing Date, no stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have been
initiated or, to the best of his knowledge, are contemplated or threatened. In
addition, the Representative will have received such other and further
certificates of officers of the Company as the Representative or Underwriters'
Counsel may reasonably request.
(e) At the time that this Agreement is executed and at the
Closing Date, the Representative will have received a signed letter from KPMG
Peat Marwick LLP, dated the date such letter is to be received by the
Representative and addressed to it, confirming that it is a firm of independent
public accountants within the meaning of the Act and Regulations and stating
that: (i) insofar as
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reported on by it, in its opinion, the Financial Statements included in the
Prospectus comply as to form in all material respects with the applicable
accounting requirements of the Act and the applicable Regulations; (ii) on the
basis of procedures and inquiries (not constituting an examination in accordance
with generally accepted auditing standards) consisting of a reading of the
unaudited interim financial statements of the Company, if any, appearing in the
Registration Statement and the Prospectus and the latest available unaudited
interim financial statements of the Company, if more recent than that appearing
in the Registration Statement and Prospectus, inquiries of officers of the
Company responsible for financial and accounting matters as to the transactions
and events subsequent to the date of the latest audited financial statements of
the Company, and a reading of the minutes of meetings of the shareholders, the
Board of Directors of the Company and any committees of the Board of Directors,
as set forth in the minute books of the Company, nothing has come to its
attention which, in its judgment, would indicate that (A) during the period from
the date of the latest financial statements of the Company appearing in the
Registration Statement and Prospectus to a specified date not more than three
business days prior to the date of such letter, there have been any decreases in
net current assets or net assets as compared with amounts shown in such
financial statements or decreases in net sales or decreases in total or per
share net income compared with the corresponding period in the preceding year or
any change in the capitalization or long-term debt of the Company, except in all
cases as set forth in or contemplated by the Registration Statement and the
Prospectus, and (B) the unaudited interim financial statements of the Company,
if any, appearing in the Registration Statement and the Prospectus, do not
comply as to form in all material respects with the applicable accounting
requirements of the Act and the Regulations or are not fairly presented in
conformity with generally accepted accounting principles and practices on a
basis substantially consistent with the audited financial statements included in
the Registration Statement or the Prospectus; and (iii) it has compared specific
dollar amounts, numbers of shares, numerical data, percentages of revenues and
earnings, and other financial information pertaining to the Company set forth in
the Prospectus (with respect to all dollar amounts, numbers of shares,
percentages and other financial information contained in the Prospectus, to the
extent that such amounts, numbers, percentages and information may be derived
from the general accounting records of the Company, and excluding any questions
requiring an interpretation by legal counsel) with the results obtained from the
application of specified readings, inquiries and other appropriate procedures
(which procedures do not constitute an examination in accordance with generally
accepted auditing standards) set forth in the letter, and found them to be in
agreement.
(f) There shall have been duly tendered to the Representative
certificates representing the Offered Shares to be sold on the Closing Date.
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<PAGE>
(g) The NASD shall have indicated that it has no objection to
the underwriting arrangements pertaining to the sale of the Offered Shares by
the Underwriters or the sale of the Shares by the Representative.
(h) No action shall have been taken by the Commission or the
NASD the effect of which would make it improper, at any time prior to the
Closing Date or the Option Closing Date, as the case may be, for any member firm
of the NASD to execute transactions (as principal or as agent) in the Shares,
and no proceedings for the purpose of taking such action shall have been
instituted or shall be pending, or, to the best of the Representative's or the
Company's knowledge, shall be contemplated by the Commission or the NASD. The
Company represents at the date hereof, and shall represent as of the Closing
Date or Option Closing Date, as the case may be, that it has no knowledge that
any such action is in fact contemplated by the Commission or the NASD.
(i) The Common Shares have been approved for listing on Nasdaq.
(j) All proceedings taken at or prior to the Closing Date or the
Option Closing Date, as the case may be, in connection with the authorization,
issuance and sale of the Shares shall be reasonably satisfactory in form and
substance to the Representative and to Underwriters' Counsel, and such counsel
shall have been furnished with all such documents, certificates and opinions as
they may request for the purpose of enabling them to pass upon the matters
referred to in Section 6(c) hereof and in order to evidence the accuracy and
completeness of any of the representations, warranties or statements of the
Company, the performance of any covenants of the Company, or the compliance by
the Company with any of the conditions herein contained.
(k) As of the date hereof, the Company will have delivered to
the Underwriters the written undertakings of its officers, directors and
security holders and/or registration rights holders, as the case may be, to the
effect of the matters set forth in Section 5(l).
If any of the conditions specified in this Section 6 have not
been fulfilled, this Agreement may be terminated by the Representative on notice
to the Company.
7. Indemnification.
----------------
(a) Each of the Company and Pulsar agrees, jointly and
severally, to indemnify and hold harmless each Underwriter, including
specifically each person that may be substituted for an Underwriter as provided
in Section 10 hereof, each officer, director, partner, employee and agent of any
Underwriter, and each person, if any, who controls any of the Underwriters
within the meaning of Section 15 of the Act or Section 20(a) of the Exchange
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<PAGE>
Act, from and against any and all losses, claims, damages, expenses or
liabilities, joint or several (and actions in respect thereof), to which they or
any of them may become subject under the Act or under any other statute or at
common law or otherwise, and, except as hereinafter provided, will reimburse
each of the Underwriters and each such person, if any, for any legal or other
expenses reasonably incurred by them or any of them in connection with
investigating or defending any actions, whether or not resulting in any
liability, insofar as such losses, claims, damages, expenses, liabilities or
actions arise out of or are based upon any untrue statement or alleged untrue
statement of a material fact contained (i) in the Registration Statement, in any
Preliminary Prospectus or in the Prospectus (or the Registration Statement or
Prospectus as from time to time amended or supplemented) or (ii) in any
application or other document executed by the Company, or based upon written
information furnished by or on behalf of the Company, filed in any jurisdiction
in order to qualify the Shares under the securities laws thereof (hereinafter
"application"), or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary in order to make the statements therein not misleading, in light of
the circumstances under which they were made, unless such untrue statement or
omission was made in such Registration Statement, Preliminary Prospectus,
Prospectus or application in reliance upon and in conformity with information
furnished in writing to the Company in connection therewith by the Underwriter
or any such person through the Underwriter expressly for use therein; provided,
however, that the indemnity agreement contained in this Section 7(a) with
respect to any Preliminary Prospectus will not inure to the benefit of the
Underwriter (or to the benefit of any other person that may be indemnified
pursuant to this Section 7(a)) if (A) the person asserting any such losses,
claims, damages, expenses or liabilities purchased the Shares which are the
subject thereof from such Underwriter or other indemnified person; (B) such
Underwriter or other indemnified person failed to send or give a copy of the
Prospectus to such person at or prior to the written confirmation of the sale of
such Shares to such person; and (C) the Prospectus did not contain any untrue
statement or alleged untrue statement or omission or alleged omission giving
rise to such cause, claim, damage, expense or liability.
(b) Each Underwriter (including specifically each person that
may be substituted for an Underwriter as provided in Section 11 hereof) agrees
to indemnify and hold harmless the Company, each of its directors, each of its
officers who have signed the Registration Statement and each person, if any, who
controls the Company within the meaning of Section 15 of the Act or Section
20(a) of the Exchange Act, from and against any and all losses, claims, damages,
expenses or liabilities, joint or several (and actions in respect thereof), to
which they or any of them may become subject under the Act or under any other
statute or at common law or otherwise, and, except as hereinafter provided, will
reimburse the Company and each such director, officer or
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<PAGE>
controlling person for any legal or other expenses reasonably incurred by them
or any of them in connection with investigating or defending any actions,
whether or not resulting in any liability, insofar as such losses, claims,
damages, expenses, liabilities or actions arise out of or are based upon any
untrue statement or alleged untrue statement of a material fact contained (i) in
the Registration Statement, in any Preliminary Prospectus or in the Prospectus
(or the Registration Statement or Prospectus as from time to time amended or
supplemented) or (ii) in any application (including any application for
registration of the Shares under state securities or Blue Sky laws), or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary in order to make the
statements therein not misleading, in light of the circumstances under which
they were made, but only insofar as any such statement or omission was made in
reliance upon and in conformity with information furnished in writing to the
Company in connection therewith by such Underwriter, or by the Representative on
behalf of such Underwriter, expressly for use therein.
(c) Promptly after receipt of notice of the commencement of any
action in respect of which indemnity may be sought against any indemnifying
party under this Section 7, the indemnified party will notify the indemnifying
party in writing of the commencement thereof, and the indemnifying party will,
subject to the provisions hereinafter stated, assume the defense of such action
(including the employment of counsel satisfactory to the indemnified party and
the payment of expenses) insofar as such action relates to an alleged liability
in respect of which indemnity may be sought against the indemnifying party.
After notice from the indemnifying party of its election to assume the defense
of such claim or action, the indemnifying party shall no longer be liable to the
indemnified party under this Section 7 for any legal or other expenses
subsequently incurred by the indemnified party in connection with the defense
thereof other than reasonable costs of investigation; provided, however, that
if, in the reasonable judgment of the indemnified party or parties, it is
advisable for the indemnified party or parties to be represented by separate
counsel, the indemnified party or parties shall have the right to employ a
single counsel to represent the indemnified parties who may be subject to
liability arising out of any claim in respect of which indemnity may be sought
by the indemnified parties thereof against the indemnifying party, in which
event the fees and expenses of such separate counsel shall be borne by the
indemnifying party. Any party against whom indemnification may be sought under
this Section 7 shall not be liable to indemnify any person that might otherwise
be indemnified pursuant hereto for any settlement of any action effected without
such indemnifying party's consent.
8. Contribution. To provide for just and equitable contribution, if
------------
(i) an indemnified party makes a claim for indemnification pursuant to Section 8
hereof (subject to the
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<PAGE>
limitations thereof) and it is finally determined, by a judgment, order or
decree not subject to further appeal, that such claim for indemnification may
not be enforced, even though this Agreement expressly provides for
indemnification in such case; or (ii) any indemnified or indemnifying party
seeks contribution under the Act, the Exchange Act, or otherwise, then the
Company and Pulsar (including, for this purpose, any contribution made by or on
behalf of any director of the Company, any officer of the Company who signed the
Registration Statement and any controlling person of the Company) as one entity
and the Underwriters (including, for this purpose, any contribution by or on
behalf of each person, if any, who controls any Underwriter within the meaning
of Section 15 of the Act or Section 20(a) of the Exchange Act and each officer,
director, partner, employee and agent of any of the Underwriters) as a second
entity, shall contribute to the losses, liabilities, claims, damages and
expenses whatsoever to which any of them may be subject, so that the
Underwriters are responsible for the proportion thereof equal to the percentage
which the underwriting discount per Share set forth on the cover page of the
Prospectus represents of the initial public offering price per Share set forth
on the cover page of the Prospectus and the Company is responsible for the
remaining portion; provided, however, that if applicable law does not permit
such allocation, then, if applicable law permits, other relevant equitable
considerations such as the relative fault of the Company and Pulsar on the one
hand, and the Underwriters, on the other hand, in connection with the facts
which resulted in such losses, liabilities, claims, damages and expenses shall
also be considered. The relative fault, in the case of an untrue statement,
alleged untrue statement, omission or alleged omission, shall be determined by,
among other things, whether such statement, alleged statement, omission or
alleged omission relates to information supplied by the Company or by the
Underwriters, and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement, alleged statement,
omission or alleged omission. The Company and Pulsar, on one hand, and the
Underwriters, on the other hand, agree that it would be unjust and inequitable
if the respective obligations of the Company, Pulsar and the Underwriters for
contribution were determined by pro rata or per capita allocation of the
--- ---- --- ------
aggregate losses, liabilities, claims, damages and expenses or by any other
method of allocation that does not reflect the equitable considerations referred
to in this Section 8. No person guilty of a fraudulent misrepresentation (within
the meaning of Section 11(f) of the Act) will be entitled to contribution from
any person who is not guilty of such fraudulent misrepresentation. For purposes
of this Section 8, each person, if any, who controls any of the Underwriters
within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act
and each officer, director, partner, employee and agent of any of the
Underwriters will have the same rights to contribution as the Underwriters, and
each person, if any, who controls the Company within the meaning of Section 15
of the Act or Section 20(a) of the Exchange Act, each officer of the Company who
has signed the Registration Statement and each director
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<PAGE>
of the Company will have the same rights to contribution as the Company, subject
in each case to the provisions of this Section 8. Anything in this Section 8 to
the contrary notwithstanding, no party will be liable for contribution with
respect to the settlement of any claim or action effected without its written
consent. This Section 8 is intended to supersede, to the extent permitted by
law, any right to contribution under the Act or the Exchange Act or otherwise
available.
9. Survival of Indemnities, Contribution, Warranties and
-----------------------------------------------------
Representations. The respective indemnity and contribution agreements of the
- ---------------
Company, Pulsar and the Underwriters contained in Sections 7 and 8 hereof, and
the representations and warranties of the Company and Pulsar contained in this
Agreement shall remain operative and in full force and effect, regardless of any
termination or cancellation of this Agreement or any investigation made by or on
behalf of the Underwriters, the Company or any of its directors and officers or
Pulsar or any controlling person referred to in said Sections, and shall survive
the delivery of, and payment for, the Shares.
10. Substitution of Underwriters.
----------------------------
(a) If one or more Underwriters should default in its or their
obligation to purchase and pay for any Offered Shares hereunder and if the
aggregate number of such Offered Shares which all Underwriters so defaulting
have agreed to purchase does not exceed 10% of the total number of the Offered
Shares, the non-defaulting Underwriters will be obligated severally to purchase
and pay for (in addition to the number of Offered Shares set forth opposite
their names in Schedule A attached hereto) the full number of Offered Shares
agreed to be purchased by all defaulting Underwriters, and not so purchased, in
proportion to their respective commitments hereunder. In such event the
Representative, for the accounts of the several nondefaulting Underwriters, may
take up and pay for all or any part of such additional Offered Shares to be
purchased by each such Underwriter under this Section 10(a), and may postpone
the Closing Date to a time not exceeding three full business days after the
Closing Date determined as provided in Section 2 hereof.
(b) If one or more Underwriters should default in its or their
obligation to purchase and pay for any Offered Shares hereunder and if the
aggregate number of such Offered Shares which all Underwriters so defaulting
have agreed to purchase exceeds 10% of the total number of Offered Shares, or if
one or more Underwriters for any reason permitted hereunder should cancel its or
their obligation to purchase and pay for Offered Shares hereunder, the non-
cancelling and non-defaulting Underwriters (hereinafter called the "remaining
Underwriters") will have the right to purchase such Offered Shares in such
proportion as may be agreed among them at the Closing Date determined as
provided in Section 2 hereof. If the remaining Underwriters do not purchase
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<PAGE>
and pay for such Offered Shares at such Closing Date, the Closing Date will be
postponed for 24 hours and the remaining Underwriters will have the right to
purchase such Offered Shares, or to substitute another person or persons to
purchase the same, or both, at such postponed Closing Date. If purchasers have
not been found for such Offered Shares by such postponed Closing Date, the
Closing Date will be postponed for a further 24 hours, and the Company will have
the right to substitute another person or persons, reasonably satisfactory to
the Representative to purchase such Offered Shares at such second postponed
Closing Date. If it shall be arranged for the remaining Underwriters or
substituted underwriters to take up the Firm Shares of the defaulting
Underwriter or Underwriters as provided in this Section, (A) the Company shall
have the right to postpone the time of delivery for a period of not more than
three (3) full Business Days, in order to effect whatever changes may thereby be
made necessary in the Registration Statement or the Prospectus or in any other
documents or arrangements, and the Company agrees promptly to file any
amendments to the Registration Statement or supplements to the Prospectus which
may thereby be made necessary. If the Company has not found such purchasers for
such Offered Shares by such second postponed Closing Date, then this Agreement
will automatically terminate, and neither the Company nor the remaining
Underwriters will be under any obligation under this Agreement (except that the
Company and the Underwriters will remain liable to the extent provided in
Sections 7 and 8 hereof and the Company will also remain liable to the extent
provided in Section 5(j) hereof). As used in this Agreement, the term
"Underwriter" includes any person substituted for an Underwriter under this
Section 10(b). Nothing in Section 11 hereof will relieve a defaulting
Underwriter from the liability for its default and nothing in this Section 10(b)
will obligate any Underwriter to purchase or find purchasers for any Offered
Shares in excess of those agreed to be purchased by such Underwriter under the
terms of Section 2 hereof.
11. Termination of Agreement.
------------------------
(a) The Company, by written or telegraphic notice to the
Representative, or the Representative, by written or telegraphic notice to the
Company, may terminate this Agreement prior to the earlier of (i) 11:00 A.M.,
New York City time, on the first full business day after the Effective Date; or
(ii) the time when the Underwriters, after the Registration Statement becomes
effective, release the Offered Shares for public offering. The time when the
Underwriters "release the Offered Shares for public offering" for the purposes
of this Section 11 means the time when the Underwriters release for publication
the first newspaper advertisement, which is subsequently published, relating to
the Offered Shares, or the time when the Underwriters release for delivery to
members of a selling group copies of the Prospectus and an offering letter or an
offering telegram relating to the Offered Shares, whichever will first occur.
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<PAGE>
(b) This Agreement, including without limitation, the obligation
to purchase the Shares and the obligation to purchase the Optional Shares after
exercise of the option referred to in Section 3 hereof, is subject to
termination in the absolute discretion of the Underwriters, by notice given to
the Company prior to delivery of and payment for all the Offered Shares or the
Optional Shares, as the case may be, if, prior to such time, any of the
following shall have occurred: (i) the Company withdraws the Registration
Statement from the Commission or the Company does not or cannot expeditiously
proceed with the public offering; (ii) the representations and warranties in
Section 4 hereof are not materially correct or cannot be complied with; (iii)
trading in securities generally on the New York Stock Exchange or the American
Stock Exchange will have been suspended; (iv) limited or minimum prices will
have been established on either such Exchange; (v) a banking moratorium will
have been declared either by federal or New York State authorities; (vi) any
other restrictions on transactions in securities materially affecting the free
market for securities or the payment for such securities, including the Offered
Shares or the Optional Shares, will be established by either of such Exchanges,
by the Commission, by any other federal or state agency, by action of the
Congress or by Executive Order; (vii) trading in any securities of the Company
shall have been suspended or halted by any national securities exchange, the
NASD or the Commission; (viii) there has been a materially adverse change in the
condition (financial or otherwise), prospects or obligations of the Company;
(ix) the Company will have sustained a material loss, whether or not insured, by
reason of fire, flood, accident or other calamity; (x) any action has been taken
by the government of the United States or any department or agency thereof
which, in the judgment of the Representative, has had a material adverse effect
upon the market or potential market for securities in general; or (xi) the
market for securities in general or political, financial or economic conditions
will have so materially adversely changed that, in the judgment of the
Representative, it will be impracticable to offer for sale, or to enforce
contracts made by the Underwriters for the resale of, the Offered Shares or the
Optional Shares, as the case may be.
(c) If this Agreement is terminated pursuant to Section 6 hereof
or this Section 11 or if the purchases provided for herein are not consummated
because any condition of the Underwriters' obligations hereunder is not
satisfied or because of any refusal, inability or failure on the part of the
Company to comply with any of the terms or to fulfill any of the conditions of
this Agreement, or if for any reason the Company shall be unable to or does not
perform all of its obligations under this Agreement, the Company will not be
liable to any of the Underwriters for damages on account of loss of anticipated
profits arising out of the transactions covered by this Agreement, but the
Company will remain liable to the extent provided in Sections 5(j), 7, 8 and 9
of this Agreement.
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<PAGE>
12. Information Furnished by the Underwriters to the Company. It is
--------------------------------------------------------
hereby acknowledged and agreed by the parties hereto that for the purposes of
this Agreement, including, without limitation, Sections 4(e), 7(a), 7(b) and 8
hereof, the only information given by the Underwriters to the Company for use in
the Prospectus are the statements set forth in the last sentence of the last
paragraph on the cover page, information in the ____ paragraph on page ___ with
respect to concessions and reallowances, the table on page _____ regarding the
offering syndicate, and the information in the ____, ________, _______ and
________ full paragraphs on page ____ with respect to discretionary accounts,
the determination of the public offering price, stabilizing the market price of
the Shares, and BlueStone, respectively, as such information appears in any
Preliminary Prospectus and in the Prospectus.
13. Notices and Governing Law. All communications hereunder will be
-------------------------
in writing and, except as otherwise provided, will be delivered at, or mailed by
certified mail, return receipt requested, or telecopied to, the following
addresses: if to BlueStone, the Representative, or the Underwriters, to
BlueStone Capital Partners, L.P., 575 Fifth Avenue, New York, New York 10017,
Facsimile No. (212) 297-5695, with a copy to Tenzer Greenblatt LLP, Attention:
Robert J. Mittman, Esq., 405 Lexington Avenue, New York, New York 10174,
Facsimile No. (212) 885-5001; if to the Company, to Litronic Inc., 2030 Main
Street, Suite 1250, Irvine, California 92614, Attention: Kris Shah, Chief
Executive Officer; with a copy to Arent Fox Kintner Plotkin & Kahn, PLLC, 1050
Connecticut Avenue, N.W., Washington, D.C. 20036-4339, Attention: Gerald P.
McCartin, Esq., Facsimile No. (202) 857-6395.
This Agreement shall be deemed to have been made and delivered in New
York City and shall be governed as to validity, interpretation, construction,
effect and in all other respects by the internal laws of the State of New York.
The Company (1) agrees that any legal suit, action or proceeding arising out of
or relating to this Agreement shall be instituted exclusively in New York State
Supreme Court, County of New York, or in the United States District Court for
the Southern District of New York, (2) waives any objection which the Company
may have now or hereafter to the venue of any such suit, action or proceeding,
and (3) irrevocably consents to the jurisdiction of the New York State Supreme
Court, County of New York, and the United States District Court for the Southern
District of New York in any such suit, action or proceeding. The Company
further agrees to accept and acknowledge service of any and all process which
may be served in any such suit, action or proceeding in the New York State
Supreme Court, County of New York, or in the United States District Court for
the Southern District of New York and agrees that service of process upon the
Company mailed by certified mail to the Company's address (Attention: President)
shall be deemed in every respect effective service of process upon the Company
in any such suit, action or proceeding.
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<PAGE>
14. Parties in Interest. This Agreement is made solely for the
-------------------
benefit of the several Underwriters, the Company and, to the extent expressed,
any person controlling the Company or the Underwriters, each officer, director,
partner, employee and agent of the Underwriters, the directors of the Company,
its officers who have signed the Registration Statement, and their respective
executors, administrators, successors and assigns, and, no other person will
acquire or have any right under or by virtue of this Agreement. The term
"successors and assigns" will not include any purchaser of the Shares from any
of the Underwriters, as such purchaser.
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement between the Company, Pulsar and the
Underwriters in accordance with its terms.
Very truly yours,
LITRONIC INC.
By:_____________________________
Name:
Title:
PULSAR DATA SYSTEMS, INC.
By:_____________________________
Name:
Title:
Confirmed and accepted in
New York, N.Y., as of the
date first above written:
BLUESTONE CAPITAL PARTNERS, L.P.
By: BlueStone Capital Management, Inc.,
General Partner
By:__________________________________
Name:
Title:
Acting on behalf of itself
as the Representative of the
several Underwriters named in
Schedule A hereto.
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<PAGE>
SCHEDULE A
TO THE UNDERWRITING AGREEMENT
Underwriter Number of Shares
- ----------- ----------------
BlueStone Capital Partners, L.P..............
Total............................... 3,000,000
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<PAGE>
Exhibit 2
STOCK ACQUISITION AGREEMENT
This Stock Acquisition Agreement (this "Agreement") dated as of February 9,
1999, is by and among Litronic Inc., a Delaware corporation ("Parent"), Litronic
Industries, Inc., a California corporation ("Litronic"), Pulsar Data Systems,
Inc., a Delaware corporation ("Pulsar"), William W. Davis, Sr. and Lillian A.
Davis (collectively the "Pulsar Stockholders"), and Kris Shah and Geraldine M.
Shah, as Trustees of the Kris Shah and Geraldine M. Shah Living Trust dated
October 9, 1997, Ramesh R. Shah and Patricia L. Shah, as Trustees of the Ramesh
R. Shah and Patricia L. Shah Living Trust dated March 22, 1982 as amended on
October 14, 1997, Dilip R. Shah and Shila D. Shah, as Trustees of the Shah
Living Trust dated November 14, 1995, Kris Shah as Trustee of the Leena Shah
Trust dated October 16, 1997 and Kris Shah, as Trustee of the Chandra L. Shah
Trust dated October 9, 1997 (each of the foregoing trustees in their capacity as
trustee, the same constituting all of the stockholders of Litronic, being
collectively referred to as the "Litronic Stockholders").
Pursuant to a Reorganization Agreement dated the date hereof by and among
Parent, Litronic and the Litronic Stockholders, at the Reorganization Closing
(as defined below), the Litronic Stockholders will exchange all of their
Litronic Shares (as defined below) for shares of Parent common stock, as a
result of which Litronic will become a wholly owned subsidiary of Parent (the
"Reorganization"). Pursuant to this Agreement, at the Acquisition Closing (as
defined below), the Pulsar Stockholders will exchange all of their Pulsar Shares
for shares of Parent common stock, as a result of which Pulsar will become a
wholly owned subsidiary of Parent (the "Acquisition").
The Boards of Directors of Parent, Litronic and Pulsar (collectively, the
"Companies") have determined that the Reorganization and Acquisition, as
applicable, are in the best interests of their respective stockholders and the
Reorganization and the Acquisition, as applicable, have been approved by the
Companies and their respective stockholders.
Accordingly, the parties hereto, in consideration of the mutual
representations, warranties and covenants contained herein, agree as follows:
1. CERTAIN DEFINITIONS
As used in this Agreement, the following terms shall have the respective
meanings set forth below:
1.1 "Acquisition" has the meaning given to it in the preamble.
1.2 "Acquisition Closing" means the closing of the Acquisition as
described in Section 2.1.
1.3 "Acquisition Proposal" has the meaning given to it in Section 8.2
1.4 "Affiliate" has the meaning given to it in Section 3.12(a).
<PAGE>
1.5 "Amended Charter" means the Amended and Restated Certificate of
Incorporation of Parent substantially in the form of Exhibit 1.3.
1.6 "Assumed Options" means options issued by Litronic under the Litronic
Industries, Inc. 1998 Stock Option Plan and assumed by Parent at the
Reorganization Closing in accordance with the terms of the Reorganization
Agreement.
1.7 "Average Closing Price" means the average of the closing prices of a
share of Parent Common Stock on each trading day during the stated period, as
recorded on Nasdaq or on such other exchange or market as is then the principal
exchange or market on which Parent Common Stock is traded.
1.8 "Balance Sheet Date" means December 31, 1997.
1.9 "best knowledge", "have knowledge of", "have no knowledge of", "do not
know of" or "to the knowledge of" and similar phrases means (i) in the case of a
natural person, the particular fact was known, or not known, as the context
requires, to such person after diligent investigation and reasonable inquiry by
such person, and (ii) in the case of an entity, the particular fact was known,
or not known, as the context requires, to any stockholder, member of the board
of directors or executive officer of such entity after diligent investigation
and reasonable inquiry.
1.10 "Claim Date" has the meaning given to it in Section 10.2(b)(ii).
1.11 "Code" means the Internal Revenue Code of 1986, as amended to date.
1.12 "Commission" means the Securities and Exchange Commission.
1.13 "Confidential Information" has the meaning given to it in Section
8.3(c).
1.14 "Cut-off Date" has the meaning given to it in Section 10.2(a).
1.15 "Damages" has the meaning given to it in Section 10.1(a)(i).
1.16 "Employment Contracts" means the employment agreements in the forms
attached hereto as Exhibit 8.12.
1.17 "Environmental Laws" has the meaning given to it in Section 3.23.
1.18 "Equitable Principles" has the meaning given to it in Section 3.2.
1.19 "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
1.20 "ERISA affiliate" has the meaning given to it in Section 3.20(j).
1.21 "Exchange Act" means the Securities Exchange Act of 1934, as amended.
2
<PAGE>
1.22 "Exchange Ratio" has the meaning given to it in Section 2.1.
1.23 "Export Control Laws" has the meaning given to it in Section 3.32(a).
1.24 "Financial Advisor" means Bluestone Capital Partners L.P.
1.25 "Financial Statements" means with respect to Litronic, the financial
statements of Litronic delivered to Pulsar as described in Section 3.5; and with
respect to Pulsar means the financial statements of Pulsar delivered to Litronic
as described in Section 5.6.
1.26 "Fraction" means that fraction which has one as its numerator and
which has, as its denominator, the number of Pulsar Shares outstanding
immediately prior to the Acquisition Closing.
1.27 "GAAP" has the meaning given to it in Section 3.5(a).
1.28 "Government" has the meaning given to it in Section 3.33(a).
1.29 "Government Contracts" has the meaning given to it in Section 3.33(a).
1.30 "Hazardous Material" has the meaning given to it in Section 3.23.
1.31 "Indemnified Party" has the meaning given to it in Section
10.1(a)(iv).
1.32 "Investigating Party" has the meaning given to it in Section 8.3(a).
1.33 "IPO" means the initial underwritten public offering of shares of
Parent Common Stock at not less than the Pre-IPO Valuation and generating at
least $30 million in gross proceeds to Parent.
1.34 "IPO Price" means the price at which shares of Parent Common Stock are
sold to the public in the IPO.
1.35 "IRS" has the meaning given to it in Section 3.15(a).
1.36 "ISO" has the meaning given to it in Section 2.5.
1.37 "Liens" has the meaning given to it in Section 3.2.
1.38 "Litronic Balance Sheet" means the balance sheet of Litronic as of
December 31, 1997 included in Litronic's Financial Statements.
1.39 "Litronic Consultant" has the meaning given to it in Section 3.21.
1.40 "Litronic Disclosure Schedule" means the Disclosure Schedule prepared
by Parent and attached hereto and incorporated herein by this reference.
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1.41 "Litronic Disclosure Supplement" has the meaning given to it in
Section 8.7.
1.42 "Litronic Employees" has the meaning given to it in Section 3.21.
1.43 "Litronic Guarantees" has the meaning given to it in Section 3.6.
1.44 "Litronic Indemnified Party" has the meaning given to it in Section
9.1(a)(iii).
1.45 "Litronic Indemnifying Party" has the meaning given to it in Section
9.2.
1.46 "Litronic Option" means an option to purchase Litronic Shares, whether
or not vested or exercisable as of the applicable time as set forth in the
Litronic Disclosure Schedule.
1.47 "Litronic Pension Plan" has the meaning given to it in Section
3.20(c).
1.48 "Litronic Plans" has the meaning given to it in Section 3.13.
1.49 "Litronic Proprietary Information" has the meaning given to it in
Section 3.11(a).
1.50 "Litronic Share" means a share of the Common Stock, no par value, of
Litronic, and "Litronic Shares" means all such shares.
1.51 "Litronic Stockholders" has the meaning given to it in the recitals.
1.52 "Litronic Systems" has the meaning given to it in Section 3.11(c).
1.53 "Litronic Welfare Plan" has the meaning given to it in Section
3.20(d).
1.54 "material" means, with respect to any entity or group of entities, any
material event, change, condition or effect related to the condition (financial
or otherwise), properties, assets, liabilities, business, operations, or results
of operations of such entity or group of entities, and the term "material" shall
be construed accordingly.
1.55 "Material Adverse Effect" means, with respect to any entity or group
of entities, any event, change or effect that is materially adverse to the
condition (financial or otherwise), properties, assets, liabilities, business,
operations, results of operations of such entity and its subsidiaries, taken as
a whole.
1.56 "Material Litronic Contracts" has the meaning given to it in Section
3.13.
1.57 "Material Pulsar Contracts" has the meaning given to it in Section
5.14.
1.58 "Notifying Party" has the meaning given it in Section 8.7.
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1.59 "ordinary course of business" means the usual and customary way in
which Pulsar or Litronic have done business in the past.
1.60 "Parent Common Stock" means the shares of common stock, par value $.01
per share, of Parent.
1.61 "Permits" has the meaning given to it in Section 3.22.
1.62 "Person" means an individual, a partnership, a corporation, an
association, a joint stock company, a trust, a joint venture, an unincorporated
organization or a governmental entity (or any department, agency or political
subdivision thereof).
1.63 "Pre-IPO Valuation" means a valuation for Parent after and taking
into account the Reorganization and the Acquisition based on a total market
capitalization of Parent following the Reorganization and the Acquisition
(assuming no exercise of the Assumed Options), but not including the IPO, of not
less than $60,406,310 (assuming gross IPO proceeds of $30 million), as adjusted
pursuant to Section 2.2.
1.64 "Prospectus" means the prospectus relating to the IPO first filed with
the Commission pursuant to Rule 424(b) and Rule 430A of the rules and
regulations of the Commission under the Securities Act or (if no such filing is
required) as included in the Registration Statement and, if any supplement or
amendment to such prospectus after the date the Registration Statement becomes
effective under the Securities Act, such prospectus as so supplemented or
amended from and after the filing with the Commission of such supplement or the
effectiveness of such amendment.
1.65 "Pulsar Balance Sheet" means the balance sheet of Pulsar as of
December 31, 1997 included in Pulsar's Financial Statements.
1.66 "Pulsar Share" means a share of Common Stock, no par value, of Pulsar,
and "Pulsar Shares" means all such shares.
1.67 "Pulsar Consultants" has the meaning given to it in Section 5.22.
1.68 "Pulsar Disclosure Schedule" means the Disclosure Schedule prepared by
Pulsar and attached hereto and incorporated herein by this reference.
1.69 "Pulsar Disclosure Supplement" has the meaning given to it in Section
8.7.
1.70 "Pulsar Employees" has the meaning given to it in Section 5.22.
1.71 "Pulsar Guarantees" has the meaning given to it in Section 5.7.
1.72 "Pulsar Indemnified Party" has the meaning given to it in Section
10.1.
1.73 "Pulsar Indemnifying Party" has the meaning given to it in Section
10.2.
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1.74 "Pulsar Pension Plans" has the meaning given to it in Section 5.21.
1.75 "Pulsar Plans" has the meaning given to it in Section 5.14.
1.76 "Pulsar Proprietary Information" has the meaning given to it in
Section 5.12(a).
1.77 "Pulsar Stockholders" means William W. Davis, Sr. and Lillian A.
Davis.
1.78 "Pulsar Systems" has the meaning given to it in Section 5.12(c).
1.79 "Pulsar Welfare Plans" has the meaning given to it in Section 5.21.
1.80 "Registration Rights Agreement" means a registration rights agreement
in the form attached hereto as Exhibit 1.80.
1.81 "Registration Statement" means the registration statement on Form S-1,
including the related preliminary prospectus, to be filed with the Commission in
connection with the IPO, including all Exhibits and financial statements, in the
form in which it becomes effective under the Securities Act and, if any
amendment thereto after the effective date of any such registration statement,
such registration statement as so amended from and after the effectiveness of
such amendment.
1.82 "Reorganization" has the meaning given to it in the preamble.
1.83 "Reorganization Agreement" has the meaning given to it in the
preamble.
1.84 "Reorganization Closing" means the closing of the Reorganization in
accordance with the terms of the Reorganization Agreement.
1.85 "Representatives" has the meaning given to it in Section 8.3(c).
1.86 "Securities Act" means the Securities Act of 1933, as amended.
1.87 "Taxes" has the meaning given to it in Section 3.15(m).
1.88 "Tax Returns" has the meaning given to it in Section 3.15(m).
1.89 "Third Party Claim" has the meaning given to it in Section 9.3.
1.90 "Underwriter" means, collectively, the managing underwriters of the
IPO.
1.91 "Year 2000 Compliant" has the meaning given to it in Section 3.34.
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2. THE ACQUISITION
2.1 The Acquisition . At the Acquisition Closing, which shall be
----------------
immediately prior to the IPO, upon the terms and subject to the conditions
hereof, each of the Pulsar Stockholders hereby agrees to deliver, and Parent
agrees to accept delivery of, stock certificates, duly endorsed for transfer,
representing all of the Pulsar Shares owned by such Pulsar Stockholder, for and
against delivery of duly executed stock certificates representing shares of
Parent Common Stock, as follows. Subject to Section 2.2, each Pulsar Share shall
be exchanged for that number of shares of Parent Common Stock determined by
multiplying the Fraction times the number obtained after dividing $21,699,380 by
the IPO Price (the "Exchange Ratio"). In lieu of any fractional shares, at the
Closing there shall be paid to each holder of Pulsar Shares who would otherwise
be entitled to receive a fractional share of Parent Common Stock an amount of
cash equal to the amount of such fraction times the IPO Price. Parent's issuance
of Parent Common Stock in exchange for Pulsar Shares is conditioned upon (i)
satisfaction of the conditions set forth in Article 9 and (ii) delivery by the
Pulsar Stockholders of certificates representing the Pulsar Shares, duly
endorsed for transfer. The Acquisition Closing will be held at the offices of
Arent Fox Kintner Plotkin & Kahn, PLLC, 1050 Connecticut Avenue, N.W.,
Washington, D.C. 20036-5339 (or such other place as the parties may agree).
2.2 Adjustment to Pre-IPO Valuation. The aggregate value (based on the
-------------------------------
IPO price per share of Parent Common Stock) of the Parent Common Stock exchanged
for the Pulsar Shares shall be equal to 35.9224% of the Pre-IPO Valuation. If
the Financial Advisor in its sole discretion determines, based upon preliminary
discussions with potential investors, that the Pre-IPO Valuation should be
increased or decreased and gives written notice thereof to Litronic and Pulsar
(such notice making specific reference to this Section 2.2), the Litronic
Stockholders and the Pulsar Stockholders agree that the Pre-IPO Valuation shall
be adjusted in accordance with the determination set forth in such notice;
provided, however, that in no event shall a party be obligated to proceed with
the Acquisition if the Pre-IPO Valuation, as so adjusted, is less than $58
million (assuming gross IPO proceeds of $30 million). If any adjustment to the
Pre-IPO Valuation is made pursuant to this Section 2.2 after the Reorganization
Closing, Parent and the Litronic Stockholders agree that the number of shares of
Parent Common Stock held by the Litronic Stockholders shall also be
proportionately adjusted so that the Litronic Stockholders hold in the aggregate
Parent Common Stock with an aggregate value (based on the IPO Price of Parent
Common Stock) equal to 64.0776% of the adjusted Pre-IPO Valuation.
2.3 Tax Consequences. It is intended that the Reorganization and the
----------------
Acquisition shall qualify as a reorganization within the meaning of Section 368
of the Code, and that the Reorganization and the Acquisition shall be tax-free,
except to the extent of cash paid in lieu of fractional shares.
2.4 Stock Legend. Each stock certificate representing the Parent Common
------------
Stock issued in the Acquisition shall bear a legend in, or substantially in, the
following form:
"The shares represented by this certificate have not been registered under
the Securities Act of 1933, as amended to date, and may not be sold,
pledged or otherwise transferred without
7
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an effective registration under said Act or unless Litronic Inc. shall have
received an opinion satisfactory to Litronic Inc. of counsel satisfactory
to Litronic Inc. that an exemption from registration under such Act is then
available."
2.5 Subsequent Actions. If, at any time after the Acquisition Closing,
------------------
Parent believes or is advised that any deeds, bills of sale, assignments,
assurances or any other actions or things are necessary or desirable to vest,
perfect or confirm of record or otherwise in Parent its right, title or interest
in, to or under any of the rights, properties or assets of Litronic or Pulsar to
be acquired by Parent as a result of, or in connection with, the Acquisition or
otherwise to carry out this Agreement, the officers and directors of Parent
shall, at the sole cost and expense of Parent, be authorized to execute and
deliver, in the name and on behalf of Parent, to carry out all such deeds, bills
of sale, assignments and assurances and to take and do, in the name and on
behalf of Parent, all such other actions and things as may be necessary or
desirable to vest, perfect or confirm any and all right, title and interest in,
to and under such rights, properties or assets in Parent or otherwise to carry
out this Agreement.
3. REPRESENTATIONS AND WARRANTIES OF LITRONIC
AND THE LITRONIC STOCKHOLDERS
Litronic and the Litronic Stockholders, jointly and severally, represent
and warrant to Parent, Pulsar and the Pulsar Stockholders that, except as
expressly provided in the Litronic Disclosure Schedule (but once disclosed in
the Litronic Disclosure Schedule, such matter shall be deemed disclosed for all
intents and purposes) by specific reference to a Section of this Article 3:
3.1 Organization and Authority. Litronic is a corporation duly organized,
--------------------------
validly existing, and in good standing under the laws of the State of California
and has all requisite corporate power and authority to (i) carry on its business
as currently conducted by it and (ii) own, lease and operate its properties.
Litronic is duly qualified or licensed and in good standing as a foreign
corporation, and has at all times when legally required been so qualified or
licensed and in good standing, in those states listed on the Litronic Disclosure
Schedule, which are the only jurisdictions in which a failure to be so qualified
or licensed would, in the aggregate, have a Material Adverse Effect on the
business of Litronic or the nature of the business conducted by it. Litronic has
full power and authority to execute and deliver this Agreement, the
Reorganization Agreement and each other agreement and instrument to be executed
and delivered by it pursuant hereto and to consummate the transactions
contemplated hereby and perform its obligations hereunder. The execution and
delivery of this Agreement and the Reorganization Agreement and the consummation
of the transactions contemplated hereby by Litronic and the performance of
Litronic's obligations hereunder have been duly and validly authorized by all
corporate actions including a unanimous vote of the Board of Directors of
Litronic, and no other corporate proceedings on the part of Litronic are
necessary to authorize this Agreement or the Reorganization Agreement or to
consummate the transactions so contemplated or to perform Litronic's obligations
hereunder. This Agreement and the Reorganization Agreement have been duly and
validly executed and delivered by Litronic and constitute a legal, valid and
binding obligation of Litronic enforceable against it in accordance with its
terms, except as enforcement may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting
enforcement of creditors' rights generally
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and subject to the rules of law governing specific performance, injunctive
relief and other equitable remedies ("Equitable Principles"). True and complete
copies of the Articles of Incorporation of Litronic and all amendments thereof,
and of the Bylaws, as amended to date, have heretofore been forwarded to Pulsar.
Litronic's minute books contain complete and accurate records of all meetings of
Litronic's stockholders and Board of Directors or written consents in lieu
thereof through the date of this Agreement.
3.2 Capitalization of Litronic. Litronic has authorized capital
--------------------------
consisting of 20,000,000 shares of Common Stock, no par value, and 5,000,0000
shares of undesignated Preferred Stock, no par value. As of the date hereof,
there are 9,999,999 issued and outstanding Litronic Shares and no shares of
Preferred Stock are outstanding. Immediately prior to the Reorganization
Closing, the Litronic Shares issued and outstanding shall consist solely of the
foregoing number plus the number of Litronic Shares, if any, issued between the
date hereof and the Reorganization Closing upon the exercise of Litronic Options
(in each case solely if existing on the date hereof and disclosed on the
Litronic Disclosure Schedule). All of the Litronic Shares are duly authorized,
validly issued, fully paid and non-assessable and are owned of record and
beneficially by the Litronic Stockholders in the amounts listed on the Litronic
Disclosure Schedule. The Litronic Stockholders have good and marketable title to
all of the issued and outstanding shares of Litronic's capital stock, free and
clear of any liens, adverse claims, security interests, pledges, mortgages,
charges or encumbrances of any nature whatsoever ("Liens") and at the
Reorganization Closing will own all of Litronic's capital stock, free and clear
of any and all Liens, including but not limited to, any claims by any present or
former stockholders of Litronic. Litronic has no authorized class of capital
stock other than the Common Stock and Preferred Stock. Litronic does not own any
shares of capital stock or other securities of, or any other interest in, nor
does it control, directly or indirectly, of record or beneficially, any other
corporation, association, joint venture, partnership, or other business
organization. The Litronic Shares have been issued and sold in full compliance
with all applicable federal and state securities laws.
3.3 No Violation of Existing Agreements. The execution and delivery of
-----------------------------------
this Agreement and the Reorganization Agreement, together with all documents and
instruments contemplated herein, the consummation by Litronic of the
transactions contemplated hereby and thereby, including the IPO, the performance
by Litronic of its obligations hereunder and thereunder and compliance with the
terms, conditions and provisions hereof and thereof by Litronic do not (i)
contravene any provisions of Litronic's Articles of Incorporation or Bylaws or
other constituent document of Litronic, each as amended to date; (ii) conflict
with, result in a breach of, constitute a default (or an event that might, with
the passage of time or the giving of notice or both, constitute a default)
under, give rise to any right to terminate, cancel or accelerate, give rise to
any loss of benefit under, or result in the creation of any lien, security
interest or other encumbrance under, any of the material terms, conditions, or
provisions of any indenture, note, bond, license, mortgage, loan, or credit
agreement or any other material agreement or instrument to which Litronic is a
party or by which it or its assets may be bound or affected; (iii) violate or
constitute a material breach of any decision, judgment, writ, injunction,
decree, law, statute, rule or regulation or order of any court or arbitration
board or of any governmental department, commission, board, agency, or
instrumentality, domestic or foreign, by which Litronic is bound or to which it
is subject; (iv) violate any applicable law, rule, or regulation to which
Litronic or any of its property is bound; or (v) interfere or otherwise
adversely affect the
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ability of Litronic to carry on business after the Reorganization Closing on
substantially the same basis as is now conducted by Litronic.
3.4 No Consents or Approvals of Governmental Authorities. No consent or
----------------------------------------------------
approval of, or filing and expiration of a period for disapproval by, any
governmental authority is required for Litronic to consummate the transactions
contemplated by this Agreement or the Reorganization Agreement.
3.5 Financial Statements.
--------------------
(a) Litronic heretofore delivered to Pulsar (a) its Financial Statements
consisting of audited balance sheets at December 31, 1995, December 31, 1996 and
December 31, 1997 and the related statements of income, stockholders equity and
cash flows for the three years then ended, which have been audited by KPMG Peat
Marwick LLP, independent certified accountants, and (b) its unaudited balance
sheet at September 30, 1998, statements of income, stockholders equity and cash
flows for nine months ended September 30, 1998. The Financial Statements were
prepared in accordance with generally accepted accounting principles ("GAAP"),
consistently applied, are intended to be consistent in form and substance with
the requirements of Regulation S-X of the Commission under the Securities Act,
and present fairly the financial position of Litronic as of their respective
dates, and the results of operations and cash flows for the periods presented
therein. The books and records of Litronic are complete and correct, have been
maintained in accordance with good business practices, and accurately reflect
the basis for the financial condition and results, subject to year end
adjustments.
(b) Litronic maintains a system of internal accounting controls sufficient
to provide reasonable assurances that (i) transactions are executed in
accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with GAAP and with statutory accounting principles and
to maintain accountability for assets; (iii) access to assets is permitted only
in accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
3.6 Guarantees. The Litronic Disclosure Schedule contains a complete and
----------
accurate list and summary description of all contractual guarantees currently in
effect heretofore issued by the Litronic Stockholders to any bank or other
lender in connection with any credit facilities extended by such creditors to
Litronic or issued by the Litronic Stockholders in connection with any other
contracts or agreements for the benefit of Litronic (collectively, the "Litronic
Guarantees") including the name of such creditor and the amount of the
indebtedness, together with any interest and fees currently owing and expected
to be outstanding as of the Reorganization Closing and the Acquisition Closing.
3.7 Absence of Undisclosed Liabilities. Except as set forth or reserved
----------------------------------
against in the Litronic Balance Sheet or where provision has been made for
adequate reserves for Taxes, Litronic (a) did not have as of the Balance Sheet
Date any material liability or obligation of any nature,
10
<PAGE>
whether accrued, absolute, contingent, or otherwise and whether due or to become
due, including without limitation, liabilities that may become known or arise
after the date hereof and which relate to transactions entered into or any state
of facts existing on or before the Balance Sheet Date and which would be
required under GAAP to be shown in such balance sheet or referenced in the notes
thereto, and (b) has not incurred since the Balance Sheet Date any such
liability or obligation except in the ordinary course of business. Without
limiting the foregoing, and except as specifically reserved against in the
Litronic Balance Sheet, Litronic has no material liability or obligation of any
nature, whether accrued, absolute, contingent, or otherwise, to the Government
for any adjustment or reimbursement of any amount previously paid to Litronic by
such entity under any agreement relating to the provision of any goods or
services by Litronic.
3.8 Conduct of Business Since the Balance Sheet Date. Since the Balance
------------------------------------------------
Sheet Date, Litronic has not taken (or suffered the occurrence of) any of the
following actions or events, agreed to take any of the following actions, or
taken any action that would otherwise result in a Material Adverse Effect to
Litronic (in each case except directly in connection with this Agreement):
(a) entered into any transaction, agreement or commitment other than in the
ordinary course of business; or
(b) entered into any transaction, agreement, or commitment, suffered the
occurrence of any event or events, or experienced any change in financial
condition, business, results of operations, prospects or otherwise, (i) that has
interfered or is reasonably likely to interfere with the normal and usual
operations of Litronic's business or (ii) that, singly or in the aggregate, has
resulted or is reasonably likely to result in a Material Adverse Effect; or
(c) incurred any indebtedness for borrowed money, or assumed, guaranteed,
endorsed or otherwise become responsible for the obligations of any other Person
(except to endorse checks for collection for deposit in the ordinary course of
business), or made any loan or advance to any Person; or
(d) mortgaged, pledged or otherwise encumbered, or, other than in the
ordinary course of business, sold, transferred or otherwise disposed of, any of
the properties or assets of Litronic, including any cancelled, released,
hypothecated or assigned indebtedness owed to Litronic, or any claims held by
Litronic, except for purchase money mortgages arising in the ordinary course of
business and statutory liens arising or incurred in the ordinary course of
business with respect to which the underlying obligations are not delinquent; or
(e) made any investment of a capital nature or entered into a commitment
for such investment either by purchase of stock or securities, contributions to
capital, property transfer, or otherwise, or by the purchase of any property or
assets of any other Person, except in each case in the ordinary course of
business; or
(f) declared, set aside or paid any dividend or other distribution (whether
in cash, stock, property or any combination thereof) in respect of the capital
stock of Litronic, or redeemed or otherwise acquired, directly or indirectly,
any shares of capital stock of Litronic, excepting only
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dividends, distributions and redemptions that have not resulted and will not
result, directly or indirectly, in a Material Adverse Effect on Litronic; or
(g) paid any long-term liability, otherwise than in accordance with its
terms; or
(h) paid any bonus compensation to any officer, director, shareholder or
employee of Litronic except in the ordinary course of business consistent with
past practice or otherwise increased the compensation paid or payable to any of
the foregoing; or
(i) sold, assigned, or transferred any trademarks, trade names, logos,
copyrights, formulae or other intangible assets; or
(j) contracted with or committed to any third party (i) to sell any capital
stock of Litronic, (ii) to sell any material assets of Litronic other than in
the ordinary course of business, (iii) to effect any merger, consolidation or
other reorganization of Litronic, or (iv) to enter into any agreement with
respect thereto; or
(k) changed the costing system or depreciation methods of accounting for
assets in any material respect; or
(l) written up or written down the carrying value of its assets other than
accounts receivable or inventories in the ordinary course of business.
3.9 Title to Assets. Litronic owns no real property. Litronic has good and
---------------
clear record title to all properties owned by it, including, without limitation,
all property reflected in the Litronic Balance Sheet, other than property
disposed of in the ordinary course of business subsequent to the Balance Sheet
Date (none of such dispositions being individually or collectively materially
adverse), free and clear of any Liens, except (a) as reflected in the Litronic
Financial Statements, or as specified in the notes thereto, (b) liens for taxes
not yet due or payable or being contested in good faith by appropriate
proceedings and as to which appropriate reserves have been set aside in the
Litronic Balance Sheet and (c) such imperfections of title and encumbrances, if
any, as do not materially detract from the value or interfere with the use of
the properties subject thereto or affected thereby, or otherwise materially
impair business operations.
3.10 Leases. A list and brief description of leases of personal property
------
involving rental payments within any 12 month period in excess of $25,000, as to
which Litronic is a party, either as lessor or lessee, are set forth in the
Litronic Disclosure Schedule. All such leases are valid and, to the knowledge of
the Litronic, enforceable in accordance with their respective terms except as
may be limited by Equitable Principles.
3.11 Intellectual Property.
---------------------
(a) The Litronic Disclosure Schedule contains a correct and complete list
of all United States and foreign brand marks and brand name registrations,
copyrights, copyright registrations and copyright applications, trademark
registrations and applications for registration, patents and patent
12
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applications, trademarks, service marks and trade names used in Litronic's
business as presently conducted and all licenses, assignments and releases of
the intellectual property rights of others in works embodied in its products and
all applications for all inventions, discoveries, improvements, formulae,
technology, know-how and other intellectual property, proprietary rights and
trade secrets relating to the business and all licenses and other agreements to
which Litronic is a party or otherwise bound which relate to any of the
intangibles or the inventions or Litronic's use thereof in connection with
Litronic's business (the "Litronic Proprietary Information"). There is (i) to
Litronic's knowledge, no existing or threatened infringement, misuse or
misappropriation of Litronic Proprietary Information by others and (ii) no
pending or threatened claim by Litronic against others for infringement, misuse
or misappropriation of any Litronic Proprietary Information. The Litronic
Proprietary Information is sufficient to carry on the business of Litronic as
presently conducted, and Litronic has the right to use, free and clear of claims
or rights of others, all Litronic Proprietary Information required for its
products or services or its business as presently conducted. Litronic is the
exclusive owner of all right, title and interest in the Litronic Proprietary
Information as purported to be owned by Litronic, and the Litronic Proprietary
Information is valid and in full force and effect. Neither the present business
activities of Litronic nor its products infringe, misuse or misappropriate any
patent, trademark, trade name, service mark, trade secret, copyright or other
intellectual property right of others, and to Litronic's knowledge no one is
claiming nor is it anticipated that anyone will claim any such infringement,
misuse or misappropriation. To the knowledge of Litronic, the Litronic
Proprietary Information is presently valid and protectable and is not part of
the public domain or knowledge, nor, to the knowledge of Litronic, has any of it
been used, divulged or appropriated for the benefit of any person other than
Litronic to the detriment of Litronic. Litronic has not granted to any person
any license or other right to use in any manner any of the Litronic Proprietary
Information, whether or not requiring the payment of royalties, except as set
forth in the Litronic Disclosure Schedule. Litronic has no obligation still
outstanding to compensate other persons for the use of any Litronic Proprietary
Information or for the sale of any service or product comprising or derived from
Litronic Proprietary Information. No university, government agency (whether
federal or state) or other organization which sponsored research and development
conducted by Litronic has any claim of right to or ownership of or other
encumbrance upon the Litronic Proprietary Information.
(b) Litronic has taken reasonable measures to protect and preserve the
security, confidentiality and value of the Litronic Proprietary Information,
including its trade secrets and other confidential information. To Litronic's
knowledge, no employee or consultant of Litronic has used any trade secrets or
other confidential information of any other person in the course of his or her
work for Litronic. To Litronic's knowledge, Litronic is not making unlawful use
of any confidential information or trade secrets belonging to any past or
present employees of Litronic. Neither Litronic nor, to the knowledge of
Litronic, any of Litronic's employees or consultants have any agreements or
arrangements with former employers of such employees or consultants relating to
confidential information or trade secrets of such employers or are bound by any
consulting agreement relating to confidential information or trade secrets of
another entity. To Litronic's knowledge, the activities of Litronic's employees
on behalf of Litronic do not violate any agreements or arrangements known to
Litronic which any such employees have with former employers or any other entity
to whom such employees may have rendered consulting services.
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(c) Litronic owns or has the right to use pursuant to lease, license,
sublicense, agreement or permission all computer hardware, software and
information systems listed on the Litronic Disclosure Schedule and necessary for
the operation of the business of Litronic as presently conducted (collectively,
"Litronic Systems"). Each Litronic System owned or used by Litronic immediately
prior to the Reorganization Closing will be owned or available for use by Parent
on identical terms and conditions immediately subsequent to the Reorganization
Closing and the Acquisition Closing. With respect to each Litronic System owned
by a third party and used by Litronic pursuant to lease, license, sublicense,
agreement or permission, to Litronic's knowledge: (a) the lease, license,
sublicense, agreement or permission covering the Litronic System is legal,
valid, binding, enforceable, and in full force and effect; (b) the lease,
license, sublicense, agreement or permission will continue to be legal, valid,
binding, enforceable, and in full force and effect on identical terms following
the Reorganization Closing and the Acquisition Closing; (c) no party to any such
lease, license, sublicense, agreement or permission is in breach or default, and
no event has occurred with which notice or lapse of time would constitute a
breach or default, and permit termination, modification or acceleration
thereunder; (d) no party to any such lease, license, sublicense, agreement or
permission has repudiated any provision thereof; (e) Litronic has not granted
any sublicense, sublease or similar right with respect to any such lease,
license, sublicense, agreement or permission; (f) Litronic's use and continued
use of the Litronic Systems does not and will not interfere with, infringe upon,
misappropriate or otherwise come into conflict with, any intellectual property
rights of third parties as a result of the continued operation of Litronic's
business.
3.12 Obligations to or from Affiliates.
---------------------------------
(a) All material transactions between Litronic and any stockholder,
executive officer or director of Litronic, or any Affiliate of any stockholder,
executive officer or director of Litronic, entered into on or after the Balance
Sheet Date have been conducted on an arm's-length basis on terms not materially
different than would be obtained if the transaction had been between Litronic
and an unrelated party. Except for debts or other outstanding obligations
reflected on the Litronic Balance Sheet, there are no debts or other obligations
of Litronic to, or to Litronic from, any stockholder or any executive officer or
director, or any Affiliate of a stockholder, executive officer or director of
Litronic. As used herein, "Affiliate" of a person means any member of the
immediate family of such person or any entity in which such person or any such
family member is an executive officer or owner of more than five percent of
beneficial interest in the outstanding equity securities.
(b) The Litronic Disclosure Schedule sets forth all information that would
be required to be provided under Item 404 of Regulation S-K of the Commission
under the Securities Act if a registration statement on Form S-1 were filed by
Litronic with the Commission on the date hereof.
3.13 Material Contracts. The Litronic Disclosure Schedule lists all
------------------
material leases, contracts, instruments, agreements or commitments (whether
written or oral) relating to the conduct of the business of Litronic (the
"Material Litronic Contracts"). Litronic has delivered to Pulsar true and
correct copies of each written Material Litronic Contract and a written
description, accurate in all material respects, of each oral arrangement so
listed. Without limiting the generality of the
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foregoing, the aforesaid list includes all material contracts, agreements and
instruments of the following types to which Litronic is a party:
(a) labor union contracts, together with a list of all labor unions
representing or, to Litronic's knowledge, attempting to represent employees of
Litronic;
(b) (i) all employee benefit plans (as defined in Section 3(3) of ERISA and
subject to ERISA), maintained, administered or contributed by Litronic or any of
its ERISA affiliates, (ii) all supplemental retirement, severance, sabbatical,
medical, dental, vision care, disability, employee relocation, cafeteria benefit
(Section 125 of the Code) or dependent care (Section 129 of the Code), life
insurance or accident insurance, bonus, pension, profit sharing, savings,
deferred compensation, or incentive plans, programs, policies, commitments,
practices, or arrangements maintained, administered or contributed by Litronic
or any of its ERISA affiliates which are not employee benefit plans as otherwise
covered under clause (i) above, (iii) any stock option, stock purchase, phantom
stock, stock appreciation rights or similar stock-oriented compensation programs
maintained, administered or contributed by Litronic or any of its ERISA
affiliates, (iv) other fringe or employee benefit programs or arrangements
maintained, administered or contributed by Litronic or any of its ERISA
affiliates that apply to senior management of Litronic and that do not generally
apply to all employees which are not employee benefit plans otherwise covered
under clause (i) above, (v) any current or former employment or executive
compensation or severance agreements, written or otherwise, as to which
unsatisfied obligations of Litronic or any of its ERISA affiliates remain for
the benefit of or relating to any present or former employee, consultant or
director of Litronic or any of its ERISA affiliates which are not employee
benefit plans otherwise covered under clause (i) above, and (vi) all
arrangements which would otherwise be described in clauses (i) through (v) above
except for the fact that they are maintained, administered or contributed to by
Litronic or any of its ERISA affiliates primarily for non-U.S. citizens or non-
U.S. residents, together with a list of all pensioned employees of Litronic or
any of its ERISA affiliates or obligations to provide any pensions hereafter
other than pursuant to the plans, programs, policies, commitments, practices or
arrangements hereinbefore in this item described (all of items described in this
Section 3.13 being collectively referred to as the "Litronic Plans" or
individually as a "Litronic Plan");
(c) employment contracts or agreements, consulting agreements, agreements
providing for termination or severance benefits, non-competition agreements,
non-disclosure agreements, contracts for professional personal services,
contracts with other persons engaged in sales or distributing activities, and
advertising contracts;
(d) written or oral agreements, understandings and arrangements of any kind
with any officer, director, employee, shareholder or agent of Litronic relating
to present or future compensation or other benefits available to such person or
otherwise, together with a list of the names and current annual salary rates of
all present officers and employees of Litronic whose current salary rate is
$50,000 or more and any bonuses paid or payable to each such person for the 1997
fiscal year;
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(e) indentures, loan agreements, notes, security agreements, mortgages,
conditional sales contracts, leases of real or personal property, contracts for
the purchase or sale of real or personal property, and agreements for financing;
(f) property, casualty, crime, directors and officers, and other forms of
insurance;
(g) all bank accounts and safety deposit boxes identifying all authorized
signatories, together with a list of all effective powers of attorney granted by
Litronic to anyone;
(h) agreements, contracts or other arrangements to which Litronic is a
guarantor, surety or endorser;
(i) contracts, agreements, commitments, arrangements or understandings
providing for the purchase or sale of all or substantially all of Litronic's
requisites of a particular product from a single supplier or to a single
customer;
(j) contracts, agreements, commitments, arrangements or understandings
which limit the freedom of Litronic from competing in any line of business or
with any person or entity;
(k) license agreements (as licensor or licensee);
(l) leases of real and personal property with a term of more than one year
(regardless of whether Litronic is lessor or lessee); and
(m) contracts, agreements, instruments, arrangements or understandings
which have not been included in items (a) through (l) above involving payment by
or to Litronic of more than $25,000 or not terminable without penalty or
otherwise materially affecting the assets, financial condition, properties or
business of Litronic.
All of the Material Litronic Contracts are in full force and effect. Except to
the extent that a Material Adverse Effect on Litronic's financial condition,
assets, liabilities, earnings, business or prospects would not result if the
following were not true: (A) Litronic and each other party to each of the
Material Litronic Contracts have performed all the obligations required to be
performed by them to date, have received no notice of default and are not in
default (with due notice or lapse of time or both) under any of the Material
Litronic Contracts, except as otherwise set forth in the Litronic Disclosure
Schedule; (B) Litronic has no knowledge of any breach or anticipated breach by
any other party to any of the Material Litronic Contracts; (C) there exists no
actual or, to the knowledge of Litronic, threatened termination, cancellation or
limitation of the business relationship of Litronic with any party to any
Material Litronic Contract; and (D) consummation of the transactions
contemplated hereby and performance by Litronic of its obligations hereunder
shall not require the consent or permission of any party to any Material
Litronic Contract or permit any party to terminate, suspend or alter the terms
of any Material Litronic Contract, except as set forth in the Litronic
Disclosure Schedule.
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3.14 Litigation. There are no actions, suits, causes of action, claims,
----------
litigation, arbitration, administrative hearings or other form of proceedings or
disputes of any kind pending or, to the best knowledge of Litronic and the
Litronic Stockholders, threatened against Litronic or its officers or directors
(in their capacities as such) or involving, affecting or relating to its
capacity to complete the transactions contemplated herein, Litronic in any
court, at law or in equity, or before any arbitration board or any governmental
department, commission, board, bureau, agency or instrumentality; nor has
Litronic been, nor is it, subject to any orders, stipulations, awards, fines,
judgments, decrees or injunctions the effect of which in the aggregate would
have a Material Adverse Effect on the business or financial position of Litronic
including, but not limited to, limitation, restriction, regulation, enjoinment
or prohibition of any business practice of Litronic in any area or the
acquisition by Litronic of any properties, assets or businesses. Litronic does
not know or have grounds to know of any basis for any such action, suits, or
other form of proceeding or disputes or of any governmental investigation
relating to Litronic or its business.
3.15 Taxes.
-----
(a) (i) All Tax Returns of, relating to or which include Litronic which are
required to have been filed have been filed on a timely basis with the
appropriate authorities and all such Tax Returns are true, correct and complete
in all respects; (ii) all Taxes required to have been paid by Litronic
(including amounts collected or withheld from third parties required to have
been paid over to the appropriate authorities) have been paid in full on a
timely basis to the appropriate authorities or contested in good faith or
adequate provision made for payment; and (iii) all Taxes or other amounts
required to have been collected or withheld by Litronic have been timely and
properly collected or withheld. Litronic has duly withheld all payroll taxes,
FICA and other federal, state and local taxes and other items requiring to be
withheld by it from employer wages, and has duly deposited the same in trust for
or paid over to the proper taxing authorities. Litronic has not executed or
filed with any taxing authority any agreement extending the periods for the
assessment or collection of any Taxes, and is not a party to any pending or, to
the best knowledge of Litronic and the Litronic Stockholders, threatened, action
or proceeding by any governmental authority for the assessment and collection of
Taxes. Within the past three years, the United States federal income tax returns
of Litronic have not been audited by the Internal Revenue Service (the "IRS"),
nor has any state's taxing authority audited any merchandise, personal property,
sales or use tax returns of Litronic.
(b) (i) No taxing authority has asserted in writing to Litronic any
adjustment, deficiency, or assessment that could result in additional Tax for
which Litronic is or may be liable; (ii) there is no pending audit, examination,
investigation, dispute, proceeding or claim for which Litronic has received
notice relating to any Tax for which Litronic is or may be liable; (iii) no
statute of limitations with respect to any Tax for which Litronic is or may be
liable has been waived or extended; (iv) the due date of any Tax Returns that
Litronic is required to file has not been extended; and (v) Litronic is not a
party to any Tax sharing or Tax allocation agreement, arrangement or
understanding, except as otherwise set forth in the Litronic Disclosure
Schedule.
(c) There are no liens on any of the assets of Litronic which arose in
connection with any failure or asserted failure to pay any Tax, other than liens
for current Taxes not yet due and payable.
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(d) Litronic is not a party to any compensation contract, agreement, plan
or arrangement that, individually or collectively, could give rise to any
payment that would not be deductible by reason of Section 162, 280G or 404 of
the Code.
(e) Litronic has not been a member of an affiliated group filing a
consolidated federal income Tax Return, and Litronic is not liable for the Taxes
of any person under Treasury Regulation 1.1502-6 (or any similar provision of
state, local, or foreign law) as transferee or successor, by contract or
otherwise.
(f) Copies of (i) correspondence or other documents relating to any Tax
examinations, (ii) extensions of statutory limitations, (iii) the federal, state
and local income Tax Returns and franchise Tax Returns of Litronic, and (iv)
correspondence between Litronic and all taxing authorities for its last three
(3) taxable years previously have been furnished to Pulsar and such Tax Returns
are true, correct and complete.
(g) The provision for Taxes, if any, shown on the Litronic Balance Sheet is
adequate to cover the aggregate liability of Litronic arising out of facts or
circumstances occurring, incurred in respect of or measured by income of
Litronic, arising out of transactions on or prior to the Balance Sheet Date for
all Taxes.
(h) Litronic has filed federal and state, and if applicable, local Tax
Returns for each period ending on or prior to the Reorganization Closing.
(i) Neither Litronic nor any Litronic Stockholder is a foreign person, as
such term is referred to in Section 1445(f)(3) of the Code.
(j) None of the assets of Litronic constitutes property that Litronic, will
be required to treat as being owned by another person pursuant to the "Safe
Harbor Lease" provisions of Section 168(f)(8) of the Code prior to repeal by the
Tax Equity and Fiscal Responsibility Act of 1982.
(k) Litronic has not at any time consented, and the Litronic Stockholders
will not permit Litronic to elect, to have the provisions of Section 341(f)(2)
of the Code apply to it.
(l) Litronic is not a personal service corporation subject to the
provisions of Section 269A of the Code.
(m) For purposes of this Agreement:
"Tax Returns" means all returns, amended returns, declarations,
reports, estimates, information returns and statements regarding Taxes which are
or were filed or required to be filed under applicable law, whether on a
consolidated, combined, unitary or individual basis.
"Taxes" means any federal, state, county, local, foreign or other tax,
fee, levy, assessment or other governmental charge, including without limitation
any income, franchise, gross receipts, property, sales, use, hotel, bed,
services, value added, withholding, social security, import
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duties, estimated, accumulated earnings, alternative or add-on minimum,
transfer, license, privilege, payroll, profits, capital stock, employment,
unemployment, excise, severance, stamp, occupancy, customs or occupation tax,
and any interest, additions to tax fines, penalties in connection, and other
related liabilities therewith.
3.16 Absence of Material Events. Except as provided in this Section 3.16
--------------------------
and in the Litronic Disclosure Schedule, since the Balance Sheet Date the
business of Litronic has been conducted in the ordinary course of business
(including borrowing money for working capital purposes only) and there has not
been (a) any material adverse change in the business, affairs, operations,
earnings or financial condition of Litronic nor, to the best of Litronic's
knowledge, are any such changes threatened, anticipated or contemplated; (b) any
actual or, to Litronic's knowledge, threatened, anticipated or contemplated
damage, destruction, loss, conversion, termination, cancellation, default or
taking by eminent domain or other action by governmental authority which has
materially affected or may hereafter materially affect the properties, assets,
business affairs, cash flow, results of operation or prospects of Litronic; (c)
any material and adverse pending or, to Litronic's knowledge, threatened,
anticipated or contemplated dispute of any kind with any material customer,
supplier, source of financing, employee, landlord, subtenant or licensee of
Litronic, or any pending or, to Litronic's knowledge, threatened, anticipated or
contemplated occurrence or situation of any kind, nature or description which is
reasonably likely to result in any reduction in the amount, or any change in the
terms or conditions, of business with any material customer, supplier or source
of financing; (d) any pending, or to Litronic's knowledge, threatened,
anticipated or contemplated occurrence or situation of any kind, nature or
description materially and adversely affecting the properties, assets, business,
affairs or prospects of Litronic; (e) any waivers by Litronic of any right, or
cancellation of any debt or claim, of substantial value; (f) any declarations,
set asides or payments of any dividend or other distributions or payments in
respect of Litronic capital stock; or (g) any changes in the accounting
principles or methods which are utilized by Litronic.
3.17 Insurance. The Litronic Disclosure Schedule contains a complete and
---------
correct list and summary description of all contracts and policies of insurance
relating to any of Litronic's assets or business, to which Litronic is an
insured party, beneficiary or loss payable payee and a complete list of
insurance relating to the Litronic Stockholders to which Litronic is a
beneficiary or loss payable payee. Such policies are in full force and effect,
all premiums due and payable with respect thereto have been paid, and no notice
of cancellation or termination has been received by Litronic with respect to any
such policy.
3.18 Banks; Power of Attorney. The Litronic Disclosure Schedule contains a
------------------------
complete and correct list showing (a) the names of each bank in which Litronic
has an account or safe deposit box and the names of all persons authorized to
draw thereon or who have access thereto, and (b) the names of all persons, if
any, holding powers of attorney from Litronic.
3.19 Absence of Improper Payments. Since January 1, 1994, Litronic: (a) has
----------------------------
not made any contributions, payments or gifts of its property to or for the
private use of any governmental official, employee or agent where either the
payment or the purpose of such contribution, payments or gifts is illegal under
the laws of the United States, any state thereof or any other jurisdiction
(foreign or domestic); (b) has not established or maintained any unrecorded fund
or asset for any
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purpose, or has made any false or artificial entries on its books or records for
any reason; (c) has not made any payments to any person where Litronic intended
or understood that any part of such payment was to be used for any other purpose
other than that described in the documents supporting the payment; or (d) has
not made any contribution, or has reimbursed any political gift or contribution
made by any other person, to candidates for public office, whether federal,
state or local, where such contribution would be in violation of applicable law.
3.20 ERISA.
-----
(a) The Litronic Disclosure Schedule contains a complete list of all
Litronic Plans.
(b) None of the Litronic Plans is a "multiemployer plan" as such term is
defined in Section 3(37) of ERISA, a "multiple employer plan" as such term is
defined in Section 413 of the Code, or a "defined benefit pension plan" as such
term is defined in Section 3(35) of ERISA. With respect to each Litronic Plan,
Litronic has delivered to Pulsar true and complete copies of the following for
each Litronic Plan, if applicable: (i) the plan document and any amendments
thereto; (ii) the summary plan description and any summary material
modifications; (iii) the trust agreement, insurance policy or other instrument
relating to the funding of Litronic Plans; (iv) the annual reports (Form 5500
series) and accompanying Schedules for Litronic Plans filed with the IRS or
Department of Labor for the last three years; (v) the audited financial
statements for Litronic Plans for the last three years; and (vi) the most recent
determination letters issued by the IRS with respect to Litronic Plans that are
intended to qualify under Section 401(a) of the Code; and (vii) any governmental
rulings, notices, determination, and opinions (and pending requests therefor).
The foregoing documents accurately reflect all of the terms of such Litronic
Plans including, without limitation, any agreement or provision which would
limit the ability of any entity to make prospective amendments to or to
terminate any of Litronic Plans.
(c) Each Litronic Plan which is an "employee pension benefit plan" as
defined in Section 3(2) of ERISA ("Litronic Pension Plan") has been determined
by the IRS to be qualified under Section 401(a) of the Code, and each such plans
remains so qualified, and to Litronic's knowledge after due inquiry, no facts or
circumstances exist which could result in the revocation of such qualification.
(d) Each Litronic Plan which is an "employee welfare benefit plan" as
defined in Section 3(1) of ERISA ("Litronic Welfare Plan") which is intended to
meet the requirements for tax-favored treatment under the Code to Litronic's
knowledge after due inquiry meets such requirements.
(e) Without limiting the generality of this Section 3.20, each Litronic
Plan has been administered in accordance with its terms and the Code, and each
Litronic Pension Plan and Litronic Welfare Plan has been administered in all
material respects in accordance with ERISA. No facts or circumstances exist
which might give rise to any liability of Litronic or ERISA affiliate, any of
the Litronic Stockholders or Pulsar. Litronic has paid all amounts required
under applicable law, any Litronic Pension Plan and any Litronic Welfare Plan to
be paid as a contribution to each Litronic Pension Plan and Litronic Welfare
Plan through the date hereof. Litronic has set aside adequate
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reserves to meet contributions which are not yet due under any Litronic Pension
Plan and Litronic Welfare Plan.
(f) Neither Litronic nor any other "disqualified person" or "party in
interest" (as such terms are defined in Section 4975 of the Code and Section
3(14) or ERISA, respectively) has engaged in any action or taken any other
action with respect to any Litronic Plan which would subject Litronic or any
ERISA affiliate, Pulsar or the Litronic Stockholders to (i) any tax, penalty or
liability for a prohibited transaction under ERISA or the Code, (ii) any tax
under Code Sections 4971, 4972, 4976, 4977, or 4979, or (iii) a penalty under
ERISA Section 502(c) or 502(l).
(g) Litronic, to the extent it is a fiduciary with respect to any Litronic
Pension Plan or Litronic Welfare Plan, has not breached any of its
responsibilities or obligations imposed upon fiduciaries under ERISA or the Code
which could result in any claim being made under, by or on behalf of any
Litronic Pension Plan or Litronic Welfare Plan or any participant or beneficiary
thereof other then benefit claims in the ordinary course, in any such event
which could give rise to liability to Litronic or any of its ERISA affiliates.
(h) Each Litronic Welfare Plan which is a group health plan within the
meaning of Code Section 5000(b)(1) complies with and in each and every case has
complied with the applicable requirements of Code Section 4980B and Part 6 of
Title I of ERISA.
(i) Except as set forth in the Litronic Disclosure Schedule, no Litronic
Plan, other than a Litronic Pension Plan, provides benefits, including death,
life, health or medical benefits (whether or not insured), with respect to
current or former employees of Litronic and any of its subsidiaries beyond their
retirement or other termination of service with Litronic, any of its
subsidiaries or ERISA affiliates, other than coverage mandated by applicable
law.
(j) For purposes of this Section 3.20 and Section 5.21, "ERISA affiliate"
means any entity which is considered one employer with Litronic or Pulsar,
respectively, under Section 4001 of ERISA or Section 414 of the Code.
3.21 Labor Matters. A true and complete list of all of Litronic's officers,
-------------
employees (the "Litronic Employees") and consultants (the "Litronic
Consultants") and their respective salaries, wages, other compensation, dates of
employment, date and amount of last salary or compensation increase, and
positions has been provided to Pulsar by Litronic. There are no material
disputes, employee grievances, or disciplinary actions pending or, to the
knowledge of Litronic, threatened by or between Litronic and any of the Litronic
Employees or Litronic Consultants. With respect to the Litronic Employees and
Litronic Consultants, Litronic has complied in all material respects with all
provisions of all laws relating to the employment of labor and has no liability
for any arrears of wages or taxes or penalties for failure to comply with any
such law or for any severance or termination payments of any type. None of the
Litronic Consultants are or were (while classified by Litronic as Litronic
Consultants) employees of Litronic for any purpose whatsoever. No employees of
Litronic are or ever have been represented by a bargaining representative with
respect to Litronic, and no election or proceedings relating to the labor
relations of Litronic is pending or, to the best of Litronic's knowledge,
threatened. Litronic has not had any material union activity or had any
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material labor disruption or material dispute with its employees of any kind,
nature or description at any time heretofore. All personnel policies and manuals
of Litronic are listed on the Litronic Disclosure Schedule and true and complete
copies thereof have been provided to Pulsar. No Litronic Employee or Litronic
Consultant shall have the right to receive from Pulsar a severance payment or
other payment in the nature thereof if his or her employment is terminated by
Pulsar following the Acquisition Closing, whether such right arises as a matter
of contract, past policy or understanding, by operation of law, or otherwise.
3.22 Permits: Compliance with Law. Litronic possesses all franchises,
----------------------------
permits, licenses, certificates, approvals and other authorizations ("Permits")
necessary to own or lease and operate its properties and to conduct its business
as now conducted, except for incidental Permits that would be readily obtainable
without undue burden in the event of any lapse, termination, cancellation, or
forfeiture or that if not obtained would not have a Material Adverse Effect on
Litronic's business. All such material Permits are in full force and effect,
and, to the knowledge of Litronic, no suspension or cancellation of any of them
is threatened, and no material Permits will be materially and adversely affected
by the consummation of the Reorganization or Acquisition. Litronic has not
failed nor is it failing to comply with any applicable law, rule, regulation,
order, zoning or other ordinance, statute, injunction, decree or any other
requirement of any court or governmental or administrative body or agency, where
such failure would have a Material Adverse Effect on Litronic's business, and
there are no proceedings pending or, to Litronic's knowledge, threatened, nor
has Litronic received any notice, regarding any such failure.
3.23 Environmental Matters. Litronic is, and to Litronic's knowledge all
---------------------
real property owned or otherwise occupied by Litronic is and has been at all
times when so owned or occupied, in material compliance with all applicable
existing federal, state and local laws and regulations relating to protection of
human health or the environment or imposing liability or standards of conduct
concerning any Hazardous Material (as hereinafter defined) ("Environmental
Laws"), except, in each case, where such noncompliance, singly or in the
aggregate, would not have a Material Adverse Effect on the condition, financial
or otherwise, or the earnings, business affairs or business prospects of
Litronic. No Hazardous Materials are stored, utilized or otherwise present on
any property owned or otherwise occupied by Litronic, excepting only (x)
cleaning supplies and similar materials customarily used by businesses in
Litronic's industry in quantities consistent with such use, and (y) petroleum
products that are used for heating (including water heating) in facilities
located on such property, none of which are stored in underground storage tanks,
or that are present in vehicles located on such property. Litronic has not
released, and has not affirmatively consented to any release of, Hazardous
Materials on, under or affecting any real property during the period of
Litronic's ownership, occupation or operation of such property (including its
participation in or exercise of any degree of control over the management of any
business located on such property). The term "Hazardous Material" means (a) any
"hazardous substance" as defined in the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended through the date hereof, (b)
any "hazardous waste" as defined by the Resource Conservation and Recovery Act,
as amended through the date hereof, (c) any petroleum or petroleum product, (d)
any polychlorinated biphenyl and (e) any pollutant or contaminant or hazardous,
dangerous or toxic chemical, material, waste or substance regulated under or
within the meaning of any other Environmental Law as amended through the date
hereof. For purposes of this Section 3.23, real
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property owned by third parties but "occupied" by Litronic shall mean only that
portion of such property as is either leased by Litronic or in fact is otherwise
physically occupied or utilized by Litronic. To the knowledge of Litronic, there
is no alleged or potential liability (including, without limitation, alleged or
potential liability for investigatory costs, cleanup costs, governmental
response costs, natural resources damages, property damages, personal injuries
or penalties) of Litronic arising out of, based on or resulting from any act or
event that constitutes a violation or alleged violation of any Environmental
Law, which alleged or potential liability (i) arises out of or relates to acts
or events occurring during Litronic's possession or occupation of the applicable
property, and (ii) singly or in the aggregate, would have a Material Adverse
Effect on the condition, financial or otherwise, or the earnings, business
affairs or business prospects of Litronic.
3.24 Corporate Records. The corporate record books of Litronic are in all
-----------------
material respects in good order, complete, accurate, up to date, with all
necessary signatures, and set forth all meetings and actions taken by the
shareholders and directors, and all votes of the shareholders or directors set
forth in certificates furnished to anyone at any time heretofore conform in all
material respects to the votes contained in the record book of Litronic.
3.25 Condition of Assets. All premises, fixtures and equipment owned or
-------------------
used by Litronic and material to its business have been properly maintained and
are in good operating order and repair, free from known defects in construction
or design, sound and properly functioning (normal wear and tear expected),
usable in the ordinary course of business and not obsolete, and (to Litronic's
knowledge in the case of leased property) in material compliance with all
applicable zoning, building and fire codes and all other applicable laws, rules,
regulations and requirements of governmental authorities and the fire insurance
rating association having jurisdiction.
3.26 Accounts Receivable. All of the accounts receivable of Litronic shown
-------------------
or reflected on the Litronic Balance Sheet, less the reserve for doubtful
accounts and notes in the amount shown on the Litronic Balance Sheet, are valid
and enforceable claims and subject to no setoff or counterclaim. All of the
accounts receivable of Litronic shown or reflected on the Litronic Balance Sheet
and as at December 31, 1998 (as reflected on Litronic's balance sheet as of such
date, when and as delivered to Pulsar) will be collected in full within 60 days
thereafter except to the extent of the reserve for doubtful accounts shown on
the Litronic's balance sheet or posted on the books of Litronic of such date.
The reserve for doubtful accounts as at December 31, 1998 will not be in excess
of said reserve as shown on the Litronic Balance Sheet. Litronic has no accounts
or loans receivable from any of its directors, officers or employees.
3.27 Charter Documents. Litronic has heretofore delivered to Pulsar copies
-----------------
of its Articles of Incorporation, as amended to date, certified by the
appropriate governmental authority, and copies of its Bylaws, as amended to
date, and a list of the officers and directors of Litronic in office, all as
certified by its Secretary.
3.28 Disclosure of all Material Matters.
----------------------------------
(a) No statement of a material fact set forth in this Agreement (including
without limitation all information in the Financial Statements, the Litronic
Disclosure Schedule and the other
23
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Schedules, Exhibits and attachments hereto, taken as a whole) with respect to
Litronic or the Litronic Stockholders is false or misleading in any material
respect, nor does this Agreement (including, without limitation all information
in the Financial Statements, the Litronic Disclosure Schedule and the other
Schedules, Exhibits, and attachments hereto, taken as a whole) omit to state a
material fact necessary in order to make the statements made or information
disclosed, in the light of the circumstances under which they were made or
disclosed, not misleading.
(b) Litronic will promptly provide all information relating to its business
or operations necessary for inclusion in the Registration Statement to satisfy
all requirements of applicable state and Federal securities laws. Litronic shall
be solely responsible for any statement, information or omission in the
Registration Statement relating to Litronic or its Affiliates based upon written
information furnished by it.
3.29 Customers and Suppliers. The Litronic Disclosure Schedule sets forth a
-----------------------
complete and correct list, as of December 31, 1998, of (a) the 20 largest
customers of the business and (b) the 20 largest suppliers of the business. To
Litronic's knowledge, there are no (i) threatened cancellations by the aforesaid
customers or suppliers with respect to Litronic's business, (ii) outstanding
disputes by such customers or suppliers with Litronic and its business, or (iii)
any material or adverse changes in the business relationship between Litronic
and any such customer or supplier.
3.30 Product Warranty. Substantially all of the products manufactured,
----------------
sold, leased and delivered by Litronic have conformed in all material respects
with all applicable contractual commitments and all express and implied
warranties and, to Litronic's knowledge, Litronic has no material liability
(whether known or unknown, asserted or unasserted, absolute or contingent,
accrued or unaccrued, liquidated or unliquidated, and whether due or to become
due) for repair or replacement thereof or other damages in connection therewith.
Substantially all of the products manufactured, sold, leased and delivered by
Litronic are subject to standard terms and conditions of sale or lease. Litronic
has delivered to Pulsar copies of the standard terms and conditions of sale or
lease for Litronic (containing applicable guaranty, warranty and indemnity
provisions). The Litronic Disclosure Schedule sets forth the aggregate expenses
incurred by Litronic in fulfilling its obligations under its guaranty, warranty
and indemnity provisions during each of the fiscal years and interim period
covered by Litronic's Financial Statements and Litronic knows of no reason why
such expenses should significantly increase as a percentage of sales in the
future.
3.31 Year 2000 Compliance. Litronic's information technology is Year 2000
--------------------
Compliant. "Year 2000 Compliant" means, with respect to a company's information
technology, the information technology is designed to be used prior to, during
and after the calendar year 2000 A.D., and the information technology used
during each such time period will accurately receive, provide and process
date/time data (including calculating, comparing and sequencing) from, into and
between the 20/th/ and 21/st/ centuries, including the years 1999 and 2000, and
leap-year calculations and will not malfunction, cease to function, or provide
invalid or incorrect results as a result of date/time data, to the extent that
other information technology, used in combination with Litronic's information
technology, properly exchanges date/time data with it. For purposes of this
Section 3.31, Litronic's information technology shall include computer software,
computer firmware, computer hardware
24
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(whether general or specific purpose), equipment including embedded programmable
microchips or controllers and other similar or related items of automated,
computerized, or software systems that are used or relied on by Litronic in the
conduct of its business.
3.32 Export Control and Related Matters.
----------------------------------
(a) Litronic is in compliance in all material respects with all United
States and foreign Export Control Laws. "Export Control Laws" means all federal,
state, local and foreign laws (including common law), statutes, codes,
ordinances, rules, regulations, executive orders or other requirements, now or
hereafter in effect, and in each case as amended or supplemented from time to
time, and any judicial or administrative interpretations thereof, relating to
the export or reexport of commodities and technologies. Export Control Laws
includes the Export Administration Act of 1979 (24 U.S.C. Sections 2401 - 2420);
the International Emergency Economic Powers Act (50 U.S.C. Sections 1701 -
1706); the Trading with the Enemy Act (50 U.S.C. Sections 1 et seq.); the Arms
Export Control Act (22 U.S.C. Sections 2778, 2779); and the International
Boycott Provisions of Section 999 of the Code.
(b) Litronic has all necessary authority under the Export Control Laws to
conduct its operations as currently conducted, including all necessary (i)
Permits for any pending export transactions, (ii) Permits for the disclosure of
information to foreign Persons and (iii) registrations with Governmental
Entities with authority to implement the Export Control Laws.
(c) Litronic has not participated directly or indirectly in any boycotts or
other similar practices in violation of the regulations of the United States
Department of Commerce or Section 999 of the Code.
3.33 Government Contracts.
--------------------
(a) For purposes of this Agreement, "Government Contracts" means, with
respect to any Person, any contract (including purchase orders, blanket purchase
orders and agreements and delivery orders) between such Person and the United
States Government or any department, agency or instrumentality thereof or any
state or local governmental agency or authority (the "Government"), and any
subcontract at any tier held by such Person under a prime government contract.
Except as set forth in the Litronic Disclosure Schedule, with respect to the
Government Contracts to which Litronic is a party: (i) such Government Contracts
constitute valid and binding obligations of Litronic and, to the knowledge of
Litronic, the other party or parties thereto, enforceable in accordance with
their terms, except as enforcement may be limited by Equitable Principles; (ii)
Litronic is in compliance in all material respects with the terms of all
Government Contracts to which it is a party and all laws, regulations and
contract provisions applicable to the obtaining, formation, pricing,
performance, billing, administration and other aspects of its Government
Contracts, including compliance in all material respects with the Truth in
Negotiations Act (as amended to date) and with all defective pricing, price
reduction or similar clauses contained or incorporated in its Government
Contracts, and Litronic is in compliance in all material respects with the False
Claims Act (as amended to date) or any similar applicable statutes or
regulations concerning false claims, false statements, defective pricing,
misrepresentation or procurement
25
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integrity concerning any Government Contract, General Services Administration
Multiple Award Schedule or Supply Schedule, open market, commercial or other
sale order involving or pursuant to its Government Contracts, except to the
extent that noncompliance or violation does not and will not have a Material
Adverse Effect; (iii) neither Litronic nor any other party has terminated,
canceled or waived any material term or condition of any Government Contract,
except to the extent that such termination, cancellation or waiver does not and
will not have a Material Adverse Effect; and (iv) the cost accounting,
estimating, property and procurement systems relating to Litronic's Government
Contracts are in compliance in all material respects with applicable laws,
regulations and contract provisions, including applicable cost principles and
applicable cost accounting standards.
(b) (i) Each billed account receivable in excess of $25,000 (determined
individually) represents a bona fide claim against the Government for sales,
services performed or other charges arising on or prior to the date hereof, and
all the products delivered and services performed which gave rise to such
accounts were delivered or performed in accordance with applicable Government
Contracts; and (ii) all unbilled or unreserved amounts included in accounts
receivable in excess of $25,000 (determined individually) will, in the ordinary
course of business as currently conducted and consistent with past practices,
mature into and become billed accounts receivable in the same or greater amount.
(c) None of Litronic's Government Contracts has a currently incurred or
currently projected cost overrun in an amount exceeding $25,000.
(d) Except for liens securing obligations under Litronic's existing term
loans and lines of credit with Fidelity National Bank and Bank of Yorba Linda
and those liens made in accordance with the Assignment of Claims Act (as
amended), 31 U.S.C. (S) 3727, and the Assignment of Contracts Act (as amended to
date), 31 U.S.C. (S) 15, Litronic has not assigned or otherwise conveyed or
transferred, or agreed to assign, to any Person, any Government Contracts to
which it is a party, or any account receivable relating thereto, whether as a
security interest or otherwise.
(e) Litronic has not received any notice or other communication in any form
from the Government regarding its actual or threatened disqualification,
suspension, or debarment from contracting with the Government including without
limitation any show cause notice or cure notices.
(f) Except as set forth on the Litronic Disclosure Schedule there is no:
(i) pending or (to the knowledge of the Litronic Stockholders or Litronic)
threatened investigation relating to any Government Contract to which Litronic
is a party; (ii) existing or (to the knowledge of the Litronic Stockholders or
Litronic) threatened claim, cost disallowance, pricing adjustment, or adverse
audit finding relating to any Government Contract to which Litronic is a party,
involving an amount exceeding $25,000; or (iii) termination for default or cure
notice or show cause notice proposed or currently in effect, relating to any
Government Contract to which Litronic is a party, involving an amount exceeding
$25,000.
3.34 Cumulative Exceptions. The exceptions and qualifications to the
---------------------
representations and warranties of Litronic in this Article 3 which are based
upon such exceptions and qualifications not
26
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being "material" or being "in all material respects," or not having a Material
Adverse Effect will not, individually or in the aggregate, have a Material
Adverse Effect.
4. REPRESENTATIONS AND WARRANTIES OF THE
LITRONIC STOCKHOLDERS
Each of the Litronic Stockholders, severally and not jointly, represents
and warrants to Parent, Pulsar and the Pulsar Stockholders that, except as
expressly provided in the Litronic Disclosure Schedule by specific reference to
a Section of this Article 4:
4.1 Title to the Litronic Shares. All of the issued and outstanding
----------------------------
Litronic Shares purported to be owned by such Litronic Stockholder as set forth
on the Litronic Disclosure Schedule pursuant to Section 3.2 are owned by such
Litronic Stockholder free and clear of any Liens whatsoever, and the Litronic
Shares are not bound by or subject to any proxy, agreement, voting trust or
other restriction regarding the voting thereof.
4.2 Authority. Such Litronic Stockholder has full power, authority and
---------
capacity to execute and deliver this Agreement and the Reorganization Agreement
and to consummate those transactions contemplated hereby which pertain to it,
and no other action is necessary by such Litronic Stockholder to consummate such
transactions. This Agreement and the Reorganization Agreement have been duly and
validly executed and delivered by such Litronic Stockholder and constitute
legal, valid and binding obligations of such Litronic Stockholder enforceable
against it in accordance with their terms, except as enforcement may be limited
by Equitable Principles.
4.3 No Conflicts. The execution, delivery and performance of this
------------
Agreement and the Reorganization Agreement by such Litronic Stockholder does not
and will not (i) conflict with, result in a breach of, constitute a default (or
an event that might, with the passage of time or the giving of notice or both,
constitute a default) under, give rise to any right to terminate, cancel or
accelerate, give rise to any loss of benefit under, or result in the creation of
any Lien under, any of the material terms, conditions, or provisions of any
indenture, mortgage, loan, or credit agreement or any other agreement or
instrument to which such Litronic Stockholder is a party or by which it or its
assets may be bound or affected; (ii) violate or constitute a material breach of
any decision, judgment, or order of any court or arbitration board or of any
governmental department, commission, board, agency, or instrumentality, domestic
or foreign, by which such Litronic Stockholder is bound or to which it is
subject; or (iii) violate any applicable law, rule, or regulation to which such
Litronic Stockholder or any of its property is bound.
4.4 Investment Representations.
--------------------------
(a) Such Litronic Stockholder has been informed and understands that the
Parent Common Stock it will receive in the Reorganization has not been
registered under the Securities Act, and, therefore, that such shares must be
held indefinitely unless they are subsequently registered under the Securities
Act or an exemption from such registration is available. Such Litronic
Stockholder acknowledges that, except as provided in the Registration Rights
Agreement, Parent is under no obligation to register under the Securities Act
any sale of such Parent Common Stock
27
<PAGE>
by it, or to comply with any provisions which would entitle its sale to any such
exemption from registration. Such Litronic Stockholder is fully familiar with
Rule 144 promulgated under the Securities Act.
(b) Such Litronic Stockholder is acquiring Parent Common Stock in the
Reorganization for its own account with no view to any distribution thereof in
violation of the Securities Act. Such Litronic Stockholder has had the
opportunity to discuss Parent's business, management and financial affairs with
Parent's management. Such Litronic Stockholder has such knowledge and
experience in financial matters that it is capable of evaluating the merits and
risks of its investment in the Parent Common Stock. The financial condition of
such Litronic Stockholder is such that it is able to bear all economic risks of
investment in the Parent Common Stock, including the risks of holding the Parent
Common Stock for an indefinite period of time. Such Litronic Stockholder is an
"accredited investor" as such term is defined in Rule 501 promulgated under the
Securities Act.
5. REPRESENTATIONS AND WARRANTIES OF PULSAR
AND THE PULSAR STOCKHOLDERS
Pulsar and the Pulsar Stockholders jointly and severally represent and
warrant to Parent, Litronic and the Litronic Stockholders that, except as
expressly provided in the Pulsar Disclosure Schedule by specific reference to a
Section of this Article 5:
5.1 Organization and Authority. Pulsar is a corporation duly organized,
--------------------------
validly existing, and in good standing under the laws of the State of Delaware
and has all requisite corporate power and authority to (i) carry on its business
as currently conducted by it and (ii) own, lease and operate its properties.
Pulsar is duly qualified or licensed and in good standing as a foreign
corporation, and has at all times when legally required been so qualified or
licensed and in good standing, in those states listed on the Pulsar Disclosure
Schedule, which are the only jurisdictions in which a failure to be so qualified
or licensed would, in the aggregate, have a Material Adverse Effect on the
business of Pulsar or the nature of the business conducted by it. Pulsar has
full power and authority to execute and deliver this Agreement and each other
agreement and instrument to be executed and delivered by it pursuant hereto and
to consummate the transactions contemplated hereby and perform its obligations
hereunder. The execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby by Pulsar and the performance of Pulsar's
obligations hereunder have been duly and validly authorized by all corporate
actions including a unanimous vote of the Board of Directors of Pulsar and of
Pulsar's Stockholders, and no other corporate proceedings on the part of Pulsar
are necessary to authorize this Agreement or to consummate the transactions so
contemplated or to perform Pulsar's obligations hereunder. This Agreement has
been duly and validly executed and delivered by Pulsar constitutes a legal,
valid and binding obligation of Pulsar enforceable against it in accordance with
its terms, except as enforcement may be limited by Equitable Principles. True
and complete copies of the Certificate of Incorporation of Pulsar and all
amendments thereof, and of the Bylaws, as amended to date, have heretofore been
forwarded to Litronic. Pulsar's minute books contain complete and accurate
records of all meetings of Pulsar's stockholders and Board of Directors or
written consents in lieu thereof through the date of this Agreement.
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<PAGE>
5.2 Capitalization of Pulsar; No Subsidiaries. Pulsar has authorized
-----------------------------------------
capital consisting of 1,000 shares of Common Stock, no par value, of which no
shares are held in Pulsar's treasury. As of the date hereof, there are 1,000
issued and outstanding shares of Pulsar Common Stock. Immediately prior to the
Acquisition Closing, the shares of Pulsar Common Stock issued and outstanding
shall consist solely of the foregoing number plus the number of shares of Pulsar
Common Stock, if any, issued between the date hereof and the Acquisition Closing
upon the exercise or conversion of instruments (in each case solely if existing
on the date hereof and disclosed on the Pulsar Disclosure Schedule), which
exercise or conversion and which issuance are in accordance with the terms of
such instruments as in effect on the date hereof. All of the Pulsar Shares are
duly authorized, validly issued, fully paid and non-assessable and are owned of
record and beneficially by the Pulsar Stockholders in the respective amounts
listed on the Pulsar Disclosure Schedule. The Pulsar Stockholders have good and
marketable title to all of the issued and outstanding shares of Pulsar's capital
stock, free and clear of Liens and at the Acquisition Closing will own all of
Pulsar's capital stock, free and clear of any and all Liens, including but not
limited to, any claims by any present or former stockholders of Pulsar. Pulsar
has no authorized class of capital stock other than the Common Stock. Pulsar
does not own any shares of capital stock or other securities of, or any other
interest in, nor does it control, directly or indirectly, of record or
beneficially, any other corporation, association, joint venture, partnership, or
other business organization. The Pulsar Shares have been issued and sold in full
compliance with all applicable federal and state securities laws.
5.3 Name. Pulsar has not had any other name and does not conduct or
----
operate, and has not heretofore conducted or operated, its business under any
name other than its current name.
5.4 No Violation of Existing Agreements. The execution and delivery of
-----------------------------------
this Agreement, together with all documents and instruments contemplated herein,
the consummation by Pulsar of the transactions contemplated hereby and thereby,
including the IPO, the performance by Pulsar of its obligations hereunder and
thereunder and compliance with the terms, conditions and provisions hereof and
thereof by Pulsar do not (i) contravene any provisions of Pulsar's Certificate
of Incorporation or Bylaws or other constituent document of Pulsar, each as
amended to date; (ii) conflict with, result in a breach of, constitute a default
(or an event that might, with the passage of time or the giving of notice or
both, constitute a default) under, give rise to any right to terminate, cancel
or accelerate, give rise to any loss of benefit under, or result in the creation
of any lien, security interest or other encumbrance under, any of the material
terms, conditions, or provisions of any indenture, note, bond, license,
mortgage, loan or credit agreement or any other agreement or instrument to which
Pulsar is a party or by which it or its assets may be bound or affected; (iii)
violate or constitute a material breach of any decision, judgment, writ,
injunction, decree, law, statute, rule or regulation or order of any court or
arbitration board or of any governmental department, commission, board, agency,
or instrumentality, domestic or foreign, by which Pulsar is bound or to which it
is subject; (iv) violate any applicable law, rule, or regulation to which Pulsar
or any of its property is bound; or (v) interfere or otherwise adversely affect
the ability of Pulsar to carry on business after the Acquisition Closing on
substantially the same basis as is now conducted by Pulsar.
29
<PAGE>
5.5 No Consents or Approvals of Governmental Authorities. No consent or
----------------------------------------------------
approval of, or filing and expiration of a period for disapproval by, any
governmental authority is required for Pulsar to consummate the transactions
contemplated by this Agreement.
5.6 Financial Statements.
--------------------
(a) Pulsar heretofore delivered to Litronic (a) its Financial Statements
consisting of audited balance sheets at December 31, 1995, December 31, 1996 and
December 31, 1997 and the related statements of income, stockholders equity and
cash flows for the three years then ended, which have been audited by KPMG Peat
Marwick LLP, independent certified accountants, and (b) its unaudited balance
sheet at September 30, 1998, statements of income, stockholders equity and cash
flows for nine months ended September 30, 1998. The Financial Statements were
prepared in accordance with GAAP, consistently applied, are intended to be
consistent in form and substance with the requirements of Regulation S-X of the
Commission under the Securities Act, and present fairly the financial position
of Pulsar as of their respective dates, and the results of operations and cash
flows for the periods presented therein. The books and records of Pulsar are
complete and correct, have been maintained in accordance with good business
practices, and accurately reflect the basis for the financial condition and
results, subject to year end adjustments.
(b) Pulsar maintains a system of internal accounting controls sufficient to
provide reasonable assurances that (i) transactions are executed in accordance
with management's general or specific authorization; (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with GAAP and with statutory accounting principles and to maintain
accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
5.7 Guarantees. The Pulsar Disclosure Schedule contains a complete and
----------
accurate list and summary description of all contractual guarantees currently in
effect heretofore issued by the Pulsar Stockholders to any bank or other lender
in connection with any credit facilities extended by such creditors to Pulsar or
issued by the Pulsar Stockholders in connection with any other contracts or
agreements for the benefit of Pulsar (collectively, the "Pulsar Guarantees")
including the name of such creditor and the amount of the indebtedness, together
with any interest and fees currently owing and expected to be outstanding as of
the Acquisition Closing.
5.8 Absence of Undisclosed Liabilities. Except as set forth or reserved
----------------------------------
against in the Balance Sheet or where provision has been made for adequate
reserves for Taxes, Pulsar (a) did not have as of the Balance Sheet Date any
material liability or obligation of any nature, whether accrued, absolute,
contingent, or otherwise and whether due or to become due, including without
limitation liabilities that may become known or arise after the date hereof and
which relate to transactions entered into or any state of facts existing on or
before the Balance Sheet Date and which would be required under GAAP to be shown
in such balance sheet or referenced in the notes thereto, and (b) has not
incurred since the Balance Sheet Date any such liability or obligation except in
the ordinary course of business. Without limiting the foregoing, and except as
specifically reserved against in the
30
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Pulsar Balance Sheet, Pulsar has no material liability or obligation of any
nature, whether accrued, absolute, contingent, or otherwise, to the Government
for any adjustment or reimbursement of any amount previously paid to Pulsar by
such entity under any agreement relating to the provision of any goods or
services by Pulsar.
5.9 Conduct of Business Since the Balance Sheet Date. Since the Balance
------------------------------------------------
Sheet Date, Pulsar has not taken (or suffered the occurrence of) any of the
following actions or events, agreed to take any of the following actions, or
taken any action that would otherwise result in a Material Adverse Effect to
Pulsar (in each case except directly in connection with this Agreement):
(a) entered into any transaction, agreement, or commitment other than in
the ordinary course of business; or
(b) entered into any transaction, agreement, or commitment, suffered the
occurrence of any event or events, or experienced any change in financial
condition, business, results of operations, prospects or otherwise, (i) that has
interfered or is reasonably likely to interfere with the normal and usual
operations of Pulsar's business or (ii) that, singly or in the aggregate, has
resulted or is reasonably likely to result in a Material Adverse Effect on the
financial condition, assets, liabilities, earnings or business of Pulsar; or
(c) incurred any indebtedness for borrowed money, or assumed, guaranteed,
endorsed or otherwise become responsible for the obligations of any other Person
(except to endorse checks for collection for deposit in the ordinary course of
business), or made any loan or advance to any Person; or
(d) mortgaged, pledged, or otherwise encumbered, or, other than in the
ordinary course of business, sold, transferred, or otherwise disposed of, any of
the properties or assets of Pulsar, including any cancelled, released,
hypothecated or assigned indebtedness owed to Pulsar, or any claims held by
Pulsar, except for purchase money mortgages arising in the ordinary course of
business and statutory liens arising or incurred in the ordinary course of
business with respect to which the underlying obligations are not delinquent; or
(e) made any investment of a capital nature or entered into a commitment
for such investment either by purchase of stock or securities, contributions to
capital, property transfer, or otherwise, or by the purchase of any property or
assets of any other Person, except in each case in the ordinary course of
business; or
(f) declared, set aside, or paid any dividend or other distribution
(whether in cash, stock, property or any combination thereof) in respect of the
capital stock of Pulsar, or redeemed or otherwise acquired, directly or
indirectly, any shares of capital stock of Pulsar; or
(g) paid any long-term liability, otherwise than in accordance with its
terms; or
(h) paid any bonus compensation to any officer, director, shareholder or
employee of Pulsar or otherwise increased the compensation paid or payable to
any of the foregoing; or
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(i) sold, assigned, or transferred any trademarks, trade names, logos,
copyrights, formulae or other intangible assets; or
(j) contracted with or committed to any third party to (i) sell any capital
stock of Pulsar, (ii) sell any material assets of Pulsar other than in the
ordinary course of business, (iii) effect any merger, consolidation or other
reorganization of Pulsar or (iv) enter into any agreement with respect thereto;
or
(k) changed the costing system or depreciation methods of accounting for
assets in any material respect; or
(l) written up or written down the carrying value of its assets.
5.10 Title to Assets. Pulsar owns no real property. Pulsar has good and
---------------
clear record title to all properties owned by it, including, without limitation,
all property reflected in the Pulsar Balance Sheet, other than property disposed
of in the ordinary course of business subsequent to the Balance Sheet Date (none
of such dispositions being individually or collectively materially adverse),
free and clear of any Liens, except (a) as reflected in the Pulsar Financial
Statements, or as specified in the notes thereto, (b) liens for taxes not yet
due or payable or being contested in good faith by appropriate proceedings and
as to which appropriate reserves have been set aside in the Pulsar Balance Sheet
and (c) such imperfections of title and encumbrances, if any, as do not
materially detract from the value or interfere with the use of the properties
subject thereto or affected thereby, or otherwise materially impair business
operations.
5.11 Leases. A list and brief description of leases of personal property
------
involving rental payments within any 12 month period in excess of $25,000, as to
which Pulsar is a party, either as lessee or lessor, are set forth in the Pulsar
Disclosure Schedule. All such leases are valid and, to the knowledge of Pulsar,
enforceable in accordance with their respective terms except as may be limited
by Equitable Principles.
5.12 Intellectual Property.
---------------------
(a) The Pulsar Disclosure Schedule contains a correct and complete list of
all United States and foreign brand marks and brand name registrations,
copyrights, copyright registrations and copyright applications, trademark
registrations and applications for registration, patents and patent
applications, trademarks, service marks and trade names used in Pulsar's
business as presently conducted and all licenses, assignments and releases of
the intellectual property rights of others in works embodied in its products and
all applications for all inventions, discoveries, improvements, processes,
formulae, technology, know-how and other intellectual property, proprietary
rights and trade secrets relating to the business and all licenses and other
agreements to which Pulsar is a party or otherwise bound which relate to any of
the intangibles or the inventions or Pulsar's use thereof in connection with
Pulsar's business (the "Pulsar Proprietary Information"). There is (i) to
Pulsar's knowledge, no existing or threatened infringement, misuse or
misappropriation of Pulsar Proprietary Information by others and (ii) no pending
or threatened claim by Pulsar against others for infringement, misuse or
misappropriation of any Pulsar Proprietary Information. The Pulsar
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<PAGE>
Proprietary Information is sufficient to carry on the business of Pulsar as
presently conducted, and Pulsar has the right to use, free and clear of claims
or rights of others, all Pulsar Proprietary Information required for its
products or services or its business as presently conducted. Pulsar is the
exclusive owner of all right, title and interest in the Pulsar Proprietary
Information as purported to be owned by Pulsar, and the Pulsar Proprietary
Information is valid and in full force and effect. Neither the present business
activities nor its products infringe, misuse or misappropriate any patent,
trademark, trade name, service mark, trade secret, copyright or other
intellectual property right of others, and to Pulsar's knowledge no one is
claiming nor is it anticipated that anyone will claim any such infringement,
misuse or misappropriation. To the knowledge of Pulsar, the Pulsar Proprietary
Information is presently valid and protectable and is not part of the public
domain or knowledge, nor, to the knowledge of Pulsar, has any of it been used,
divulged or appropriated for the benefit of any person other than Pulsar to the
detriment of Pulsar. Pulsar has not granted to any person any license or other
right to use in any manner any of the Pulsar Proprietary Information, whether or
not requiring the payment of royalties, except as set forth in the Pulsar
Disclosure Schedule. Pulsar has no obligation still outstanding to compensate
other Person for the use of any Pulsar Proprietary Information or for the sale
of any service or product comprising or derived from Pulsar Proprietary
Information. No university, government agency (whether federal or state) or
other organization which sponsored research and development conducted by Pulsar
has any claim of right to or ownership of or other encumbrance upon the Pulsar
Proprietary Information.
(b) Pulsar has taken reasonable measures to protect and preserve the
security, confidentiality and value of the Pulsar Proprietary Information,
including its trade secrets and other confidential information. To Pulsar's
knowledge, no employee or consultant of Pulsar has used any trade secrets or
other confidential information of any other person in the course of his or her
work for Pulsar. To Pulsar's knowledge, Pulsar is not making unlawful use of any
confidential information or trade secrets belonging to any past or present
employees of Pulsar. Neither Pulsar nor, to the knowledge of Pulsar, any of
Pulsar's employees or consultants have any agreements or arrangements with
former employers of such employees or consultants relating to confidential
information or trade secrets of such employers or are bound by any consulting
agreement relating to confidential information or trade secrets of another
entity. The activities of Pulsar's employees on behalf of Pulsar do not violate
any agreements or arrangements known to Pulsar which any such employees have
with former employers or any other entity to whom such employees may have
rendered consulting services.
(c) Pulsar owns or has the right to use pursuant to lease, license,
sublicense, agreement or permission all computer hardware, software and
information systems listed on the Pulsar Disclosure Schedule and necessary for
the operation of the business of Pulsar as presently conducted (collectively,
"Pulsar Systems"). Each Pulsar System owned or used by Pulsar immediately prior
to the Acquisition Closing will be owned or available for use by Pulsar on
identical terms and conditions immediately subsequent to the Acquisition
Closing. With respect to each Pulsar System owned by a third party and used by
Pulsar pursuant to lease, license, sublicense, agreement or permission, to
Pulsar's knowledge: (a) the lease, license, sublicense, agreement or permission
covering the Pulsar System is legal, valid, binding, enforceable, and in full
force and effect; (b) the lease, license, sublicense, agreement or permission
will continue to be legal, valid, binding, enforceable, and in full force and
effect on identical terms following the Acquisition Closing; (c) no
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party to any such lease, license, sublicense, agreement or permission is in
breach or default, and no event has occurred with which notice or lapse of time
would constitute a breach or default, and permit termination, modification or
acceleration thereunder; (d) no party to any such lease, license, sublicense,
agreement or permission has repudiated any provision thereof; (e) Pulsar has not
granted any sublicense, sublease or similar right with respect to any such
lease, license, sublicense, agreement or permission; (f) Pulsar's use and
continued use of the Pulsar Systems does not and will not interfere with,
infringe upon, misappropriate or otherwise come into conflict with, any
intellectual property rights of third parties as a result of the continued
operation of Pulsar's business.
5.13 Obligations to or from Affiliates.
---------------------------------
(a) All material transactions between Pulsar and any stockholder, officer
or director of Pulsar, or any Affiliate of any stockholder, officer or director
of Pulsar, entered into on or after the Balance Sheet Date have been conducted
on an arm's-length basis on terms no different than would be obtained if the
transaction had been between Pulsar and an unrelated party. Except for debts or
other outstanding obligations reflected on the Pulsar Balance Sheet, there are
no debts or other obligations of Pulsar to, or to Pulsar from, either of the
Pulsar Stockholders or any officer or director, or any Affiliate of the Pulsar
Stockholders or any officer or director of Pulsar.
(b) The Pulsar Disclosure Schedule sets forth all information that would be
required to be provided under Item 404 of Regulation S-K of the Commission under
the Securities Act if a registration statement on Form S-1 were filed by Pulsar
with the Commission on the date hereof.
5.14 Material Contracts. The Pulsar Disclosure Schedule lists all material
------------------
leases, contracts, instruments, agreements or commitments (whether written or
oral) relating to the conduct of the business of Pulsar (the "Material Pulsar
Contracts"). Pulsar has delivered to Litronic true and correct copies of each
written Material Pulsar Contract and a written description, accurate in all
material respects, of each oral arrangement so listed. Without limiting the
generality of the foregoing, the aforesaid list includes all material contracts,
agreements and instruments of the following types to which Pulsar is a party:
(a) labor union contracts, together with a list of all labor unions
representing or, to Pulsar's knowledge, attempting to represent employees of
Pulsar;
(b) (i) all employee benefit plans (as defined in Section 3(3) of ERISA and
subject to ERISA), maintained, administered or contributed by Pulsar or any of
its ERISA affiliates, (ii) all supplemental retirement, severance, sabbatical,
medical, dental, vision care, disability, employee relocation, cafeteria benefit
(Section 125 of the Code) or dependent care (Section 129 of the Code), life
insurance or accident insurance, bonus, pension, profit sharing, savings,
deferred compensation, or incentive plans, programs, policies, commitments,
practices, or arrangements maintained, administered or contributed by Pulsar or
any of its ERISA affiliates which are not employee benefit plans as otherwise
covered under clause (i) above, (iii) any stock option, stock purchase, phantom
stock, stock appreciation rights or similar stock-oriented compensation programs
maintained, administered or contributed by Pulsar or any of its ERISA
affiliates, (iv) other fringe or employee benefit programs or arrangements
maintained, administered or contributed by Pulsar or any of its
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ERISA affiliates that apply to senior management of Pulsar and that do not
generally apply to all employees which are not employee benefit plans otherwise
covered under clause (i) above, (v) any current or former employment or
executive compensation or severance agreements, written or otherwise, as to
which unsatisfied obligations of Pulsar or any of its ERISA affiliates remain
for the benefit of or relating to any present or former employee, consultant or
director of Pulsar or any of its ERISA affiliates which are not employee benefit
plans otherwise covered under clause (i) above, and (vi) all arrangements which
would otherwise be described in clauses (i) through (v) above except for the
fact that they are maintained, administered or contributed to by Pulsar or any
of its ERISA affiliates primarily for non-U.S. citizens or non-U.S. residents,
together with a list of all pensioned employees of Pulsar or any of its ERISA
affiliates or obligations to provide any pensions hereafter other than pursuant
to the plans, programs, policies, commitments, practices or arrangements
hereinbefore in this item described (all of items described in this Section 5.14
being collectively referred to as the "Pulsar Plans" or individually as a
"Pulsar Plan");
(c) employment contracts or agreements, consulting agreements, agreements
providing for termination or severance benefits, non-competition agreements,
non-disclosure agreements, contracts for professional personal services,
contracts with other persons engaged in sales or distributing activities, and
advertising contracts;
(d) written or oral agreements, understandings and arrangements of any kind
with any officer, director, employee, shareholder or agent of Pulsar relating to
present or future compensation or other benefits available to such person or
otherwise, together with a list of the names and current annual salary rates of
all present officers and employees of Pulsar whose current salary rate is
$50,000 or more and any bonuses paid or payable to each such person for the 1997
fiscal year;
(e) indentures, loan agreements, notes, security agreements, mortgages,
conditional sales contracts, leases of real or personal property, contracts for
the purchase or sale of real or personal property, and agreements for financing;
(f) property, casualty, crime, directors and officers, and other forms of
insurance;
(g) all bank accounts and safety deposit boxes identifying all authorized
signatories, together with a list of all effective powers of attorney granted by
Pulsar to anyone;
(h) agreements, contracts or other arrangements to which Pulsar is a
guarantor, surety or endorser;
(i) contracts, agreements, commitments, arrangements or understandings
providing for the purchase or sale of all or substantially all of Pulsar's
requisites of a particular product from a single supplier or to a single
customer;
(j) contracts, agreements, commitments, arrangements or understandings
which limit the freedom of Pulsar from competing in any line of business or with
any person or entity;
(k) license agreements (as licensor or licensee);
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(l) leases of real and personal property with a term of more than one year
(regardless of whether Pulsar is lessor or lessee); and
(m) contracts, agreements, instruments, arrangements or understandings
which have not been included in items (a) through (l) above involving payment by
or to Pulsar of more than $25,000 or not terminable without penalty or otherwise
materially affecting the assets, financial condition, properties or business of
Pulsar.
All of the Material Pulsar Contracts are in full force and effect. Except to the
extent that a Material Adverse Effect on Pulsar's financial condition, assets,
liabilities, earnings, business or prospects would not result if the following
were not true: (A) Pulsar and each other party to each of the Material Pulsar
Contracts have performed all the obligations required to be performed by them to
date, have received no notice of default and are not in default (with due notice
or lapse of time or both) under any of the Material Pulsar Contracts, except as
otherwise set forth in the Pulsar Disclosure Schedule; (B) Pulsar has no present
expectation or intention of not fully performing all of its obligations under
any of the Material Pulsar Contracts, and Pulsar has no knowledge of any breach
or anticipated breach by any other party to any of the Material Pulsar
Contracts; (C) there exists no actual or, to the knowledge of Pulsar, threatened
termination, cancellation or limitation of the business relationship of Pulsar
with any party to any Material Pulsar Contract; and (D) consummation of the
transactions contemplated hereby and performance by Pulsar of its obligations
hereunder shall not require the consent or permission of any party to any
Material Pulsar Contract or permit any party to terminate, suspend or alter the
terms of any Material Pulsar Contract, except as otherwise set forth in the
Pulsar Disclosure Schedule.
5.15 Litigation. There are no actions, suits, causes of action, claims,
----------
litigation, arbitration, administrative hearings, or other form of proceedings
or disputes of any kind pending or, to the best knowledge of Pulsar and the
Pulsar Stockholders, threatened against Pulsar or its officers or directors (in
their capacities as such) or involving, affecting or relating to its capacity to
complete the transactions contemplated herein in any court, at law or in equity,
or before any arbitration board or any governmental department, commission,
board, bureau, agency or instrumentality; nor has Pulsar been, nor is it,
subject to any orders, stipulations, awards, fines, judgments, decrees or
injunctions the effect of which in the aggregate would have a Material Adverse
Effect on the business or financial position of Pulsar including, but not
limited to, limitation, restriction, regulation, enjoinment or prohibition of
any business practice of Pulsar in any area or the acquisition by Pulsar of any
properties, assets or businesses. Pulsar does not know or have grounds to know
of any basis for any such action, suits, or other form of proceeding or disputes
or of any governmental investigation relating to Pulsar or its business.
5.16 Taxes.
-----
(a) (i) All Tax Returns of, relating to or which include Pulsar which are
required to have been filed have been filed on a timely basis with the
appropriate authorities and all such Tax Returns are true, correct and complete
in all respects; (ii) all Taxes required to have been paid by Pulsar (including
amounts collected or withheld from third parties required to have been paid over
to the appropriate authorities) have been paid in full on a timely basis to the
appropriate authorities or
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contested in good faith or adequate provision made for payment; and (iii) all
Taxes or other amounts required to have been collected or withheld by Pulsar
have been timely and properly collected or withheld. Pulsar has duly withheld
all payroll taxes, FICA and other federal, state and local taxes and other items
requiring to be withheld by it from employer wages, and has duly deposited the
same in trust for or paid over to the proper taxing authorities. Pulsar has not
executed or filed with any taxing authority any agreement extending the periods
for the assessment or collection of any Taxes, and is not a party to any pending
or, to the best knowledge of Pulsar and the Pulsar Stockholders, threatened,
action or proceeding by any governmental authority for the assessment and
collection of Taxes. Within the past three years, the United States federal
income tax returns of Pulsar have not been audited by the IRS, nor has any
state's taxing authority audited any merchandise, personal property, sales or
use tax returns of Pulsar.
(b) (i) No taxing authority has asserted in writing to Pulsar any
adjustment, deficiency, or assessment that could result in additional Tax for
which Pulsar is or may be liable; (ii) there is no pending audit, examination,
investigation, dispute, proceeding or claim for which Pulsar has received notice
relating to any Tax for which Pulsar is or may be liable; (iii) no statute of
limitations with respect to any Tax for which Pulsar is or may be liable has
been waived or extended; (iv) the due date of any Tax Returns that Pulsar is
required to file has not been extended; and (v) Pulsar is not a party to any Tax
sharing or Tax allocation agreement, arrangement or understanding, except as
otherwise set forth in the Pulsar Disclosure Schedule.
(c) There are no liens on any of the assets of Pulsar which arose in
connection with any failure or asserted failure to pay any Tax, other than liens
for current Taxes not yet due and payable.
(d) Pulsar is not a party to any compensation contract, agreement, plan or
arrangement that, individually or collectively, could give rise to any payment
that would not be deductible by reason of Section 162, 280G or 404 of the Code.
(e) Pulsar has not been a member of an affiliated group filing a
consolidated federal income Tax Return, and Pulsar is not liable for the Taxes
of any person under Treasury Regulation 1.1502-6 (or any similar provision of
state, local, or foreign law) as transferee or successor, by contract or
otherwise.
(f) Copies of (i) any correspondence or other documents relating to any Tax
examinations, (ii) extensions of statutory limitations, (iii) the federal, state
and local income Tax Returns and franchise Tax Returns of Pulsar, and (iv)
correspondence between Pulsar and all taxing authorities for its last three (3)
taxable years previously have been furnished to Litronic and such Tax Returns
are true, correct and complete.
(g) The provision for Taxes, if any, shown on the Pulsar Balance Sheet is
adequate to cover the aggregate liability of Pulsar arising out of facts or
circumstances occurring, incurred in respect of or measured by income of Pulsar,
arising out of transactions on or prior to the Balance Sheet Date for all Taxes.
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(h) Pulsar has filed federal and state, and if applicable, local Tax
Returns for each period ending on or prior to the Acquisition Closing.
(i) Neither Pulsar nor any Pulsar Stockholder is a foreign person, as such
term is referred to in Section 1445(f)(3) of the Code.
(j) None of the assets of Pulsar constitutes property that Pulsar, will be
required to treat as being owned by another person pursuant to the "Safe Harbor
Lease" provisions of Section 168(f)(8) of the Code prior to repeal by the Tax
Equity and Fiscal Responsibility Act of 1982.
(k) Pulsar has not at any time consented, and the Pulsar Stockholders will
not permit Pulsar to elect, to have the provisions of Section 341(f)(2) of the
Code apply to it.
(l) Pulsar is not a personal service corporation subject to the provisions
of Section 269A of the Code.
5.17 Absence of Material Events. Except as provided in this Section 5.17
--------------------------
and the Pulsar Disclosure Schedule, since the Balance Sheet Date the business of
Pulsar has been conducted in the ordinary course of business (including
borrowing money for working capital purposes only) and there has not been (a)
any material adverse change in the business, affairs, prospects, operations,
earnings or financial condition of Pulsar nor, to the best of Pulsar's
knowledge, are any such changes threatened, anticipated or contemplated; (b) any
actual or, to Pulsar's knowledge, threatened, anticipated or contemplated
damage, destruction, loss, conversion, termination, cancellation, default or
taking by eminent domain or other action by governmental authority which has
materially affected or may hereafter materially affect the properties, assets,
business affairs, cash flow or results of operation or prospects of Pulsar; (c)
any material and adverse pending or, to Pulsar's knowledge, threatened,
anticipated or contemplated dispute of any kind with any material customer,
supplier, source of financing, employee, landlord, subtenant or licensee of
Pulsar, or any pending or, to Pulsar's knowledge, threatened, anticipated or
contemplated occurrence or situation of any kind, nature or description which is
reasonably likely to result in any reduction in the amount, or any change in the
terms or conditions, of business with any material customer, supplier or source
of financing; (d) any pending, or to Pulsar's knowledge, threatened, anticipated
or contemplated occurrence or situation of any kind, nature or description
materially and adversely affecting the properties, assets, business, affairs or
prospects of Pulsar; (e) any waivers by Pulsar of any right, or cancellation of
any debt or claim, of substantial value; (f) any declarations, set asides or
payments of any dividend or other distributions or payments in respect of Pulsar
capital stock; or (g) any changes in the accounting principles or methods which
are utilized by Pulsar.
5.18 Insurance. The Pulsar Disclosure Schedule contains a complete and
---------
correct list and summary description of all contracts and policies of insurance
relating to any of Pulsar's assets or business, to which Pulsar is an insured
party, beneficiary or loss payable payee and insurance relating to the Pulsar
Stockholders to which Pulsar is a beneficiary or loss payable payee. Such
policies are in full force and effect, all premiums due and payable with respect
thereto have been paid, and no notice of cancellation or termination has been
received by Pulsar with respect to any such policy.
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5.19 Banks; Power of Attorney. The Pulsar Disclosure Schedule contains a
------------------------
complete and correct list showing (a) the names of each bank in which Pulsar has
an account or safe deposit box and the names of all persons authorized to draw
thereon or who have access thereto, and (b) the names of all persons, if any,
holding powers of attorney from Pulsar.
5.20 Absence of Improper Payments. Since January 1, 1994, Pulsar: (a) has
----------------------------
not made any contributions, payments or gifts of its property to or for the
private use of any governmental official, employee or agent where either the
payment or the purpose of such contribution, payments or gifts is illegal under
the laws of the United States, any state thereof or any other jurisdiction
(foreign or domestic); (b) has not established or maintained any unrecorded fund
or asset for any purpose, or has made any false or artificial entries on its
books or records for any reason; (c) has not made any payments to any person
where Pulsar intended or understood that any part of such payment was to be used
for any other purpose other than that described in the documents supporting the
payment; or (d) has not made any contribution, or has reimbursed any political
gift or contribution made by any other person, to candidates for public office,
whether federal, state or local, where such contribution would be in violation
of applicable law.
5.21 ERISA.
-----
(a) The Pulsar Disclosure Schedule contains a complete list of all Pulsar
Plans.
(b) None of Pulsar Plans is a "multiemployer plan" as such term is defined
in Section 3(37) of ERISA, a "multiple employer plan" as such term is defined in
Section 413 of the Code, or a "defined benefit pension plan" as such term is
defined in Section 3(35) of ERISA. With respect to each Pulsar Plan, Pulsar has
delivered to Pulsar true and complete copies of the following for each Pulsar
Plan, if applicable: (i) the plan document and any amendments thereto; (ii) the
summary plan description and any summary material modifications; (iii) the trust
agreement, insurance policy or other instrument relating to the funding of
Pulsar Plans; (iv) the annual reports (Form 5500 series) and accompanying
Schedules for Pulsar Plans filed with the IRS or Department of Labor for the
last three years; (v) the audited financial statements for Pulsar Plans for the
last three years; and (vi) the most recent determination letters issued by the
IRS with respect to Pulsar Plans that are intended to qualify under Section
401(a) of the Code; and (vii) any governmental rulings, notices, determination,
and opinions (and pending requests therefore). The foregoing documents
accurately reflect all of the terms of such Pulsar Plans including, without
limitation, any agreement or provision which would limit the ability of any
entity to make prospective amendments to or to terminate any of Pulsar Plans.
(c) Each Pulsar Plan which is an "employee pension benefit plan" as defined
in Section 3(2) of ERISA ("Pulsar Pension Plan") has been determined by the IRS
to be qualified under Section 401(a) of the Code, and each such plans remains so
qualified, and to Pulsar's knowledge after due inquiry, no facts or
circumstances exist which could result in the revocation of such qualification.
(d) Each Pulsar Plan which is an "employee welfare benefit plan" as defined
in Section 3(1) of ERISA ("Pulsar Welfare Plan") which is intended to meet the
requirements for tax-favored treatment under the Code to Pulsar's knowledge
after due inquiry meets such requirements.
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(e) Without limiting the generality of this Section 5.21, each Pulsar Plan
has been administered in accordance with its terms and the Code, and each Pulsar
Pension Plan and Pulsar Welfare Plan has been administered in all material
respects in accordance with ERISA. No facts or circumstances exist which might
give rise to any liability of Pulsar or ERISA affiliate or any of the Pulsar
Stockholders. Pulsar has paid all amounts required under applicable law, any
Pulsar Pension Plan and any Pulsar Welfare Plan to be paid as a contribution to
each Pulsar Pension Plan and Pulsar Welfare Plan through the date hereof. Pulsar
has set aside adequate reserves to meet contributions which are not yet due
under any Pulsar Pension Plan and Pulsar Welfare Plan.
(f) Neither Pulsar nor any other "disqualified person" or "party in
interest" (as such terms are defined in Section 4975 of the Code and Section
3(14) or ERISA, respectively) has engaged in any action or taken any other
action with respect to any Pulsar Plan which would subject Pulsar, any ERISA
affiliate or the Pulsar Stockholders to (i) any tax, penalty or liability for a
prohibited transaction under ERISA or the Code, (ii) any tax under Code Sections
4971, 4972, 4976, 4977, or 4979, or (iii) a penalty under ERISA Section 502(c)
or 502(l).
(g) Pulsar, to the extent it is a fiduciary with respect to any Pulsar
Pension Plan or Pulsar Welfare Plan, has not breached any of its
responsibilities or obligations imposed upon fiduciaries under ERISA or the Code
which could result in any claim being made under, by or on behalf of any Pulsar
Pension Plan or Pulsar Welfare Plan or any participant or beneficiary thereof
other then benefit claims in the ordinary course, in any such event which could
give rise to liability to Pulsar or any of its ERISA affiliates.
(h) Each Pulsar Welfare Plan which is a group health plan within the
meaning of Code Section 5000(b)(1) complies with and in each and every case has
complied with the applicable requirements of Code Section 4980B and Part 6 of
Title I of ERISA.
(i) Except as set forth in the Pulsar Disclosure Schedule, no Pulsar Plan,
other than a Pulsar Pension Plan, provides benefits, including death, life,
dental, health or medical benefits (whether or not insured), with respect to
current or former employees of Pulsar and any of its subsidiaries beyond their
retirement or other termination of service with Pulsar, any of its subsidiaries
or ERISA affiliates, other than coverage mandated by applicable law.
5.22 Labor Matters. A true and complete list of all of Pulsar's officers,
-------------
employees (the "Pulsar Employees") and consultants (the "Pulsar Consultants")
and their respective salaries, wages, other compensation, dates of employment,
date and amount of last salary or compensation increase, and positions has been
provided to Litronic by Pulsar. There are no material disputes, employee
grievances, or disciplinary actions pending or, to the knowledge of Pulsar,
threatened by or between Pulsar and any of the Pulsar Employees or Pulsar
Consultants. With respect to the Pulsar Employees and Pulsar Consultants, Pulsar
has complied in all respects with all provisions of all laws relating to the
employment of labor and has no liability for any arrears of wages or taxes or
penalties for failure to comply with any such law or for any severance or
termination payments of any type. None of the Pulsar Consultants are or were
(while classified by Pulsar as Pulsar Consultants) employees of Pulsar for any
purpose whatsoever. No employees of Pulsar are or ever have been represented by
a bargaining representative with respect to Pulsar, and no election or
proceedings relating to the
40
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labor relations of Pulsar is pending or, to the best of Pulsar's knowledge,
threatened. Pulsar has not had any material union activity or had any material
labor disruption or material dispute with its employees of any kind, nature or
description at any time heretofore. All personnel policies and manuals of Pulsar
are listed on the Pulsar Disclosure Schedule and true and complete copies
thereof have been provided to Litronic. No Pulsar Employee or Pulsar Consultant
shall have the right to receive from Pulsar a severance payment or other payment
in the nature thereof if his or her employment is terminated by Pulsar following
the Acquisition Closing, whether such right arises as a matter of contract, past
policy or understanding, by operation of law, or otherwise.
5.23 Permits: Compliance with Law. Pulsar possesses all Permits necessary
----------------------------
to own or lease and operate its properties and to conduct its business as now
conducted, except for incidental Permits that would be readily obtainable
without undue burden in the event of any lapse, termination, cancellation, or
forfeiture or that if not obtained would not have a Material Adverse Effect on
Pulsar's business. All such material Permits are in full force and effect, and,
to the knowledge of Pulsar, no suspension or cancellation of any of them is
threatened, and no material Permits will be adversely affected by the
consummation of the Reorganization or the Acquisition. Pulsar has not failed nor
is it failing to comply with any applicable law, rule, regulation, order, zoning
or other ordinance, statute, injunction, decree or any other requirement of any
court or governmental or administrative body or agency, where such failure would
have a Material Adverse Effect on Pulsar's business, and there are no
proceedings pending or, to Pulsar's knowledge, threatened, nor has Pulsar
received any notice, regarding any such failure.
5.24 Environmental Matters. Pulsar is, and to Pulsar's knowledge all real
---------------------
property owned or otherwise occupied by Pulsar is and has been at all times when
so owned or occupied, in material compliance with all Environmental Laws,
except, in each case, where such noncompliance, singly or in the aggregate,
would not have a Material Adverse Effect on the condition, financial or
otherwise, or the earnings, business affairs or business prospects of Pulsar. No
Hazardous Materials are stored, utilized or otherwise present on any property
owned or otherwise occupied by Pulsar, excepting only (x) cleaning supplies and
similar materials customarily used by businesses in Pulsar's industry in
quantities consistent with such use, and (y) petroleum products that are used
for heating (including water heating) in facilities located on such property,
none of which are stored in underground storage tanks, or that are present in
vehicles located on such property. Pulsar has not released, and has not
affirmatively consented to any release of, Hazardous Materials on, under or
affecting any real property during the period of Pulsar's ownership, occupation
or operation of such property (including its participation in or exercise of any
degree of control over the management of any business located on such property).
For purposes of this Section 5.24, real property owned by third parties but
"occupied" by Pulsar shall mean only that portion of such property as is either
leased by Pulsar or in fact is otherwise physically occupied or utilized by
Pulsar. To the knowledge of Pulsar, there is no alleged or potential liability
(including, without limitation, alleged or potential liability for investigatory
costs, cleanup costs, governmental response costs, natural resources damages,
property damages, personal injuries or penalties) of Pulsar arising out of,
based on or resulting from any act or event that constitutes a violation or
alleged violation of any Environmental Law, which alleged or potential liability
(i) arises out of or relates to acts or events occurring during Pulsar's
possession or occupation of the applicable property, and (ii) singly or in the
aggregate,
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would have a Material Adverse Effect on the condition, financial or otherwise,
or the earnings, business affairs or business prospects of Pulsar.
5.25 Corporate Records. The corporate record books of Pulsar are in all
-----------------
material respects in good order, complete, accurate, up to date, with all
necessary signatures, and set forth all meetings and actions taken by the
shareholders and directors, and all votes of the shareholders or directors set
forth in certificates furnished to anyone at any time heretofore conform in all
material respects to the votes contained in the record book of Pulsar.
5.26 Condition of Assets. All premises, fixtures and equipment owned or
-------------------
used by Pulsar and material to its business have been properly maintained and
are in good operating order and repair, free from known defects in construction
or design, sound and properly functioning (normal wear and tear expected),
usable in the ordinary course of business and not obsolete, and (to Pulsar's
knowledge in the case of leased property) in material compliance with all
applicable zoning, building and fire codes and all other applicable laws, rules,
regulations and requirements of governmental authorities and the fire insurance
rating association having jurisdiction.
5.27 Accounts Receivable. All of the accounts receivable of Pulsar shown or
-------------------
reflected on the Pulsar Balance Sheet, less the reserve for doubtful accounts
and notes in the amount shown on the Pulsar Balance Sheet, are valid and
enforceable claims and subject to no setoff or counterclaim. All of the accounts
receivable of Pulsar shown or reflected on the Pulsar Balance Sheet and as at
December 31, 1998 (as reflected on Pulsar's balance sheet as of such date, when
and as delivered to Litronic) will be collected in full within 60 days
thereafter except to the extent of the reserve for doubtful accounts shown on
the Pulsar Balance Sheet or posted on the books of Pulsar of such date. The
reserve for doubtful accounts as at December 31, 1998 will not be in excess of
said reserve as shown on the Pulsar Balance Sheet. Pulsar has no accounts or
loans receivable from any of its directors, officers or employees.
5.28 Charter Documents. Pulsar has heretofore delivered to Litronic copies
-----------------
of its Certificate of Incorporation, as amended to date, certified by the
appropriate governmental authority, and copies of its Bylaws, as amended to
date, and a list of the officers and directors of Pulsar in office, all as
certified by its Secretary.
5.29 Disclosure of all Material Matters.
----------------------------------
(a) No statement of a material fact set forth in this Agreement (including
without limitation all information in the Financial Statements, the Pulsar
Disclosure Schedule and the other Schedules, Exhibits and attachments hereto,
taken as a whole) with respect to Pulsar or its stockholders is false or
misleading, nor does this Agreement (including, without limitation all
information in the Financial Statements, the Pulsar Disclosure Schedule and the
other Schedules, Exhibits, and attachments hereto, taken as a whole) omit to
state a material fact necessary in order to make the statements made or
information disclosed, in the light of the circumstances under which they were
made or disclosed, not misleading.
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(b) Provided only that any information furnished in writing by Litronic to
Pulsar specifically for inclusion in the Registration Statement or the
Prospectus (as applicable) is accurate, complete and not misleading, and that
Pulsar has deleted from the Registration Statement or the Prospectus (as
applicable) any information with respect to Litronic or its Business, operations
or affiliates that Litronic has specifically requested be deleted, (i) at the
time the Registration Statement becomes effective under the Securities Act, it
will not contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading and will comply in all material respects with applicable
state and Federal securities laws, and (ii) at the time of each closing in
connection with the IPO, the Prospectus will not include an untrue statement of
a material fact or omit to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading and will comply in all material respects with applicable
state and Federal securities laws.
5.30 Customers and Suppliers. The Pulsar Disclosure Schedule sets forth a
-----------------------
complete and correct list, as of December 31, 1998, of (a) the 20 largest
customers of the business and (b) the 20 largest suppliers of the business.
There are no (i) threatened cancellations by the aforesaid customers or
suppliers with respect to Pulsar's business, (ii) outstanding disputes by such
customers or suppliers with Pulsar and its business, or (iii) any adverse
changes in the business relationship between Pulsar and any such customer or
supplier.
5.31 Product Warranty. Substantially all of the products manufactured,
----------------
sold, leased, and delivered by Pulsar have conformed in all material respects
with all applicable contractual commitments and all express and implied
warranties and, to Pulsar's knowledge, Pulsar has no material liability (whether
known or unknown, asserted or unasserted, absolute or contingent, accrued or
unaccrued, liquidated or unliquidated, and whether due or to become due) for
repair or replacement thereof or other damages in connection therewith.
Substantially all of the products manufactured, sold, leased and delivered by
Pulsar are subject to standard terms and conditions of sale or lease. Pulsar has
delivered to Litronic copies of the standard terms and conditions of sale or
lease for each of Pulsar (containing applicable guaranty, warranty, and
indemnity provisions). The Pulsar Disclosure Schedule sets forth the aggregate
expenses incurred by Pulsar in fulfilling its obligations under its guaranty,
warranty and indemnity provisions during each of the fiscal years and interim
period covered by Pulsar's Financial Statements and Pulsar knows of no reason
why such expenses should significantly increase as a percentage of sales in the
future.
5.32 Year 2000 Compliance. Pulsar's information technology is Year 2000
--------------------
Compliant. For purposes of this Section 5.32, Pulsar's information technology
shall include computer software, computer firmware, computer hardware (whether
general or specific purpose), equipment including embedded programmable
microchips or controllers and other similar or related items of automated,
computerized, or software systems that are used or relied on by Pulsar in the
conduct of its business.
5.33 Export Control and Related Matters.
----------------------------------
(a) Pulsar is in compliance in all material respects with all United States
and foreign Export Control Laws.
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(b) Pulsar has all necessary authority under the Export Control Laws to
conduct its operations as currently conducted, including all necessary (i)
Permits for any pending export transactions, (ii) Permits for the disclosure of
information to foreign Persons and (iii) registrations with Governmental
Entities with authority to implement the Export Control Laws.
(c) Pulsar has not participated directly or indirectly in any boycotts or
other similar practices in violation of the regulations of the United States
Department of Commerce or Section 999 of the Code.
5.34 Government Contracts.
--------------------
(a) Except as set forth in the Pulsar Disclosure Schedule, with respect to
the Government Contracts to which Pulsar is a party: (i) such Government
Contracts constitute valid and binding obligations of Pulsar and, to the
knowledge of Pulsar, the other party or parties thereto, enforceable in
accordance with their terms, except as enforcement may be limited by Equitable
Principles; (ii) Pulsar is in compliance in all material respects with the terms
of all Government Contracts to which it is a party and all laws, regulations and
contract provisions applicable to the obtaining, formation, pricing,
performance, billing, administration and other aspects of its Government
Contracts, including compliance in all material respects with the Truth in
Negotiations Act (as amended) and with all defective pricing, price reduction or
similar clauses contained or incorporated in its Government Contracts, and
Pulsar is in compliance in all material respects with the False Claims Act (as
amended) or any similar applicable statutes or regulations concerning false
claims, false statements, defective pricing, misrepresentation, or procurement
integrity concerning any Government Contract, General Services Administration
Multiple Award Schedule or Supply Schedule, open market, commercial or other
sale order involving or pursuant to its Government Contracts, except to the
extent that noncompliance or violation does not and will not have a Material
Adverse Effect; (iii) neither Pulsar nor any other party has terminated,
canceled or waived any material term or condition of any Government Contract,
except to the extent that such termination, cancellation or waiver does not and
will not have a Material Adverse Effect; and (iv) the cost accounting,
estimating, property and procurement systems relating to Pulsar's Government
Contracts are in compliance in all material respects with applicable laws,
regulations and contract provisions, including applicable cost principles and
applicable cost accounting standards.
(b) (i) Each billed account receivable in excess of $25,000 (determined
individually) represents a bona fide claim against the Government for sales,
services performed or other charges arising on or prior to the date hereof, and
all the products delivered and services performed which gave rise to such
accounts were delivered or performed in accordance with applicable Government
Contracts; and (ii) all unbilled or unreserved amounts included in accounts
receivable in excess of $25,000 (determined individually) will, in the ordinary
course of business as currently conducted and consistent with past practices,
mature into and become billed accounts receivable in the same or greater amount.
(c) None of Pulsar's Government Contracts has a currently incurred or
currently projected cost overrun in an amount exceeding $25,000.
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(d) Except for liens securing obligations under Pulsar's existing line of
credit with Wilmington Trust Company and IBM Global Finance Corporation, Pulsar
has not assigned or otherwise conveyed or transferred, or agreed to assign, to
any Person, any Government Contracts to which it is a party, or any account
receivable relating thereto, whether as a security interest or otherwise.
(e) Pulsar has not received any notice or other communication in any form
from the Government regarding its actual or threatened disqualification,
suspension, or debarment from contracting with the Government including without
limitation any show cause notice or cure notices.
(f) Except as set forth on the Pulsar Disclosure Schedule there is no: (i)
pending or (to the knowledge of the Pulsar Stockholders or Pulsar) threatened
investigation relating to any Government Contract to which Pulsar is a party;
(ii) existing or (to the knowledge of the Pulsar Stockholders or Pulsar)
threatened claim, cost disallowance, pricing adjustment or adverse audit finding
relating to any Government Contract to which Pulsar is a party, involving an
amount exceeding $25,000; or (iii) termination for default or cure notice or
show cause notice proposed or currently in effect, relating to any Government
Contract to which Pulsar is a party, involving an amount exceeding $25,000.
5.35 Cumulative Exceptions. The exceptions and qualifications to the
---------------------
representations and warranties of Pulsar in this Article 5 which are based upon
such exceptions and qualifications not being "material" or being "in all
material respects," or not having a Material Adverse Effect will not,
individually or in the aggregate, have a Material Adverse Effect.
6. REPRESENTATIONS AND WARRANTIES OF
THE PULSAR STOCKHOLDERS
Each Pulsar Stockholder, severally and not jointly, represents and
warrants to Litronic and the Litronic Stockholders that, except as expressly
provided in the Pulsar Disclosure Schedule by specific reference to a Section of
this Article 6:
6.1 Title to the Pulsar Shares. All of the issued and outstanding shares
--------------------------
of Pulsar Common Stock purported to be owned by such Pulsar Stockholder as set
forth on the Pulsar Disclosure Schedule pursuant to Section 5.2 are owned by
such Pulsar Stockholder free and clear of any Liens whatsoever, and such Pulsar
Shares are not bound by or subject to any proxy, agreement, voting trust or
other restriction regarding the voting thereof.
6.2 Authority. Such Pulsar Stockholder has full power, authority and
---------
capacity to execute and deliver this Agreement and to consummate those
transactions contemplated hereby which pertain to him or her, and no other
action is necessary by such Pulsar Stockholder to consummate such transactions.
This Agreement has been duly and validly executed and delivered by such Pulsar
Stockholder and constitutes a legal, valid and binding obligation of such Pulsar
Stockholder enforceable against him or her in accordance with its terms, except
as enforcement may be limited by Equitable Principles.
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6.3 No Conflicts. The execution, delivery and performance of this
------------
Agreement by such Pulsar Stockholder does not and will not (i) conflict with,
result in a breach of, constitute a default (or an event that might, with the
passage of time or the giving of notice or both, constitute a default) under,
give rise to any right to terminate, cancel or accelerate, give rise to any loss
of benefit under, or result in the creation of any Lien under, any of the
material terms, conditions, or provisions of any indenture, mortgage, loan, or
credit agreement or any other agreement or instrument to which such Pulsar
Stockholder is a party or by which him or her or his or her assets may be bound
or affected; (ii) violate or constitute a material breach of any decision,
judgment, or order of any court or arbitration board or of any governmental
department, commission, board, agency, or instrumentality, domestic or foreign,
by which such Pulsar Stockholder is bound or to which he or she is subject; or
(iii) violate any applicable law, rule or regulation to which such Pulsar
Stockholder or any of his or her property is bound.
6.4 Investment Representations.
--------------------------
(a) Such Pulsar Stockholder has been informed and understands that the
Parent Common Stock he or she will receive in the Acquisition has not been
registered under the Securities Act, and, therefore, that such shares must be
held indefinitely unless they are subsequently registered under the Securities
Act or an exemption from such registration is available. Such Pulsar
Stockholder acknowledges that, except as provided in the Registration Rights
Agreement, Parent is under no obligation to register under the Securities Act
any sale of such Parent Common Stock by him or her, or to comply with any
provisions which would entitle his or her sale to any such exemption from
registration. Such Pulsar Stockholder is fully familiar with Rule 144
promulgated under the Securities Act.
(b) Such Pulsar Stockholder is acquiring Parent Common Stock in the
Acquisition for his or her own account with no view to any distribution thereof
in violation of the Securities Act. Such Pulsar Stockholder has had the
opportunity to discuss Parent's business, management and financial affairs with
Parent's management. Such Pulsar Stockholder has such knowledge and experience
in financial matters that he or she is capable of evaluating the merits and
risks of its investment in the Parent Common Stock. The financial condition of
such Pulsar Stockholder is such that he or she is able to bear all economic
risks of investment in the Parent Common Stock, including the risks of holding
the Parent Common Stock for an indefinite period of time. Such Pulsar
Stockholder is an "accredited investor" as such term is defined in Rule 501
promulgated under the Securities Act.
7. REPRESENTATIONS AND WARRANTIES OF PARENT
Parent represents and warrants to Litronic, the Litronic Stockholders,
Pulsar and the Pulsar Stockholders as follows:
7.1 Organization and Authority. Parent is a corporation duly organized,
--------------------------
validly existing, and in good standing under the laws of the State of Delaware
and has all requisite corporate power and authority to (i) carry on its business
as currently conducted by it and (ii) own, lease and operate its properties.
Parent is duly qualified or licensed and in good standing as a foreign
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corporation, and has at all times when legally required been so qualified or
licensed and in good standing, in those states in which a failure to be so
qualified or licensed would, in the aggregate, have a Material Adverse Effect on
the business of Parent or the nature of the business conducted by it. Parent has
full power and authority to execute and deliver this Agreement and each other
agreement and instrument to be executed and delivered by it pursuant hereto and
to consummate the transactions contemplated hereby and perform its obligations
hereunder. The execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby by Parent and the performance of Parent's
obligations hereunder have been duly and validly authorized by all corporate
actions including a unanimous vote of the Board of Directors of Parent, and no
other corporate proceedings on the part of Parent are necessary to authorize
this Agreement or to consummate the transactions so contemplated or to perform
Parent's obligations hereunder. This Agreement has been duly and validly
executed and delivered by Parent and constitutes a legal, valid and binding
obligation of Parent enforceable against it in accordance with its terms, except
as enforcement may be limited by Equitable Principles. True and complete copies
of the Certificate of Incorporation of Parent and all amendments thereof, and of
the Bylaws, as amended to date, have heretofore been forwarded to Litronic and
Pulsar. Parent's minute books contain complete and accurate records of all
meetings of the Parent Stockholders and Board of Directors or written consents
in lieu thereof.
7.2 Capitalization; No Subsidiaries. Parent has authorized capital
-------------------------------
consisting of 25,000,000 shares of Common Stock, par value $.01 per share, and
5,000,0000 shares of undesignated Preferred Stock, par value $.01 per share. As
of the date hereof, there are 100 issued and outstanding shares of Parent Common
Stock which are held by Kris Shah. Immediately prior to the Reorganization
Closing, the Parent Common Stock issued and outstanding shall consist solely of
the foregoing number. All of the shares of outstanding Parent Common Stock are
duly authorized, validly issued, fully paid and non-assessable and are owned of
record and beneficially by Kris Shah. Kris Shah has good and marketable title to
all of the issued and outstanding shares of Parent's capital stock, free and
clear of any Liens. At the Reorganization Closing, the Litronic Stockholders
will acquire the Parent Common Stock issued to them in the Reorganization free
and clear of any and all Liens. At the Acquisition Closing, the Pulsar
Stockholders will acquire the Parent Common Stock issued to them in the
Acquisition free and clear of any Liens. Parent has no authorized class of
capital stock other than the Common Stock and Preferred Stock. Parent does not
own any shares of capital stock or other securities of, or any other interest
in, nor does it control, directly or indirectly, of record or beneficially, any
other corporation, association, joint venture, partnership, or other business
organization.
8. COVENANTS
8.1 Conduct of Business of Litronic and Pulsar.
------------------------------------------
(a) Except as contemplated by this Agreement, during the period from the
date of this Agreement to the Acquisition Closing, Litronic and Pulsar will each
conduct their respective operations only in the ordinary and usual course of
business and consistent with past practice and will use all commercially
reasonable efforts to preserve intact their respective present business
organizations, keep available the services of their respective present officers
and employees, and
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preserve their respective relationships with customers, suppliers, contractors,
and others having business dealings with each of them to the end that its
goodwill and on-going business shall not be impaired at the Acquisition Closing.
Litronic and Pulsar shall each collect its receivables and pay its trade
payables in the ordinary course of business consistent with past practice.
(b) Without limiting the generality of Section 8.1(a) and except as
otherwise expressly provided in this Agreement, before the Acquisition Closing,
Litronic and Pulsar will each comply with all laws applicable to the conduct of
their respective businesses and continue in effect their present insurance
coverage and, except with the prior written consent of the other, will not (i)
issue, sell, or pledge, or authorize or propose the issuance, sale, or pledge of
(A) any shares of capital stock of any class, or securities convertible into any
such shares, or any rights, warrants or options to acquire any such shares or
other convertible securities, excepting only pursuant to the exercise or
conversion of options and other instruments or securities outstanding on the
date hereof and disclosed on the Litronic Disclosure Schedule and the Pulsar
Disclosure Schedule which exercise or conversion and which issuance are in
accordance with the terms of such instruments or securities as in effect on the
date hereof, or (B) any other securities in respect of, in lieu of, or in
substitution for, Litronic Shares outstanding on the date hereof; (ii) purchase
or otherwise acquire, or propose to purchase or otherwise acquire, any shares of
capital stock; (iii) declare or pay any dividend or distribution on any shares
of its capital stock; (iv) authorize, recommend, propose or announce an
intention to authorize, recommend or propose, or enter into an agreement in
principle or an agreement with respect to, any change in its capitalization,
merger, consolidation or business combination, any acquisition of a material
amount of assets or securities, any disposition of a material amount of assets
or securities, or any entry into a material contract or any release or
relinquishment of any material contract rights, not in the ordinary course of
business; (v) propose or adopt any amendments to its Articles or Certificate of
Incorporation or Bylaws; (vi) incur, assume, or prepay any long-term debt or,
except in the ordinary course of business under existing lines of credit, incur
or assume any short term debt; (vii) make any loans, advances, or capital
contributions to, or investments in, any other person, other than travel or
other advances to employees consistent with past practice; (viii) assume,
guarantee, endorse, or otherwise become liable or responsible (whether directly,
contingently, or otherwise) for the obligations of any other person, except to
endorse checks for collection or deposit in the ordinary course of business; or
(ix) agree in writing or otherwise to take any of the foregoing actions or any
action that would make any representation or warranty in this Agreement untrue
or incorrect as of the date hereof or as of the Acquisition Closing, as if made
as of such time.
8.2 No Solicitation. Neither Litronic nor Pulsar shall, nor shall they
---------------
permit any of their officers, directors, employees, agents, or representatives
(including, without limitation, investment bankers, attorneys and accountants),
directly or indirectly to (a) initiate, contract with, solicit or encourage any
inquiries or proposals by, or (b) enter into any discussions or negotiations
with, or disclose directly or indirectly any information concerning its business
and properties to, or afford any access to its properties, books, and records
to, any corporation, partnership, person, or other entity or group in connection
with any acquisition proposal regarding a sale of Litronic's or Pulsar's capital
stock or a merger, consolidation, sale of all or a substantial portion of the
assets or any similar transaction that is material to Litronic or Pulsar
("Acquisition Proposal"). Litronic and Pulsar will each notify the other within
three business days of receipt if any discussions or negotiations are
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sought to be initiated, any inquiry or proposal is made, or any such information
is requested with respect to an Acquisition Proposal or potential Acquisition
Proposal or if any Acquisition Proposal is received or indicated to be
forthcoming. Such notice shall state all substantive terms and conditions of any
Acquisition Proposal and the identity of the person making the Acquisition
Proposal or seeking to initiate discussions or negotiations or requesting
information.
8.3 Access to Information.
---------------------
(a) Between the date hereof and the Acquisition Closing, Pulsar, on the one
hand, and Litronic, on the other hand, may, directly and through their
Representatives, make such investigation of the other and its business and
assets as each deems necessary or advisable (the entity and/or its
representatives making such investigation being the "Investigating Party"), but
such investigation shall not affect any of the representations and warranties
contained herein or in any instrument or document delivered pursuant hereto.
(b) From the date of this Agreement, Litronic will give Pulsar and the
Underwriter and their respective Representatives full access, at reasonable
times and with reasonable notice, to the offices and other facilities and to the
books, contracts, commitments and records of Litronic, will permit Pulsar and
the Underwriter and their respective Representatives to make such inspections as
they may reasonably require, and will cause its Representatives to furnish
Pulsar and the Underwriter and their respective Representatives with such
financial and operating data and other information with respect to the business,
operations, assets, liabilities and prospects of Litronic as Pulsar and the
Underwriter and their respective Representatives may from time to time
reasonably request. From the date of this Agreement, Pulsar will give Litronic
full access, at reasonable times, to the offices and other facilities and to the
books, contracts, commitments and records of Pulsar and, to the extent in the
possession or control of Pulsar, will permit Litronic and its Representatives to
make such inspections as they may reasonably require, and will cause its
Representatives to furnish Litronic and its Representatives with such financial
and operating data and other information with respect to the business,
operations, assets, liabilities and prospects of Pulsar, as Litronic and its
Representatives may from time to time reasonably request.
(c) Pulsar, on the one hand, and Parent and Litronic, on the other hand,
will, and will cause their respective employees, agents, stockholders,
directors, officers, attorneys, accountants and other advisors (including the
Underwriter and its employees and agents) (collectively, "Representatives") to,
hold in strict confidence all Confidential Information and will not disclose the
same to any Person. If this Agreement is terminated, each party having received
or created any documents containing Confidential Information (including
documents received or created by its Representatives), will promptly return to
the other party or destroy (or cause to be returned or destroyed) all documents
(including all copies thereof) so received or created containing such
Confidential Information. For purposes hereof, "Confidential Information" means
all information of any kind (oral and written) concerning Litronic or Pulsar,
respectively, including, but not limited to, information relating to, identity
and description of goods and services used, purchasing, costs, pricing, sources,
technology, research, test procedures and results, customers and prospects,
marketing, and selling and servicing, except information (i) ascertainable or
obtained from public or published information, (ii) received from a third party
not known to Pulsar or its Representatives,
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or to Litronic or its Representatives, as applicable, to be under an obligation
to Litronic or Pulsar, as applicable, to keep such information confidential,
(iii) that is or becomes known to the public (other than through a breach of
this Agreement), (iv) that was in the receiving party's possession before
disclosure thereof to it in connection with this Agreement, or (v) that is
independently developed by Pulsar or by Litronic (including their respective
Representatives), as applicable. After the Acquisition Closing, Pulsar, the
Litronic Stockholders and the Pulsar Stockholders agree not to, at any time,
directly or indirectly, use, communicate, disclose or disseminate any
Confidential Information in any manner whatsoever, except such disclosures which
are necessary to comply with their duties as officers of Parent. Notwithstanding
the foregoing, any party may disclose the Confidential Information as required
by legal process, applicable law or in connection with regulatory filings;
provided, that if any party or any of its Representatives is requested or
required by legal process (whether by oral questions, interrogatories, requests
for information or documents, subpoenas, civil investigative demands or similar
processes) by any person to disclose any Confidential Information supplied to it
in the course of its dealings, it is agreed that such party will (i) provide the
other parties with prompt notice of such request(s) and the documents requested
so that the other parties may seek an appropriate protective order or waive
compliance with the provisions of this Section 8.3(c), and (ii) consult with the
other parties as to the advisability of taking legally available steps to resist
or narrow such request, and not oppose any action by the other parties to obtain
an appropriate protective order or other reliable assurance that confidential
treatment will be accorded to the Confidential Information.
8.4 Reasonable Best Efforts; Stockholders Approval.
----------------------------------------------
(a) Subject to the terms and conditions hereof, each party to this
Agreement agrees to fully cooperate in all reasonable respects with the others
and the others' Representatives in connection with any steps required to be
taken as part of its obligations under this Agreement and in connection with the
IPO. Each of Litronic and Pulsar agrees that it will use its reasonable best
efforts to cause all conditions to its obligations under this Agreement to be
satisfied as promptly as possible, including, but not limited to, using all
reasonable efforts to obtain all required consents, waivers, amendments,
modifications, approvals, authorizations, novations and licenses, and will not
undertake a course of action inconsistent with this Agreement or which would
make any of its representations, warranties, agreements or covenants in this
Agreement untrue in any material respect or any conditions precedent to its
obligations under this Agreement unable to be satisfied at or prior to the
Reorganization Closing or Acquisition Closing, as applicable.
(b) Without limiting the foregoing, the Litronic Stockholders and the
Pulsar Stockholders shall execute and deliver a written consent in lieu of such
special meeting unanimously approving this Agreement.
8.5 Consents. Each of Pulsar and Litronic will use reasonable efforts to
--------
obtain as promptly as practicable such consents of third parties to agreements
that would otherwise be violated by any provisions hereof and to make such
filings with governmental authorities as are necessary to consummate the
transactions contemplated by this Agreement. The parties will cooperate to
immediately determine whether any filings are requested pursuant to the Hart-
Scott-Rodino Act. If filings are required, the parties shall cooperate with each
other and file as soon as practicable. If the
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Acquisition occurs, Parent shall be responsible for the filing fees; otherwise
Pulsar and Litronic shall each be responsible for one-half of the filing fees.
8.6 Public Announcements. Except as provided in the immediately following
--------------------
sentence, all public announcements, notices or other communications regarding
this Agreement and the transactions contemplated hereby to third parties other
than the parties hereto and their respective Representatives shall require the
prior approval of Pulsar and Litronic. Notwithstanding the foregoing, neither
the filing of the Registration Statement (or any other document filed with any
public official in connection with the IPO), nor the distribution of the
Prospectus (whether in preliminary or final form), nor any selling activity
conducted by Parent or the Underwriter in connection with the IPO, including
without limitation those conducted as part of the so-called "road show", shall
be construed to be public announcements, notices or other communications
requiring the prior approval of Litronic and Pulsar.
8.7 Notification of Certain Matters. Each of the parties (the "Notifying
-------------------------------
Party") shall give prompt notice to the other parties of (i) the occurrence or
non-occurrence of any event that would be likely to cause any representation or
warranty of the Notifying Party contained in this Agreement to be untrue or
inaccurate in any material respect at or prior to the Acquisition Closing and
(ii) any material failure of the Notifying Party to comply with or satisfy any
covenant, condition, or agreement to be complied with or satisfied by it
hereunder. Without limiting the foregoing, from time to time prior to the
Closing Litronic will promptly supplement or amend the Litronic Disclosure
Schedule and Pulsar will promptly supplement or amend the Pulsar Disclosure
Schedule, in each case both to correct any inaccuracy in, respectively, the
Litronic Disclosure Schedule or the Pulsar Disclosure Schedule when delivered
and to reflect any development which, if existing at the date of this Agreement,
would have been required to be set forth in the applicable party's Disclosure
Schedule or which has rendered inaccurate the information contained in such
Disclosure Schedule (each notice furnishing such information being called, as
applicable a "Litronic Disclosure Supplement" or a "Pulsar Disclosure
Supplement"). Approximately six business days prior to the Acquisition Closing,
Litronic will deliver to Pulsar a final Litronic Disclosure Supplement and
Pulsar will deliver to Litronic a final Pulsar Disclosure Supplement consisting
of a complete update of, respectively, the Litronic Disclosure Schedule or the
Pulsar Disclosure Schedule as though all representations and warranties
contained in Article 3 hereof and Article 5 hereof were to be made as of the
date of the Acquisition Closing. In addition, Litronic and Pulsar shall promptly
notify each other in writing if at any time prior to a closing in connection
with the IPO it obtains knowledge of any facts relating to Litronic or Pulsar or
their officers, directors or stockholders that might make it necessary or
appropriate to amend or supplement the Prospectus in order to make the
statements contained therein not misleading or comply with applicable law. The
delivery of any Litronic Disclosure Supplement, any Pulsar Disclosure Supplement
or other notice pursuant to this Section 8.7 shall not render correct any
representation or warranty that was incorrect when made or limit or otherwise
affect the remedies available hereunder to the party receiving such Litronic
Disclosure Supplement, Pulsar Disclosure Supplement or notice.
8.8 Covenants of the Litronic Stockholders. The Litronic Stockholders, as
--------------------------------------
applicable, hereby covenant and agree with Pulsar and the Pulsar Stockholders
that they shall:
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(a) take no action which Litronic may not take pursuant to Section 8.2;
(b) take action and refrain from action to the extent required of Litronic
pursuant to Section 8.4;
(c) vote, or cause to be voted, all of their Litronic Shares for the
approval of each aspect of this Agreement (including the Reorganization)
requiring the approval of the stockholders of Litronic, and against the approval
of any other agreement providing for a merger, consolidation, sale of assets or
other business combination of Litronic with any person or entity other than the
Companies;
(d) cause Litronic to provide to Pulsar the notifications required of
Litronic under Section 8.7;
(e) execute and deliver at the Reorganization Closing the Employment
Contracts;
(f) subject to the other terms of this Agreement, (i) use all commercially
reasonable efforts to take whatever action may be reasonably necessary or
desirable to effect, perform or confirm of record or otherwise in Parent full
right, title and interest in and to the business, properties and assets now
conducted or owned by Litronic, free and clear of all Liens (excepting only
Liens reflected on the Litronic Balance Sheet or otherwise disclosed on the
Litronic Disclosure Schedule) or to collect, realize upon, gain possession of or
otherwise acquire full right, title and interest in and to such business,
properties and assets and (ii) use their reasonable best efforts to take
whatever action may be reasonably necessary or desirable carry out the intent
and purposes of the transactions contemplated hereby and to permit Parent to
undertake and complete the IPO;
(g) notify Parent and Pulsar in writing if at any time prior to a closing
in connection with the IPO they obtain actual knowledge of any facts relating to
Litronic or its officers, directors or stockholders that might make it necessary
or appropriate to amend or supplement the Prospectus used in the registration
statement filed in connection with the IPO in order to make the statements
contained therein not misleading or comply with applicable law (with the
delivery of any notice pursuant to this Section 8.8(g) not limiting or otherwise
affecting the remedies available hereunder to the party receiving such notice);
(h) execute and deliver such other instruments and take such other actions
as may be reasonably required by Parent or the Underwriter in order to carry out
the intent of this Agreement and to complete and close the IPO, subject to the
other terms of this Agreement; and
(i) satisfy (or cause to be satisfied) prior to the Reorganization Closing
any indebtedness to Litronic owed by the Litronic Stockholders or by any
Affiliate of the Litronic Stockholders.
8.9 Covenants of the Pulsar Stockholders. The Pulsar Stockholders, as
------------------------------------
applicable, hereby covenant and agree with Litronic and the Litronic
Stockholders that they shall:
(a) take no action which Pulsar may not take pursuant to Section 8.2;
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(b) take action and refrain from action to the extent required of Pulsar
pursuant to Section 8.4
(c) vote, or cause to be voted, all of their shares of Pulsar Common Stock
for the approval of each aspect of this Agreement (including the Acquisition)
requiring the approval of the stockholders of Pulsar, and against the approval
of any other agreement providing for a merger, consolidation, sale of assets or
other business combination of Pulsar with any person or entity other than the
Companies;
(d) cause Pulsar to provide to Litronic the notifications required of
Pulsar under Section 8.7;
(e) with respect to William W. Davis, Sr., execute and deliver at the
Acquisition Closing the Employment Contracts;
(f) subject to the other terms of this Agreement, use their reasonable best
efforts to take whatever action may be reasonably necessary or desirable carry
out the intent and purposes of the transactions contemplated hereby and to
permit Pulsar to undertake and complete the IPO;
(g) notify Parent and Litronic in writing if at any time prior to a closing
in connection with the IPO they shall obtain actual knowledge of any facts
relating to Pulsar or its officers, directors or stockholders that might make it
necessary or appropriate to amend or supplement the Prospectus used in the
registration statement filed in connection with the IPO in order to make the
statements contained therein not misleading or comply with applicable law (with
the delivery of any notice pursuant to this Section 8.9(g) not limiting or
otherwise affecting the remedies available hereunder to the party receiving such
notice);
(h) execute and deliver such other instruments and take such other actions
as may be reasonably required by Litronic in order to carry out the intent of
this Agreement and by Pulsar to complete and close the IPO, subject to the other
terms of this Agreement;
(i) satisfy (or cause to be satisfied) prior to the Acquisition Closing any
indebtedness to Pulsar owed by the Pulsar Stockholders or by any Affiliate of
the Pulsar Stockholders; and
(j) with respect to Pulsar's indebtedness to IBM Global Finance Corporation
which is guaranteed by the Pulsar Stockholders, William W. Davis, Sr. agrees (i)
to use reasonable efforts after the Acquisition Closing to obtain the release of
the guarantee of such indebtedness by Lillian Davis and (ii) to the extent IBM
Global Finance Corporation is willing to release some, but not all, of the
Pulsar Stockholders' guarantees, to require the release of all or as much as
possible of the guarantee of Lillian Davis before releasing any of his
guarantee.
8.10 Tax Free Reorganization. From and after the Reorganization Closing,
-----------------------
neither Pulsar nor Litronic shall take or suffer to be taken any action which
will cause either of the Reorganization or the Acquisition not to qualify as a
reorganization within the meaning of Section 368 of the Code, which shall be
tax-free except to the extent of cash paid in lieu of fractional shares.
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8.11 Monthly Financial Information. Within thirty days after the end of
-----------------------------
each month ending after the date of this Agreement and prior to the Acquisition
Closing, Litronic and Pulsar will each furnish to each other internally prepared
financial statements comparable to its Financial Statements prepared in a manner
consistent with its Financial Statements and certified by the chief financial
officer of Litronic and Pulsar.
8.12 Employment Contracts. At the Acquisition Closing, William W. Davis,
--------------------
Sr. and Kris Shah shall enter into the Employment Contracts with Parent, in the
form of Exhibit 8.12.
8.13 Covenants of Parent. Subject to the consummation of the Reorganization
-------------------
and the Acquisition, Parent hereby covenants and agrees with Litronic and the
Litronic Stockholders and Pulsar and the Pulsar Stockholders as follows:
(a) If, prior to the Acquisition Closing, any Litronic Stockholder or any
Pulsar Stockholder gives written notice to Parent of a statement contained in
the Registration Statement that, in such Stockholder's opinion, is false or
misleading, or that the Registration Statement omits to state a fact necessary
to make the statements contained therein not false or misleading, and if Parent
fails to amend the Registration Statement to address such statement or omission
to the reasonable satisfaction of such Stockholder, then Parent hereby agrees to
indemnify such Stockholder against any loss or damage (including reasonable
attorneys' fees) suffered by such Stockholder as a consequence of any claim
brought against such Stockholder by any third party on the basis of the
statement or omission of which such Stockholder gave notice.
(b) Parent will use all commercially reasonable efforts to obtain the
release, at or immediately following the Acquisition Closing, of all Litronic
Guarantees. Parent covenants that it will either (i) take steps to ensure, to
the Litronic Stockholders' reasonable satisfaction, that each such loan and
similar credit obligation guaranteed by the Litronic Stockholders will be
satisfied and permanently discharged as of the Acquisition Closing or (ii)
obtain and deliver to the Litronic Stockholders at or before the Reorganization
Closing the written assurance from the guaranteed party with respect to each
such loan and similar credit obligation guaranteed by the Litronic Stockholders
to the effect that, upon or as of the Acquisition Closing, the Litronic
Stockholders will be released from the applicable Litronic Guarantee. Parent
further covenants that it will indemnify the Litronic Stockholders against any
loss (including reasonable attorneys' fees) in connection with any Litronic
Guarantees that have been so disclosed and, if applicable, reflected.
(c) After completion of the IPO, Parent shall use its best efforts to
continue the quotation of the Parent Common Stock on the Nasdaq National Market.
(d) Parent agrees with respect to continuing employees of Litronic and
Pulsar to recognize all vacation time accrued through the Acquisition Closing
under the vacation policies of Litronic and Pulsar as of the Acquisition
Closing, and to implement health, retirement and other benefit plans with
benefits comparable or superior to those currently in place at Litronic and
Pulsar.
(e) At or prior to the Acquisition Closing, Parent shall take or cause to
be taken all necessary action such that, at the Acquisition Closing and
concurrent with the effectiveness of the
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Amended Charter, the Board of Directors of Parent shall be comprised of five (5)
members. The first class of directors shall serve until the annual meeting of
stockholders held in 2000 and shall initially consist of two members, one of
whom shall be identified by Litronic and one of whom shall be identified by
Pulsar prior to the Reorganization Closing, who shall be elected to the Board of
Directors immediately after the Acquisition Closing. The second class of
directors shall serve until the annual meeting of stockholders held in 2001 and
shall initially consist of Anthony Giraudo, who shall be elected to the Board of
Directors immediately after the Acquisition Closing. The third class of
directors shall serve until the annual meeting of stockholders held in 2002 and
shall initially consist of William W. Davis, Sr. and Kris Shah, who shall be
elected to the Board of Directors immediately after the Acquisition Closing. All
subsequent terms of each class of directors after such class first stands for
re-election shall expire at the third succeeding annual meeting of stockholders
after their election. At or prior to the Acquisition Closing, the Companies
shall take or cause to be taken all necessary action such that, at the
Acquisition Closing, the officers of Parent shall be as set forth on Exhibit
8.13(e), and each such person shall hold office until his or her respective
successor is duly elected or appointed and qualified.
(f) Prior to the Acquisition Closing, Parent shall take or cause to be
taken all necessary action to adopt the Parent 1999 Stock Option Plan in
substantially the form of Exhibit 8.13(f).
(g) Parent will cause a Form S-8 registration statement ("Form S-8") to be
filed under the Securities Act with respect to the Parent Common Stock issuable
upon exercise of the Assumed Options within 90 days of the first anniversary of
the Acquisition Closing and will use its best efforts to maintain the
effectiveness and current status of the Form S-8 for so long as any such Assumed
Options remain outstanding; provided that (i) any Assumed Options held by any
member of the immediate family of Kris Shah (other than A. R. Shah) or any
officer, director or stockholder of Parent as of the Acquisition Closing shall
be subject to the terms of applicable lock-up agreements with the Underwriter
and (ii) no more than 100,000 shares of Parent Common Stock in the aggregate may
be sold pursuant to the Form S-8 prior to the second anniversary of the
Acquisition Closing. With respect to those individuals, if any, who subsequent
to the Acquisition Closing will become subject to the reporting requirements
under Section 16(a) of the Exchange Act, Parent shall administer those
individuals' Assumed Options in a manner that complies with Rule 16b-3
promulgated under the Exchange Act.
(h) Parent will use all commercially reasonable efforts to ensure, to the
reasonable satisfaction of Lillian Davis, that (i) the indebtedness of Pulsar to
Wilmington Trust Company which is guaranteed by Lillian Davis will be satisfied
and permanently discharged within 90 days of the Acquisition Closing, or, in
lieu thereof, (ii) Lillian Davis will be released from such guarantee within
such 90-day period.
8.14 Cooperation. Each of the parties hereto hereby agrees to fully
-----------
cooperate with the other parties hereto in preparing and filing any notices,
applications, reports and other instruments and documents which are required by,
or which are desirable in the reasonable opinion of any of the parties hereto,
or their respective legal counsel, in respect of, any statute, rule, regulation
or order of any governmental or administrative body in connection with the
transactions contemplated by this Agreement.
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9. CONDITIONS TO CONSUMMATION OF THE ACQUISITION
9.1 Conditions to the Obligations of Pulsar and the Pulsar Stockholders
-------------------------------------------------------------------
with respect to the Acquisition. The respective obligations of Pulsar and the
-------------------------------
Pulsar Stockholders to consummate the Acquisition are subject to the
satisfaction at the Acquisition Closing, or waiver by Pulsar in writing, in
whole or in part, of each of the following conditions:
(a) The IPO shall have been completed at the same time.
(b) Each of the representations, warranties, agreements and covenants of
Parent, Litronic and the Litronic Stockholders (giving effect to the Litronic
Disclosure Schedule) shall be true and correct as of, and shall not have been
violated in any respect at, the Acquisition Closing as though made on and as of
the Acquisition Closing, except for (i) representations, warranties, agreements
and covenants which make reference to a specific date (including the date of
this Agreement), which need only be true and correct as of the specified date,
and (ii) failures of representations or warranties to be true and correct as of
the Acquisition Closing solely on account of matters arising between the date
hereof and the Acquisition Closing in the ordinary course of Litronic's
business, if and to the extent such matters are consistent with past practice of
Litronic and do not create a Material Adverse Effect with respect to Litronic,
either singly or in the aggregate; Parent, Litronic and the Litronic
Stockholders shall, on or before the Acquisition Closing, have performed all of
their respective obligations under this Agreement which by the terms hereof are
to be performed on or before the Acquisition Closing; and there shall have been
delivered to Pulsar a certificate signed by the President of Litronic on behalf
of and in the name of Litronic and by the Litronic Stockholders dated as of the
date of the Acquisition Closing to the foregoing effect (except with respect to
the representations, warranties and agreements of Parent).
(c) The Pulsar Stockholders, the Litronic Stockholders and Parent shall
have entered into the Registration Rights Agreement.
(d) No action, claim, suit, inquiry, investigation or proceeding by or
before any court or other governmental body shall have been instituted by any
governmental body or other Person or threatened in writing by any governmental
body which seeks to restrain, prohibit or invalidate the transactions
contemplated by this Agreement or which would have a Material Adverse Effect on
the right of Pulsar to consummate the Acquisition.
(e) Pulsar shall have received the opinion dated the date of the
Acquisition Closing and in form and substance reasonably satisfactory to Pulsar
and its counsel of Rutan & Tucker, LLP, counsel to Litronic, substantially to
the effect set forth on Exhibit 9.2(e) (subject to qualifications and
assumptions customary in transactions such as the Acquisition), which opinion
provides that it may be relied upon by the Underwriter.
(f) All proceedings taken by Litronic and all instruments executed and
delivered by Litronic prior to the date of the Acquisition Closing in connection
with the transactions herein contemplated shall be satisfactory in form and
substance to counsel for Pulsar acting reasonably.
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(g) No statute, rule or regulation shall have been enacted or promulgated
which makes illegal or prohibits consummation of the transactions contemplated
hereby or which would have a Material Adverse Effect on the ability of Pulsar to
conduct the business of Litronic as presently conducted by Litronic.
(h) Kris Shah and William W. Davis, Sr. shall have executed and delivered
to Parent the Employment Contracts.
(i) Litronic shall have delivered to Pulsar a certificate of its Secretary
certifying as to requisite corporate or other action authorizing the
transactions contemplated by this Agreement, the incumbency of officers and
directors, and the status of record ownership of the Litronic Shares.
(j) Parent and Litronic shall have delivered to Pulsar such other
certificates, documents and consents as Pulsar and its counsel shall reasonably
require.
(k) The Acquisition shall have been consummated on or prior to May 1, 1999
or such later date as the parties shall agree by a written instrument signed by
all of them.
(l) Except as otherwise provided by this Agreement, there shall not have
occurred after the date hereof, in the reasonable judgment of Pulsar, any
Material Adverse Effect on Litronic.
(m) Except as otherwise set forth in this Agreement including the Litronic
Disclosure Schedule, all necessary consents, waivers, approvals, licenses and
authorizations by third parties shall have been received.
(n) Parent shall have adopted and filed the Amended Charter with the
Secretary of State of the State of Delaware.
(o) The quotation of the Parent Common Stock on the Nasdaq National Market,
including the shares of Parent Common Stock issuable pursuant to the
Reorganization and the Acquisition and upon exercise of all Assumed Options,
shall have been authorized subject to completion of the IPO.
9.2 Conditions to the Obligations of Parent with respect to the
-----------------------------------------------------------
Acquisition .The obligations of Parent to consummate the Acquisition are subject
- ------------
to the satisfaction at the Acquisition Closing, or waiver by Parent in writing,
in whole or in part, of each of the following conditions:
(a) The IPO shall have been completed at the same time.
(b) Each of the representations, warranties and agreements of Pulsar and
the Pulsar Stockholders (giving effect to the Pulsar Disclosure Schedule) shall
be true and correct as of, and shall not have been violated in any respect at,
the Acquisition Closing (without giving effect to the Acquisition) as though
made on and as of the Acquisition Closing except for (i) representations and
warranties and agreements which make reference to a specific date (including the
date of this Agreement), which need only be true and correct as of the specified
date, and (ii) failures of representations or warranties to be true and correct
as of the Acquisition Closing solely on account
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of matters arising between the date hereof and the Acquisition Closing in the
ordinary course of Pulsar's business, if and to the extent such matters are
consistent with past practice of Pulsar and do not create a Material Adverse
Effect with respect to Pulsar, either singly or in the aggregate; Pulsar and the
Pulsar Stockholders shall, on or before the Acquisition Closing, have performed
all of their respective obligations under this Agreement which by the terms
hereof are to be performed on or before the Acquisition Closing; and there shall
have been delivered to Parent a certificate signed by the President of Pulsar on
the behalf of and in the name of Pulsar and by the Pulsar Stockholders, dated as
of the date of the Acquisition Closing to the foregoing effect.
(c) The Pulsar Stockholders, the Litronic Stockholders and Parent shall have
entered into the Registration Rights Agreement.
(d) No action, claim, suit, inquiry, investigation or proceeding by or
before any court or other governmental body shall have been instituted by any
governmental body or other Person or threatened in writing by any governmental
body which seeks to restrain, prohibit or invalidate the transactions
contemplated by this Agreement or which would have a Material Adverse Effect on
the right of Parent to consummate the Acquisition.
(e) Parent shall have received the opinion, dated the date of the
Acquisition Closing and in form and substance satisfactory to Parent and its
counsel, of Arent Fox Kintner Plotkin & Kahn, PLLC, substantially to the effect
set forth on Exhibit 9.3(e) (subject to qualifications and assumptions customary
in transactions such as the Acquisition).
(f) All proceedings taken by Pulsar and all instruments executed and
delivered by Pulsar prior to the date of the Acquisition Closing in connection
with the transactions herein contemplated shall be satisfactory in form and
substance to counsel for Parent, acting reasonably.
(g) No statute, rule or regulation shall have been enacted or promulgated
which makes illegal or prohibits consummation of the transactions contemplated
hereby or which would have a Material Adverse Effect on the ability of Parent to
conduct the business of Pulsar as presently conducted by Pulsar.
(h) Kris Shah and William W. Davis, Sr., shall have executed and delivered
to Parent the Employment Contracts.
(i) Pulsar shall have delivered to Parent a certificate of its Secretary,
certifying as to requisite corporate or other action authorizing the
transactions contemplated by this Agreement, the incumbency of officers and
directors, and the status of record ownership of its capital stock.
(j) Kris Shah shall have been elected as chairman of the board, chief
executive officer and a director of Parent as of immediately following the
closing of the IPO.
(k) Pulsar shall have delivered to Parent such other certificates,
documents and consents (including the legal existence and good standing of
Pulsar) as Parent and its counsel shall reasonably require.
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(l) The Acquisition shall have been consummated on or prior to May 1, 1999
or such later date as the parties shall agree by a written instrument signed by
all of them.
(m) Except as otherwise provided by this Agreement, there shall not have
occurred after the date hereof, in the reasonable judgment of Parent, any
Material Adverse Effect on Pulsar.
(n) Except as otherwise set forth in this Agreement, including the Pulsar
Disclosure Schedule, all necessary consents, waivers, approvals, licenses and
authorizations by third parties shall have been received.
(o) Parent shall have adopted and filed the Amended Charter with the
Secretary of State of the State of Delaware.
10. INDEMNIFICATION
10.1 Agreements to Indemnify.
-----------------------
(a) As used in this Article 10:
(i) "Damages" means claims, damages, liabilities, losses, judgments,
settlements and expenses, including, without limitation, all reasonable fees and
disbursements of counsel incident to the investigation or defense of any claim
or proceeding or threatened claim or proceeding, but shall not include claims
fully covered by insurance, calculated taking into account the after tax benefit
of any deductions arising out of such "Damages."
(ii) "Litronic Indemnified Party" means Litronic prior to the
Reorganization Closing and the former stockholders of Litronic collectively
after the Reorganization Closing, "Pulsar Indemnified Party" means Pulsar prior
to the Acquisition Closing and the former stockholders of Pulsar after the
Acquisition Closing and "Parent Indemnified Party" means Parent.
(iii) "Indemnified Party" means either of the Pulsar Indemnified Party,
the Litronic Indemnified Party or the Parent Indemnified Party, as applicable
under the circumstances.
(b) On the terms and subject to the limitations set forth in this
Agreement, Litronic, prior to the Reorganization Closing, and the Litronic
Stockholders, after the Reorganization Closing, shall indemnify, defend and hold
the Pulsar Indemnified Party and the Parent Indemnified Party harmless from,
against and in respect of any and all Damages incurred by any Pulsar Indemnified
Party or any Parent Indemnified Party arising from or in connection with any
actual or alleged breach of any representation, warranty, covenant or agreement
made by Litronic or by the Litronic Stockholders in this Agreement or in any
Exhibit, Schedule, certificate or other document delivered or to be delivered at
the Reorganization Closing or the Acquisition Closing by or on behalf of
Litronic or the Litronic Stockholders pursuant to the terms of this Agreement or
otherwise referred to or incorporated in this Agreement; provided, however, that
(i) this provision shall not be construed to provide to the Pulsar Indemnified
Party or the Parent Indemnified Party any indemnification with respect to the
Registration Statement and the information contained therein, or with respect to
any
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failure of the IPO to be consummated, and (ii) each Litronic Stockholder shall
be severally, and not jointly, liable hereunder with respect to any actual or
alleged breach of any representation in Article 4.
(c) On the terms and subject to the limitations set forth in this
Agreement, Pulsar, prior to the Acquisition Closing, and the Pulsar
Stockholders, after the Acquisition Closing, shall indemnify, defend and hold
the Litronic Indemnified Party and the Parent Indemnified Party harmless from,
against and in respect of any and all Damages incurred by any Litronic
Indemnified Party or any Parent Indemnified Party arising from or in connection
with any actual or alleged breach of any representation, warranty, covenant or
agreement made by Pulsar or the Pulsar Stockholders in this Agreement or in any
Exhibit, Schedule, certificate or other document delivered or to be delivered at
the Reorganization Closing or the Acquisition Closing by or on behalf of Pulsar
or the Pulsar Stockholders pursuant to the terms of this Agreement or otherwise
referred to or incorporated in this Agreement; provided, however, that (i) this
provision shall not be construed to provide to the Litronic Indemnified Party or
the Parent Indemnified Party any indemnification with respect to the
Registration Statement and the information contained therein, or with respect to
any failure of the IPO to be consummated, and (ii) each Pulsar Stockholder shall
be severally, and not jointly, liable hereunder with respect to any actual or
alleged breach of any representation in Article 6.
(d) On the terms and subject to the limitations set forth in this
Agreement, Parent shall indemnify, defend and hold the Litronic Indemnified
Party and the Pulsar Indemnified Party harmless from, against and in respect of
any and all Damages incurred by any Litronic Indemnified Party or any Pulsar
Indemnified Party arising from or in connection with any actual or alleged
breach of any representation, warranty, covenant or agreement made by Parent in
this Agreement or in any Exhibit, Schedule, certificate or other document
delivered or to be delivered at the Reorganization Closing or the Acquisition
Closing by or on behalf of Parent pursuant to the terms of this Agreement or
otherwise referred to or incorporated in this Agreement; provided, however, that
this provision shall not be construed to provide to the Litronic Indemnified
Party or the Pulsar Indemnified Party any indemnification with respect to the
Registration Statement and the information contained therein, or with respect to
any failure of the IPO to be consummated.
(e) Subject to Section 10.2, Litronic's and the Litronic Stockholders'
representations and warranties set forth in Article 3, the Litronic
Stockholders' representations and warranties set forth in Article 4, Pulsar's
and the Pulsar Stockholders' representations and warranties set forth in Article
5, the Pulsar Stockholders' representations and warranties set forth in Article
6 and Parent's representations and warranties set forth in Article 7, shall, for
purposes of this Article 10, be deemed to have survived the Acquisition Closing
and the other transactions contemplated hereby notwithstanding any contrary
terms of this Agreement, and whenever such representations, warranties,
covenants and agreements are referred to in this Article 10, the text of the
same as set forth in the aforesaid Articles shall be deemed to be set forth in
their entirety herein, and the same are hereby incorporated herein by such
references. Each representation, warranty, covenant and agreement of Litronic
and the Litronic Stockholders shall be deemed to have been relied
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upon by the Pulsar Indemnified Party and the Parent Indemnified Party, and each
representation, warranty, covenant and agreement of Pulsar and the Pulsar
Stockholders shall be deemed to have been relied upon by the Litronic
Indemnified Party and the Parent Indemnified Party, notwithstanding any
investigation or inspection made by or on behalf of any Pulsar Indemnified Party
or any Litronic Indemnified Party or any Parent Indemnified Party, as
applicable, and shall not be affected in any respect of any such investigation
or inspection. No waiver of a closing condition by a Pulsar Indemnified Party or
a Litronic Indemnified Party shall be deemed to relieve a party that is
otherwise obligated to provide indemnification of its obligations pursuant to
this Section 10.1 on account of the matters that were the subject of such
waiver.
10.6 Limitations on Indemnity Obligations. The indemnity obligations of
------------------------------------
Litronic or the Litronic Stockholders, as applicable (in either case, the
"Litronic Indemnifying Party"), or Pulsar or the Pulsar Stockholders, as
applicable (the "Pulsar Indemnifying Party") (both the Litronic Indemnifying
Party and the Pulsar Indemnifying Party being called generically the
"Indemnifying Party"), under this Agreement shall be subject to the following
limitations:
(a) The indemnity obligations of the Indemnifying Party shall expire on the
second anniversary of the Acquisition Closing (the "Cut-off Date"); provided,
however, that such obligations with respect to (i) the representations and
warranties contained in Sections 3.1, 3.2, 3.9, 4.1, 4.2, 5.1, 5.2, 5.10, 6.1
and 6.2 of this Agreement shall continue forever without limitation, and (ii)
the representations and warranties regarding Taxes, which are contained in
Section 3.15 and Section 5.16, shall remain in effect until all claims for Taxes
due by or on account of Litronic or Pulsar, respectively, for any period up to
and including the Acquisition Closing have been settled and any statute of
limitations period with respect to such Taxes has expired; and provided further
that the indemnity obligations of the Indemnifying Party for Damages timely
asserted by an Indemnified Party before the expiration of the applicable
indemnity period, if any, in the manner provided in this Agreement shall
continue until such Damages are finally resolved and discharged.
(b) Subject to the maximum aggregate amounts provided elsewhere in this
Section 10.2(b) with respect to the Litronic Stockholders' or the Pulsar
Stockholders' indemnity obligations, with respect to any Damages for which the
Litronic Stockholders or the Pulsar Stockholders are liable pursuant to Section
10.1, the Litronic Stockholders or the Pulsar Stockholders shall be liable
solely for a fraction of each dollar of Damages suffered equal to the fraction
derived by dividing the number of shares of Litronic Common Stock or shares of
Pulsar Common Stock held by the particular Litronic Stockholders or Pulsar
Stockholders, as the case may be, as of the date hereof by the total number of
shares of Litronic Common Stock or shares of Pulsar Common Stock outstanding on
a fully diluted basis as of the date hereof. The aggregate indemnity obligations
of such stockholders for any Damages shall not in any event exceed an amount
equal to the product of the total number of shares of Parent Common Stock to
which such stockholder becomes entitled pursuant to Section 2.1 or 2.2,
multiplied by the IPO Price. The indemnity obligations may be satisfied by
delivery of (a) cash or other immediately available funds or (b) shares of
Parent Common Stock, valued at the IPO Price.
(c) An Indemnified Party shall be entitled to indemnification only if the
aggregate and collective Damages incurred or suffered by it exceeds $100,000, in
which event it shall be entitled to indemnification of the full amount of such
Damages.
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(d) Notwithstanding the preambles to, respectively, Article 3 and Article
5, the contractual liability of the Litronic Stockholders and the Pulsar
Stockholders for any breach of the representations and warranties contained in,
respectively, Article 3 and Article 5 shall be limited to such stockholder's
liability provided in this Article 10.
10.3 Notice of Third Party Claims. An Indemnified Party shall promptly
----------------------------
notify the Indemnifying Party in writing of any matter asserted by a third
person that might give rise to any indemnity obligation of the Indemnifying
Party hereunder (a "Third Party Claim"), specifying in reasonable detail the
nature thereof and indicating the amount (if known, or estimated if necessary)
of the Damages that have been or may be sustained by the Indemnified Party.
Failure of any Indemnified Party to promptly give such notice shall not relieve
the Indemnifying Party of its obligation to indemnify under this Article 10, but
as a result of any such failure, the Indemnified Party shall be liable to the
Indemnifying Party for, and only for, the amount of actual damages caused by
such failure, which amount shall be an offset against the amount of Damages for
which the Indemnifying Party is liable hereunder. Together with or following
such notice, the Indemnified Party shall deliver to the Indemnifying Party
copies of all notices and documents received by the Indemnified Party relating
to the Third Party Claim (including court papers).
10.4 Defense and Settlement of Third Party Claims. The Indemnifying Party
--------------------------------------------
shall have the right (without prejudice to the right of any Indemnified Party to
participate at its or his own expense through counsel of its or his own
choosing) to defend against any Third Party Claim at its or his expense and
through counsel of its own choosing and to control such defense if the
Indemnifying Party gives written notice of its intention to do so within 15
business days of its or his receipt of notice of the Third Party Claim. The
Indemnified Party shall cooperate fully in all reasonable respects in the
defense of such Third Party Claim and shall make available to the Indemnifying
Party or its counsel all pertinent information under their control relating
thereto. The Indemnified Party shall have the right to elect to settle any Third
Party Claim; provided, however, the Indemnifying Party shall not have any
indemnification obligation with respect to any monetary payment to any third
party required by such settlement unless the Indemnifying Party shall have
consented thereto. The Indemnifying Party shall have the right to elect to
settle any Third Party Claim subject to the consent of the Indemnified Party;
provided, however, that if the Indemnified Party fails to give such consent
within 15 business days of being requested to do so, the Indemnified Party
shall, at its expense, assume the defense of such Third Party Claim and
regardless of the outcome of such matter, the Indemnifying Party's liability
hereunder shall be limited to the amount of any such proposed settlement. The
foregoing provisions notwithstanding, in no event (a) may an Indemnifying Party
adjust, compromise or settle any Third Party Claim unless such adjustment,
compromise or settlement unconditionally releases the Indemnified Party from all
liability, (b) may an Indemnifying Party adjust, compromise or settle any Third
Party Claim if such adjustment, compromise or settlement affects the absolute
and sole right of Parent to own or use any of Litronic's or Pulsar's assets or
(c) may an Indemnifying Party defend any Third Party Claim which, if adversely
determined, would materially impair the financial condition, business or
prospects of Parent.
10.5 Notice of Other Claims. If any Indemnified Party incurs any Damages
----------------------
that does not involve a Third Party Claim, the Indemnified Party shall deliver a
notice of such Damages with
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reasonable promptness to the Indemnifying Party. If the Indemnifying Party
notifies the Indemnified Party that it does not dispute the Damages described in
such notice or fails to notify the Indemnified Party within 30 days after
delivery of such notice by the Indemnified Party whether the Indemnifying Party
disputes the Damages described in such notice, the Damages in the amount
specified in the Indemnified Party's notice will be conclusively deemed a
liability of the Indemnifying Party and the Indemnifying Party shall pay the
amount of such Damages to the Indemnified Party on demand. Failure of any
Indemnified Party to promptly give such notice shall not relieve the
Indemnifying Party of its or his obligation to indemnify under this Article 10,
but as a result of any such failure, the Indemnified Party shall be liable to
the Indemnifying Party for, and only for, the amount of the actual damages
caused by such failure, which amount shall be an offset against the amount of
Damages for which the Indemnifying Party is liable hereunder.
11. TERMINATION; AMENDMENTS; WAIVER
11.1 Termination. This Agreement may be terminated at any time prior to
-----------
the Acquisition Closing, notwithstanding approval thereof by the stockholders of
the Companies:
(a) by mutual consent of the stockholders of the Companies and their Boards
of Directors;
(b) by any party, in its sole discretion, if the Reorganization,
Acquisition and the IPO have not been consummated on or before May 1, 1999,
unless the failure of the Reorganization, Acquisition and IPO to occur by such
date shall be due to the failure of the party seeking to terminate this
Agreement to perform or observe the covenants and agreements of such party set
forth herein;
(c) by Litronic or the Litronic Stockholders if there has been a
misrepresentation or breach on the part of Pulsar or the Pulsar Stockholders in
the representations, warranties, covenants or obligations of Pulsar or the
Pulsar Stockholders set forth herein, provided that in the case of a breach of
any such covenant or obligation, such breach has not been cured within ten
business days after Litronic has notified Pulsar or the Pulsar Stockholder in
question of such breach;
(d) by Pulsar or the Pulsar Stockholders if there has been a
misrepresentation or breach on the part of Litronic or the Litronic Stockholders
in the representations, warranties, covenants and obligations of Litronic and
the Litronic Stockholders set forth herein, provided that in the case of a
breach of any such covenant or obligation, such breach has not been cured within
ten business days after Pulsar has notified Litronic or the Litronic Stockholder
in question of such breach; or
(e) by any party if any court shall have issued an order, decree or ruling
or taken any other action permanently enjoining, restraining or otherwise
prohibiting either of the Reorganization or the Acquisition and such order,
decree, ruling or other action shall have become final and non-appealable.
The power of termination provided for by this Section 11.1 may be exercised
for Pulsar or Litronic only by their respective Boards of Directors in their
sole discretion, and will be
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effective only after written notice thereof, signed on behalf of the party for
which it is given by its Chairman of the Board, President or other duly
authorized officer, shall have been given to the other. If this Agreement is
terminated in accordance with this Section 11.1, the Acquisition shall be
abandoned without further action by Pulsar or Litronic.
11.2 Effect of Termination. In the event of termination of this Agreement
---------------------
by any party as provided in Section 11.1, this Agreement shall forthwith become
void and have no effect, and none of the Companies, nor any of their officers,
directors or stockholders shall have any liability of any nature whatsoever
hereunder, or in connection with the transactions contemplated hereby, except
(a) Section 13.7 shall survive any termination of this Agreement and (b)
notwithstanding anything to the contrary contained in this Agreement, no party
shall be relieved of or released from any liabilities or damages arising out of
its breach of any provision of this Agreement.
11.3 Amendment. This Agreement may not be amended except by an instrument
---------
in writing signed on behalf of each of the parties hereto.
11.4 Extension; Waiver. At any time prior to the Acquisition Closing the
-----------------
parties hereto, by action taken or authorized (in the case of the Companies) by
their respective Boards of Directors, may, to the extent legally allowed,
subject to Section 10.3, (a) extend the time for the performance of any of the
obligations or other acts of the other parties hereto, (b) waive any
inaccuracies in the representations and warranties contained herein or in any
document delivered pursuant hereto and (c) waive compliance with any of the
agreements or conditions contained herein. Any agreement on the part of a party
hereto to any such extension or waiver shall be valid only if set forth in a
written instrument signed on behalf of such party, but such extension or waiver
or failure to insist on strict compliance with an obligation, covenant,
agreement or condition shall not operate as a waiver of, or estoppel with
respect to, any subsequent or other failure.
12. DISPUTE RESOLUTION
Except for matters with respect to which injunctive relief is sought, all
claims, disputes and other matters in controversy (a "dispute") arising directly
or indirectly out of or related to this Agreement, or the breach thereof,
whether contractual or noncontractual, and whether during the term or after the
termination of this Agreement, shall be resolved exclusively according to the
procedures set forth in this Article 12.
12.1 Mediation. Neither party shall commence an arbitration proceeding
---------
pursuant to the provisions of Section 12.2 unless that party first gives a
written notice (a "Dispute Notice") to the other party setting forth the nature
of the dispute. The parties shall attempt in good faith to resolve the dispute
by mediation under the Commercial Mediation Rules of the American Arbitration
Association ("AAA") in effect on the date of the Dispute Notice. If the parties
cannot agree on the selection of a mediator within 20 days after delivery of the
Dispute Notice, the mediator will be selected by the AAA. If the dispute has not
been resolved by mediation as provided above within 60 days after delivery of
the Dispute Notice, then the dispute shall be determined by arbitration in
accordance with the provisions of Section 12.2.
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<PAGE>
12.2 Arbitration. Any dispute that is not settled through mediation as
-----------
provided in Section 12.1 above shall be resolved by arbitration in Orange
County, California, governed by the Federal Arbitration Act, 9 U.S.C. (S) 1 et
seq, and administered by the American Arbitration Association under its
Commercial Arbitration Rules in effect on the date of the Dispute Notice, as
modified by the provisions of this Section 12.2, by a single arbitrator. Each
party shall be entitled to strike on a peremptory basis, for any reason or no
reason, any or all of the names of potential arbitrators on the list submitted
to the parties by the AAA as being qualified in accordance with the criteria
established by the AAA. If the parties cannot agree on a mutually acceptable
single arbitrator from the one or more lists submitted by the AAA, the AAA shall
designate three persons who, in its opinion, meet the criteria established by
the AAA, which designees may include persons named on any list previously
submitted by the AAA. Each party shall be entitled to strike one of such three
designees on a peremptory basis, indicating its order of preference with respect
to the remaining designees, and the selection of the arbitrator shall be made
from among such designee(s) which have not been so stricken by either party in
accordance with their indicated order of mutual preference to the extent
possible. The arbitrator shall base the award on applicable law and judicial
precedent and, unless both parties agree otherwise, shall include in such award
the findings of fact and conclusions of law upon which the award is based.
Judgment on the award rendered by the arbitrator(s) may be entered in any court
having jurisdiction thereof.
12.3 Costs and Attorneys' Fees. If any party fails to proceed with
-------------------------
mediation or arbitration as provided herein or unsuccessfully seeks to stay such
mediation or arbitration, or fails to comply with any arbitration award, or is
unsuccessful in vacating or modifying the award pursuant to a petition or
application for judicial review, the other parties shall be entitled to be
awarded costs, including reasonable attorneys' fees, paid or incurred by such
other parties in successfully compelling such arbitration or defending against
the attempt to stay, vacate or modify such arbitration award and/or successfully
defending or enforcing the award.
12.4 Tolling Statute of Limitations. All applicable statutes of
------------------------------
limitations and defenses based upon the passage of time shall be tolled while
the procedures specified in this Article 12 are pending. The parties will take
such action, if any, required to effectuate such tolling.
13. MISCELLANEOUS
13.1 Entire Agreement; Assignment. This Agreement (a) constitutes, with
----------------------------
the Litronic Disclosure Schedule, the Pulsar Disclosure Schedule, the other
Schedules and the Exhibits hereto, the entire agreement among the parties with
respect to the subject matter hereto and supersedes all other prior agreements
and understandings, both written and oral, among the parties or any of them with
respect to the subject matter hereof and (b) shall not be assigned by operation
of law or otherwise.
13.2 Validity. The invalidity or unenforceability of any provision of this
--------
Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement, each of which shall remain in full force and
effect.
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<PAGE>
13.3 Notices. All notices, requests, claims, demands and other
-------
communications hereunder shall be in writing and shall be deemed to have been
duly given or made when delivered in person or by electronic facsimile
transmission, cable, telegram, or telex, or when mailed by registered or
certified mail (postage prepaid, return receipt requested) or delivered to a
courier of national reputation to the respective parties as follows:
If to Parent, to it at:
Kris Shah
2030 Main Street, Suite 1250
Irvine, California 92614
with a copy to:
Arent Fox Kintner Plotkin & Kahn, PLLC
1050 Connecticut Avenue, NW
Washington, DC 20036-5339
Attention: Gerald P. McCartin, Esq.
Facsimile: (202) 857-6395
If to Pulsar or the Pulsar Stockholders, to them at:
William W. Davis, Sr.
4390 Parliament Place, Suite R
Lanham, Maryland 20706
Lillian Davis
3309 Shortridge Lane
Mitchellville, Maryland 20721
with a copy to:
Christopher Locke, Esq.
371 Fairhill Lane
Elkton, Maryland 21921
Facsimile: (302) 369-4026
If to Litronic or the Litronic Stockholders, to them at:
Kris Shah
2030 Main Street, Suite 1250
Irvine, California 92614
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<PAGE>
with a copy to:
Rutan & Tucker, LLP
611 Anton Boulevard, 14/th/ Floor
Costa Mesa, California 92626-1998
Attention: Gregg Amber, Esq.
Facsimile: (714) 546-9035
or to such other address as the person to whom notice is given may have
previously furnished to the others in writing in the manner set forth above
(provided that notice of any change of address shall be effective only upon
receipt thereof). Receipts of notice shall be deemed to have occurred upon
receipt of confirmation if notice is by fax or upon passage of three days if
notice is by mail.
13.4 Governing Law. This Agreement and all rights of the parties arising
-------------
in connection with the transactions contemplated hereby (including the
negotiation hereof, and whether or not such transactions shall be consummated)
shall be governed by and construed in accordance with the internal laws of State
of Delaware, regardless of the laws that might otherwise govern under applicable
principles of conflicts of laws thereof.
13.5 Descriptive Headings. The descriptive headings herein are inserted
--------------------
for convenience of reference only and are not intended to be part of or to
affect the meaning or interpretation of this Agreement.
13.6 Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same agreement. Copies (photostatic,
facsimile or otherwise) of signatures to this Agreement shall be deemed to be
originals and may be relied upon to the same extent as originals, and delivery
of a duly executed signature page to this Agreement shall be deemed to be
delivery of this Agreement in its entirety.
13.7 Expenses. All costs and expenses incurred in connection with the
--------
transactions contemplated by this Agreement shall be paid by the party incurring
such expenses, except that, notwithstanding the foregoing, (a) the fees of Arent
Fox Kintner Plotkin & Kahn, PLLC relating to the Reorganization, the Acquisition
and IPO, (b) the fees of KPMG Peat Marwick LLP relating to the preparation of
the pro forma financial statements needed for the completion of the
Reorganization, Acquisition and IPO and the representation of Pulsar in the IPO
registration process, and (c) the fees incurred by Parent as the registrant in
the registration statement relating to the IPO, including, but limited to,
printer, registration and filing, and "Blue Sky" fees, shall be payable by
Litronic and Pulsar at the rate of 64.0776% and 35.9224%, respectively.
Notwithstanding the foregoing and Section 13.8, if the IPO is completed, all of
the fees and expenses referred to in this Section 13.7 shall be paid by Parent.
13.8 Broker Fees. Pulsar and Litronic shall each be responsible for any
-----------
advisory, brokers' or finders' fees charged by its advisors, except for any fees
due to Financial Advisor pursuant to the Financial Advisor IPO engagement letter
and those certain engagement letters dated as of the date
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<PAGE>
hereof between Financial Advisor and each of Pulsar and Litronic relating to
Financial Advisor's role as exclusive financial advisor for the Reorganization
and Acquisition, which fees shall be payable by the parties in accordance with
the terms of such engagement letters. Each party will indemnify and hold
harmless the other from any claim for advisory, brokers' or finders' fees by any
person or entity other than the Financial Advisor engaged or claiming to be
engaged by the indemnifying party.
13.9 Parties in Interest. This Agreement shall be binding upon and inure
-------------------
solely to the benefit of each party hereto. Nothing in this Agreement, express
or implied, is intended to confer upon any other person any rights or remedies
of any nature whatsoever under or by reason of this Agreement.
13.10 Interpretation. The parties acknowledge and agree that each party
--------------
and its counsel reviewed and negotiated the terms and provisions of this
Agreement and has contributed to its revision and that the rule of construction
to the effect that any ambiguities are resolved against the drafting party shall
not be employed in the interpretation of this Agreement.
13.11 Schedules. All references in this Agreement to Schedules shall
---------
mean the Schedules identified in this Agreement, which are incorporated into
this Agreement and shall be deemed a part of the representations and warranties
to which they relate. To the extent a disclosure has been made by Pulsar, the
Pulsar Stockholders, Litronic or the Litronic Stockholders on any Schedule, it
shall be in writing, shall indicate the Section pursuant to which it is being
delivered, and shall be initialed by the delivering party. For purposes of this
Agreement, information which is necessary to make a given Schedule complete and
accurate, but is omitted therefrom, shall nevertheless be deemed to be contained
therein if it is contained on any other Schedule; but only if such information
appears on such other Schedule in such form and detail that it is responsive to
the requirements of such given Schedule.
13.12 No Assignment. This Agreement shall not be assigned by operation
-------------
of law or otherwise, and any assignment shall be null and void.
13.13 Severability. If any term or other provision of this Agreement is
------------
invalid, illegal or incapable of being enforced by any rule of law, or public
policy, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect so long as the economic or legal substance of
the transactions contemplated hereby is not affected in any manner adverse to
any party. Upon such determination that any term or other provision is invalid,
illegal or incapable of being enforced, the parties hereto shall negotiate in
good faith to modify this Agreement so as to effect the original intent of the
parties as closely as possible in an acceptable manner to the end that
transactions contemplated hereby are fulfilled to the greatest extent possible.
[Remainder of page intentionally blank]
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<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Stock Acquisition
Agreement to be executed on its behalf by its officers thereunto duly
authorized, all as of the day and year first above written.
LITRONIC INC.
By:_____________________________
Kris Shah, Chief Executive Officer
PULSAR DATA SYSTEMS, INC.
By:__________________________
William W. Davis, Sr., President
_____________________________
William W. Davis, Individually
______________________________
Lillian A. Davis, Individually
LITRONIC INDUSTRIES, INC.
By:_____________________________
Kris Shah, President
KRIS SHAH AND GERALDINE M. SHAH LIVING
TRUST DATED OCTOBER 9, 1997
By:______________________________
Kris Shah, Trustee
By:______________________________
Geraldine M. Shah, Trustee
[Signatures continued on the following page]
69
<PAGE>
RAMESH R. SHAH AND PATRICIA L. SHAH LIVING
TRUST DATED MARCH 22, 1982 AS AMENDED ON
OCTOBER 14, 1997
By:___________________________________
Ramesh R. Shah, Trustee
By:____________________________________
Patricia L. Shah, Trustee
SHAH LIVING TRUST DATED NOVEMBER 14, 1995
By:_______________________________________
Dilip R. Shah, Trustee
By:_______________________________________
Shila D. Shah, Trustee
LEENA SHAH TRUST DATED OCTOBER 16, 1997
By:__________________________
Kris Shah, Trustee
CHANDRA L. SHAH TRUST DATED OCTOBER 9, 1997
By:__________________________
Kris Shah, Trustee
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<PAGE>
REORGANIZATION AGREEMENT
by and among
LITRONIC INC.
AND
KRIS SHAH AND GERALDINE M. SHAH, AS TRUSTEES
RAMESH R. SHAH AND PATRICIA L. SHAH, AS TRUSTEES
DILIP R. SHAH AND SHILA D. SHAH, AS TRUSTEES
KRIS SHAH, AS TRUSTEE
KRIS SHAH, AS TRUSTEE
<PAGE>
REORGANIZATION AGREEMENT
This Reorganization Agreement (this "Agreement") dated as of February 9,
1999, is by and among Litronic Inc., a Delaware corporation ("Parent"), and Kris
Shah and Geraldine M. Shah, as Trustees of the Kris Shah and Geraldine M. Shah
Living Trust dated October 9, 1997, Ramesh R. Shah and Patricia L. Shah, as
Trustees of the Ramesh R. Shah and Patricia L. Shah Living Trust dated March 22,
1982 as amended on October 14, 1997, Dilip R. Shah and Shila D. Shah, as
Trustees of the Shah Living Trust dated November 14, 1995, Kris Shah as Trustee
of the Leena Shah Trust dated October 16, 1997 and Kris Shah, as Trustee of the
Chandra L. Shah Trust dated October 9, 1997 (each of the foregoing trustees in
their capacity as trustee, the same constituting all of the stockholders of
Litronic Industries, Inc., a California corporation ("Litronic"), being
collectively referred to as the "Litronic Stockholders").
This Agreement contemplates that, concurrent with the effectiveness of the
Registration Statement (as defined below), the Litronic Stockholders will
exchange all of their shares of Litronic common stock for shares of Parent
common stock, as a result of which Litronic will become a wholly owned
subsidiary of Parent (the "Reorganization"). Concurrent with the execution of
this Agreement, Parent, Litronic and the Litronic Stockholders are entering into
a Stock Acquisition Agreement with Pulsar Data Systems, Inc., a Delaware
corporation ("Pulsar"), and Pulsar's stockholders, pursuant to which Pulsar's
stockholders, concurrent with the closing of the IPO (as defined below), will
exchange all of their shares of Pulsar common stock for shares of Parent common
stock, as a result of which Pulsar will become a wholly owned subsidiary of
Parent (the "Acquisition").
Accordingly, the parties hereto, in consideration of the mutual
representations, warranties and covenants contained herein, agree as follows:
1. CERTAIN DEFINITIONS
As used in this Agreement, the following terms shall have the respective
meanings set forth below:
1.1 "Acquisition" has the meaning given to it in the recitals.
1.2 "Assumed Options" has the meaning given to it in Section 2.4.
1.3 "Closing" has the meaning given to it in Section 2.1.
1.4 "Exchange Act" means the Securities Exchange Act of 1934, as amended.
1.5 "IPO" means the initial underwritten public offering of shares of
Parent Common Stock at not less than the Pre-IPO Valuation and generating at
least $30 million in gross proceeds to Parent.
<PAGE>
1.6 "IPO Price" means the price at which shares of Parent Common Stock are
sold to the public in the IPO.
1.7 "ISO" has the meaning given to it in Section 2.4.
1.8 "Exchange Ratio" has the meaning given to it in Section 2.1.
1.9 "Financial Advisor" means Bluestone Capital Partners L.P.
1.10 "Fraction" means that fraction which has one as its numerator and
which has, as its denominator, the number of Litronic Shares outstanding
immediately prior to the Closing.
1.11 "Litronic Option" means an option to purchase Litronic Shares, whether
or not vested or exercisable as of the applicable time as set forth in Exhibit
1.11.
1.12 "Litronic Share" means a share of the Common Stock, no par value, of
Litronic, and "Litronic Shares" means all such shares.
1.13 "Litronic Stockholders" has the meaning given to it in the recitals.
1.14 "Parent Common Stock" means the shares of common stock, par value $.01
per share, of Parent.
1.15 "Pre-IPO Valuation" means a valuation for Parent after and taking
into account the Reorganization and the Acquisition based on a total market
capitalization of Parent following the Reorganization and the Acquisition
(assuming no exercise of the Assumed Options), but not including the IPO, of not
less than $60,406,310, with the IPO generating gross proceeds of not less than
$30 million, as adjusted pursuant to Section 2.2.
1.16 "Registration Statement" means the registration statement on Form S-1
to be filed with the Securities and Exchange Commission in connection with the
IPO.
2. THE REORGANIZATION
2.1 The Reorganization. At the Closing, which shall occur concurrently
------------------
with the effectiveness of the Registration Statement, upon the terms and subject
to the conditions hereof, each of the Litronic Stockholders hereby agrees to
deliver, and Parent agrees to accept delivery of, stock certificates, duly
endorsed for transfer, representing all of the Litronic Shares owned by such
Litronic Stockholder, for and against delivery of duly executed stock
certificates representing shares of Parent Common Stock, as follows. Subject to
Section 2.2, each Litronic Share shall be exchanged for that number of shares of
Parent Common Stock determined by multiplying the Fraction times the number
obtained after dividing $38,706,930 by the IPO Price (the "Exchange Ratio");
provided that the number of shares of Parent Common Stock issuable pursuant to
the foregoing clause to any Litronic Stockholder shall be reduced by the number
of shares, if any, of Parent Common Stock held by such Stockholder immediately
prior to the Closing. In lieu of any fractional shares, at the Closing there
2
<PAGE>
shall be paid to each holder of Litronic Shares who would otherwise be entitled
to receive a fractional share of Parent Common Stock an amount of cash equal to
the amount of such fraction times the IPO Price. The Closing will be held at the
offices of Arent Fox Kintner Plotkin & Kahn, PLLC, 1050 Connecticut Avenue,
N.W., Washington, D.C. 20036-5339 (or such other place as the parties may
agree).
2.2 Adjustment to Pre-IPO Valuation. The aggregate value (based on the
-------------------------------
IPO price per share of Parent Common Stock) of the Parent Common Stock exchanged
for the Litronic Shares shall be equal to 64.0776% of the Pre-IPO Valuation. If
the Financial Advisor in its sole discretion determines, based upon preliminary
discussions with potential investors, that the Pre-IPO Valuation should be
increased or decreased and gives written notice thereof to Litronic (such notice
making specific reference to this Section 2.2), the Litronic Stockholders agree
that the Pre-IPO Valuation shall be adjusted in accordance with the
determination set forth in such notice; provided, however, that in no event
shall the Litronic Stockholders be obligated to proceed with the Reorganization
if the Pre-IPO Valuation, as so adjusted, is less than $58 million (assuming
gross IPO proceeds of $30 million). If any adjustment to the Pre-IPO Valuation
is made pursuant to this Section 2.2 after the Closing, Parent and the Litronic
Stockholders agree that the number of shares of Parent Common Stock held by the
Litronic Stockholders shall also be proportionately adjusted so that the
Litronic Stockholders hold in the aggregate Parent Common Stock with an
aggregate value (based on the IPO Price of Parent Common Stock) equal to
64.0776% of the adjusted Pre-IPO Valuation.
2.3 Tax Consequences. It is intended that the Reorganization shall qualify
----------------
as a reorganization within the meaning of Section 368 of the Code, and that the
Reorganization shall be tax-free, except to the extent of cash paid in lieu of
fractional shares.
2.4 Assumed Options. At the Closing, the Litronic 1998 Stock Option Plan
---------------
(the "1998 Plan") and each of the Litronic Options (whether or not then
exercisable or vested) issued thereunder will be assumed by Parent and, by
virtue of the closing of the Reorganization and without any further action on
the part of any holder, each of the Litronic Options shall be converted into an
option (collectively, the "Assumed Options") to purchase that number of shares
of Parent Common Stock determined by multiplying the number of Litronic Shares
subject to the Litronic Option at the Closing by the Exchange Ratio, at an
exercise price per share of Parent Common Stock equal to the exercise price per
share of the Litronic Option immediately prior to the Closing divided by the
Exchange Ratio and rounded up to the nearest whole cent. If the foregoing
calculation results in an Assumed Option being exercisable for a fraction of a
share of Parent Common Stock, then the number of shares of Parent Common Stock
subject to that option will be rounded to the nearest whole number of shares
(rounded down, in the case of Litronic Options that are "incentive stock
options" under Section 422 of the Code). Parent shall issue, upon any partial or
total exercise of Assumed Options in lieu of Litronic Shares the number of
shares of Parent Common Stock to which the holder of the Assumed Option is
entitled. Parent shall not grant any further options under the 1998 Plan, which
shall terminate except with respect to the administration of the Assumed
Options. Parent will reserve a sufficient number of shares of Parent Common
Stock for issuance upon exercise of the Assumed Options. If any adjustment to
the Pre-IPO Valuation is made pursuant to Section 2.2 after the Closing, Parent
and the Litronic Stockholders agree that the number of shares of Parent Common
Stock for which the Assumed Options shall be exercisable, and the per share
exercise price
3
<PAGE>
with respect thereto as determined in accordance with the foregoing provisions,
shall also be proportionately adjusted.
2.5 Stock Legend. Each stock certificate representing the Parent Common
------------
Stock issued in the Reorganization shall bear a legend in, or substantially in,
the following form:
"The shares represented by this certificate have not been registered under
the Securities Act of 1933, as amended to date, and may not be sold,
pledged or otherwise transferred without an effective registration under
said Act or unless Litronic Inc. shall have received an opinion
satisfactory to Litronic Inc. of counsel satisfactory to Litronic Inc. that
an exemption from registration under such Act is then available."
2.6 Subsequent Actions. If, at any time after the Closing, Parent believes
------------------
or is advised that any deeds, bills of sale, assignments, assurances or any
other actions or things are necessary or desirable to vest, perfect or confirm
of record or otherwise in Parent its right, title or interest in, to or under
any of the rights, properties or assets of Litronic to be acquired by Parent as
a result of, or in connection with, the Reorganization or otherwise to carry out
this Agreement, the officers and directors of Parent shall, at the sole cost and
expense of Parent, be authorized to execute and deliver, in the name and on
behalf of Parent, to carry out all such deeds, bills of sale, assignments and
assurances and to take and do, in the name and on behalf of Parent, all such
other actions and things as may be necessary or desirable to vest, perfect or
confirm any and all right, title and interest in, to and under such rights,
properties or assets in Parent or otherwise to carry out this Agreement.
3. TERMINATION; AMENDMENTS.
3.1 Termination. This Agreement may be terminated at any time prior to the
-----------
Closing:
(a) by mutual consent of Parent and the Litronic Stockholders;
(b) by any party, in its sole discretion, if the Registration Statement has
not become effective by May 1, 1999; or
(c) by any party if any court shall have issued an order, decree or ruling or
taken any other action permanently enjoining, restraining or otherwise
prohibiting the Reorganization and such order, decree, ruling or other
action shall have become final and non-appealable.
3.2 Effect of Termination. In the event of termination of this Agreement
---------------------
by any party as provided in Section 3.1, this Agreement shall forthwith become
void and have no effect, and none of Parent, its officers, directors or
stockholders or the Litronic Stockholders shall have any liability of any nature
whatsoever hereunder, or in connection with the transactions contemplated
hereby.
3.3 Amendment. This Agreement may not be amended except by an instrument
---------
in writing signed on behalf of each of the parties hereto.
4
<PAGE>
4. MISCELLANEOUS
4.1 Entire Agreement; Assignment. This Agreement (a) constitutes the
----------------------------
entire agreement among the parties with respect to the subject matter hereto and
supersedes all other prior agreements and understandings, both written and oral,
among the parties or any of them with respect to the subject matter hereof and
(b) shall not be assigned by operation of law or otherwise.
4.2 Validity. The invalidity or unenforceability of any provision of this
--------
Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement, each of which shall remain in full force and
effect.
4.3 Governing Law. This Agreement and all rights of the parties arising in
-------------
connection with the transactions contemplated hereby (including the negotiation
hereof, and whether or not such transactions shall be consummated) shall be
governed by and construed in accordance with the internal laws of State of
Delaware, regardless of the laws that might otherwise govern under applicable
principles of conflicts of laws thereof.
4.4 Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same agreement. Copies (photostatic,
facsimile or otherwise) of signatures to this Agreement shall be deemed to be
originals and may be relied upon to the same extent as originals, and delivery
of a duly executed signature page to this Agreement shall be deemed to be
delivery of this Agreement in its entirety.
4.5 Parties in Interest. This Agreement shall be binding upon and inure
-------------------
solely to the benefit of each party hereto. Nothing in this Agreement, express
or implied, is intended to confer upon any other person any rights or remedies
of any nature whatsoever under or by reason of this Agreement.
[Remainder of page intentionally blank]
5
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IN WITNESS WHEREOF, each of the parties has executed or caused this
Reorganization Agreement to be executed on its behalf by its officers or other
representative thereunto duly authorized, all as of the day and year first above
written.
LITRONIC INC.
By:__________________________________
Kris Shah, Chief Executive Officer
KRIS SHAH AND GERALDINE M. SHAH LIVING
TRUST DATED OCTOBER 9, 1997
By: ______________________________
Kris Shah, Trustee
By: ______________________________
Geraldine M. Shah, Trustee
RAMESH R. SHAH AND PATRICIA L. SHAH LIVING
TRUST DATED MARCH 22, 1982 AS AMENDED ON
OCTOBER 14, 1997
By: ___________________________________
Ramesh R. Shah, Trustee
By: ____________________________________
Patricia L. Shah, Trustee
SHAH LIVING TRUST DATED NOVEMBER 14, 1995
By: _______________________________________
Dilip R. Shah, Trustee
By: _______________________________________
Shila D. Shah, Trustee
[Signatures continued on following page]
6
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LEENA SHAH TRUST DATED OCTOBER 16, 1997
By: __________________________
Kris Shah, Trustee
CHANDRA L. SHAH TRUST DATED OCTOBER 9, 1997
By: __________________________
Kris Shah, Trustee
7
<PAGE>
EXHIBIT 3.1
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
LITRONIC, INC.
Litronic, Inc., a corporation organized and existing under the and by
virtue of the General Corporation Law of the State of Delaware (the
CORPORATION), does hereby certify the following:
FIRST: The Certificate of Incorporation is hereby amended to change the
name, by deleting the present Article FIRST and inserting a new Article FIRST,
as follows:
FIRST: The name of the Corporation is
"LITRONIC INC."
SECOND: The Certificate of Incorporation is hereby further amended by
deleting the present Article ELEVENTH and inserting a new Article ELEVENTH, as
follows:
ELEVENTH: The number of directors of the Corporation shall be
determined by and provided for in the manner set forth in the Bylaws
of the Corporation, but shall not at any time be less than one (1).
THIRD: The Corporation has not received any payment for any of its
stock.
FOURTH: The foregoing amendment has been duly adopted in accordance with
Section 241 of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, this certificate of amendment is executed by the Sole
Incorporator in accordance with Section 103 (a) (1) a of the General Corporation
Law of the State of Delaware.
DATED: February 5, 1999
/s/ Kris Shah
-------------------------------------------
Kris Shah
<PAGE>
CERTIFICATE OF INCORPORATION
OF
LITRONIC, INC.
The undersigned, for the purpose of incorporating a corporation under the
General Corporation Law of the State of Delaware, does hereby certify as
follows:
FIRST. The name of the Corporation is LITRONIC, INC.
SECOND. The address of the Corporation's registered office in the State of
Delaware is 1013 Centre Road, City of Wilmington, County of New Castle 19805-
1297. The name of its registered agent at such address is The Prentice-Hall
Corporation System, Inc.
THIRD. The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware.
FOURTH.
Section 1. Authorized Shares. The total number of shares which the
Corporation shall have authority to issue is thirty million (30,000,000) shares
of capital stock, of which twenty five million (25,000,000) shares shall be
designated Common Stock, par value of $.01 per share, and five million
(5,000,000) shares shall be designated Preferred Stock, par value of $.01 per
share.
Section 2. Preferred Stock. Shares of Preferred Stock may be issued
from time to time in one or more classes or series as the Board of Directors, by
resolution or resolutions, may from time to time determine, each of said classes
or series to be distinctively designated. The voting powers, preferences and
relative, participating, optional and other special rights, and the
qualifications, limitations or restrictions thereof, if any, of each such class
or series may differ from those of any and all other classes or series of
Preferred Stock at any time outstanding, and the Board of Directors is hereby
expressly granted authority, subject to any limitations contained in any class
or series of Preferred Stock at any time outstanding, to fix or alter, by
resolution or resolutions, the designation, number, voting powers, preferences
and relative, participating, optional and other special rights, and the
qualifications, limitations and restrictions thereof, of each such class or
series, including, but without limiting the generality of the foregoing, the
following:
(i) The distinctive designation of, and the number of shares of
Preferred Stock that shall constitute, such class or series, which number
(except as otherwise provided by the Board of Directors in the resolution
establishing such class or series) may be
2
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increased or decreased (but not below the number of shares of such class or
series then outstanding) from time to time by like action of the Board of
Directors;
(ii) The rights in respect of dividends, if any, of such class or
series of Preferred Stock, the extent of the preference or relation, if any, of
such dividends to the dividends payable on any other class or classes or any
other series of the same or other class or classes of capital stock of the
Corporation, and whether such dividends shall be cumulative or noncumulative;
(iii) The right, if any, of the holders of such class or series of
Preferred Stock to convert the same into, or exchange the same for, shares of
any other class or classes or of any other series of the same or any other class
or classes of capital stock of the Corporation and the terms and conditions of
such conversion or exchange;
(iv) Whether or not shares of such class or series of Preferred Stock
shall be subject to redemption, and the redemption price or prices and the time
or times at which, and the terms and conditions on which, shares of such class
or series of Preferred Stock may be redeemed;
(v) The rights, if any, of the holders of such class or series of
Preferred Stock upon the voluntary or involuntary liquidation, dissolution of
winding up of the Corporation or in the event of any merger or consolidation of
or sale of assets by the Corporation;
(vi) The terms of any sinking fund or redemption or purchase account,
if any, to be provided for shares of such class or series of Preferred Stock;
(vii) The voting powers, if any, of the holders of any class or
series of Preferred Stock generally or with respect to any particular matter,
which may be less than, equal to or greater than one vote per share, and which
may, without limiting the generality of the foregoing, include the right, voting
as a class or series by itself or together with the holders of any other class
or classes or series of the same of other class or classes of Preferred Stock or
all classes or series of Preferred Stock, to elect one or more directors of the
Corporation (which, without limiting the generality of the foregoing, may
include a specified number or portion of the then-existing number of authorized
directorships of the Corporation, or a specified number or portion of
directorships in addition to the then-existing number of authorized
directorships of the Corporation) generally or under such specific circumstances
and on such conditions, as shall be provided in the resolution or resolutions of
the Board of Directors adopted pursuant hereto; and
(viii) Such other powers, preferences and relative, participating,
optional and other special rights, and the qualifications, limitations and
restrictions thereof, as the Board of Directors shall determine.
FIFTH. The name and mailing address of the incorporator is Kris Shah, 2950
Redhill Avenue, Costa Mesa, California 92626.
SIXTH. In furtherance and not in limitation of the powers conferred by statute,
the Board of Directors of the Corporation is expressly authorized to make, alter
or repeal the bylaws of the Corporation.
3
<PAGE>
SEVENTH. A director of the Corporation shall not be liable to the Corporation
or its stockholders for monetary damages for breach of fiduciary duty as a
director, except to the extent such exemption from liability or limitation
thereof is not permitted under the General Corporation Law of the State of
Delaware as the same exists or may hereafter be amended. Any amendment,
modification or repeal of the foregoing sentence by the stockholders of the
Corporation shall not adversely affect any right or protection of a director of
the Corporation in respect of any act or omission occurring prior to the time of
such amendment, modification or repeal.
EIGHTH. Elections of directors need not be by written ballot except and to the
extent provided in the bylaws of the Corporation.
NINTH. The Corporation is to have perpetual existence.
TENTH. The Corporation reserves the right at any time, and from time to time,
to amend, alter, change or repeal any provision contained in this Certificate of
Incorporation, and other provisions authorized by the laws of the State of
Delaware at the time in force may be added or inserted, in the manner now or
hereafter prescribed by law; and all rights, preferences and privileges of
whatsoever nature conferred upon stockholders, directors or any other persons
whomsoever by and pursuant to this Certificate of Incorporation, as may be
amended from time to time, are granted subject to the rights reserved in this
Article TENTH.
ELEVENTH. The initial Board of Directors shall consist of three (3) directors.
THE UNDERSIGNED, being the incorporator hereinbefore named, for the purpose of
forming a corporation pursuant to the General Corporation Law of the State of
Delaware, does hereby make this Certificate, hereby declaring and certifying
that this my act and deed and the facts herein stated are true, and accordingly,
hereunto set my hand this 29th day of January, 1997.
Executed on January 29, 1997
/s/ Kris Shah
------------------------------------
Kris Shah, Incorporator
4
<PAGE>
EXHIBIT 3.2
BYLAWS
OF
LITRONIC INC.
<PAGE>
TABLE OF CONTENTS
PAGE
----
PREAMBLE................................................................ 1
ARTICLE I CORPORATE OFFICES......................................... 1
1.1 REGISTERED OFFICE......................................... 1
1.2 OTHER OFFICES............................................. 1
ARTICLE II MEETINGS OF STOCKHOLDERS.................................. 1
2.1 PLACE OF MEETINGS......................................... 2
2.2 ANNUAL MEETING............................................ 2
2.3 SPECIAL MEETING........................................... 2
2.4 NOTICE OF STOCKHOLDERS' MEETINGS.......................... 2
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE.............. 3
2.6 QUORUM.................................................... 3
2.7 ADJOURNED MEETING; NOTICE................................. 3
2.8 VOTING.................................................... 4
2.9 WAIVER OF NOTICE.......................................... 4
2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING... 5
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING;
GIVING CONSENTS.......................................... 5
2.12 PROXIES................................................... 5
2.13 LIST OF STOCKHOLDERS ENTITLED TO VOTE..................... 6
2.14 NOMINATIONS AND PROPOSALS................................. 7
2.15 INSPECTORS
ARTICLE III DIRECTORS................................................. 7
3.1 POWERS.................................................... 7
3.2 NUMBER OF DIRECTORS....................................... 7
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS... 8
3.4 RESIGNATION AND VACANCIES................................. 8
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE.................. 8
3.6 FIRST MEETINGS............................................ 8
3.7 REGULAR MEETINGS.......................................... 8
3.8 SPECIAL MEETINGS; NOTICE.................................. 9
3.9 QUORUM.................................................... 9
3.10 WAIVER OF NOTICE.......................................... 9
3.11 ADJOURNED MEETING; NOTICE................................. 9
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING......... 9
3.13 FEES AND COMPENSATION OF DIRECTORS........................ 10
3.14 APPROVAL OF LOANS TO OFFICERS............................. 10
3.15 REMOVAL OF DIRECTORS...................................... 10
i
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ARTICLE IV COMMITTEES................................................ 10
4.1 COMMITTEES OF DIRECTORS................................... 11
4.2 COMMITTEE MINUTES......................................... 11
4.3 MEETINGS AND ACTION OF COMMITTEES......................... 11
4.4 ADVISORY COMMITTEES....................................... 11
ARTICLE V OFFICERS.................................................. 11
5.1 OFFICERS.................................................. 11
5.2 ELECTION OF OFFICERS...................................... 12
5.3 SUBORDINATE OFFICERS...................................... 12
5.4 REMOVAL AND RESIGNATION OF OFFICERS....................... 12
5.5 VACANCIES IN OFFICES...................................... 12
5.6 CHAIRMAN OF THE BOARD..................................... 12
5.7 CHIEF EXECUTIVE OFFICER................................... 13
5.8 PRESIDENT................................................. 13
5.9 VICE PRESIDENT............................................ 13
5.10 SECRETARY................................................. 14
5.11 CHIEF FINANCIAL OFFICER................................... 14
5.12 TREASURER................................................. 14
5.13 ASSISTANT SECRETARY....................................... 14
5.14 ASSISTANT TREASURER....................................... 14
5.15 AUTHORITY AND DUTIES OF OFFICERS.......................... 14
ARTICLE VI INDEMNITY................................................. 15
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS................. 15
6.2 INDEMNIFICATION OF OTHERS................................. 15
6.3 INSURANCE................................................. 15
6.4 EXPENSES.................................................. 16
6.5 EMPLOYEES AND AGENTS...................................... 16
6.6 CONTRACT RIGHTS........................................... 16
6.7 MERGER OR CONSOLIDATION................................... 16
ARTICLE VII RECORDS AND REPORTS........................................ 17
7.1 MAINTENANCE AND INSPECTION OF RECORDS..................... 17
7.2 INSPECTION BY DIRECTORS................................... 17
7.3 REPRESENTATION OF SHARES OF OTHER CORPORATIONS............ 17
ARTICLE VIII GENERAL MATTERS............................................ 17
8.1 CHECKS.................................................... 18
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS.......... 18
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES.................... 18
8.4 SPECIAL DESIGNATION ON CERTIFICATES....................... 19
8.5 LOST CERTIFICATES......................................... 19
8.6 CONSTRUCTION; DEFINITIONS................................. 19
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8.7 DIVIDENDS................................................. 19
8.8 FISCAL YEAR............................................... 19
8.9 SEAL...................................................... 19
8.10 TRANSFER OF STOCK......................................... 20
8.11 STOCK TRANSFER AGREEMENTS................................. 20
8.12 REGISTERED STOCKHOLDERS................................... 20
ARTICLE IX AMENDMENTS................................................ 20
ARTICLE X DISSOLUTION............................................... 20
iii
<PAGE>
BYLAWS
OF
LITRONIC INC.
PREAMBLE
These bylaws are subject to, and governed by, the General Corporation Law
of the State of Delaware (the "Delaware General Corporation Law") and the
Certificate of Incorporation, as it may be amended from time to time (the
"Certificate of Incorporation"), of LITRONIC INC., a Delaware corporation (the
"Corporation"). In the event of a direct conflict between the provisions of
these bylaws and the mandatory provisions of the Delaware General Corporation
Law or the provisions of the Certificate of Incorporation, such provisions of
the Delaware General Corporation Law or the certificate of incorporation of the
Corporation, as the case may be, will be controlling.
ARTICLE I
CORPORATE OFFICES
1.1 REGISTERED OFFICE
The registered office of the Corporation shall be at Corporation Trust
Center, 1209 Orange Street, in the City of Wilmington, County of New Castle,
State of Delaware. The name of the registered agent of the Corporation at such
location is The Corporation Trust Company.
1.2 OTHER OFFICES
The board of directors may at any time establish other offices at any place
or places where the Corporation is qualified to do business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
2.1 PLACE OF MEETINGS
Meetings of stockholders shall be held at any place, within or outside the
State of Delaware, designated by the board of directors. In the absence of any
such designation, stockholders' meetings shall be held at the principal office
of the Corporation.
2.2 ANNUAL MEETING
The annual meeting of stockholders shall be held each year on a date and at
a time designated by the board of directors.
<PAGE>
2.3 SPECIAL MEETING
A special meeting of the stockholders may be called, at any time by the
board of directors, or by the president, or by one or more stockholders holding
shares in the aggregate entitled to cast not less than 10% of the votes at that
meeting.
If a special meeting is called by any person or persons other than the
board of directors or the president or the chairman of the board, then the
request shall be in writing, specifying the time of such meeting and the general
nature of the business proposed to be transacted, and shall be delivered
personally or sent by registered mail or by telegraphic or other facsimile
transmission to the chairman of the board, the president, any vice president or
the secretary of the Corporation. The officer receiving the request shall cause
notice to be promptly given to the stockholders entitled to vote, in accordance
with the provisions of Sections 2.4 and 2.5 of these bylaws, that a meeting will
be held at the time requested by the person or persons calling the meeting, so
long as that time is not less than 35 nor more than 60 days after the receipt of
the request. If the notice is not given within 20 days after receipt of the
request, then the person or persons requesting the meeting may give the notice.
Nothing contained in this paragraph of this Section 2.3 shall be construed as
limiting, fixing or affecting the time when a meeting of stockholders called by
action of the board of directors may be held.
2.4 NOTICE OF STOCKHOLDERS' MEETINGS
All notices of meetings with stockholders shall be in writing and shall be
sent or otherwise given in accordance with Section 2.5 of these bylaws not less
than ten nor more than 60 days before the date of the meeting to each
stockholder entitled to vote at such meeting. The notice shall specify the
place, date, and hour of the meeting, and, in the case of a special meeting, the
purpose or purposes for which the meeting is called.
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
Written notice of any meeting of stockholders, if mailed, is given when
deposited in the United States mail, postage prepaid, directed to the
stockholder at his address as it appears on the records of the Corporation. An
affidavit of the secretary or an assistant secretary or of the transfer agent of
the Corporation that the notice has been given shall, in the absence of fraud,
be prima facie evidence of the facts stated therein.
2.6 QUORUM
The holders of a majority of the stock issued and outstanding and entitled
to vote thereat, present in person or represented by proxy, shall constitute a
quorum at all meetings of the stockholders for the transaction of business
except as otherwise provided by statute or by the Certificate of Incorporation.
If, however, such quorum is not present or represented at any meeting of the
stockholders, then the stockholders entitled to vote thereat, present in person
or represented by proxy, shall have power to adjourn the meeting from time to
time, without notice other than announcement at the meeting, until a quorum is
present or represented. At such adjourned meeting
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<PAGE>
at which a quorum is present or represented, any business may be transacted that
might have been transacted at the meeting as originally noticed.
2.7 ADJOURNED MEETING; NOTICE
When a meeting is adjourned to another time or place, unless these bylaws
otherwise require, notice need not be given of the adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting the Corporation may transact any business that
might have been transacted at the original meeting. If the adjournment is for
more than 30 days, or if after the adjournment a new record date is fixed for
the adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting.
2.8 VOTING
The stockholders entitled to vote at any meeting of stockholders shall be
determined in accordance with the provisions of Section 2.11 of these bylaws,
subject to the provisions of Sections 217 and 218 of the Delaware General
Corporation Law (relating to voting rights of fiduciaries, pledgors and joint
owners of stock and to voting trusts and other voting agreements).
Except as may be otherwise provided by law or in the Certificate of
Incorporation, each stockholder shall be entitled to one vote for each share of
capital stock held by such stockholder.
2.9 WAIVER OF NOTICE
Whenever notice is required to be given under any provision of the Delaware
General Corporation Law or of the Certificate of Incorporation or these bylaws,
a written waiver thereof, signed by the person entitled to notice, whether
before or after the time stated therein, shall be deemed equivalent to notice.
Attendance of a person at a meeting shall constitute a waiver of notice of such
meeting, except when the person attends a meeting for the express purpose of
objecting, at the beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened. Neither the business to
be transacted at, nor the purpose of, any regular or special meeting of the
stockholders need be specified in any written waiver of notice unless so
required by the Certificate of Incorporation or these bylaws.
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2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT
WITHOUT A MEETING
Unless otherwise provided in the Certificate of Incorporation, any action
required to be taken at any annual or special meeting of stockholders of the
Corporation, or any action which may be taken at any annual or special meeting
of such stockholders, may be taken without a meeting, without prior notice and
without a vote, if a consent or consents in writing, setting forth the action so
taken and bearing the dates of signature of the stockholders who signed the
consent or consents, shall be signed by the holders of outstanding stock having
not less than the minimum number of votes that would be necessary to authorize
or take such action at a meeting at which all shares entitled to vote thereon
were present and voted and shall be delivered to the Corporation by delivery to
its registered office in the State of Delaware, or the Corporation's principal
place of business, or an officer or agent of the Corporation having custody of
the book or books in which proceedings of meetings of the stockholders are
recorded. Delivery made to the Corporation's registered office shall be by hand
or by certified or registered mail, return receipt requested. All consents
properly delivered in accordance with this section shall be deemed to be
recorded when so delivered. No written consent shall be effective to take the
corporate action referred to therein unless, within 60 days of the earliest
dated consent delivered to the Corporation as required by this section, written
consents signed by the holders of a sufficient number of shares to take such
corporate action are so recorded. Prompt notice of the taking of the corporate
action without a meeting by less than unanimous written consent shall be given
to those stockholders who have not consented in writing. Any action taken
pursuant to such written consent or consents of the stockholders shall have the
same force and effect as if taken by the stockholders at a meeting thereof.
2.11 RECORD DATE FOR STOCKHOLDER NOTICE;
VOTING; GIVING CONSENTS
In order that the Corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment thereof,
or entitled to express consent to corporate action in writing without a meeting,
or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock or for the purpose of any other lawful
action, the board of directors may fix, in advance, a record date, which shall
not be more than 60 nor less than ten days before the date of such meeting, nor
more than 60 days prior to any other action.
If the board of directors does not so fix a record date:
(i) The record date for determining stockholders entitled to notice of or
to vote at a meeting of stockholders shall be at the close of business on the
day next preceding the day on which notice is given, or, if notice is waived, at
the close of business on the day next preceding the day on which the meeting is
held.
(ii) The record date for determining stockholders entitled to express
consent to corporate action in writing without a meeting, when no prior action
by the board of directors is necessary, shall be the day on which the first
written consent is expressed.
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(iii) The record date for determining stockholders for any other
purpose shall be at the close of business on the day on which the board of
directors adopts the resolution relating thereto.
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the board of directors may fix a new record date for the
adjourned meeting.
2.12 PROXIES
Each stockholder entitled to vote at a meeting of stockholders or to
express consent or dissent to corporate action in writing without a meeting may
authorize another person or persons to act for him by a written proxy, signed by
the stockholder and filed with the secretary of the Corporation, but no such
proxy shall be voted or acted upon after three years from its date, unless the
proxy provides for a longer period. A proxy shall be deemed signed if the
stockholder's name is placed on the proxy (whether by manual signature,
typewriting, telegraphic transmission or otherwise) by the stockholder or the
stockholder's attorney-in-fact. The revocability of a proxy that states on its
face that it is irrevocable shall be governed by the provisions of Section
212(e) of the Delaware General Corporation Law.
2.13 LIST OF STOCKHOLDERS ENTITLED TO VOTE
The officer who has charge of the stock ledger of the Corporation shall
prepare and make, at least ten days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
2.14 NOMINATIONS AND PROPOSALS
Nominations of persons for election to the board of directors of the
Corporation and the proposal of business to be considered by the stockholders
may be made at any meeting of stockholders only (a) pursuant to the
Corporation's notice of meeting, (b) by or at the direction of the board of
directors or (c) by any stockholder of the Corporation who was a stockholder of
record at the time of giving of notice provided for in these bylaws, who is
entitled to vote at the meeting and who complies with the notice procedures set
forth in this Section 2.14.
For nominations or other business to be properly brought before a
stockholders meeting by a stockholder pursuant to clause (c) of the preceding
sentence, the stockholder must have given timely notice thereof in writing to
the secretary of the Corporation and such other business must otherwise be a
proper matter for stockholder action. To be timely, a stockholder's notice shall
be
5
<PAGE>
delivered to the secretary at the principal executive offices of the Corporation
not later than the close of business on the 60th day nor earlier than the close
of business on the 90th day prior to the meeting; provided, however, that if
less than 65 days notice of the meeting is given to stockholders, notice by the
stockholder to be timely must be so delivered not earlier than the close of
business on the seventh day following the day on which the notice of meeting was
mailed. In no event shall the public announcement of an adjournment of a
stockholders meeting commence a new time period for the giving of a
stockholder's notice as described above. Such stockholder's notice shall set
forth (a) as to each person whom the stockholder proposes to nominate for
election or reelection as a director all information relating to such person
that is required to be disclosed in solicitations of proxies for election of
directors in an election contest, or is otherwise required, in each case
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended
(or any successor thereto) and Rule 14a-11 thereunder (or any successor thereto)
(including such person's written consent to being named in the proxy statement
as a nominee and to serving as a director if elected); (b) as to any other
business that the stockholder proposes to bring before the meeting, a brief
description of the business desired to be brought before the meeting, the
reasons for conducting such business at the meeting and any material interest in
such business of such stockholder and the beneficial owner, if any, on whose
behalf the proposal is made; and (c) as to the stockholder giving the notice and
the beneficial owner, if any, on whose behalf the nomination or proposal is made
(i) the name and address of such stockholder, as they appear on the
Corporation's books, and of such beneficial owner, and (ii) the class and number
of shares of the Corporation which are owned beneficially and of record by such
stockholder and such beneficial owner. Notwithstanding any provision herein to
the contrary, no business shall be conducted at a stockholders meeting except in
accordance with the procedures set forth in this Section 2.14.
2.15 INSPECTORS
The board of directors may, in advance of any meeting of stockholders,
appoint one or more inspectors to act at such meeting or any adjournment
thereof. If any of the inspectors so appointed shall fail to appear or act, the
chairman of the meeting shall, or if inspectors shall not have been appointed,
the chairman of the meeting may, appoint one or more inspectors. Each inspector,
before entering upon the discharge of his duties, shall take and sign an oath
faithfully to execute the duties of inspector at such meeting with strict
impartiality and according to the best of his ability. The inspectors shall
determine the number of shares of capital stock of the Corporation outstanding
and the voting power of each, the number of shares represented at the meeting,
the existence of a quorum, and the validity and effect of proxies and shall
receive votes, ballots, or consents, hear and determine all challenges and
questions arising in connection with the right to vote, count and tabulate all
votes, ballots, or consents, determine the results, and do such acts as are
proper to conduct the election or vote with fairness to all stockholders. On
request of the chairman of the meeting, the inspectors shall make a report in
writing of any challenge, request, or matter determined by them and shall
execute a certificate of any fact found by them. No director or candidate for
the office of director shall act as an inspector of an election of directors.
Inspectors need not be stockholders.
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ARTICLE III
DIRECTORS
3.1 POWERS
Subject to the provisions of the Delaware General Corporation Law and any
limitations in the certificate of incorporation or these bylaws relating to
action required to be approved by the stockholders or by the outstanding shares,
the business and affairs of the Corporation shall be managed and all corporate
powers shall be exercised by or under the direction of the board of directors.
3.2 NUMBER OF DIRECTORS
The number of directors of the Corporation shall be not less than one (1)
nor more than eleven (11). The exact number of directors shall be two. This
number may be changed, within the limits specified above, by a duly adopted
amendment to the Certificate of Incorporation or by an amendment to this bylaw
duly adopted by the vote or written consent of the holders of a majority of the
stock issued and outstanding and entitled to vote or by resolution of a majority
of the board of directors, except as may be otherwise specifically provided by
statute or by the Certificate of Incorporation.
No reduction of the authorized number of directors shall have the effect of
removing any director before that director's term of office expires.
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS
The Board of Directors shall be divided into three classes designated as
Class I, Class II and Class III, respectively. Directors shall be assigned to
each class in accordance with a resolution or resolutions adopted by the Board
of Directors. At the first annual meeting of stockholders following the date
hereof, the term of office of the Class I directors shall expire and Class I
directors shall be elected for a full term of three years. At the second annual
meeting of stockholders following the date hereof, the term of office of the
Class II directors shall expire and Class II directors shall be elected for a
full term of three years. At the third annual meeting of stockholders following
the date hereof, the term of office of the Class III directors shall expire and
Class III directors shall be elected for a full term of three years. At each
succeeding annual meeting of stockholders, directors shall be elected for a full
term of three years to succeed the directors of the class whose terms expire at
such annual meeting.
Notwithstanding the foregoing provisions of this Section 3.3, each director
shall serve until his or her successor is duly elected and qualified or until
his or her death, resignation or removal. No decrease in the number of directors
constituting the Board of Directors shall shorten the term of any incumbent
director.
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3.4 RESIGNATION AND VACANCIES
Any vacancies on the Board of Directors resulting from death, resignation,
disqualification, removal, or other causes shall, unless the Board of Directors
determines by resolution that any such vacancies or newly created directorships
shall be filled by stockholders, except as otherwise provided by law, be filled
only by the affirmative vote of a majority of the remaining directors then in
office, even though less than a quorum of the Board of Directors and not by the
stockholders. Newly created directorships resulting from any increase in the
number of directors shall, unless the Board of Directors determines by
resolution that any such newly created directorship shall be filled by the
stockholders, be filled only by the affirmative vote of the directors then in
office, even though less than a quorum of the Board of Directors and not by the
stockholders. Any director elected in accordance with the preceding sentence
shall hold office for the remainder of the full term of the class of directors
in which the new directorship was created or the vacancy occurred and until such
director's successor shall have been elected and qualified.
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
The board of directors of the Corporation may hold meetings, both regular
and special, either within or outside the State of Delaware.
Unless otherwise restricted by the certificate of incorporation or these
bylaws, members of the board of directors, or any committee designated by the
board of directors, may participate in a meeting of the board of directors, or
any committee, by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and such participation in a meeting shall constitute presence in
person at the meeting.
3.6 FIRST MEETINGS
The first meeting of each newly elected board of directors shall be held at
such time and place as shall be determined by the directors.
3.7 REGULAR MEETINGS
Regular meetings of the board of directors may be held without notice at
such time and at such place as shall from time to time be determined by the
board.
3.8 SPECIAL MEETINGS; NOTICE
Special meetings of the board of directors may be called by the chief
executive officer on three days' notice to each director, either personally or
by mail, telegram, telex, or telephone; special meetings shall be called by the
president or secretary in like manner and on like notice on the written request
of two directors unless the board consists of only one director, in which case
special meetings shall be called by the president or secretary in like manner
and on like notice on the written request of the sole director.
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3.9 QUORUM
At all meetings of the board of directors, a majority of the authorized
number of directors shall constitute a quorum for the transaction of business
and the act of a majority of the directors present at any meeting at which there
is a quorum shall be the act of the board of directors, except as may be
otherwise specifically provided by statute or by the certificate of
incorporation. If a quorum is not present at any meeting of the board of
directors, then the directors present thereat may adjourn the meeting from time
to time, without notice other than announcement at the meeting, until a quorum
is present.
3.10 WAIVER OF NOTICE
Whenever notice is required to be given under any provision of the Delaware
General Corporation Law or of the certificate of incorporation or these bylaws,
a written waiver thereof, signed by the person entitled to notice, whether
before or after the time stated therein, shall be deemed equivalent to notice.
Attendance of a person at a meeting shall constitute a waiver of notice of such
meeting, except when the person attends a meeting for the express purpose of
objecting, at the beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened. Neither the business to
be transacted at, nor the purpose of, any regular or special meeting of the
directors, or members of a committee of directors, need be specified in any
written waiver of notice unless so required by the certificate of incorporation
or these bylaws.
3.11 ADJOURNED MEETING; NOTICE
If a quorum is not present at any meeting of the board of directors, then
the directors present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum is present.
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Unless otherwise restricted by the certificate of incorporation or these
bylaws, any action required or permitted to be taken at any meeting of the board
of directors, or of any committee thereof, may be taken without a meeting if all
members of the board or committee, as the case may be, consent thereto in
writing and the writing or writings are filed with the minutes of proceedings of
the board or committee.
3.13 FEES AND COMPENSATION OF DIRECTORS
Unless otherwise restricted by the certificate of incorporation or these
bylaws, the board of directors shall have the authority to fix the compensation
of directors.
3.14 APPROVAL OF LOANS TO OFFICERS
The Corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the Corporation or of its
subsidiary, including any officer or employee
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who is a director of the Corporation or its subsidiary, whenever, in the
judgment of the directors, such loan, guaranty or assistance may reasonably be
expected to benefit the Corporation. The loan, guaranty or other assistance may
be with or without interest and may be unsecured, or secured in such manner as
the board of directors shall approve, including, without limitation, a pledge of
shares of stock of the Corporation. Nothing in this section contained shall be
deemed to deny, limit or restrict the powers of guaranty or warranty of the
Corporation at common law or under any statute.
3.15 REMOVAL OF DIRECTORS
Unless otherwise provided by statute or by the Certificate of
Incorporation, any director or the entire board of directors may be removed only
for cause, and only by the affirmative vote of the holders of a majority of the
shares then entitled to vote at an election of directors.
No reduction of the authorized number of directors shall have the effect of
removing any director prior to the expiration of such director's term of office.
ARTICLE IV
COMMITTEES
4.1 COMMITTEES OF DIRECTORS
The board of directors may, by resolution passed by a majority of the whole
board, designate one or more committees, with each committee to consist of one
or more of the directors of the Corporation. The board may designate one or more
directors as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the board of
directors to act at the meeting in the place of any such absent or disqualified
member. Any such committee, to the extent provided in the resolution of the
board of directors or in the bylaws of the Corporation, shall have and may
exercise all the powers and authority of the board of directors in the
management of the business and affairs of the Corporation, and may authorize the
seal of the Corporation to be affixed to all papers that may require it; but no
such committee shall have the power or authority to (i) amend the certificate of
incorporation (except that a committee may, to the extent authorized in the
resolution or resolutions providing for the issuance of shares of stock adopted
by the board of directors as provided in Section 151(a) of the Delaware General
Corporation Law, fix any of the preferences or rights of such shares relating to
dividends, redemption, dissolution, any distribution of assets of the
Corporation or the conversion into, or the exchange of such shares for, shares
of any other class or classes or any other series of the same or any other class
or classes of stock of the Corporation), (ii) adopt an agreement of merger or
consolidation under Sections 251 or 252 of the Delaware General Corporation Law,
(iii) recommend to the stockholders the sale, lease or exchange of all or
substantially all of the Corporation's property and assets, (iv) recommend to
the stockholders a dissolution of the Corporation or a revocation of a
dissolution, or (v) amend the bylaws of the Corporation; and, unless the board
resolution establishing the committee, the bylaws or the certificate of
incorporation expressly so provide, no such committee shall have the power or
authority to declare a dividend, to
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authorize the issuance of stock, or to adopt a certificate of ownership and
merger pursuant to Section 253 of the Delaware General Corporation Law.
4.2 COMMITTEE MINUTES
Each committee shall keep regular minutes of its meetings and report the
same to the board of directors when required.
4.3 MEETINGS AND ACTION OF COMMITTEES
Meetings and actions of committees shall be governed by, and held and taken
in accordance with, the provisions of Article III of these bylaws, Section 3.5
(place of meetings and meetings by telephone), Section 3.7 (regular meetings),
Section 3.8 (special meetings and notice), Section 3.9 (quorum), Section 3.10
(waiver of notice), Section 3.11 (adjournment and notice of adjournment), and
Section 3.12 (action without a meeting), with such changes in the context of
those bylaws as are necessary to substitute the committee and its members for
the board of directors and its members; provided, however, that the time of
regular meetings of committees may also be called by resolution of the board of
directors and that notice of special meetings of committees shall also be given
to all alternate members, who shall have the right to attend all meetings of the
committee. The board of directors may adopt rules for the government of any
committee not inconsistent with the provisions of these bylaws.
4.4 ADVISORY COMMITTEES
The board of directors may, by resolution passed by a majority of the whole
board, designate one or more advisory committees, with each committee to consist
of one or more of the directors of the Corporation or any other such persons as
the board may appoint. The board may designate one or more persons as alternate
members of any committee, who may replace any absent or disqualified member at
any meeting of the committee. Members who are not board members shall not have
the responsibilities or obligations of board members nor be deemed directors of
the Corporation for any other purpose.
ARTICLE V
OFFICERS
5.1 OFFICERS
The officers of the Corporation shall be a chief executive officer ("CEO"),
a president, one or more vice presidents, a secretary, a chief financial officer
("CFO") and a treasurer. The Corporation may also have, at the discretion of the
board of directors, a chairman of the board, one or more assistant vice
presidents, assistant secretaries, assistant treasurers, and any such other
officers as may be appointed in accordance with the provisions of Section 5.3 of
these bylaws. Any number of offices may be held by the same person.
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5.2 ELECTION OF OFFICERS
The officers of the Corporation, except such officers as may be appointed
in accordance with the provisions of Sections 5.3 or 5.5 of these bylaws, shall
be chosen by the board of directors, subject to the rights, if any, of an
officer under any contract of employment.
5.3 SUBORDINATE OFFICERS
The board of directors may appoint, or empower the CEO to appoint, such
other officers and agents as the business of the Corporation may require, each
of whom shall hold office for such period, have such authority, and perform such
duties as are provided in these bylaws or as the board of directors may from
time to time determine.
5.4 REMOVAL AND RESIGNATION OF OFFICERS
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by an
affirmative vote of the majority of the board of directors at any regular or
special meeting of the board or by any officer upon whom such power of removal
may be conferred by the board of directors.
Any officer may resign at any time by giving written notice to the
Corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the Corporation under any contract to which the officer is a
party.
5.5 VACANCIES IN OFFICES
Any vacancy occurring in any office of the Corporation shall be filled by
the board of directors.
5.6 CHAIRMAN OF THE BOARD
The chairman of the board, if such an officer be elected, shall, if
present, preside at meetings of the board of directors and exercise and perform
such other powers and duties as may from time to time be assigned to him by the
board of directors or as may be prescribed by these bylaws. If there is no CEO,
then the chairman of the board shall also be the CEO of the Corporation and
shall have the powers and duties prescribed in Section 5.7 of these bylaws.
5.7 CHIEF EXECUTIVE OFFICER
Subject to such supervisory powers, if any, as may be given by the board of
directors to the chairman of the board, if there be such an officer, the CEO of
the Corporation shall, subject to the control of the board of directors, have
general supervision, direction, and control of the business and the officers of
the Corporation. He shall preside at all meetings of the stockholders and, in
the absence or nonexistence of a chairman of the board, at all meetings of the
board of directors. He shall have the general powers and duties of management
usually vested in the CEO of a Corporation, and
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shall have such other powers and duties as may be prescribed by the board of
directors or these bylaws.
5.8 PRESIDENT
The president may assume and perform the duties of the chief executive
officer in the absence or disability of the chief executive officer or whenever
the office of the chief executive officer is vacant. The president of the
Corporation shall exercise and perform such powers and duties as may from time
to time be assigned to him by the board of directors, the CEO or as may be
prescribed by these bylaws. The president shall have authority to execute in the
name of the Corporation bonds, contracts, deeds, leases and other written
instruments to be executed by the Corporation. In the absence or nonexistence of
the chairman of the board and chief executive officer, he shall preside at all
meetings of the stockholders and, in the absence or nonexistence of a chairman
of the board and the chief executive officer, at all meetings of the board of
directors and shall perform such other duties as the board of directors may from
time to time determine.
5.9 VICE PRESIDENT
In the absence or disability of the CEO and the president, the vice
presidents, if any, in order of their rank as fixed by the board of directors
or, if not ranked, a vice president designated by the board of directors, shall
perform all the duties of the president and when so acting shall have all the
powers of, and be subject to all the restrictions upon, the president. The vice
presidents shall have such other powers and perform such other duties as from
time to time may be prescribed for them respectively by the board of directors,
these bylaws, the president or the chairman of the board.
5.10 SECRETARY
The secretary shall keep or cause to be kept, at the principal executive
office of the Corporation or such other place as the board of directors may
direct, a book of minutes of all meetings and actions of directors, committees
of directors, and shareholders. The minutes shall show the time and place of
each meeting, whether regular or special (and, if special, how authorized and
the notice given), the names of those present at directors' meetings or
committee meetings, the number of shares present or represented at shareholders'
meetings, and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal executive
office of the Corporation or at the office of the Corporation's transfer agent
or registrar, as determined by resolution of the board of directors, a share
register, or a duplicate share register, showing the names of all shareholders
and their addresses, the number and classes of shares held by each, the number
and date of certificates evidencing such shares, and the number and date of
cancellation of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings of
the shareholders and of the board of directors required to be given by law or by
these bylaws. He shall keep the seal of the Corporation, if one be adopted, in
safe custody and shall have such other powers and perform such other duties as
may be prescribed by the board of directors or by these bylaws.
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5.11 CHIEF FINANCIAL OFFICER
The CFO shall keep and maintain, or cause to be kept and maintained,
adequate and correct books and records of accounts of the properties and
business transactions of the Corporation, including accounts of its assets,
liabilities, receipts, disbursements, gains, losses, capital, retained earnings,
and shares. The books of account shall at all reasonable times be open to
inspection by any director. The CFO shall have such other powers and perform
such other duties as may be prescribed by the board of directors or these
bylaws.
5.12 TREASURER
The treasurer shall deposit all money and other valuables in the name and
to the credit of the Corporation with such depositories as may be designated by
the board of directors. He shall disburse the funds of the Corporation as may be
ordered by the board of directors, shall render to the president and directors,
whenever they request it, an account of all of his transactions as treasurer and
of the financial condition of the Corporation, and shall have such other powers
and perform such other duties as may be prescribed by the board of directors or
these bylaws.
5.13 ASSISTANT SECRETARY
The assistant secretary, or, if there is more than one, the assistant
secretaries in the order determined by the stockholders or board of directors
(or if there be no such determination, then in the order of their election)
shall, in the absence of the secretary or in the event of his or her inability
or refusal to act, perform the duties and exercise the powers of the secretary
and shall perform such other duties and have such other powers as the board of
directors or the stockholders may from time to time prescribe.
5.14 ASSISTANT TREASURER
The assistant treasurer, or, if there is more than one, the assistant
treasurers, in the order determined by the stockholders or board of directors
(or if there be no such determination, then in the order of their election),
shall, in the absence of the treasurer or in the event of his or her inability
or refusal to act, perform the duties and exercise the powers of the treasurer
and shall perform such other duties and have such other powers as the board of
directors or the stockholders may from time to time prescribe.
5.15 AUTHORITY AND DUTIES OF OFFICERS
In addition to the foregoing authority and duties, all officers of the
Corporation shall respectively have such authority and perform such duties in
the management of the business of the Corporation as may be designated from time
to time by the board of directors or the stockholders.
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ARTICLE VI
INDEMNITY
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Corporation shall, to the maximum extent and in the manner permitted by
the Delaware General Corporation Law, indemnify each of its directors and
officers against expenses (including attorneys' fees), judgments, fines,
settlements, and other amounts actually and reasonably incurred in connection
with any proceeding, arising by reason of the fact that such person is or was an
agent of the Corporation. For purposes of this Section 6.1, a "director" or
"officer" of the Corporation includes any person (i) who is or was a director or
officer of the Corporation or any subsidiary of the Corporation, (ii) who is or
was serving at the request of the Corporation as a director or officer of
another corporation, partnership, joint venture, trust or other enterprise, or
(iii) who was a director or officer of a corporation which was a predecessor
corporation of the Corporation or any of its subsidiaries or of another
enterprise at the request of such predecessor corporation or subsidiary.
6.2 INDEMNIFICATION OF OTHERS
The Corporation shall have the power, to the extent and in the manner
permitted by the Delaware General Corporation Law, to indemnify each of its
employees and agents (other than directors and officers) against expenses
(including attorneys' fees), judgments, fines, settlements, and other amounts
actually and reasonably incurred in connection with any proceeding, arising by
reason of the fact that such person is or was an agent of the Corporation. For
purposes of this Section 6.2, an "employee" or "agent" of the Corporation (other
than a director or officer) includes any person (i) who is or was an employee or
agent of the Corporation or any subsidiary of the Corporation, (ii) who is or
was serving at the request of the Corporation as an employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, or (iii) who
was an employee or agent of a corporation which was a predecessor corporation of
the Corporation or any of its subsidiaries or of another enterprise at the
request of such predecessor corporation or subsidiary.
6.3 INSURANCE
The Corporation may purchase and maintain insurance on behalf of any person
who is or was a director, officer, employee or agent of the Corporation, or is
or was serving at the request of the Corporation or its subsidiaries as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the Corporation would have the power to indemnify him against
such liability under the provisions of the Delaware General Corporation Law.
6.4 EXPENSES
Expenses incurred by any person described in Section 6.1 of this Article VI
in defending a proceeding shall be paid by the Corporation in advance of such
proceeding's final disposition upon receipt of an undertaking by or on behalf of
the director or officer to repay such amount if it shall
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ultimately be determined that he is not entitled to be indemnified by the
Corporation. Such expenses incurred by other employees and agents described in
Section 6.2 of this Article VI may be so paid upon such terms and conditions, if
any, as the board of directors deems appropriate.
6.5 EMPLOYEES AND AGENTS
Persons who are not covered by the foregoing provisions of this Article VI
and who are or were employees or agents of the Corporation, or who are or were
serving at the request of the Corporation as employees or agents of another
corporation, partnership, joint venture, trust or other enterprise, may be
indemnified to the extent authorized at any time or from time to time by the
board of directors.
6.6 CONTRACT RIGHTS
The provisions of this Article VI shall be deemed to be a contract right
between the Corporation and each director or officer who serves in any such
capacity at any time while this Article VI and the relevant provisions of the
Delaware General Corporation Law or other applicable law are in effect, and any
repeal or modification of this Article VI or any such law shall not affect any
rights or obligations then existing with respect to any state of facts or
proceeding then existing.
6.7 MERGER OR CONSOLIDATION
For purposes of this Article VI, references to "the Corporation" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, and employees or agents, so that
any person who is or was a director, officer, employee or agent of such
constituent corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, shall stand in the same
position under this Article VI with respect to the resulting or surviving
corporation as he would have with respect to such constituent corporation if its
separate existence had continued.
ARTICLE VII
RECORDS AND REPORTS
7.1 MAINTENANCE AND INSPECTION OF RECORDS
The Corporation shall, either at its principal executive office or at such
place or places as designated by the board of directors, keep a record of its
shareholders listing their names and addresses and the number and class of
shares held by each shareholder, a copy of these bylaws as amended to date,
accounting books, and other records.
Any stockholder of record, in person or by attorney or other agent, shall,
upon written demand under oath stating the purpose thereof, have the right
during the usual hours for business to inspect for any proper purpose the
Corporation's stock ledger, a list of its stockholders, and its other
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books and records and to make copies or extracts therefrom. A proper purpose
shall mean a purpose reasonably related to such person's interest as a
stockholder. In every instance where an attorney or other agent is the person
who seeks the right to inspection, the demand under oath shall be accompanied by
a power of attorney or such other writing that authorizes the attorney or other
agent to so act on behalf of the stockholder. The demand under oath shall be
directed to the Corporation at its registered office in Delaware or at its
principal place of business.
The officer who has charge of the stock ledger of a Corporation shall
prepare and make, at least ten days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
7.2 INSPECTION BY DIRECTORS
Any director shall have the right to examine the Corporation's stock
ledger, a list of its stockholders, and its other books and records for a
purpose reasonably related to his position as a director. The Court of Chancery
is hereby vested with the exclusive jurisdiction to determine whether a director
is entitled to the inspection sought. The Court may summarily order the
Corporation to permit the director to inspect any and all books and records, the
stock ledger, and the stock list and to make copies or extracts therefrom. The
Court may, in its discretion, prescribe any limitations or conditions with
reference to the inspection, or award such other and further relief as the Court
may deem just and proper.
7.3 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
The chairman of the board, the CEO, the CFO or any other person authorized
by the board of directors or the CEO, is authorized to vote, represent, and
exercise on behalf of this Corporation all rights incident to any and all shares
of any other corporation or corporations standing in the name of this
Corporation. The authority granted herein may be exercised either by such person
directly or by any other person authorized to do so by proxy or power of
attorney duly executed by such person having the authority.
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ARTICLE VIII
GENERAL MATTERS
8.1 CHECKS
From time to time, the board of directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness that are issued in
the name of or payable to the Corporation, and only the persons so authorized
shall sign or endorse those instruments.
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS
The board of directors, except as otherwise provided in these bylaws, may
authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
Corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the board of directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the Corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES
The shares of a Corporation shall be represented by certificates, provided
that the board of directors of the Corporation may provide by resolution or
resolutions that some or all of any or all classes or series of its stock shall
be uncertificated shares. Any such resolution shall not apply to shares
represented by a certificate until such certificate is surrendered to the
Corporation. Notwithstanding the adoption of such a resolution by the board of
directors, every holder of stock represented by certificates and upon request
every holder of uncertificated shares shall be entitled to have a certificate
signed by, or in the name of the Corporation by the chairman or vice-chairman of
the board of directors, or the president or vice-president, and by the treasurer
or an assistant treasurer, or the secretary or an assistant secretary of such
Corporation representing the number of shares registered in certificate form.
Any or all of the signatures on the certificate may be a facsimile. In case any
officer, transfer agent or registrar who has signed or whose facsimile signature
has been placed upon a certificate has ceased to be such officer, transfer agent
or registrar before such certificate is issued, it may be issued by the
Corporation with the same effect as if he were such officer, transfer agent or
registrar at the date of issue.
The Corporation may issue the whole or any part of its shares as partly
paid and subject to call for the remainder of the consideration to be paid
therefor. Upon the face or back of each stock certificate issued to represent
any such partly paid shares, upon the books and records of the Corporation in
the case of uncertificated partly paid shares, the total amount of the
consideration to be paid therefor and the amount paid thereon shall be stated.
Upon the declaration of any dividend on fully paid shares, the Corporation shall
declare a dividend upon partly paid shares of the same class, but only upon the
basis of the percentage of the consideration actually paid thereon.
18
<PAGE>
8.4 SPECIAL DESIGNATION ON CERTIFICATES
If the Corporation is authorized to issue more than one class of stock or
more than one series of any class, then the powers, the designations, the
preferences, and the relative, participating, optional or other special rights
of each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the Corporation shall
issue to represent such class or series of stock; provided, however, that,
except as otherwise provided in Section 202 of the Delaware General Corporation
Law, in lieu of the foregoing requirements there may be set forth on the face or
back of the certificate that the Corporation shall issue to represent such class
or series of stock a statement that the Corporation will furnish without charge
to each stockholder who so requests the powers, the designations, the
preferences, and the relative, participating, optional or other special rights
of each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights.
8.5 LOST CERTIFICATES
Except as provided in this Section 8.5, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the Corporation and canceled at the same time. The Corporation
may issue a new certificate of stock or uncertificated shares in the place of
any certificate theretofore issued by it, alleged to have been lost, stolen or
destroyed, and the Corporation may require the owner of the lost, stolen or
destroyed certificate, or his legal representative, to give the Corporation a
bond sufficient to indemnify it against any claim that may be made against it on
account of the alleged loss, theft or destruction of any such certificate or the
issuance of such new certificate or uncertificated shares.
8.6 CONSTRUCTION; DEFINITIONS
Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the Delaware General Corporation Law shall
govern the construction of these bylaws. Without limiting the generality of this
provision, the singular number includes the plural, the plural number includes
the singular, and the term "person" includes both a Corporation and a natural
person.
8.7 DIVIDENDS
The directors of the Corporation, subject to any restrictions contained in
the Certificate of Incorporation, may declare and pay dividends upon the shares
of its capital stock pursuant to the Delaware General Corporation Law. Dividends
may be paid in cash, in property, or in shares of the Corporation's capital
stock.
The directors of the Corporation may set apart out of any of the funds of
the Corporation available for dividends a reserve or reserves for any proper
purpose and may abolish any such reserve. Such purposes shall include but not be
limited to equalizing dividends, repairing or maintaining any property of the
Corporation, and meeting contingencies.
19
<PAGE>
8.8 FISCAL YEAR
The fiscal year of the Corporation shall be fixed by resolution of the
board of directors and may be changed by the board of directors.
8.9 SEAL
The seal of the Corporation shall be such as from time to time may be
approved by the board of directors.
8.10 TRANSFER OF STOCK
Upon surrender to the Corporation or the transfer agent of the Corporation
of a certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignation or authority to transfer, it shall be the duty of the
Corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate, and record the transaction in its books.
8.11 STOCK TRANSFER AGREEMENTS
The Corporation shall have power to enter into and perform any agreement
with any number of shareholders of any one or more classes of stock of the
Corporation to restrict the transfer of shares of stock of the Corporation of
any one or more classes owned by such stockholders in any manner not prohibited
by the Delaware General Corporation Law.
8.12 REGISTERED STOCKHOLDERS
The Corporation shall be entitled to recognize the exclusive right of a
person registered on its books as the owner of shares to receive dividends and
to vote as such owner, shall be entitled to hold liable for calls and
assessments the person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of another person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
ARTICLE IX
AMENDMENTS
The original or other bylaws of the Corporation may be adopted, amended or
repealed by the stockholders or the board of directors.
ARTICLE X
DISSOLUTION
If it should be deemed advisable in the judgment of the board of directors
of the Corporation that the Corporation should be dissolved, the board, after
the adoption of a resolution to that effect by a majority of the whole board at
any meeting called for that purpose, shall cause notice to be
20
<PAGE>
mailed to each stockholder entitled to vote thereon of the adoption of the
resolution and of a meeting of stockholders to take action upon the resolution.
At the meeting a vote shall be taken for and against the proposed
dissolution. If a majority of the outstanding stock of the Corporation entitled
to vote thereon votes for the proposed dissolution, then a certificate stating
that the dissolution has been authorized in accordance with the provisions of
Section 275 of the Delaware General Corporation Law and setting forth the names
and residences of the directors and officers shall be executed, acknowledged,
and filed and shall become effective in accordance with Section 103 of the
Delaware General Corporation Law. Upon such certificate's becoming effective in
accordance with Section 103 of the Delaware General Corporation Law, the
Corporation shall be dissolved.
Whenever all the stockholders entitled to vote on a dissolution consent in
writing, either in person or by duly authorized attorney, to a dissolution, no
meeting of directors or stockholders shall be necessary. The consent shall be
filed and shall become effective in accordance with Section 103 of the Delaware
General Corporation Law. Upon such consent's becoming effective in accordance
with Section 103 of the Delaware General Corporation Law, the Corporation shall
be dissolved. If the consent is signed by an attorney, then the original power
of attorney or a photocopy thereof shall be attached to and filed with the
consent. The consent filed with the Secretary of State shall have attached to it
the affidavit of the secretary or some other officer of the Corporation stating
that the consent has been signed by or on behalf of all the stockholders
entitled to vote on a dissolution; in addition, there shall be attached to the
consent a certification by the secretary or some other officer of the
Corporation setting forth the names and residences of the directors and officers
of the Corporation.
21
<PAGE>
CERTIFICATE OF PRESIDENT
OF
LITRONIC INC.
(a Delaware corporation)
I hereby certify that I am the duly elected and acting President of the
Corporation and that the foregoing Bylaws, comprising 22 pages, including this
page, constitute the Bylaws of the Corporation as duly adopted by the Board of
Directors thereof by action taken without a meeting.
DATED: February 8, 1999
/s/ William W. Davis, Sr.
-------------------------------
William W. Davis, Sr., President
22
<PAGE>
EXHIBIT 3.3
[FORM OF]
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
LITRONIC INC.
(PURSUANT TO SECTIONS 228, 242 AND 245 OF THE
GENERAL CORPORATION LAW OF THE STATE OF DELAWARE)
Litronic Inc., a corporation (the "Corporation") organized and existing
under the General Corporation Law of the State of Delaware (the "General
Corporation Law")
DOES HEREBY CERTIFY:
FIRST: That the Corporation was originally incorporated on January 30,
1997, under the name "Litronic, Inc.," pursuant to the General Corporation Law.
Prior to the issuance of any stock, and prior to the election of directors, the
Corporation changed its name to "Litronic Inc." on February 5, 1999.
SECOND: That the Amended and Restated Certificate of Incorporation of
Litronic Inc., in the form set forth below, has been duly adopted in accordance
with the provisions of Sections 228, 242 and 245 of the General Corporation Law
by the directors and the stockholders of the Corporation.
THIRD: That the Amended and Restated Certificate of Incorporation, as so
adopted, which amends and restates the Corporation's Certificate of
Incorporation, as amended, in its entirety, reads in full as set forth below:
ARTICLE I
The name of the Corporation is Litronic Inc.
ARTICLE II
The address of the registered office of the Corporation in the State of
Delaware is Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, County of New Castle, State of Delaware. The name of the registered
agent of the Corporation at such location is Corporation Trust Company.
<PAGE>
ARTICLE III
The nature of the business or purposes to be conducted or promoted is to
engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law.
ARTICLE IV
SECTION 1. The Corporation is authorized to issue one class of stock to
be designated "Common Stock" and another class of stock to be designated
"Preferred Stock." The total number of shares of Common Stock that the
Corporation is authorized to issue is 25,000,000 with a par value of $.01 per
share. The total number of shares of Preferred Stock that the Corporation is
authorized to issue is 5,000,000 with a par value of $.01 per share.
SECTION 2. Except as otherwise provided by law, the shares of stock of
the Corporation, regardless of class, may be issued by the Corporation from time
to time in such amounts, for such consideration and for such corporate purposes
as the Board of Directors may from time to time determine. A description of the
different classes and series of the Corporation's capital stock and a statement
of the designations and the relative rights, preferences and limitations of the
shares of each class and series of capital stock are as follows:
(a) Common Stock
(i) Voting Rights. Except as otherwise provided by the General
Corporation Law or in this Article IV (or in any certificate of
designation establishing a series of Preferred Stock), the holders of
Common Stock shall exclusively possess all voting power. Each holder
of record of issued and outstanding Common Stock shall be entitled to
one (1) vote on all matters for each share so held.
(ii) Dividends. Subject to the rights and preferences, if any, of the
holders of Preferred Stock, each issued and outstanding share of
Common Stock shall entitle the record holder thereof to receive an
equal portion of cash dividends and distributions out of funds legally
available therefor, when, as and if declared by the Board of
Directors, in such amounts and at such times as the Board of Directors
shall determine.
(iii) Liquidation. Upon any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, after there shall have
been paid to or set aside for the holders of any class of capital
stock having preference over the Common Stock in such circumstances
the full preferential amounts to which they are respectively entitled,
the holders of the Common Stock, and of any class or series of capital
stock entitled to participate in whole or in part therewith as to the
distribution of assets, shall be entitled, after payment or provision
for payment of all debts and liabilities of the Corporation, to
receive the remaining assets of the
<PAGE>
Corporation available for distribution, in cash or in kind, in
proportion to their holdings.
(b) Preferred Stock
The Board of Directors is authorized by resolution or resolutions, from
time to time adopted, to provide for the issuance of Preferred Stock in one or
more series and to fix and state the voting powers, designations, preferences
and relative participating, optional or other special rights of the shares of
each series and the qualifications, limitations and restrictions thereof,
including, but not limited to, determination of one or more of the following:
(i) the distinctive designations of each such series and the number of
shares which shall constitute such series, which number may be increased
(except where otherwise provided by the Board of Directors in creating such
series) or decreased (but not below the number of shares thereof then
outstanding) from time to time by the Board of Directors;
(ii) the annual rate or amount of dividends payable on shares of such
series, whether such dividends shall be cumulative or non-cumulative, the
conditions upon which and the dates when such dividends shall be payable,
the date from which dividends on cumulative series shall accrue and be
cumulative on all shares of such series issued prior to the payment date
for the first dividend of such series, the relative rights of priority, if
any, of payment of dividends on shares of that series, and the
participating or other special rights, if any, with respect to such
dividends;
(iii) whether such series will have any voting rights in addition
to those prescribed by law and, if so, the terms and conditions of the
exercise of such voting rights;
(iv) whether the shares of such series shall be redeemable or callable
and, if so, the prices at which, and the terms and conditions on which,
such shares may be redeemed or called, which price may vary under different
conditions and at different redemption or call dates;
(v) the amount or amounts payable upon the shares of such series in
the event of voluntary or involuntary liquidation, dissolution or winding
up of the Corporation, and the relative rights of priority, if any, of
payment of shares of such series;
(vi) whether the shares of such series shall be entitled to the
benefit of a sinking or retirement fund to be applied to the purchase or
redemption of such shares, and if so entitled, the amount of such fund and
the manner of its application, including the price or prices at which such
shares may be redeemed or purchased through the application of such fund;
<PAGE>
(vii) whether the shares of such series shall be convertible into,
or exchangeable for, shares of any other class or classes or of any other
series of the same or any other class or classes of stock of the
Corporation, and if so convertible or exchangeable, the conversion price or
prices, or the rate or rates of exchange, and the adjustments thereof, if
any, at which such conversion or exchange may be made, and any other terms
of such conversion or exchange;
(viii) whether the shares of such series which are redeemed or
converted shall have the status of authorized but unissued shares of
Preferred Stock and whether such shares may be reissued as shares of the
same or any other series of stock;
(ix) the conditions and restrictions, if any, on the payment of
dividends or on the making of other distributions on, or the purchase,
redemption or other acquisition by the Corporation, or any subsidiary
thereof, of, the Common Stock or any other class (or other series of the
same class) ranking junior to the shares of such series as to dividends or
upon liquidation, dissolution or winding up; and
(x) the conditions and restrictions, if any, on the creation of
indebtedness of the Corporation, or any subsidiary thereof, or on the issue
of any additional stock ranking on parity with or prior to the shares of
such series as to dividends or upon liquidation, dissolution or winding up.
All shares within each series of Preferred Stock shall be alike in every
particular, except with respect to the dates from which dividends, if any, shall
commence to accrue.
ARTICLE V
To the fullest extent permitted by the General Corporation Law as the same
exists or as it may hereafter be amended, a director of the Corporation shall
not be personally liable to the Corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director.
The Corporation shall indemnify to the fullest extent permitted by law any
person made or threatened to be made a party to an action or proceeding, whether
criminal, civil, administrative or investigative, by reason of the fact that he,
his testator or intestate is or was a director or officer of the Corporation or
any predecessor of the Corporation or serves or served at any other enterprise
as a director, officer or employee at the request of the Corporation or any
predecessor to the Corporation.
Neither any amendment nor repeal of this Article V, nor the adoption of any
provision of this Amended and Restated Certificate of Incorporation inconsistent
with this Article V, shall eliminate or reduce the effect of this Article V, in
respect of any matter occurring, or any cause of action, suit, claim or
proceeding that, but for this Article V, would accrue or arise, prior to such
amendment, repeal or adoption of an inconsistent provision.
<PAGE>
ARTICLE VI
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Amended and Restated Certificate of Incorporation,
in the manner now or hereafter prescribed by statute or this Amended and
Restated Certificate of Incorporation, and all rights conferred upon
stockholders herein are granted subject to this reservation.
ARTICLE VII
In furtherance and not in limitation of powers conferred by statute, the
Board of Directors is expressly authorized to make, alter, amend or repeal the
Bylaws of the Corporation.
ARTICLE VIII
SECTION 1. At any time following the closing of the first sale of
Common Stock of the Corporation pursuant to a registration statement declared
effective by the Securities and Exchange Commission under the Securities Act of
1933, as amended, stockholders of the Corporation may not take any action by
written consent in lieu of a meeting and any action contemplated by stockholders
after such time must be taken at a duly called annual or special meeting of
stockholders.
SECTION 2. The number of directors which constitute the whole Board of
Directors shall be fixed exclusively by one or more resolutions adopted from
time to time by the Board of Directors in accordance with the Bylaws of the
Corporation. The Board of Directors shall be divided into three classes
designated as Class I, Class II, and Class III, respectively. Directors shall
be assigned to each class in accordance with a resolution or resolutions adopted
by the Board of Directors. At the first annual meeting of stockholders following
the date hereof, the term of office of the Class I directors shall expire and
Class I directors shall be elected for a full term of three years. At the
second annual meeting of stockholders following the date hereof, the term of
office of the Class II directors shall expire and Class II directors shall be
elected for a full term of three years. At the third annual meeting of
stockholders following the date hereof, the term of office of the Class III
directors shall expire and Class III directors shall be elected for a full term
of three years. At each succeeding annual meeting of stockholders, directors
shall be elected for a full term of three years to succeed the directors of the
class whose terms expire at such annual meeting.
SECTION 3. Advance notice of new business and stockholder nominations
for the election of directors shall be given in the manner and to the extent
provided in the Bylaws of the Corporation.
ARTICLE IX
Elections of directors need not be by written ballot unless the Bylaws of
the Corporation shall so provide.
<PAGE>
ARTICLE X
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the Corporation.
ARTICLE XI
The Corporation is to have perpetual existence.
***
FOURTH: That said amendments were duly adopted in accordance with the
provisions of Sections 228, 242 and 245 of the General Corporation Law.
I hereby further declare and certify under penalty of perjury under the
laws of the State of Delaware that the facts set forth in the foregoing
certificate are true and correct of my own knowledge and that this certificate
is my act and deed.
IN WITNESS WHEREOF, this Amended and Restated Certificate of Incorporation
has been signed by the Chairman of the Board and Chief Executive Officer this
___ day of _______ 1999.
Litronic Inc.
By:
---------------------------------
Kris Shah
Chairman and Chief Executive Officer
Attest:
By:
---------------------------------
William W. Davis, Sr.
President and Chief Operating Officer
<PAGE>
Exhibit 4.1
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT ("Agreement"), dated as of
____________, 1999, is made and entered into by and among Litronic Inc., a
Delaware corporation ("Company") and Kris Shah and Geraldine M. Shah, as
Trustees of the Kris Shah and Geraldine M. Shah Living Trust October 9, 1997,
Ramesh R. Shah and Patricia L. Shah, as Trustees of the Ramesh R. Shah and
Patricia L. Shah Living Trust dated March 22, 1982 as amended on October 14,
1997, Dilip R. Shah and Shila D. Shah, as Trustees of the Shah Living Trust
dated November 14, 1995, Kris Shah as Trustee of the Leena Shah Trust dated
October 16, 1997, Kris Shah, as Trustee of the Chandra L. Shah Trust dated
October 9, 1997, William W. Davis, Sr. and Lillian A. Davis (collectively,
"Holders").
RECITALS
A. Holders are the holders of an aggregate of 6,040,631 shares
("Shares") of the Company's common stock, $.01 par value per share ("Common
Stock") as set forth on Exhibit A hereto.
B. Holders acquired their Shares pursuant to a Reorganization
Agreement and a Stock Acquisition Agreement, each dated as of February 9, 1999
(the "Acquisition Agreements").
C. Pursuant to the Acquisition Agreements, the Company is obligated
to provide Holders with registration rights with respect to the Shares owned by
Holders upon the terms and conditions hereinafter set forth.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing premises and the mutual
covenants and conditions hereinafter set forth, the parties hereto hereby agree
as follows:
1. Definitions.
-----------
1.1 "Common Stock" means the Common Stock, $.01 par value per share,
------------
of the Company.
1.2 "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
1.3 "Registration Expenses" has the meaning set forth in Section 3.
---------------------
1.4 "Registrable Securities" means (i) the Shares and (ii) any
----------------------
securities issued or issuable with respect to the Shares by way of a stock
dividend or stock split or in connection with a combination of shares,
recapitalization, merger, consideration or other reorganization. As to any
particular Registrable Securities, once issued, such shares shall cease to be
Registrable Securities when (a) such shares have been registered under the
Securities Act, the registration statement with
<PAGE>
respect to the sale of such shares has become effective under the Securities Act
and such shares have been disposed of pursuant to such effective registration
statement, (b) such shares have been distributed pursuant to Rule 144 (or any
similar provision relating to the disposition of securities then in force) under
the Securities Act, (c) such shares have been otherwise transferred, new
certificates or other evidences of ownership for them not bearing a legend
restricting further transfer and not subject to any stop-transfer order or other
restrictions on transfer shall have been delivered by the Company and subsequent
disposition of such shares shall not require registration or qualification of
such shares under the Securities Act or any state securities laws then in force,
(d) such shares cease to be outstanding or (e) such shares could be freely
transferred pursuant to Rule 144(k).
1.5 "SEC" means the Securities and Exchange Commission.
---
1.6 "Securities Act" means the Securities Act of 1933, as amended.
--------------
1.7 "Shares" has the meaning set forth in the recitals to this
------
Agreement.
2. Incidental Registration.
-----------------------
2.1 Registration Rights. If (i) any Holder ("Registering Holder(s)")
-------------------
is granted the right, pursuant to contract, as a matter of courtesy or
otherwise, to have any of his, her or its Common Stock or securities convertible
into or exchangeable for Common Stock registered under the Securities Act (other
than a registration on Form S-4 or Form S-8, or any successor or similar forms
or a registration in connection with any merger of the Company with and into a
company subject to the reporting requirements of the Exchange Act) or (ii) the
Company at any time after the expiration of applicable "lock-up" periods agreed
to by Holders in connection with the Company's initial public offering of
securities proposes to register any securities under the Securities Act (other
than a registration on Form S-4 or Form S-8, or any successor or similar forms
or a registration in connection with any merger of the Company with and into a
company subject to the reporting requirements of the Exchange Act) with respect
to an underwritten offering in a manner which would permit registration of the
Registrable Securities for sale to the public under the Securities Act, the
Registering Holder(s) or the Company, as the case may be, shall (a) give written
notice of the proposed filing to the Holders of Registrable Securities as soon
as practicable but in no even less than 30 days before the anticipated filing
date, which notice shall describe the number of shares to be included in the
offering, the intended method of distribution and the name of the managing
underwriter or underwriters of the offering, if any; and (b) offer in such
notice the opportunity, subject to Section 2.2, to register such number of
shares of Registrable Securities as each Holder may request in writing within 15
days following receipt of such notice. Subject to Section 2.2, the Registering
Holder(s) or the Company, as the case may be, will use their or its best efforts
to effect the registration under the Securities Act of the Registrable
Securities which the Registering Holders or the Company has been so requested to
register by Holders, to the extent requisite to permit the disposition (in
accordance with such intended methods thereof) of the Registrable Securities so
to be registered; provided, that Holders must offer and sell the Registrable
--------
Securities in a manner as contemplated in the registration statement and as
reasonably determined by the Registering Holder(s) or the Company and the
underwriters selected by the Registering Holder(s) or the Company, if any.
2
<PAGE>
2.2 Priority in Incidental Registration. If the managing underwriter,
-----------------------------------
if any, advises the Registering Holder(s) or the Company in writing that, in its
opinion, the number of securities which the Company, Holders and any other
persons intend to include in such registration exceeds the number which would
have an adverse effect on such offering, including the price at which such
securities can be sold, the Registering Holder(s) or the Company will include in
such registration (i) first, all the securities the Company proposes to sell for
its own account, (ii) second, securities, if any, to be included therein
pursuant to demand registration requests and (iii) third, a number of such
securities equal to the number, in the opinion of such underwriters, which can
be sold without having the adverse effect referred to above, such amount to be
allocated pro rata among Holders and other persons having similar registration
rights on the basis of the relative number of securities Holders and other
persons have requested to be included in such registration.
3. Registration Expenses. The Company will pay all Registration Expenses
---------------------
in connection with each registration of Registrable Securities requested
pursuant to this Agreement. As used in this Agreement, "Registration Expenses"
shall mean all expenses incident to the Company's performance of or compliance
with this Agreement, including, without limitation, all SEC, stock exchange,
National Association of Securities Dealers, Inc. or Nasdaq registration and
filing fees and expenses, fees and expenses of compliance with securities or
blue sky laws (including, without limitation, reasonable fees and disbursements
of counsel for the Company in connection with blue sky qualification of the
Registrable Securities), rating agency fees, printing expenses, messenger and
delivery expenses, fees and disbursements of counsel for the Company and all
independent certified public accountants (including the expenses of any annual
audit, special audit or "cold comfort" letters required by or incident to such
performance and compliance), securities acts liability insurance (if the Company
so desires), the reasonable fees and expenses of any special experts retained by
the Company in connection with such registration, and fees and expenses of other
persons retained by the Company. Notwithstanding the foregoing, all fees and
disbursements of accountants and other experts engaged by Holders and all other
costs and expenses of Holders shall be borne by Holders. The Company shall have
no obligation to pay any underwriting fees, discounts or selling commissions
attributable to the Registrable Securities being sold by Holders, which expenses
shall be borne by the selling Holders.
4. Registration Procedure.
----------------------
4.1 Company Obligations. In effecting the registration of the
-------------------
Registrable Securities as provided in this Agreement, the Company shall, at its
sole expense:
(a) Prepare and file with the SEC a registration statement with
respect to the Registrable Securities and use its best efforts to cause such
registration statement to become effective; provided, however, that before
-------- -------
filing with the SEC a registration statement or prospectus or any amendments or
supplements thereto, the Company will (i) furnish to one counsel selected by
Holders copies of all such documents proposed to be filed, which documents will
be subject to the review of such counsel, and (ii) notify Holders of any stop
order issued or threatened by the SEC and take all reasonable actions required
to prevent the entry of such stop order or to remove it if entered;
3
<PAGE>
(b) Furnish to Holders copies of the registration statement, each
amendment and supplement thereto (in each case including all exhibits thereto),
the prospectus included in such registration statement (including each
preliminary prospectus) in conformity with the requirements of the Securities
Act and such other documents as Holders may reasonably request in order to
facilitate the disposition of the Registrable Securities owned by them;
(c) Use its best efforts to register or qualify the Registrable
Securities under such other securities or blue sky laws of such jurisdictions as
shall be reasonably requested by Holders and do any and all other acts and
things which may be reasonably necessary or advisable to enable Holders to
consummate the disposition in such jurisdictions of the Registrable Securities
owned by Holders; provided, that the Company shall not be required in connection
--------
therewith or as a condition thereto to (i) qualify generally to do business in
any jurisdiction where it would not otherwise be required to qualify but for
this paragraph (c), (ii) subject itself to taxation in any such jurisdiction, or
(iii) file a general consent to service of process in any such jurisdiction;
(d) Use its best efforts to cause the Registrable Securities covered
by such registration statement to be registered with or approved by such other
governmental agencies or authorities as may be necessary by virtue of the
business and operations of the Company to enable Holders to consummate the
disposition of such Registrable Securities;
(e) Immediately notify Holders at any time when a prospectus relating
thereto is required to be delivered under the Securities Act, of the happening
of any event as a result of which the prospectus included in such registration
statement contains an untrue statement of a material fact or omits to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading and the Company will promptly prepare and furnish to
Holders a supplement or amendment to such prospectus so that, as thereafter
delivered to the purchasers of such Registrable Securities, such prospectus will
not contain an untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading;
(f) Enter into such customary agreements and take all such other
actions as Holders reasonably request in order to expedite or facilitate the
disposition of such Registrable Securities, including customary indemnification;
(g) Make available for inspection by Holders and any attorney,
accountant or other agent retained by Holders (collectively, the "Inspectors"),
all financial and other records, pertinent corporate documents and properties of
the Company as shall be reasonably necessary to enable them to exercise their
due diligence responsibility, and cause the Company's officers, directors and
employees to supply all information reasonably requested by any such Inspector
in connection with such registration statement; and
(h) Otherwise use its best efforts to comply with all applicable
rules and regulations of the SEC.
4
<PAGE>
4.2 Holder's Obligations. In connection with the registration of
--------------------
Registrable Securities as provided in this Agreement, Holders' shall:
(a) Provide (in writing and signed by Holders and stated to be
specifically for use in the related registration statement, preliminary
prospectus, prospectus or other document incident thereto) all such information
and materials and take all such action as may be required in order to permit the
Company to comply with all applicable requirements of the SEC and any applicable
state securities laws and to obtain any desired acceleration of the effective
date of any registration statement prepared and filed by the Company pursuant to
this Agreement.
(b) If requested by the Company or the managing underwriter or
underwriters in connection with any proposed registration and distribution
pursuant to the Agreement, (i) agree to sell the Registrable Securities on the
basis provided in any underwritings agreements entered into in connection
therewith and (ii) complete and execute all questionnaires, powers of attorney,
indemnities, underwriting agreements and other documents customary in similar
offerings.
(c) Execute and deliver to the Company such written undertakings as
the Company and its counsel may reasonably required in order to assume full
compliance with the relevant provisions of the Securities Act.
5. Indemnification.
---------------
5.1 Indemnification by the Company. In connection with the
------------------------------
registration of the Registrable Securities under the Securities Act pursuant to
this Agreement, the Company will, and it hereby does, indemnify and hold
harmless, to the full extent permitted by law, each Holder, each other person
who participates as an underwriter in the offering or sale of such securities
and each other person, if any, who controls such Holder or any such underwriter
within the meaning of the Securities Act, against any and all losses, claims,
damages or liabilities, joint or several, and expenses (including any amounts
paid in any settlement effected with the Company's prior written consent) to
which such Holder or any such underwriter or controlling person may become
subject under the Securities Act, common law or otherwise, insofar as such
losses, claims, damages or liabilities (or actions or proceedings in respect
thereof) or expenses arising out of or are based upon (i) any untrue statement
or alleged untrue statement of any material fact contained in any registration
statement under which such securities were registered under the Securities Act,
any preliminary, final or summary prospectus contained therein, or any amendment
or supplement thereto, or (ii) any omission or alleged omission to state therein
a material fact required to be stated therein or necessary to make the
statements therein not misleading, and the Company will reimburse such Holder
and each such underwriter and controlling person for any legal or any other
expenses reasonably incurred by them in connection with investigating or
defending such loss, claim, liability, action or proceedings; provided, that the
--------
Company shall not be liable in any such case to the extent that any such loss,
claim, damage, liability (or action or proceeding in respect thereof) or
expenses arises out of or is based upon any untrue statement or alleged untrue
statement or omission or alleged omission made in such registration statement or
amendment or supplement thereto or in any such preliminary, final or summary
prospectus in reliance upon and in conformity with written information furnished
5
<PAGE>
to the Company through an instrument duly executed by such Holder or underwriter
or controlling person specifically stating that it is for use in the preparation
thereof; and provided, further, that the Company will not be liable to such
-------- -------
Holder or any person who participates as an underwriter in the offering or sale
of Registrable Securities or any other person, if any, who controls such
underwriter within the meaning of the Securities Act, under the indemnity
agreement in this Section 5.1 with respect to any preliminary prospectus as then
amended or supplemented as the case may be, to the extent that any such loss,
claim, damage or liability of such Holder, underwriter or controlling person
results from the fact that such Holder or underwriter or controlling person sold
Registrable Securities to a person to whom there was not sent, given or
delivered, at or prior to the written confirmation of such sale, a copy of the
final prospectus (including any documents incorporated by reference therein),
whichever is most recent, if the Company has previously furnished copies thereof
to such Holder or underwriter or controlling person and such final prospectus,
as then amended or supplemented, has corrected any such misstatement or
omission. Such indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of such Holder or any underwriter or
controlling person and shall survive the transfer of such securities by such
Holder.
5.2 Indemnification by Holders. The Company may require, as a
--------------------------
condition to including the Registrable Securities in any registration statement
filed in accordance with this Agreement with respect to a Holder, that the
Company shall have received an undertaking reasonably satisfactory to it from
such Holder or any underwriter, to indemnify and hold harmless (in the same
manner and to the same extent as set forth in Section 5.1) the Company and its
controlling persons and all other prospective sellers and their respective
controlling persons with respect to any statement or alleged statement in or
omission or alleged omission from such registration statement, any preliminary,
final or summary prospectus contained therein, or any amendment or supplement,
if such statement or alleged statement or omission or alleged omission was made
in reliance upon and in conformity with written information furnished to the
Company through an instruction duly executed by such Holder or underwriter
specifically stating that it is for use in the preparation of such registration
statement, preliminary, final or summary prospectus or amendment or supplement,
or a document incorporated by reference into any of the foregoing. Such
indemnity shall remain in full force and effect regardless of any investigation
made by or on behalf of the Company or such Holder and shall survive the
transfer of such securities by such Holder; provided, however, that such Holder
-------- -------
shall not be liable to the Company under this Section 5.2 for any amounts
exceeding the product of the purchase price per Registrable Security and the
number of Registrable Securities being sold pursuant to such registration
statement or prospectus by such Holder.
5.3 Notices of Claims, Etc. Promptly after receipt by an indemnified
----------------------
party hereunder of written notice of the commencement of any action or
proceeding with respect to which a claim for indemnification may be made
pursuant to this Section 5, such indemnified party will, if a claim in respect
thereof is to be made against an indemnifying party, promptly give written
notice to the latter of the commencement of such action; provided, that the
--------
failure of any indemnified party to give notice as provided herein shall not
relieve the indemnifying party of its obligations under the preceding
subsections of this Section 5, except to the extent that the indemnifying party
is actually materially prejudiced by such failure to give notice. In case any
such action is brought against an indemnified party, unless in such indemnified
party's reasonable judgement a conflict of
6
<PAGE>
interest between such indemnified and indemnifying parties may exist in respect
of such claim, the indemnifying party will be entitled to participate in and to
assume the defense thereof, jointly with any other indemnifying party similarly
notified to the extent that it may wish, with counsel reasonably satisfactory to
such indemnified party, and after notice from the indemnifying party to such
indemnified party of the indemnifying party's election so to assume the defense
thereof, the indemnifying party will not be liable to such indemnified party for
any legal or other expenses subsequently incurred by the latter in connection
with the defense thereof, unless in such indemnified party's reasonable judgment
a conflict of interest between such indemnified and indemnifying parties arises
in respect of such claim after the assumption of the defense thereof, and the
indemnifying party will not be subject to any liability for any settlement made
without its consent (which consent shall not be unreasonably withheld). No
indemnifying party will consent to entry of any judgment or enter into any
settlement which does not include as an unconditional term thereof the giving by
the claimant or plaintiff to such indemnified party of a release from all
liability in respect to such claim or litigation. An indemnifying party who is
not entitled to, or elects not to, assume the defense of a claim will not be
obligated to pay the fees and expenses of more than one counsel for all parties
indemnified by such indemnifying party with respect to such claim, unless in the
reasonable judgment of any indemnified party a conflict of interest may exist
between such indemnified party and any other of such indemnified parties with
respect to such claim, in which event the indemnifying party shall be obligated
to pay the fees and expenses of such additional counsel or counsels.
5.4 Other Indemnification. Indemnification similar to that specified
---------------------
in the preceding Sections 5.1, 5.2 and 5.3 (with appropriate modifications)
shall be given by the Company and Holders with respect to any required
registration or other qualification of securities under any federal or state law
or regulation of governmental authority other than the Securities Act.
6. Rule 144. The Company shall file in a timely manner all reports
--------
required to be filed by it under the Securities Act and the Exchange Act and the
rules and regulations adopted by the SEC thereunder, and it will take such
further action as a Holder may reasonably request, all to the extent required
from time to time to enable Holders to sell Registrable Securities without
registration under the Securities Act within the limitation of the exemptions
provided by (i) Rule 144 under the Securities Act, as such rule may be amended
from time to time, or (ii) any similar rule or regulation hereafter adopted by
the SEC relating to the disposition of securities. Upon the request of a Holder,
the Company will deliver to such Holder a written statement as to whether the
Company has complied with such requirements. In addition, the Company hereby
agrees that for a period of three months following the date on which a
registration statement filed pursuant to this Agreement shall have become
effective, the Company shall not deregister such securities under Section 12 of
the Exchange Act (even if then permitted to do so pursuant to the Exchange Act
and the rules and regulations promulgated thereunder).
7. Right to Join in Sale.
---------------------
(a) Anything in this Agreement to the contrary notwithstanding, if any
Holder or group of Holders (collectively, "Disposing Holder") proposes, other
than transfers to a Permitted Transferee (as defined in paragraph (d) below), to
sell, dispose of or otherwise transfer any of their
7
<PAGE>
shares of Common Stock or securities convertible into or exchangeable for Common
Stock (collectively, "Stock") in a private transaction, such person or group
shall refrain from effecting such transaction unless, prior to the consummation
thereof, the other Holders shall have been afforded the opportunity to join in
such sale on a pro rata basis, as hereinafter provided.
(b) Prior to consummation of any proposed sale, disposition or
transfer of any Stock described in paragraph (a) above, the Disposing Holder
shall cause the person or group that proposes to acquire such Stock (the
"Proposed Purchaser") to offer (the "Purchase Offer") in writing to the other
Holders to purchase the shares of Stock owned by them (regardless of whether the
shares of Stock to be purchased in the Purchase Offer are the same class as the
shares of Stock owned by the other Holders), such that the number of shares of
Stock so offered to be purchased from the other Holders shall be equal to the
product obtained by multiplying the total number of shares of Stock then owned
by the other Holders by a fraction, the numerator of which is the aggregate
number of shares of Stock proposed to be purchased by the Proposed Purchaser
from all persons (including the Disposing Holder) and the denominator of which
is the aggregate number of shares of Stock then owned by all of such persons, in
all cases considering any securities convertible into or exchangeable for shares
of Common Stock (collectively, "Convertible Securities") on an as if converted
basis. Such purchase shall be made at the highest price per share and on such
other terms and conditions as the Proposed Purchaser has offered to purchase
shares of Stock to be sold by the Disposing Holder, in all cases considering any
Convertible Securities on an as if converted basis. The other Holders shall have
20 calendar days from the date of their receipt of the Purchase Offer in which
to accept the Purchase Offer, and the closing of such purchase shall occur
within 30 calendar days after such acceptance or at such other time as the other
Holders, the Disposing Holder and the Proposed Purchaser may agree. The number
of shares of Stock to be sold to the Proposed Purchaser by the Disposing Holder
shall be reduced by the aggregate number of shares of Stock purchased by the
Proposed Purchaser from the other Holders pursuant to the acceptance by them of
the Purchase Offer in accordance with the provisions of this Section 7,
considering any Convertible Securities on an as if converted basis.
(c) If a sale or other transfer subject to this Section 7 is to be
made to a Proposed Purchaser who is not a Holder, the Disposing Holder shall
notify the Proposed Purchaser that the sale or other transfer is subject to this
Section 7 and shall ensure that no sale or other transfer is consummated without
the Proposed Purchaser first complying with this Section 7. It shall be the
responsibility of each Disposing Holder to determine whether any transaction to
which it is a party is subject to this Section 7.
(d) For purposes of this Section 7, a Permitted Transferee shall mean
any Holder, any member of a Holder's immediate family or any trust established
for the benefit of a Holder or a Holder's immediate family, provided that the
Permitted Transferee must agree to be bound by the provisions of this Agreement.
8. No Inconsistent Agreements. The Company and the Holders will not
--------------------------
hereafter enter into any agreement with respect to any of its securities which
is inconsistent with the rights granted to Holders in this Agreement.
8
<PAGE>
9. Remedies. The Company acknowledges and agrees that in the event of any
--------
breach of this Agreement by it, Holders would be irreparably harmed and could
not be made whole by monetary damages. The Company accordingly agrees to waive
the defense in any action for specific performance that a remedy at law would be
adequate and that a Holder, in addition to any other remedy to which he, she or
it may be entitled at law or in equity, shall be entitled to compel specific
performance of this Agreement in any action instituted in any court of the
United States or any state thereof having subject matter jurisdiction for such
action.
10. Sale Without Registration. At the time of any transfer of any
-------------------------
Registrable Securities which is not registered under the Securities Act, the
Company may require, as a condition of allowing such transfer, that the Holder
or the transferee furnish to the Company: (a) such information as is reasonably
necessary in order to establish that such transfer may be made without
registration under the Securities Act; and (b) at the expense of such Holder or
the transferee, an opinion of counsel, satisfactory in form and substance to the
Company, to the effect that such transfer may be made without registration under
the Securities Act; provided, that nothing contained in this Section 10 shall
--------
relieve the Company from complying with any request for registration,
qualification or compliance made pursuant to these registration rights
provisions.
11. General Provisions.
------------------
11.1 Waivers. No action taken pursuant to this Agreement, including
-------
any investigation by or on behalf of any party hereto, shall be deemed to
constitute a waiver by the party taking such action or compliance with any
representation, warranty, covenant, or agreement contained herein or in any
ancillary document. The waiver by any party hereto of a breach of any provision
of this Agreement shall not operate or be construed as a waiver of any other or
subsequent breach. The waiver by any party of any of the conditions precedent to
its respective obligations under this Agreement shall not preclude it from
seeking redress for breach of this Agreement.
11.2 Notices. All notices and other communications which are required
-------
or may be given under this Agreement shall be in writing and shall be deemed to
have been duly given if delivered personally, by courier service, telecopied, or
mailed by registered or certified mail, postage prepaid, return receipt
requested, to the party to whom the same is so delivered or mailed:
(a) if to the Company:
Litronic Inc.
2030 Main Street, Suite 1250
Irvine, California 92614
Attn: President
(b) if to Holders:
c/o Kris Shah
40 Mission Bay Drive
Corona del Mar, California 92625
9
<PAGE>
and
---
c/o William W. Davis, Sr.
4390 Parliament Place, Suite R
Lanham, Maryland 20706
and
---
c/o Lillian A. Davis
3309 Shortridge Lane
Mitchellville, Maryland 20721
or to such other address as any of the above shall have specified by notice
hereunder. Notices delivered personally, by mail or telecopied shall be deemed
communicated as of actual receipt.
11.3 Entire Agreement; Amendments. This Agreement constitutes the
----------------------------
entire agreement among the parties hereto with respect to the subject matter
hereof, and supersedes any and all prior agreements and undertakings, oral or
written, concerning the subject matter hereof. This Agreement may not be changed
or terminated orally, and may only be changed or terminated by a writing signed
by the party against whom such change or termination is sought.
11.4 Binding Effect; Benefits. This Agreement shall inure to the
------------------------
benefit of and shall be binding upon and enforceable by the parties hereto and
their respective heirs, legal representatives, successors, and assigns. Nothing
in this Agreement, expressed or implied, is intended to or shall confer on any
person other than the parties hereto any rights, remedies, obligations, or
liabilities under or by reason of this Agreement.
11.5 Headings. The section and other headings contained in this
--------
Agreement are for reference purposes only and shall not affect the meaning or
interpretation of this Agreement.
11.6 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which, when executed, shall be deemed to be an original
and all of which together shall be deemed to be one and the same instrument.
11.7 Rules of Construction. In this Agreement, unless the context
---------------------
otherwise requires, words in the singular include the plural, and in the plural
include the singular, and words of the masculine gender include the feminine and
the neuter, and, when the sense so indicates, words of the neuter gender may
refer to any gender.
11.8 Assignment. This Agreement is not assignable without the prior
----------
written consent of the nonassigning party or parties.
10
<PAGE>
11.9 Governing Law; Venue. The validity, performance, and enforcement
--------------------
of this Agreement shall be governed by the laws of the State of California. Any
action commenced hereunder shall be conducted before a court of appropriate
jurisdiction in Orange County, California.
11.10 Cooperation. The parties agree to execute such further documents
-----------
and take such further actions as necessary to carry out the provisions of this
Agreement and to fully accomplish its purpose and intent.
11.11 Attorneys' Fees. The prevailing party in any proceedings
---------------
(including, without limitation any arbitration proceedings) arising in
connection with this Agreement shall be entitled to reimbursement for his or its
reasonable costs incurred in connection therewith, including attorneys' fees.
11.12 Time of Essence. Time is of essence in connection with the
---------------
performance of this Agreement.
The parties hereto have duly executed this Agreement on the day and date
first above written.
LITRONIC, INC.
By:
---------------------------------------------
Kris Shah, President
------------------------------------------------
Kris Shah, Trustee of the Kris Shah and
Geraldine M. Shah Living Trust dated October 9,
1997
------------------------------------------------
Geraldine M. Shah, Trustee of the Kris Shah and
Geraldine M. Shah Living Trust dated October 9,
1997
------------------------------------------------
Ramesh R. Shah, Trustee of the Ramesh R. Shah
and Patricia L. Shah Living Trust dated March
22, 1982 as amended on October 14, 1997
------------------------------------------------
Patricia L. Shah, Trustee of the Ramesh R. Shah
and Patricia L. Shah Living Trust dated March
22, 1982 as amended on October 14, 1997
------------------------------------------------
Dilip R. Shah, Trustee of the Shah Living Trust
dated November 14, 1995
11
<PAGE>
------------------------------------------------
Shila D. Shah, Trustee of the Shah Living Trust
dated November 14, 1995
------------------------------------------------
Kris Shah, Trustee of the Leena Shah Trust dated
October 16, 1997
------------------------------------------------
Kris Shah, Trustee of the Chandra L. Shah Trust
dated October 9, 1997
------------------------------------------------
William W. Davis, Sr.
------------------------------------------------
Lillian A. Davis
12
<PAGE>
Exhibit A
Holder Number of Shares
- ------ ----------------
Kris Shah and Geraldine M. Shah, 2,349,877
as Trustees of the Kris Shah and
Geraldine M. Shah Living Trust
dated October 9, 1997
Ramesh R. Shah and Patricia L. Shah, 463,657
as Trustees of the Ramesh R. Shah and
Patricia L. Shah Living Trust dated
March 22, 1982, as amended on October
14, 1997
Dilip R. Shah and Shila D. Shah, as 186,557
Trustees of the Shah Living Trust dated
November 14, 1995
Kris Shah as Trustee of the Leena Shah 435,301
Trust dated October 16, 1997
Kris Shah as Trustee of the Chandra L. 435,301
Shah Trust dated October 9, 1997
William W. Davis, Sr. 1,084,969
Lillian A. Davis 1,084,969
13
<PAGE>
Exhibit 4.2
WARRANT AGREEMENT dated as of _______ __, 1999 between Litronic
corporation with executive offices located at 2030 Main Street, Suite 1250,
Irvine, California 92610 (the "Company"), on one hand, and BlueStone Capital
Partners, L.P. with executive offices located at 575 Fifth Avenue, New York, New
York 10017 ("BlueStone")(BlueStone hereinafter referred to as the
"Representative"), on the other hand.
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Company proposes to issue to the Representative, in its
individual capacity and not as representative of the several Underwriters
(defined below), warrants ("Warrants") to purchase up to 300,000(as such number
may be adjusted from time to time pursuant to Article 8 of this Agreement)
shares (the "Shares") of common stock, par value $.01 per share, of the Company
(the "Common Stock"); and
WHEREAS, the Representatives has agreed, pursuant to the underwriting
agreement (the "Underwriting Agreement") dated _______ __, 1999 between the
Representative, as representative of the several underwriters named in Schedule
A to the Underwriting Agreement (the "Underwriters") and the Company, to act as
representative of the several Underwriters in connection with the Company's
proposed public offering (the "Public Offering") of 3,000,000 shares of Common
Stock (the "Public Shares") at an initial public offering price of $____ per
Public Share; and
WHEREAS, the Warrants issued pursuant to this Agreement are being
issued by the Company to the Representative and/or to their designees who are
officers or partners of the Representative and/or, at the Representative's
direction, to members of the selling group or underwriting syndicate and/or
their respective officers or partners (collectively, the "Designees"), in
consideration for, and as part of the Representative's compensation in
connection with, the Representative's acting as representative of the several
Underwriters pursuant to the Underwriting Agreement;
NOW, THEREFORE, in consideration of the premises, the payment by the
Representative to the Company of THREE HUNDRED DOLLARS ($300.00), the agreements
herein set forth and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. GRANT.
-----
The Representative and/or the Designees are hereby granted the right
to purchase, at any time from ______ __, 2000 until 5:00 P.M., New York City
time, on ______ __, 2004, (the "Warrant Exercise Term"), up to 300,000 fully
paid and non-assessable Shares at an initial exercise price (subject to
adjustment as provided in Article 8 hereof) of $_______ per Share.
<PAGE>
2. WARRANT CERTIFICATES.
--------------------
The warrant certificates delivered and to be delivered pursuant to
this Agreement (the "Warrant Certificates") shall be in the form set forth as
Exhibit A attached hereto and made a part hereof, with such appropriate
insertions, omissions, substitutions and other variations as required or
permitted by this Agreement.
3. EXERCISE OF WARRANTS.
--------------------
3.1 CASH EXERCISE. The Warrants initially are exercisable at a
-------------
price of $______ per Share, payable in cash or by check to the order of the
Company, or any combination [165% of the initial price of the Common Stock]
thereof, subject to adjustment as provided in Article 8 hereof. Upon surrender
of a Warrant Certificate with the annexed Form of Election to Purchase duly
executed, together with payment of the Exercise Price (as hereinafter defined)
for the Shares purchased, at the Company's principal offices in California
(currently located at 2030 Main Street, Suite 1250, Irvine, California 92610)
the registered holder of a Warrant Certificate ("Holder" or "Holders") shall be
entitled to receive a certificate or certificates for the Shares so purchased.
The purchase rights represented by each Warrant Certificate are exercisable at
the option of the Holder thereof, in whole or in part (but not as to fractional
shares of the Common Stock). In the case of the purchase of less than all the
Shares purchasable under any Warrant Certificate, the Company shall cancel said
Warrant Certificate upon the surrender thereof and shall execute and deliver a
new Warrant Certificate of like tenor for the balance of the Shares purchasable
thereunder.
3.2 CASHLESS EXERCISE. At any time during the Warrant Exercise
-----------------
Term, the Holder may, at the Holder's option, exchange, in whole or in part, the
Warrants represented by such Holder's Warrant Certificate (a "Warrant
Exchange"), into the number of Shares determined in accordance with this Section
3.2, by surrendering such Warrant Certificate at the principal office of the
Company or at the office of its transfer agent, accompanied by a notice stating
such Holder's intent to effect such exchange, the number of Warrants to be so
exchanged and the date on which the Holder requests that such Warrant Exchange
occur (the "Notice of Exchange"). The Warrant Exchange shall take place on the
date specified in the Notice of Exchange or, if later, the date the Notice of
Exchange is received by the Company (the "Exchange Date"). Certificates for the
Shares issuable upon such Warrant Exchange and, if applicable, a new Warrant
Certificate of like tenor representing the Warrants which were subject to the
surrendered Warrant Certificate and not included in the Warrant Exchange, shall
be issued as of the Exchange Date and delivered to the Holder within three (3)
days following the Exchange Date. In connection with any Warrant Exchange, the
Holder shall be entitled to subscribe for and acquire (i) the number of Shares
(rounded to the next highest integer) which would, but for the Warrant Exchange,
then be issuable pursuant to the provision of Section 3.1
<PAGE>
above upon the exercise of the Warrants specified by the Holder in its Notice of
Exchange (the "Total Number") less (ii) the number of Shares equal to the
quotient obtained by dividing (a) the product of the Total Number and the
existing Exercise Price (as hereinafter defined) by (b) the Market Price (as
hereinafter defined) of a Public Share on the day preceding the Warrant
Exchange. "Market Price" at any date shall be deemed to be the last reported
sale price, or, in case no such reported sales takes place on such day, the
average of the last reported sale prices for the last three (3) trading days, in
either case as officially reported by the principal securities exchange on which
the Common Stock is listed or admitted to trading or as reported in the Nasdaq
National Market System, or, if the Common Stock is not listed or admitted to
trading on any national securities exchange or quoted on the NASDAQ National
Market System, the closing bid price as furnished by (i) the National
Association of Securities Dealers, Inc. through Nasdaq or (ii) a similar
organization if Nasdaq is no longer reporting such information.
4. ISSUANCE OF CERTIFICATES.
------------------------
Upon the exercise of the Warrants, the issuance of certificates for
the Shares purchased shall be made forthwith (and in any event within three (3)
business days thereafter) without charge to the Holder thereof including,
without limitation, any tax which may be payable in respect of the issuance
thereof, and such certificates shall (subject to the provisions of Article 5
hereof) be issued in the name of, or in such names as may be directed by, the
Holder thereof; provided, however, that the Company shall not be required to pay
any tax which may be payable in respect of any transfer involved in the issuance
and delivery of any such certificates in a name other than that of the Holder
and the Company shall not be required to issue or deliver such certificates
unless or until the person or persons requesting the issuance thereof shall have
paid to the Company the amount of such tax or shall have established to the
satisfaction of the Company that such tax has been paid.
The Warrant Certificates and the certificates representing the Shares
shall be executed on behalf of the Company by the manual or facsimile signature
of the present or any future Chairman or Vice Chairman of the Board of Directors
or President or Vice President of the Company under its corporate seal
reproduced thereon, attested to by the manual or facsimile signature of the
present or any future Secretary or Assistant Secretary of the Company. Warrant
Certificates shall be dated the date of execution by the Company upon initial
issuance, division, exchange, substitution or transfer.
The Warrant Certificates, and upon exercise of the Warrants, in part
or in whole, certificates representing the Shares shall bear a legend
substantially similar to the following:
<PAGE>
"The securities represented by this certificate and the other
securities issuable upon exercise thereof have not been
registered for purposes of public distribution under the
Securities Act of 1933, as amended (the "Act"), and may not be
offered or sold except (i) pursuant to an effective registration
statement under the Act, (ii) to the extent applicable, pursuant
to Rule 144 under the Act (or any similar rule under such Act
relating to the disposition of securities), or (iii) upon the
delivery by the holder to the Company of an opinion of counsel,
reasonably satisfactory to counsel to the Company, stating that
an exemption from registration under such Act is available."
5. RESTRICTION ON TRANSFER OF WARRANTS.
-----------------------------------
The Holder of a Warrant Certificate, by the Holder's acceptance
thereof, covenants and agrees that the Warrants are being acquired as an
investment and not with a view to the distribution thereof, and that the
Warrants may not be sold, transferred, assigned, hypothecated or otherwise
disposed of, in whole or in part, for a period of one (1) year from the date
hereof, except to the Designees.
6. PRICE.
-----
6.1 INITIAL AND ADJUSTED EXERCISE PRICE. The initial exercise
-----------------------------------
price of each Warrant shall be $____ per Share [165% of the initial offering
price of the Common Stock]. The adjusted exercise price per Share shall be the
price which shall result from time to time from any and all adjustments of the
initial exercise price in accordance with the provisions of Article 8 hereof.
6.2 EXERCISE PRICE. The term "Exercise Price" herein shall mean
--------------
the initial exercise price or the adjusted exercise price, depending upon the
context.
7. REGISTRATION RIGHTS.
-------------------
7.1 REGISTRATION UNDER THE SECURITIES ACT OF 1933. None of the
---------------------------------------------
Warrants or Shares have been registered for purposes of public distribution
under the Securities Act of 1933, as amended (the "Act").
7.2 REGISTRABLE SECURITIES. As used herein the term
----------------------
"Registrable Security" means each of the Shares and any shares of Common Stock
issued upon any stock split or stock dividend in respect of such Shares;
provided, however, that with respect to any particular Registrable Security,
such security shall cease to be a Registrable Security when, as of the date of
determination, (i) it has been effectively registered under the Act and disposed
of pursuant thereto, (ii) registration under the Act is no longer required for
the subsequent public distribution of such security or
<PAGE>
(iii) it has ceased to be outstanding. The term "Registrable Securities" means
any and/or all of the securities falling within the foregoing definition of a
"Registrable Security." In the event of any merger, reorganization,
consolidation, recapitalization or other change in corporate structure affecting
the Common Stock, such adjustment shall be made in the definition of
"Registrable Security" as is appropriate in order to prevent any dilution or
enlargement of the rights granted pursuant to this Article 7.
7.3 PIGGYBACK REGISTRATION. If, at any time during the seven
----------------------
years following the effective date of the Public Offering, the Company proposes
to prepare and file one or more post-effective amendments to the registration
statement filed in connection with the Public Offering or any new registration
statement or post-effective amendments thereto covering equity or debt
securities of the Company, or any such securities of the Company held by its
shareholders (in any such case, other than in connection with a merger,
acquisition or pursuant to Form S-8 or successor form), (for purposes of this
Article 7, collectively, the "Registration Statement"), it will give written
notice of its intention to do so by registered mail ("Notice"), at least thirty
(30) business days prior to the filing of each such Registration Statement, to
all holders of the Registrable Securities. Upon the written request of such a
holder (a "Requesting Holder"), made within twenty (20) business days after
receipt of the Notice, that the Company include any of the Requesting Holder's
Registrable Securities in the proposed Registration Statement, the Company
shall, as to each such Requesting Holder, use its best efforts to effect the
registration under the Act of the Registrable Securities which it has been so
requested to register ("Piggyback Registration"), at the Company's sole cost and
expense and at no cost or expense to the Requesting Holders.
Notwithstanding the provisions of this Section 7.3, the Company
shall have the right at any time after it shall have given written notice
pursuant to this Section 7.3 (irrespective of whether any written request for
inclusion of Registrable Securities shall have already been made) to elect not
to file any such proposed Registration Statement, or to withdraw the same after
the filing but prior to the effective date thereof.
7.4 DEMAND REGISTRATION.
-------------------
(a) At any time during the Warrant Exercise Term, any
"Majority Holder" (as such term is defined in Section 7.4.(c) below) of the
Registrable Securities shall have the right (which right is in addition to the
piggyback registration rights provided for under Section 7.3 hereof),
exercisable by written notice to the Company (the "Demand Registration
Request"), to have the Company prepare and file with the Securities and Exchange
Commission (the "Commission"), on one occasion, at the sole expense of the
Company (except as provided in Section 7.5.(b) hereof, a Registration Statement
and such other documents, including a prospectus, as may be necessary (in the
opinion of both counsel for
<PAGE>
the Company and counsel for such Majority Holder), in order to comply with the
provisions of the Act, so as to permit a public offering and sale of the
Registrable Securities by the holders thereof. The Company shall use its best
efforts to cause the Registration Statement to become effective under the Act,
so as to permit a public offering and sale of the Registrable Securities by the
holders thereof. Once effective, the Company will use its best efforts to
maintain the effectiveness of the Registration Statement until the earlier of
(i) the date that all of the Registrable Securities have been sold or (ii) the
date that the holders of the Registrable Securities receive an opinion of
counsel to the Company that all of the Registrable Securities may be freely
traded (without limitation or restriction as to quantity or timing and without
registration under the Act) under Rule 144(k) promulgated under the Act or
otherwise.
(b) The Company covenants and agrees to give written notice
of any Demand Registration Request to all holders of the Registrable Securities
within ten (10) business days from the date of the Company's receipt of any such
Demand Registration Request. After receiving notice from the Company as provided
in this Section 7.4(b), holders of Registrable Securities may request the
Company to include their Registrable Securities in the Registration Statement to
be filed pursuant to Section 7.4(a) hereof by notifying the Company of their
decision to have such securities included within ten (10) days of their receipt
of the Company's notice.
(c) The term "Majority Holder" as used in Section 7.4
hereof shall mean any holder or any combination of holders of Registrable
Securities, if included in such holders' Registrable Securities are that
aggregate number of Shares (including Shares already issued and Shares issuable
pursuant to the exercise of outstanding Warrants) as would constitute a majority
of the aggregate number of Shares (including Shares already issued and Shares
issuable pursuant to the exercise of outstanding Warrants) included in all the
Registrable Securities.
7.5. COVENANTS OF THE COMPANY WITH RESPECT TO REGISTRATION. The
-----------------------------------------------------
Company covenants and agrees as follows:
(a) In connection with any registration under Section 7.4
hereof, the Company shall file the Registration Statement as expeditiously as
possible, but in any event no later than thirty (30) business days following
receipt of any demand therefor, shall use its best efforts to have any such
Registration Statement declared effective at the earliest possible time, and
shall furnish each holder of Registrable Securities such number of prospectuses
as shall reasonably be requested.
(b) The Company shall pay all costs, fees and expenses
(other than underwriting fees, discounts and nonaccountable expense allowances
applicable to the Registrable Securities and the fees and expenses of counsel
retained by the
<PAGE>
holders of the Registrable Securities) in connection with all Registration
Statements filed pursuant to Sections 7.3. and 7.4.(a) hereof including, without
limitation, the Company's legal and accounting fees, printing expenses, and blue
sky fees and expenses.
(c) The Company will take all necessary action which may be
required in qualifying or registering the Registrable Securities included in the
Registration Statement for offering and sale under the securities or blue sky
laws of such states as are reasonably requested by the holders of such
securities, provided that the Company shall not be obligated to execute or file
any general consent to service of process or to qualify as a foreign corporation
to do business under the laws of any such jurisdiction.
(d) The Company shall indemnify any holder of the
Registrable Securities to be sold pursuant to any Registration Statement and any
underwriter or person deemed to be an underwriter under the Act and each person,
if any, who controls such holder or underwriter or person deemed to be an
underwriter within the meaning of Section 15 of the Act or Section 20(a) of the
Securities Exchange Act of 1934, as amended ("Exchange Act"), against all loss,
claim, damage, expense or liability (including all expenses reasonably incurred
in investigating, preparing or defending against any claim whatsoever) to which
any of them may become subject under the Act, the Exchange Act or otherwise,
arising from such registration statement to the same extent and with the same
effect as the provisions pursuant to which the Company has agreed to indemnify
the Underwriters contained in Section 7 of the Underwriting Agreement and to
provide for just and equitable contribution as set forth in Section 8 of the
Underwriting Agreement.
(e) Any holder of Registrable Securities to be sold
pursuant to a Registration Statement, and such Holder's successors and assigns,
shall severally, and not jointly, indemnify, the Company, its officers and
directors and each person, if any, who controls the Company within the meaning
of Section 15 of the Act or Section 20(a) of the Exchange Act, against all loss,
claim, damage or expense or liability (including all expenses reasonably
incurred in investigating, preparing or defending against any claim whatsoever)
to which they may become subject under the Act, the Exchange Act or otherwise,
arising from information furnished by or on behalf of such Holder, or such
Holder's successors or assigns, for specific inclusion in such Registration
Statement to the same extent and with the same effect as the provisions pursuant
to which the Underwriters have agreed to indemnify the Company contained in
Section 7 of the Underwriting Agreement and to provide for just and equitable
contribution as set forth in Section 8 of the Underwriting Agreement.
(f) Nothing contained in this Agreement shall be construed
as requiring any Holder to exercise the Warrants held
<PAGE>
by such Holder prior to the initial filing of any Registration Statement or the
effectiveness thereof.
(g) The Company shall promptly deliver copies of all
correspondence between the Commission and the Company, its counsel or auditors
and all memoranda relating to discussions with the Commission or its staff with
respect to the Registration Statement to each Holder of Registrable Securities
included for registration in such Registration Statement pursuant to Section 7.3
or Section 7.4 hereof that requests such correspondence and memoranda and to the
managing underwriter, if any, of the offering in connection with which such
Holder's Registrable Securities are being registered and shall permit each such
Holder and managing underwriter to do such investigation, upon reasonable
advance notice, with respect to information contained in or omitted from the
Registration Statement as it deems reasonably necessary to comply with
applicable securities laws or rules of the National Association of Securities
Dealers, Inc. Such investigation shall include access to books, records and
properties and opportunities to discuss the business of the Company with its
officers and independent auditors, all to such reasonable extent and at such
reasonable times and as often as any such Holder or managing underwriter shall
reasonably request.
8. ADJUSTMENTS OF EXERCISE PRICE AND NUMBER OF SHARES.
--------------------------------------------------
8.1 COMPUTATION OF ADJUSTED PRICE. In case the Company shall at
-----------------------------
any time after the date hereof pay a dividend in shares of Common Stock or make
a distribution in shares of Common Stock, then upon such dividend or
distribution, the Exercise Price in effect immediately prior to such dividend or
distribution shall forthwith be reduced to a price determined by dividing:
(a) an amount equal to the total number of shares of Common
Stock outstanding immediately prior to such dividend or distribution multiplied
by the Exercise Price in effect immediately prior to such dividend or
distribution, by
(b) the total number of shares of Common Stock outstanding
immediately after such issuance or sale.
For the purposes of any computation to be made in accordance with
the provisions of this Section 8.1, the Common Stock issuable by way of dividend
or other distribution on any stock of the Company shall be deemed to have been
issued immediately after the opening of business on the date following the date
fixed for the determination of stockholders entitled to receive such dividend or
other distribution.
8.2 SUBDIVISION AND COMBINATION. In case the Company shall at
---------------------------
any time subdivide or combine the outstanding shares of Common Stock, the
Exercise Price shall forthwith be
<PAGE>
proportionately decreased in the case of subdivision or increased in the case of
combination.
8.3 ADJUSTMENT IN NUMBER OF SHARES. Upon each adjustment of the
------------------------------
Exercise Price pursuant to the provisions of this Article 8, the number of
Shares issuable upon the exercise of each Warrant shall be adjusted to the
nearest full number by multiplying a number equal to the Exercise Price in
effect immediately prior to such adjustment by the number of Shares issuable
upon exercise of the Warrants immediately prior to such adjustment and dividing
the product so obtained by the adjusted Exercise Price.
8.4 RECLASSIFICATION, CONSOLIDATION, MERGER, ETC. In case of any
---------------------------------------------
reclassification or change of the outstanding shares of Common Stock (other than
a change in par value to no par value, or from no par value to par value, or as
a result of a subdivision or combination), or in the case of any consolidation
of the Company with, or merger of the Company into, another corporation (other
than a consolidation or merger in which the Company is the surviving corporation
and which does not result in any reclassification or change of the outstanding
shares of Common Stock, except a change as a result of a subdivision or
combination of such shares or a change in par value, as aforesaid), or in the
case of a sale or conveyance to another corporation of the property of the
Company as an entirety, the Holders shall thereafter have the right to purchase
the kind and number of shares of stock and other securities and property
receivable upon such reclassification, change, consolidation, merger, sale or
conveyance as if the Holders were the owners of the shares of Common Stock
underlying the Warrants immediately prior to any such events at a price equal to
the product of (x) the number of shares of Common Stock issuable upon exercise
of the Holder's Warrants and (y) the Exercise Price in effect immediately prior
to the record date for such reclassification, change, consolidation, merger,
sale or conveyance as if such Holders had exercised the Warrants.
8.5 DETERMINATION OF OUTSTANDING SHARES OF COMMON STOCK. The
---------------------------------------------------
number of shares of Common Stock at any one time outstanding shall include the
aggregate number of shares of Common Stock issued and the aggregate number of
shares of Common Stock issuable upon the exercise of options, rights, warrants
and upon the conversion or exchange of convertible or exchangeable securities.
8.6 DIVIDENDS AND OTHER DISTRIBUTIONS WITH RESPECT TO
-------------------------------------------------
OUTSTANDING SECURITIES. In the event that the Company shall at any time prior to
- ----------------------
the exercise of all Warrants make any distribution of its assets to holders of
its Common Stock as a liquidating or a partial liquidating dividend, then the
holder of Warrants who exercises its Warrants after the record date for the
determination of those holders of Common Stock entitled to such distribution of
assets as a liquidating or partial liquidating dividend shall be entitled to
receive for the Warrant Price per Warrant, in addition to each share of Common
Stock, the amount of
<PAGE>
such distribution (or, at the option of the Company, a sum equal to the value of
any such assets at the time of such distribution as determined by the Board of
Directors of the Company in good faith) which would have been payable to such
holder had he been the holder of record of the Common Stock receivable upon
exercise of his Warrant on the record date for the determination of those
entitled to such distribution. At the time of any such dividend or distribution,
the Company shall make appropriate reserves to ensure the timely performance of
the provisions of this Subsection 8.6.
8.7 SUBSCRIPTION RIGHTS FOR SHARES OF COMMON STOCK OR OTHER
-------------------------------------------------------
SECURITIES. In the case the Company or an affiliate of the Company shall at any
- ----------
time after the date hereof and prior to the exercise of all the Warrants issue
any rights, warrants or options to subscribe for shares of Common Stock or any
other securities of the Company or of such affiliate to all the shareholders of
the Company, the Holders of unexercised Warrants on the record date set by the
Company or such affiliate in connection with such issuance of rights, warrants
or options shall be entitled, in addition to the shares of Common Stock or other
securities receivable upon the exercise of the Warrants, to receive such rights,
warrants or options shall be entitled, in addition to the shares of Common Stock
or other securities receivable upon the exercise of the Warrants, to receive
such rights at the time such rights, warrants or options that such Holders would
have been entitled to receive had they been, on such record date, the holders of
record of the number of whole shares of Common Stock then issuable upon exercise
of their outstanding Warrants (assuming for purposes of this Section 8.7), that
the exercise of the Warrants is permissible immediately upon issuance).
9. EXCHANGE AND REPLACEMENT OF WARRANT CERTIFICATES.
------------------------------------------------
Each Warrant Certificate is exchangeable without expense, upon the
surrender thereof by the registered Holder at the principal executive office of
the Company, for a new Warrant Certificate of like tenor and date representing
in the aggregate the right to purchase the same number of Shares in such
denominations as shall be designated by the Holder thereof at the time of such
surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it
of the loss, theft, destruction or mutilation of any Warrant Certificate, and,
in case of loss, theft or destruction, of indemnity or security reasonably
satisfactory to it, and reimbursement to the Company of all reasonable expenses
incidental thereto, and upon surrender and cancellation of the Warrant
Certificate, if mutilated, the Company will make and deliver a new Warrant
Certificate of like tenor, in lieu thereof.
10. ELIMINATION OF FRACTIONAL INTERESTS.
-----------------------------------
The Company shall not be required to issue certificates representing
fractions of Shares, nor shall it be required to issue
<PAGE>
scrip or pay cash in lieu of fractional interests, it being the intent of the
parties that all fractional interests shall be eliminated by rounding any
fraction up to the nearest whole number of Shares.
11. RESERVATION AND LISTING OF SECURITIES.
-------------------------------------
The Company shall at all times reserve and keep available out of its
authorized shares of Common Stock, solely for the purpose of issuance upon the
exercise of the Warrants, such number of shares of Common Stock as shall be
issuable upon the exercise thereof. The Company covenants and agrees that, upon
exercise of the Warrants and payment of the Exercise Price therefor, all Shares
issuable upon such exercise shall be duly and validly issued, fully paid, non-
assessable and not subject to the preemptive rights of any shareholder. As long
as the Warrants shall be outstanding, the Company shall use its best efforts to
cause all shares of Common Stock issuable upon the exercise of the Warrants to
be listed on the Nasdaq National Market or listed on such national securities
exchanges as the Common Stock is listed at such time.
12. NOTICES TO WARRANT HOLDERS.
--------------------------
Nothing contained in this Agreement shall be construed as conferring
upon the Holder or Holders the right to vote or to consent or to receive notice
as a shareholder in respect of any meetings of shareholders for the election of
directors or any other matter, or as having any rights whatsoever as a
shareholder of the Company. If, however, at any time prior to the expiration of
the Warrants and their exercise, any of the following events shall occur:
(a) the Company shall take a record of the holders of its shares
of Common Stock for the purpose of entitling them to receive a dividend or
distribution payable otherwise than in cash, or a cash dividend or distribution
payable otherwise than out of current or retained earnings, as indicated by the
accounting treatment of such dividend or distribution on the books of the
Company; or
(b) the Company shall offer to all the holders of its Common
Stock any additional shares of capital stock of the Company or securities
convertible into or exchangeable for shares of capital stock of the Company, or
any option, right or warrant to subscribe therefor; or
(c) a dissolution, liquidation or winding up of the Company
(other than in connection with a consolidation or merger) or a sale of all or
substantially all of its property, assets and business as an entirety shall be
proposed; or
(d) reclassification or change of the outstanding shares of
Common Stock (other than a change in par value to no par value, or from no par
value to par value, or as a result of a
<PAGE>
subdivision or combination), consolidation of the Company with, or merger of the
Company into, another corporation (other than a consolidation or merger in which
the Company is the surviving corporation and which does not result in any
reclassification or change of the outstanding shares of Common Stock, except a
change as a result of a subdivision or combination of such shares or a change in
par value, as aforesaid), or a sale or conveyance to another corporation of the
property of the Company as an entirety is proposed; or
(e) The Company or an affiliate of the Company shall propose to
issue any rights to subscribe for shares of Common Stock or any other securities
of the Company or of such affiliate to all the shareholders of the Company;
then, in any one or more of said events, the Company shall give written notice
to the Holder or Holders of such event at least fifteen (15) days prior to the
date fixed as a record date or the date of closing the transfer books for the
determination of the shareholders entitled to such dividend, distribution,
convertible or exchangeable securities or subscription rights, options or
warrants, or entitled to vote on such proposed dissolution, liquidation, winding
up or sale. Such notice shall specify such record date or the date of closing
the transfer books, as the case may be. Failure to give such notice or any
defect therein shall not affect the validity of any action taken in connection
with the declaration or payment of any such dividend or distribution, or the
issuance of any convertible or exchangeable securities or subscription rights,
options or warrants, or any proposed dissolution, liquidation, winding up or
sale.
13. NOTICES.
-------
All notices, requests, consents and other communications hereunder
shall be in writing and shall be deemed to have been duly made when delivered,
or mailed by registered or certified mail, return receipt requested:
(a) If to a registered Holder of the Warrants, to the address of
such Holder as shown on the books of the Company; or
(b) If to the Company, to the address set forth in Section 3 of
this Agreement or to such other address as the Company may designate by notice
to the Holders.
14. SUPPLEMENTS AND AMENDMENTS.
--------------------------
The Company and BlueStone may from time to time supplement or amend
this Agreement without the approval of any Holders of Warrant Certificates in
order to cure any ambiguity, to correct or supplement any provision contained
herein which may be defective or inconsistent with any provisions herein, or to
make any other provisions in regard to matters or questions arising hereunder
which the Company and BlueStone may deem necessary or desirable and which the
Company and the BlueStone deem not to
<PAGE>
adversely affect the interests of the Holders of Warrant Certificates.
15. SUCCESSORS.
----------
All the covenants and provisions of this Agreement by or for the
benefit of the Company and the Holders inure to the benefit of their respective
successors and assigns hereunder.
16. TERMINATION.
-----------
This Agreement shall terminate at the close of business on _______ __,
2007. Notwithstanding the foregoing, this Agreement will terminate on any
earlier date when all Warrants have been exercised and all the Shares have been
resold to the public; provided, however, that the provisions of Section 7.5.
hereof shall survive any termination pursuant to this Section 16 until the close
of business on _______ __, 2010.
17. GOVERNING LAW.
-------------
This Agreement and each Warrant Certificate issued hereunder shall be
deemed to be a contract made under the laws of the State of New York and for all
purposes shall be construed in accordance with the laws of said State.
18. BENEFITS OF THIS AGREEMENT.
--------------------------
Nothing in this Agreement shall be construed to give to any person or
corporation other than the Company and the Representatives and any other
registered holder or holders of the Warrant Certificates, Warrants or the Shares
any legal or equitable right, remedy or claim under this Agreement; and this
Agreement shall be for the sole and exclusive benefit of the Company and the
Representatives and any other holder or holders of the Warrant Certificates,
Warrants or the Shares.
19. COUNTERPARTS.
------------
This Agreement may be executed in any number of counterparts and each
of such counterparts shall for all purposes be deemed to be an original, and
such counterparts shall together constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed, as of the day and year first above written.
[SEAL] LITRONIC INC.
By:
<PAGE>
_____________________________________________
Name:
Title:
Attest:
____________________________
BLUESTONE CAPITAL PARTNERS, L.P.
By: BlueStone Capital Management, Inc.,
General Partner
By:
_____________________________________________
Kerry J. Dukes,
President
<PAGE>
EXHIBIT A
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED OR SOLD EXCEPT (i) PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, (ii) TO THE EXTENT APPLICABLE,
PURSUANT TO RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT RELATING
TO THE DISPOSITION OF SECURITIES), OR (iii) UPON THE DELIVERY BY THE HOLDER TO
THE COMPANY OF AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO COUNSEL FOR THE
COMPANY, STATING THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS
AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.
EXERCISABLE ON OR BEFORE
5:00 P.M., NEW YORK TIME, _______ __, 2004
No. W-
_______ Warrants
WARRANT CERTIFICATE
This Warrant Certificate certifies that _______________ ____________ or
registered assigns, is the registered holder of _______ Warrants to purchase, at
any time from _______ __, 2000 until 5:00 P.M. New York City time on ______ __,
2004 ("Expiration Date"), up to _____ fully-paid and non-assessable shares (the
"Shares") of common stock, par value $.01 per share (the "Common Stock"), of
Litronic Inc., a Delaware corporation (the "Company"), at the initial exercise
price, subject to adjustment in certain events (the "Exercise Price"), of $____
per Share upon surrender of this Warrant Certificate and payment of the Exercise
Price at an office or agency of the Company, but subject to the conditions set
forth herein and in the warrant agreement dated as of ______ __, 1998 between
the Company and BlueStone Capital Partners, L.P.(the "Warrant Agreement").
Payment of the Exercise Price may be made in cash, or by certified or official
bank check in New York Clearing House funds payable to the order of the Company,
or any combination thereof.
No Warrant may be exercised after 5:00 P.M., New York City time, on the
Expiration Date, at which time all Warrants evidenced hereby, unless exercised
prior thereto, shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are part of a duly authorized
issue of Warrants issued pursuant to the Warrant Agreement, which Warrant
Agreement is hereby incorporated by reference in and made a part of this
instrument and is hereby referred to in a description of the rights, limitation
of rights,
<PAGE>
obligations, duties and immunities thereunder of the Company and the holders
(the words "holders" or "holder" meaning the registered holders or registered
holder) of the Warrants.
The Warrant Agreement provides that upon the occurrence of certain events, the
Exercise Price and/or number of the Company's securities issuable thereupon may,
subject to certain conditions, be adjusted. In such event, the Company will, at
the request of the holder, issue a new Warrant Certificate evidencing the
adjustment in the Exercise Price and the number and/or type of securities
issuable upon the exercise of the Warrants; provided, however, that the failure
of the Company to issue such new Warrant Certificates shall not in any way
change, alter, or otherwise impair, the rights of the holder as set forth in the
Warrant Agreement.
Upon due presentment for registration of transfer of this Warrant Certificate at
an office or agency of the Company, a new Warrant Certificate or Warrant
Certificates of like tenor and evidencing in the aggregate a like number of
Warrants shall be issued to the transferee(s) in exchange for this Warrant
Certificate, subject to the limitations provided herein and in the Warrant
Agreement, without any charge except for any tax, or other governmental charge
imposed in connection therewith.
Upon the exercise of less than all of the Warrants evidenced by this
Certificate, the Company shall forthwith issue to the holder hereof a new
Warrant Certificate representing such number of unexercised Warrants.
The Company may deem and treat the registered holder(s) hereof as the absolute
owner(s) of this Warrant Certificate (notwithstanding any notation of ownership
or other writing hereon made by anyone), for the purpose of any exercise hereof,
and of any distribution to the holder(s) hereof, and for all other purposes, and
the Company shall not be affected by any notice to the contrary.
All terms used in this Warrant Certificate which are defined in the Warrant
Agreement shall have the meanings assigned to them in the Warrant Agreement.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly
executed under its corporate seal.
Dated: _______ __, 1999 LITRONIC INC.
[SEAL] By:________________________________
Name:
Title:
Attest:
______________________________
<PAGE>
[FORM OF ELECTION TO PURCHASE]
The undersigned hereby irrevocably elects to exercise the right, represented by
this Warrant Certificate, to purchase _________ Shares and herewith tenders in
payment for such Shares cash or a certified or official bank check payable in
New York Clearing House Funds to the order of Litronic Inc. in the amount of
$__________ , all in accordance with the terms hereof. The undersigned requests
that a certificate for such Shares be registered in the name of , whose address
is __________________, and that such Certificate be delivered to
__________________, whose address is _____________.
Dated: Signature:
________________________________________
(Signature must conform in
all respects to name of holder
as specified on the face of
the Warrant Certificate.)
___________________________
___________________________
(Insert Social Security or Other
Identifying Number of Assignee)
<PAGE>
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder desires to transfer the
Warrant Certificate.)
FOR VALUE RECEIVED
_____________________________
hereby sells, assigns and transfers unto
________________________________________________________________________________
(Please print name and address of transferee) this Warrant Certificate, together
with all right, title and interest therein, and does hereby irrevocably
constitute and appoint _______________, Attorney, to transfer the within Warrant
Certificate on the books of the within-named Company, with full power of
substitution.
Dated: Signature:
________________________________________
(Signature must conform in
all respects to name of holder
as specified on the face of
the Warrant Certificate.)
________________________________________
________________________________________
(Insert Social Security or Other
Identifying Number of Holder
___________________________
___________________________
(Insert Social Security or Other
Identifying Number of Assignee)
<PAGE>
Exhibit 10.1
EXECUTIVE EMPLOYMENT AGREEMENT
------------------------------
THIS AGREEMENT, dated ______________, effective as of ____________, 1999
("Effective Date"), is made and entered into by and between LITRONIC INC., a
Delaware corporation ("Employer") and KRIS SHAH ("Executive").
RECITALS
---------
Employer desires that the Executive enter into an employment relationship
with Employer in order to provide the necessary leadership and senior management
skills that are important to the success of Employer. Employer believes that
obtaining the Executive's services as an employee of Employer and the benefits
of his business experience are of material importance to Employer and Employer's
stockholders.
AGREEMENT
----------
NOW, THEREFORE, in consideration of Executive's employment by Employer and
the mutual promises and covenants contained herein, the receipt and sufficiency
of which is hereby acknowledged, Employer and Executive intend by this Agreement
to specify the terms and conditions of Executive's employment relationship with
Employer.
1. GENERAL DUTIES OF EMPLOYER AND EXECUTIVE.
----------------------------------------
1.1 Employer agrees to employ Executive and Executive agrees to accept
employment by Employer and to serve Employer in an executive capacity upon the
terms and conditions set forth herein. Employer hereby employs Executive as the
Chairman of the Board and Chief Executive Officer of Employer as of the
Effective Date, reporting to the Board of Directors of Employer (the "Board").
Executive will also serve as a member of the Board. Executive's duties and
responsibilities shall be those normally assumed by the Chairman of the Board
and Chief Executive Officer of a publicly-owned company similarly situated to
Employer, as well as such other or additional duties, as may from time-to-time
be assigned to Executive by the Board. Such other or additional duties shall be
consistent with the senior executive functions set forth above.
1.2 While employed hereunder, Executive shall use his best efforts to obey
the lawful directions of the Board. Executive shall also use his best efforts to
promote the interests of Employer and to maintain and to promote the reputation
of Employer. While employed hereunder, Executive shall devote his full business
time, efforts, skills and attention to the affairs of Employer and faithfully
perform his duties and responsibilities hereunder.
1.3 While this Agreement is in effect, Executive may from time to time
engage in any activities that do not compete directly with Employer, provided
that such activities do not interfere with his performance of his duties.
Executive shall be permitted to (i) invest his personal assets as a passive
investor in such form or manner as Executive may choose in his discretion, (ii)
participate in various charitable efforts, and (iii) serve as a member of the
Board of Directors of other corporations which are not competitors of Employer.
Shah Executive Employment Agreement
<PAGE>
1.4 Executive shall perform his duties at the corporate office of Employer
located in Irvine, California. Executive shall not be relocated to another
location more than thirty miles from Irvine, California without his prior
written consent.
2. COMPENSATION AND BENEFITS.
-------------------------
2.1 As compensation for his services to Employer, Employer shall pay to
Executive an annual base salary of $175,000 during the first 12-month period
that this Agreement is in effect, payable in equal semimonthly payments in
accordance with the Employer's regular payroll policy for salaried employees
(the "Salary"). Thereafter, the Compensation Committee of the Board shall
perform an annual review of the Executive's Salary based on Executive's
performance of his duties and the Employer's other compensation policies. The
Compensation Committee may, at its sole discretion, increase (but not decrease)
the Salary after the first 12-month period that this Agreement is in effect.
2.2 In addition, Executive shall be entitled to an incentive bonus
("Incentive Bonus"), payable no later than March 31 of each year based on
Employer's earnings before interest and taxes (after adding back the
amortization of goodwill from Employer's acquisition of Pulsar Data Systems,
Inc.) (defined as "EBIT" for purposes of this Section 2.2) for the previous
fiscal year. The Incentive Bonus for fiscal year 1999 (payable on or before
March 31, 2000) shall be calculated on a pro forma basis in accordance with GAAP
as determined by Employer's Auditors as if the business combination of Employer
had occurred on January 1, 1999. If EBIT in any fiscal year during the term of
this Agreement exceeds $2,500,000, then Executive shall be entitled to an
Incentive Bonus of $100,000. For each additional $1,000,000 of annual EBIT,
Executive shall be entitled an additional $37,500 of Incentive Bonus (this
additional amount may only be earned by Employer's EBIT increasing in $1,000,000
increments, i.e., it shall not be prorated for amounts above the previous
threshold that are less than $1,000,000). Employer shall pay Executive a
prorated Incentive Bonus (the "Prorated Bonus") if this Agreement is terminated
for any reason other than for "Due Cause." The Prorated Bonus shall be based on
a fraction, the numerator of which is the number of calendar days during the
fiscal year during which Executive was employed prior to and including the
effective date of the termination of Executive's employment and the denominator
of which is 365.
2.3 Upon Executive's furnishing to Employer customary and reasonable
documentary support (such as receipts or paid bills) evidencing costs and
expenses incurred by him in the performance of his services and duties hereunder
(including, without limitation, travel and entertainment and cellular telephone
expenses) and containing sufficient information to establish the amount, date,
place and essential character of the expenditure, Executive shall be reimbursed
for such costs and expenses in accordance with Employer's normal expense
reimbursement policy.
2.4 Employer shall provide Executive with a luxury automobile satisfactory
to Executive (with monthly lease payments not to exceed $1,600), and shall pay
all maintenance and operating costs (including insurance) for that automobile.
-2-
Shah Executive Employment Agreement
<PAGE>
2.5 As long as this Agreement is in effect, Executive shall be entitled to
participate in the medical (including hospitalization), dental, life and
disability insurance plans, to the extent offered by Employer, and in amounts
consistent with the Employer's policy, for other senior executive officers of
Employer.
2.6 Executive shall have the right to participate in any additional
compensation, benefit, pension, stock option, stock purchase, 401(k) or other
plan or arrangement of Employer now or hereafter existing for the benefit of
other senior executive officers of Employer.
2.7 Executive shall be entitled to such vacation (but in no event less
than three weeks per year), holiday and other paid or unpaid leaves of absence
consistent with Employer's normal policies for other senior executive officers
of Employer or as otherwise approved by the Board. Executive shall be entitled
to accrue vacation time for one year. If he does not take the accrued vacation
during the next year, he shall be paid for the unused vacation at his Salary
rate then in effect.
3. PRESERVATION OF BUSINESS; FIDUCIARY RESPONSIBILITY.
--------------------------------------------------
Executive shall use his best efforts to preserve the business and
organization of Employer and to preserve the business relations of Employer. So
long as the Executive is employed by Employer, Executive shall observe and
fulfill proper standards of fiduciary responsibility attendant upon his service
and office.
4. TERM.
----
The term of this Agreement shall commence on the Effective Date and shall
end on __________, 2002, subject to earlier termination as set forth in Section
5, below. After the end of the initial term, this Agreement shall be subject to
successive one year renewals unless, at least 90 days prior to the expiration of
the initial term or any renewal term, either party gives written notice to the
other of his or its intention not to renew.
5. TERMINATION OTHER THAN BY EXPIRATION OF THE TERM.
------------------------------------------------
Employer or Executive may terminate Executive's employment under this
Agreement at any time, but only on the following terms:
5.1 Either Executive or Employer may terminate this Agreement in
accordance with Section 4.1.
5.2 Employer may terminate Executive's employment under this Agreement at
any time for "Due Cause" (as defined in Appendix I attached hereto and
incorporated herein by this reference) upon the good faith determination by the
Board that Due Cause exists for the termination of the employment relationship.
-3-
Shah Executive Employment Agreement
<PAGE>
5.3 If Executive is incapacitated by accident, sickness or otherwise so as
to render Executive mentally or physically incapable of performing the services
required under Section 1 of this Agreement for a period of 180 consecutive days,
and such incapacity is confirmed by the written opinion of two practicing
medical doctors licensed by and in good standing in the State of California (one
selected by Employer and one by Executive), upon the expiration of such period
or at any time reasonably thereafter, Employer may terminate Executive's
employment under this Agreement upon giving Executive or his legal
representative written notice at least 30 days prior to the termination date,
subject to the provisions of Section 6.2, below. Executive agrees, after written
notice by the Board, to submit to examinations by such practicing medical
doctors. If such medical doctors do not agree as to whether Executive is
disabled, they shall promptly select a mutually acceptable third practicing
medical doctor to further evaluate Executive, whose conclusion shall be
rendered, in writing, within ten days of his or her selection. The conclusion of
the third practicing medical doctor shall be final and binding on Employer and
Executive.
5.4 This Agreement shall terminate immediately upon Executive's death,
subject to the provisions of Section 6.2, below.
5.5 Subject to the provisions of Section 6.3, below, Employer may
terminate Executive's employment under this Agreement at any time for any reason
whatsoever, even without Due Cause, by giving a written notice of termination to
Executive, in which case the employment relationship shall terminate immediately
upon the giving of such notice. If Employer terminates the employment of
Executive other than (i) pursuant to Section 5.2 for Due Cause, (ii) due to
incapacity pursuant to Section 5.3 or due to Executive's death pursuant to
Section 5.4, or (iii) Executive's Retirement (as defined in Appendix I attached
hereto and incorporated herein by this reference), then such action by Employer,
unless consented to in writing by Executive, shall be deemed to be a
constructive termination by Employer of Executive's employment (a "Constructive
Termination"), and, in such event, Executive shall be entitled to receive the
compensation set forth in Section 6.3 below.
5.6 Executive may terminate this Agreement at any time for "Good Reason"
(as defined in Appendix I attached hereto and incorporated herein by this
reference) within 30 days after Executive learns of the event or condition
constituting "Good Reason" and, in such event, shall be entitled to receive the
compensation set forth in Section 6.3 below.
6. EFFECT OF TERMINATION.
---------------------
6.1 If the employment relationship is terminated (a) by Executive upon 90
days' written notice pursuant to Section 5.1, (b) by Employer for Due Cause
pursuant to Section 5.2, or (c) by Executive breaching this Agreement by
refusing to continue his employment and failing to give the requisite 90 days'
written notice, all compensation and benefits shall cease as of the date of
termination, other than: (i) those benefits that are provided by retirement and
benefit plans and programs specifically adopted and approved by Employer for
Executive that are earned and vested by the date of termination; (ii)
Executive's pro rata annual Salary (as in effect as of the date of termination,
payable in the manner as prescribed in the second sentence of Section 2.1)
through the date of termination; (iii) any stock options which have vested as of
the date of termination pursuant to the terms of the Agreement granting such
options; and (iv) accrued vacation as required by California law.
-4-
Shah Executive Employment Agreement
<PAGE>
6.2 If Executive's employment relationship is terminated due to
Executive's incapacity pursuant to Section 5.3 or due to Executive's death
pursuant to Section 5.4, Executive or Executive's estate or legal
representative, will be entitled to (i) those benefits that are provided by
retirement and benefits plans and programs specifically adopted and approved by
Employer for Executive that are earned and vested at the date of termination, a
Prorated Bonus for the fiscal year in which incapacity or death occurs, and,
even though no longer employed by Employer, Executive shall continue to receive
the annual Salary compensation (as in effect as of the date of termination,
payable in the manner as prescribed in the second sentence of Section 2.1) for
six months following the date of termination, offset, however, by any payments
received by Executive as a result of any disability insurance maintained by
Employer for Executive's benefit.
6.3 In the event of a Constructive Termination or a termination of this
Agreement by Executive for Good Reason, then Employer shall:
(a) pay to Executive on the date of termination his Salary in effect as of
the date of termination through the end of the month during which such
termination occurs plus credit for any vacation earned but not taken;
(b) pay to Executive as severance pay Executive's Salary in effect as of
the date of termination for the greater of (i) the balance of the term
of this Agreement or (ii)an additional two years, payable in equal
semimonthly payments in accordance with the Employer's regular payroll
policy for salaried employees;
(c) pay to Executive the Prorated Bonus for the fiscal year during which
termination occurs;
(d) pay to or reimburse Executive any amounts due Executive pursuant to
Section 2.4 of this Agreement for a period of 12 months after the date
of termination; and
(e) maintain, at Employer's expense, in full force and effect, for
Executive's continued benefit, all medical and life insurance to which
Executive was entitled immediately prior to the date of termination (or
at the election of Executive in the event of a Change in Control,
immediately prior to the date of the Change in Control) until the
earliest of (i) 12 months or (ii) the date or dates that Executive's
continued participation in Employer's medical and/or life insurance
plans, as applicable, is not possible under the terms of such plans
(the earliest of (i) and (ii) is referred to herein as the "Benefits
Date"). If Employer's medical and/or life insurance plans do not allow
Executive's continued participation in such plan or plans, then
Employer will pay to Executive, in monthly installments, from the date
on which Executive's participation in such medical and/or life
insurance, as applicable, is prohibited until the Benefits Date, the
monthly premium or premiums which had been payable by Employer with
respect to Executive for such discontinued medical and/or life
insurance, as applicable.
-5-
Shah Executive Employment Agreement
<PAGE>
6.4 Anything in this Agreement to the contrary notwithstanding, if the
Auditors (as defined in Appendix I attached hereto and incorporated herein by
this reference) determine that any payment or distribution by Employer to or for
the benefit of Executive, whether paid or payable (or distributed or
distributable) pursuant to the terms of this Agreement or otherwise (a
"Payment"), would be nondeductible by Employer for federal income tax purposes
because of the application of Section 280G of the Code (as defined in Appendix I
attached hereto and incorporated herein by this reference), or because of the
application of any federal or state income tax law enacted after the date hereof
which restricts or limits the deductibility of compensation paid to an Executive
(a "Subsequent Law"), then the aggregate present value of the amounts payable or
distributable to or for the benefit of Executive pursuant to this Agreement (the
"Payments") shall be reduced (but not below zero) to the Reduced Amount. For
purposes of this Section 6.4, the "Reduced Amount" shall be an amount which
maximizes the aggregate amount of Payments without causing any Payment to be
nondeductible by Employer because of the application of Subsequent Law, or which
maximizes the aggregate present value of Payments without causing any Payment to
be nondeductible by Employer because of the application of Section 280G of the
Code. For purposes of this Section 6.4, present value shall be determined in
accordance with Section 280G(d)(4) of the Code and Income Tax Regulations
promulgated thereunder.
6.5 If the Auditors determine that any Payment would be nondeductible by
Employer because of the application of Section 280G of the Code, or because of
the application of Subsequent Law, then Employer shall promptly give notice to
that effect and a copy of the detailed calculation thereof and of the Reduced
Amount, and Executive may then elect, in his sole discretion, which and how much
of the Payments shall be eliminated or reduced (as long as after such election
the aggregate present value of the Payments equals the Reduced Amount) and shall
advise Employer in writing of his election within 20 days of his receipt of
notice. If no such election is made by Executive within such 20 day period, then
Employer may elect which and how much of the Payments shall be eliminated or
reduced (as long as after such election the aggregate present value of Executive
Payments equals the Reduced Amount) and shall notify Executive promptly of such
election. All determinations made by the Auditors under this Section 6.5 and
Section 6.4 shall be binding upon Employer and Executive and shall be made
within 60 days of Executive's termination of employment. As promptly as
practicable following such determination and the elections hereunder, Employer
shall pay to or distribute to or for the benefit of Executive such amounts as
are then due to him under this Agreement, as modified by Section 6.4 and this
Section 6.5, and shall promptly pay to or distribute for the benefit of
Executive in the future such amounts as become due to him under this Agreement.
6.6 If it is determined by the Auditors that Payments have been made by
Employer which should not have been made (an "Overpayment") or that additional
Payments which will not have been made by Employer could be due (an
"Underpayment"), consistent in each case with the calculation of the Reduced
Amount pursuant to Section 6.4, then the following actions are to be taken: If
the Auditors, based upon the assertion of a deficiency by the Internal Revenue
Service against Employer or Executive which the Auditors believe has a high
probability of success, determine that an Overpayment has been made, such
Overpayment shall be treated for all purposes as a loan to Executive which he
shall repay to Employer, together with interest at the applicable federal rate
provided for in Section 7872(f)(2)(A) of the Code. If the Auditors, based upon
controlling precedent, determine that an Underpayment has occurred, such
Underpayment shall promptly be paid by
-6-
Shah Executive Employment Agreement
<PAGE>
Employer to or for the benefit of Executive, together with interest at the
applicable federal rate provided for in Section 7872(f)(2)(A) of the Code.
6.7 Executive shall not be required to mitigate damages or the amount of
any payment provided for under this Agreement by seeking other employment or
otherwise, nor shall the amount of any payment provided for under this Agreement
be reduced by any compensation earned by Executive as the result of employment
by another Employer after the date of termination, or otherwise.
6.8 Except as expressly provided herein, the provisions of this Agreement,
and any payment or benefit provided for hereunder, shall not reduce any amounts
otherwise payable, or in any way diminish Executive's existing rights, or rights
which would accrue solely as a result of the passage of time, under any Employer
benefit plan, employment agreement or other contract, plan or arrangement.
6.9 Except as may be required pursuant to Section 6.4 above, the amount of
any payment provided under this Agreement shall not be reduced by reason of any
present value calculation.
6.10 In case of termination of this Agreement, compensation and benefits
shall be paid to the Executive as set forth in the applicable subsection of this
Section 6 and stock options granted to Executive, if any, shall be governed by
the provisions of all stock option agreements between Employer and Executive. In
the event of a Constructive Termination or a termination of this Agreement by
Executive for Good Reason, all other rights and benefits Executive may have
under the employee and/or executive benefit plans and arrangements of Employer
generally shall be determined in accordance with the terms and conditions of
such plans and arrangements.
7. COVENANTS OF CONFIDENTIALITY, NONDISCLOSURE AND NONCOMPETITION.
--------------------------------------------------------------
7.1 During the term of this Agreement, Employer will provide to Executive
certain confidential and proprietary information owned by Employer as more fully
described below. Executive acknowledges that he occupies or will occupy a
position of trust and confidence with Employer, and that Employer would be
irreparably damaged if Executive were to breach the covenants set forth in this
Section 7.1. Accordingly, Executive agrees that he will not, without the prior
written consent of Employer, at any time during the term of this Agreement or
any time thereafter, except as may be required by competent legal authority or
as required by Employer to be disclosed in the course of performing Executive's
duties under this Agreement for Employer, use or disclose to any person, firm or
other legal entity, any confidential records, secrets or information obtained by
Executive during his employment hereunder related to Employer or any parent,
subsidiary or affiliated person or entity (collectively, "Confidential
Information"). Confidential Information shall include, without limitation,
information about Employer's inventions (as defined in Section 8.1 below),
customer lists and product pricing, data, know-how, formulae, processes, ideas,
past, current and planned product development, market studies, computer software
and programs, database and network technologies, strategic planning and risk
management. Executive acknowledges and agrees that all Confidential Information
of Employer and/or its affiliates will be received in confidence and as a
fiduciary of Employer. Executive will exercise utmost diligence to protect and
guard such Confidential Information.
-7-
Shah Executive Employment Agreement
<PAGE>
7.2 Executive agrees that he will not, without the express written consent
of the Board, take with him upon the termination of this Agreement, any document
or paper, or any photocopy or reproduction or duplication thereof, relating to
any Confidential Information.
7.3 Executive agrees that, while Executive is employed with Employer and
for a period of 24 months after the date of termination of this Agreement (the
"Restricted Period"), provided that Executive continues to be paid his Salary
(as in effect at the date of termination) during the Restricted Period, he will
not, either directly or indirectly, have an interest in any business (whether as
manager, operator, licensor, licensee, partner, 5% or greater equity holder,
employee, consultant, director, advisor or otherwise) competitive with Employer
or any of its business activities or solicit individuals or other entities that
are customers or competitors of Employer during the six-month period immediately
prior to the date of termination of this Agreement. Executive also agrees that,
for the Restricted Period, he will not, either directly or indirectly, solicit
any employee of Employer to terminate his employment with Employer.
7.4 For purposes of this Section 7, "Employer" shall include any of its
subsidiaries or any other entity in which it holds a 50% or greater equity
interest.
8. INVENTIONS.
----------
8.1 Any and all inventions, product, discoveries, improvements, processes,
formulae, manufacturing methods or techniques, designs or styles, software
applications or programs (collectively, "Inventions") made, developed or created
by Executive, alone or in conjunction with others, during regular hours of work
or otherwise, during the term of Executive's employment with Employer and for a
period of two years thereafter that may be directly or indirectly related to the
business of, or tests being carried out by, Employer, or any of its
subsidiaries, shall be promptly disclosed by Executive to Employer and shall be
Employer's exclusive property. The following provisions of the California Labor
Code shall supplement this Subsection 8.1:
SECTION 2870 OF THE CALIFORNIA LABOR CODE
Application of Provisions Providing that Employee Shall Assign or
-----------------------------------------------------------------
Offer to Assign Rights in Invention to Employer.
-----------------------------------------------
(a) Any provision in an employment agreement which provides that
an employee shall assign, or offer to assign, any of his or her rights
in an invention to his or her employer shall not apply to an invention
that the employee developed entirely on his or her own time without
using employer's equipment, supplies, facilities, or trade secret
information except for those inventions that either:
(1) Relate at the time of conception or reduction to
practice of the invention to employer's business, or actual or
demonstrably anticipated research or development of employer, or
-8-
Shah Executive Employment Agreement
<PAGE>
(2) Result from any work performed by the employee for
employer.
(b) To the extent a provision in an employment agreement purports
to require an employee to assign an invention otherwise excluded from
being required to be assigned under subdivision (a), the provision is
against the public policy of this state and is unenforceable.
8.2 Executive will, upon Employer's request and without additional
compensation, execute any documents necessary or advisable in the opinion of
Employer's legal counsel to direct the issuance of patents to Employer with
respect to Inventions that are to be Employer's exclusive property under this
Section 8 or to vest in Employer title to such Inventions; the expense of
securing any patent, however, shall be borne by Employer.
8.3 Executive will hold for Employer's sole benefit any Invention that is
to be Employer's exclusive property under this Section 8 for which no patent is
issued.
9. NO VIOLATION.
------------
Executive represents that he is not bound by any Agreement with any former
employer or other party that would be violated by Executive's employment by
Employer.
10. RETURN OF EMPLOYER'S PROPERTY.
-----------------------------
Upon the termination of this Agreement or whenever requested by Employer,
Executive shall immediately deliver to Employer all property in his possession
or under his control belonging to Employer, in good condition, ordinary wear and
tear excepted.
11. INJUNCTIVE RELIEF.
-----------------
Executive acknowledges that the breach, or threatened breach, by Executive
of the provisions of this Agreement shall cause irreparable harm to Employer,
which harm cannot be fully redressed by the payment of damages to Employer.
Accordingly, Employer shall be entitled, in addition to any other right or
remedy it may have at law or in equity, to seek an injunction or restraining
Executive from any violation or threatened violation of this Agreement.
12. DISPUTE RESOLUTION.
------------------
Subject to Section 11, all claims, disputes and other matters in
controversy ("dispute") arising, directly or indirectly out of or related to
this Agreement, or the breach thereof, whether contractual or noncontractual,
and whether during the term or after the termination of this Agreement, shall be
resolved exclusively according to the procedures set forth in this Section 12,
and not through resort to any judicial proceedings.
-9-
Shah Executive Employment Agreement
<PAGE>
12.1 Neither party shall commence an arbitration proceeding pursuant to the
provisions of Subsection 12.2 below unless such party shall first give a written
notice (a "Dispute Notice") to the other party setting forth the nature of the
dispute. The parties shall attempt in good faith to resolve the dispute by
mediation under the American Arbitration Association Commercial Mediation Rules
in effect on the date of the Dispute Notice. If the parties cannot agree on the
selection of a mediator within 20 days after delivery of the Dispute Notice, the
mediator will be selected by the American Arbitration Association. If the
dispute has not been resolved by mediation within 60 days after delivery of the
Dispute Notice, then the dispute shall be determined by arbitration in
accordance with the provisions of Subsection 12.2 below.
12.2 Any dispute that is not settled by mediation as provided in Subsection
12.1 above shall be resolved by arbitration before a single arbitrator appointed
by the American Arbitration Association or its successor in Irvine, California.
The determination of the arbitrator shall be final and absolute. The arbitrator
shall be governed by the duly promulgated rules and regulations of the American
Arbitration Association or its successor then in effect, and the pertinent
provisions of the laws of the State of California relating to arbitration. The
decision of the arbitrator may be entered as a final judgment in any court of
the State of California or elsewhere. The prevailing party in any such
arbitration shall also be entitled to recover reasonable attorneys',
accountants' and experts' fees and costs of suit in addition to any other relief
awarded such prevailing party.
13. MISCELLANEOUS.
-------------
13.1 If any provisions contained in this Agreement is for any reason held
to be totally invalid or unenforceable, such provision will be fully severable,
and in lieu of such invalid or unenforceable provision there will be added
automatically as part of this Agreement a provision as similar in terms as may
be valid and enforceable.
13.2 All notices and other communications required or permitted hereunder
or necessary or convenience in connection herewith shall be in writing and shall
be deemed to have been given when mailed by registered mail or certified mail,
return receipt requested or hand delivered, as follows (provided that notice of
change of address shall be deemed given only when received):
If to Employer: Litronic Inc.
2030 Main Street, Suite 1250
Irvine, CA 92614
Attention: President
If to Executive: Kris Shah
40 Mission Bay Drive
Corona del Mar, CA 92625
or to such other names or addresses as Employer or Executive, as the case may
be, shall designate by notice to the other party hereto in the manner specified
in this Subsection 13.2.
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Shah Executive Employment Agreement
<PAGE>
13.3 This Agreement shall be binding upon and inure to the benefit of
Employer, its successors, legal representatives and assigns, and Executive, his
heirs, executors, administrators, representatives, legatees and permitted
assigns. Executive agrees that his rights and obligations hereunder are personal
to him and may not be assigned without the express written consent of Employer.
If Executive should die while any amounts are due to him pursuant to this
Agreement, all such amounts shall be paid to Executive's devisee, legatee or
other designee, or if there be no such designee, to Executive's estate. Employer
will require any successor or assign (whether direct or indirect, by purchase,
merger, consolidation or otherwise) to all or substantially all of the business
and/or assets of Employer, by Agreement in form and substance satisfactory to
Executive and his legal counsel, expressly, absolutely and unconditionally to
assume and agree to perform this Agreement in the same manner and to the same
extent that Employer would be required to perform each of them if no such
succession or assignment had taken place. Any failure of Employer to obtain such
Agreement prior to the effectiveness of any such succession or assignment shall
be a material breach of this Agreement and shall entitle Executive to terminate
Executive's employment for Good Reason. As used in this Agreement, "Employer"
shall mean Employer as hereinbefore defined and any successor or assign to its
business and/or assets as aforesaid which executes and delivers the Agreement
provided for in this Section or which otherwise becomes bound by all the terms
and provisions of this Agreement by operation of law. If at any time during the
term of this Agreement Executive is employed by any corporation a majority of
the voting securities of which is then owned by Employer, "Employer" as used in
this Agreement shall in addition include such Employer. In such event, Employer
agrees that it shall pay or shall cause such Employer to pay any amounts owed to
Executive pursuant to this Agreement.
13.4 This Agreement replaces and merges all previous agreements and
discussions relating to the same or similar subject matters between Executive
and Employer with respect to the subject matter of this Agreement. This
Agreement may not be modified in any respect by any verbal statement,
representation or Agreement made by any employee, officer, or representative of
Employer or by any written Agreement unless signed by an officer of Employer who
is expressly authorized by Employer to execute such document.
13.5 The laws of the State of California will govern the interpretation,
validity and effect of this Agreement without regard to principles of conflicts
of law, the place of execution or the place for performance thereof, except that
the laws of the State of Delaware shall govern matters of indemnity set forth in
Exhibit A. Employer and Executive agree that the state and federal courts
situated in Orange County, California shall have personal jurisdiction over
Employer and Executive to hear all disputes arising under this Agreement. This
Agreement is to be at least partially performed in Orange County, California,
and, as such, Employer and Executive agree that venue shall be proper with the
state or federal courts in Orange County, California to hear such disputes.
13.6 Executive and Employer shall execute and deliver any and all
additional instruments and agreements that may be necessary or proper to carry
out the purposes of this Agreement.
13.7 The descriptive headings of the several sections of this Agreement are
inserted for convenience only and do not constitute a party of this Agreement.
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13.8 This Agreement may be executed in one or more counterparts, all of
which shall be considered one and the same Agreement.
13.9 Executive acknowledges that Executive has had the opportunity to read
this Agreement and discuss it with advisors and legal counsel, if Executive has
so chosen. Executive also acknowledges the importance of this Agreement and that
Employer is relying on this Agreement in entering into an employment
relationship with Executive.
13.10 The Indemnity provisions attached as Exhibit A are hereby
specifically incorporated into and made a part of this Agreement.
The undersigned, intending to be legally bound, have executed this
Agreement on the date first written above, but effective as of ____________,
1999.
EMPLOYER: LITRONIC INC.
By:-----------------------------------
William W. Davis, Sr., President
EXECUTIVE: --------------------------------------
Kris Shah
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Shah Executive Employment Agreement
<PAGE>
APPENDIX I
ADDITIONAL DEFINITIONS
----------------------
For purposes of this Agreement, the following additional capitalized terms
shall have the respective definitions set forth below:
AUDITORS. The term "Auditors" as used in this Agreement shall mean
Employer's independent auditors.
BENEFIT PLAN. The term "Benefit Plan" as used herein shall mean any benefit
plan or arrangement (including, without limitation, Employer's profit sharing or
stock option plans, if any, and medical, disability and life insurance plans) in
which Executive is participating (or any other plans providing Executive with
substantially similar benefits).
CHANGE IN CONTROL. A "Change in Control" of Employer shall be deemed to
have occurred if (A) there shall be consummated any consolidation or merger of
Employer in which Employer is not the continuing or surviving corporation or
pursuant to which all or substantially all of the shares of Employer's Common
Stock would be converted into cash, securities or other property, other than a
merger of Employer in which the holders of Employer's Common Stock immediately
prior to the merger have the same proportionate ownership of common stock of the
surviving corporation immediately after the merger; (B) there shall be
consummated any sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of all, or substantially all, of the assets of
Employer; (C) the shareholders of Employer approve any plan or proposal for the
liquidation or dissolution of Employer; (D) any "person" (as such term is used
in Sections 13(d) and 14(d) (2) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")), other than Executive, William W. Davis, Sr. or
any members of their immediate families, shall become the beneficial owner
(within the meaning of Rule 13d-3 under the Exchange Act) of 30% or more of
Employer's outstanding Common Stock after the date hereof; (E) during any period
of two consecutive years, individuals who at the beginning of such period
constitute the entire Board shall cease for any reason to constitute a majority
thereof unless the election, or the nomination for election by Employer's
shareholders, of each new director was approved by a vote of at least two-thirds
of the directors then still in office who were directors at the beginning of the
period or; (F) there shall be any change of control of a nature required to be
reported in response to Item 6 (e) of Schedule 14A of Regulation 14A promulgated
under the Securities Exchange Act of 1934 or any successor regulation of
substantially similar import, regardless of whether Employer is subject to such
reporting requirement.
CODE. The term "Code" as used in this Agreement shall mean the Internal
Revenue Code of 1986, as amended.
DUE CAUSE. The term "Due Cause" as used in this Agreement shall mean any of
the following events:
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(a) any intentional misapplication by Executive of Employer's funds or
other material assets, or any other act of dishonesty injurious to Employer
committed by Executive; or
(b) Executive's conviction of (i) a felony or (ii) a crime involving
moral turpitude; or
(c) Executive's use or possession of any controlled substance or
chronic abuse of alcoholic beverages, which use or possession the Board
reasonably determines renders Executive unfit to serve in his capacity as a
senior executive of Employer; or
(d) Executive's breach, nonperformance or nonobservance of any of the
terms of this Agreement, including but not limited to Executive's failure
to adequately perform his duties or comply with the reasonable directions
of the Board. Notwithstanding anything in the foregoing subsections (c) or
(d) to the contrary, Employer shall not terminate Executive unless the
Board first provides Executive with a written memorandum describing in
detail how his performance hereunder is not satisfactory and Executive is
given a reasonable period of time (not less than 30 days) to remedy the
unsatisfactory performance related by the Board to Executive in that
memorandum. A determination of whether Executive has satisfactorily
remedied such unsatisfactory performance shall be promptly made by a
majority of the disinterested directors of the Board at the end of the
period provided to Executive for such remedy and such determination shall
be final.
GOOD REASON. The term "Good Reason" as used in this Agreement shall mean
any of the following which occur without Executive's written consent:
(a) the assignment to Executive by the Board of duties substantially
inconsistent with Executive's position, duties, responsibilities or
status with Employer; a substantial change in Executive's titles or
offices; any removal of Executive from or any failure to reelect
Executive to any of his positions as an officer, except in connection
with the termination of his employment for disability or as a member
of the Board; Retirement; Executive's death; or by Executive other
than for Good Reason;
(b) a purported reduction by Employer in Executive's base salary to an
amount less than the greater of (i) the base salary as in effect on
the date hereof or (ii) 10% below the base salary in effect at the
time of the purported reduction;
(c) any failure by Employer to continue in effect any Benefit Plan;
(d) any failure by Employer to obtain the assumption of this Agreement by
any successor or assign of Employer;
(e) a failure by Employer to comply with any material provision of this
Agreement which has not been cured within 30 days after notice of such
noncompliance has been given by Executive to Employer, or if such
failure is not capable of being cured in such time, a cure shall not
have been diligently initiated by Employer within such 30 day period;
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(f) a material reduction in the highest level of support services and
staff, office space and accouterments available to Executive during
the term of this Agreement and that which is necessary to perform any
additional duties assigned to Executive thereafter, which reduction is
not generally effective for all officers employed by Employer; or
(g) If Employer avails itself of, or is subjected by any third party to, a
proceeding in bankruptcy in which Employer is the named debtor, an
assignment by Employer for the benefit of its creditors, the
appointment of a receiver for Employer, or any other proceeding
involving insolvency or the protection of or from creditors and the
same has not been discharged or terminated within 90 days;
provided, however, that any of the foregoing actions shall not be
considered to be Good Reason if such action is undertaken by Employer as a
termination for Due Cause.
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<PAGE>
EXHIBIT A
[INDEMNITY PROVISIONS]
1. DEFINITIONS. As used herein, the following terms shall have the meanings
set forth below:
"PROCEEDING" shall mean any threatened, pending or completed action, suit
or proceeding, whether brought in the name of Employer or otherwise and whether
of a civil, criminal, administrative or investigative nature, by reason of the
fact that Executive is or was an officer and/or a director of Employer, or is or
was serving at the request of Employer as a director, officer, employee or agent
of another enterprise, whether or not he is serving in such capacity at the time
any liability or Expense is incurred for which indemnification or advancement of
Expenses (as defined in subparagraph (b) below) is to be provided under these
indemnity provisions.
"EXPENSES" means, all costs, charges and expenses incurred in connection
with a Proceeding, including, without limitation, attorneys' fees, disbursements
and retainers, accounting and witness fees, travel and deposition costs,
expenses of investigations, judicial or administrative proceedings or appeals,
and any expenses of establishing a right to indemnification pursuant to this
Agreement or otherwise, including reasonable compensation for time spent by
Executive in connection with the investigation, defense or appeal of a
Proceeding or action for indemnification for which he is not otherwise
compensated by Employer or any third party; provided, however, that the term
Expenses includes only those costs, charges and expenses incurred with
Employer's prior consent, which consent shall not be unreasonably withheld; and
provided, further, that the term "Expenses" does not include (i) the amount of
damages, judgments, amounts paid in settlement, fines or penalties relating to
any Proceeding or (ii) excise taxes under the Employee Retirement Income
Security Act of 1974, as amended ("ERISA") relating to any Proceeding, either of
which are actually levied against Executive or paid by or on behalf of
Executive.
2. AGREEMENT TO SERVE. Executive agrees to continue to serve as and officer
and/or a director of Employer at the will of Employer for so long as Executive
is duly elected or appointed or until such time as Executive tenders a
resignation in writing or is terminated as an officer or director by Employer.
Nothing in these indemnity provisions shall be construed to create any right in
Executive to continued employment with Employer or any subsidiary or affiliate
of Employer. Nothing in these indemnity provisions shall affect or alter any of
the terms of any otherwise valid employment agreement or other agreement between
Executive and Employer relating to Executive's conditions and/or terms of
employment.
3. INDEMNIFICATION IN THIRD PARTY ACTIONS. Employer shall indemnify Executive
in accordance with the provisions of this Section 3 if Executive is a party to
or threatened to be made a party to or is otherwise involved in any Proceeding
(other than a Proceeding by or in the right of Employer to procure a judgment in
its favor), by reason of the fact that Executive is or was an officer and/or a
director of Employer, or is or was serving at the request of Employer as a
director, officer, employee or agent of another enterprise, against all
Expenses, damages, judgments, amounts paid in settlement, fines, penalties and
ERISA excise taxes actually and reasonably incurred by Executive in connection
with the defense or settlement of such Proceeding, to the fullest extent
permitted by Delaware law,
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whether or not Executive was the successful party in any such Proceeding;
provided that any settlement shall be approved in writing by Employer.
4. INDEMNIFICATION IN PROCEEDINGS BY OR IN THE RIGHT OF EMPLOYER. Employer
shall indemnify Executive in accordance with the provisions of this section if
Executive is a party to or threatened to be made a party to or is otherwise
involved in any Proceeding by or in the right of Employer to procure a judgment
in its favor by reason of the fact that Executive is or was an officer and/or a
director of Employer, or is or was serving at the request of Employer as a
director, officer, employee or agent of another enterprise, against all Expenses
actually and reasonably incurred by Executive in connection with the defense or
settlement of such Proceeding, to the fullest extent permitted by Delaware law,
whether or not Executive is the successful party in any such Proceeding.
Employer shall further indemnify Executive for any damages, judgments, amounts
paid in settlement, fines, penalties and ERISA excise taxes actually and
reasonably incurred by Executive in any such Proceeding described in the
immediately preceding sentence, provided either (i) the Proceeding is settled
with the approval of a court of competent jurisdiction, or (ii) indemnification
of such amounts is otherwise ordered by a court of competent jurisdiction in
connection with such Proceeding.
5. CONCLUSIVE PRESUMPTION REGARDING STANDARD OF CONDUCT. Executive shall be
conclusively presumed to have met the relevant standards of conduct required by
Delaware law for indemnification pursuant to these indemnity provisions, unless
a determination is made that Executive has not met such standards (i) by the
Board of Directors of Employer by a majority vote of a quorum thereof consisting
of directors who were not parties to such Proceeding, (ii) by the shareholders
of Employer by majority vote, or (iii) in a written opinion of Employer's
independent legal counsel. Further, the termination of any Proceeding by
judgment, order, settlement, conviction or upon a plea of nolo contendere or its
equivalent, shall not, of itself, rebut such presumption that Executive met the
relevant standards of conduct required for indemnification pursuant to these
indemnity provisions.
6. INDEMNIFICATION OF EXPENSES OF SUCCESSFUL PARTY. Notwithstanding any of the
other provisions hereof, to the extent that Executive has been successful on the
merits or otherwise in defense of any Proceeding or in defense of any claim,
issue or matter therein, Executive shall be indemnified against all Expenses
incurred in connection therewith to the fullest extent permitted by Delaware
law. For purposes of this paragraph, Executive will be deemed to have been
successful on the merits if the Proceeding is terminated by settlement or is
dismissed with prejudice.
7. ADVANCES OF EXPENSES. The Expenses incurred by Executive in connection with
any Proceeding shall be paid promptly by Employer in advance of the final
disposition of the Proceeding at the written request of Executive to the fullest
extent permitted by Delaware law; provided that Executive shall undertake in
writing to repay such amount to the extent that it is ultimately determined that
Executive is not entitled to indemnification by Employer.
8. PARTIAL INDEMNIFICATION. If Executive is entitled under any of these
indemnity provisions to indemnification by Employer for some or a portion of the
Expenses, damages, judgments, amounts paid in settlement, fines, penalties or
ERISA excise taxes actually and reasonably incurred by Executive in the
investigation, defense, appeal or settlement of any Proceeding but not, however,
for the total amount thereof, Employer shall nevertheless indemnify Executive
for the portion of such
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<PAGE>
Expenses, damages, judgments, amounts paid in settlement, fines, penalties or
ERISA excise taxes to which Executive is entitled.
9. INDEMNIFICATION PROCEDURE; DETERMINATION OF RIGHT TO INDEMNIFICATION.
(a) Promptly after receipt by Executive of notice of the commencement of
any Proceeding with respect to which Executive intends to claim indemnification
or advancement of Expenses pursuant to these indemnity provisions, Executive
will notify Employer of the commencement thereof. The omission to so notify
Employer will not relieve Employer from any liability which it may have to
Executive under these indemnity provisions or otherwise.
(b) If a claim for indemnification or advancement of Expenses under these
indemnity provisions is not paid by or on behalf of Employer within 30 days of
receipt of written notice thereof, Executive may at any time thereafter bring
suit in any court of competent jurisdiction against Employer to enforce the
right to indemnification or advancement of Expenses provided by these indemnity
provisions. It shall be a defense to any such action (other than an action
brought to enforce a claim for Expenses incurred in defending any Proceeding in
advance of its final disposition where the required undertaking, if any is
required, has been tendered to Employer) that Executive has failed to meet the
standard of conduct that makes it permissible under Delaware law for Employer to
indemnify Executive for the amount claimed. The burden of proving by clear and
convincing evidence that indemnification or advancement of Expenses is not
appropriate shall be on Employer. The failure of the directors or shareholders
of Employer or independent legal counsel to have made a determination prior to
the commencement of such Proceeding that indemnification or advancement of
Expenses are proper in the circumstances because Executive has met the
applicable standard of conduct shall not be a defense to the action or create a
presumption that Executive has not met the applicable standard of conduct.
(c) Executive's Expenses incurred in connection with any action concerning
Executive's right to indemnification or advancement of Expenses in whole or in
part pursuant to these indemnity provisions shall also be indemnified in
accordance with the terms of these indemnity provisions by Employer regardless
of the outcome of such action, unless a court of competent jurisdiction
determines that each of the material claims made by Executive in such action was
not made in good faith or was frivolous.
(d) With respect to any Proceeding for which indemnification is requested,
Employer will be entitled to participate therein at its own expense and, except
as otherwise provided below, to the extent that it may wish, Employer may assume
the defense thereof, with counsel satisfactory to Executive. After notice from
Employer to Executive of its election to assume the defense of a Proceeding,
Employer will not be liable to Executive under these indemnity provisions for
any Expenses subsequently incurred by Executive in connection with the defense
thereof, other than reasonable costs of investigation or as otherwise provided
below. Employer shall not settle any Proceeding in any manner which would impose
any penalty or limitation on Executive without Executive's prior written
consent. Executive shall have the right to employ counsel in any such
Proceeding, but the Expenses of such counsel incurred after notice from Employer
of its assumption of the defense thereof and Executive's approval of Employer's
counsel shall be at the expense of Executive, unless (i) the employment of
counsel by Executive has been authorized by Employer,
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<PAGE>
(ii) Executive shall have reasonably concluded that there may be a conflict of
interest between Employer and Executive in the conduct of the defense of a
Proceeding, or (iii) Employer shall not in fact have employed counsel to assume
the defense of a Proceeding, in each of which cases the Expenses of Executive's
counsel shall be at the expense of Employer. Notwithstanding the foregoing,
Employer shall not be entitled to assume the defense of any Proceeding brought
by or on behalf of Employer or as to which Executive has concluded that there
may be a conflict of interest between Employer and Executive.
10. RETROACTIVE EFFECT. Notwithstanding anything to the contrary contained in
these indemnity provisions, Employer's obligation to indemnify Executive and
advance Expenses to Executive shall be deemed to be in effect since the
Effective Date.
11. LIMITATIONS ON INDEMNIFICATION. No payments pursuant to these indemnity
provisions shall be made by Employer:
(a) to indemnify or advance Expenses to Executive with respect to actions
initiated or brought voluntarily by Executive and not by way of defense, except
with respect to actions brought to establish or enforce a right to
indemnification or advancement of Expenses under these indemnity provisions or
any other statute or law or otherwise as required under Delaware law, but such
indemnification or advancement of Expenses may be provided by Employer in
specific cases if approved by the Board of Directors by a majority vote of a
quorum thereof consisting of directors who are not parties to such action;
(b) to indemnify Executive for any Expenses, damages, judgments, amounts
paid in settlement, fines, penalties or ERISA excise taxes for which payment is
actually made to Executive under a valid and collectible insurance policy,
except in respect of any excess beyond the amount paid under such insurance;
(c) to indemnify Executive for any Expenses, damages, judgments, amounts
paid in settlement, fines, penalties or ERISA excise taxes for which Executive
has been or is indemnified by Employer or any other party otherwise than
pursuant to these indemnity provisions;
(d) to indemnify Executive for any Expenses, damages, judgments, fines or
penalties sustained in any Proceeding for an accounting of profits made from the
purchase or sale by Executive of securities of Employer pursuant to the
provisions of Section 16(b) of the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated thereunder or similar provisions of
any federal, state or local statutory law;
(e) to indemnify Executive for any Expenses, damages, judgments, amounts
paid in settlement, fines, penalties or ERISA excise taxes in connection with
any Proceeding where a court of competent jurisdiction has determined that (i)
Executive failed to act in good faith and in a manner reasonably believed to be
in or not opposed to the best interest of Employer, or (ii) with respect to any
Proceeding which is of a criminal nature, Executive had reasonable cause to
believe his conduct was unlawful; or
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<PAGE>
(f) if a court of competent jurisdiction shall enter a final order,
decree or judgment to the effect that such indemnification or advancement of
Expenses hereunder is unlawful under the circumstances.
12. LIMITATION OF ACTIONS AND RELEASE OF CLAIMS. Notwithstanding anything to
the contrary contained herein, no legal action shall be brought and no cause of
action shall be asserted by or on behalf of Employer, any affiliate or
subsidiary of Employer or any other enterprise that Executive was serving as a
director, officer, employee or agent at the request of Employer against
Executive, or Executive's spouse, heirs, executors of administrators after the
expiration of two years from the date Executive ceases (for any reason) to serve
in any one or more of the capacities covered by this Agreement, and any claim or
cause of action of Employer, its affiliates or subsidiaries or any such other
enterprise shall be extinguished and deemed released unless asserted by the
filing of a legal action within such two-year period.
13. MAINTENANCE OF D&O INSURANCE.
(a) Upon Executive's request, Employer hereby agrees to maintain in full
force and effect, at its sole cost and expense, directors' and officers'
liability insurance ("D&O Insurance") by an insurer, in an amount and with a
deductible reasonably acceptable to Executive, covering the period during which
Executive is serving in any one or more of the capacities covered by these
indemnity provisions and for so long thereafter as Executive shall be subject to
any possible claim or threatened, pending or completed Proceeding by reason of
the fact that Executive is serving in any of the capacities covered by these
indemnity provisions.
(b) In all policies of D&O Insurance to be maintained pursuant to
Paragraph 13(a) above, Executive shall be named as an insured in such a manner
as to provide Executive with the greatest rights and benefits available under
such policy.
(c) Notwithstanding the foregoing, Employer shall have no obligation to
maintain D&O Insurance if Employer determines, in good faith, that (i) such
insurance cannot be obtained on terms which are commercially reasonable, (ii)
the premium costs for such insurance is significantly disproportionate to the
amount of coverage provided, (iii) the coverage provided by such insurance is
limited by exclusions so as to provide an insufficient benefit, or (iv)
Employer, after using best efforts, is otherwise unable to obtain such
insurance.
14. INDEMNIFICATION HEREUNDER NOT EXCLUSIVE. The indemnification and
advancement of Expenses provided by these provisions shall not be deemed to
limit or preclude any other rights to which Executive may be entitled under
Employer's Certificate of Incorporation, Employer's Bylaws, any agreement, any
vote of shareholders or disinterested directors of Employer, Delaware law, or
otherwise.
15. SUCCESSORS AND ASSIGNS. These indemnity provisions shall be binding upon,
and shall inure to the benefit of (i) Executive and Executive's heirs, devisees,
legatees, personal representatives, executors, administrators and assigns and
(ii) Employer and its successors and assigns, including any transferee of all or
substantially all of Employer's assets and any successor or assign of Employer
by merger or by operation of law.
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16. SEVERABILITY. Each of these indemnity provisions is a separate and distinct
agreement and independent of the other, so that if any provision hereof shall be
held to be invalid or unenforceable for any reason, such invalidity or
unenforceability shall not affect the validity or enforceable of the other
provisions hereof. To the extent required, any of these indemnity provisions may
be modified by a court of competent jurisdiction to preserve its validity and to
provide Executive with the broadest possible indemnification and advancement of
Expenses permitted under Delaware law. If any of these indemnity provisions or
any portion thereof is invalidated on any ground by any court of competent
jurisdiction, then Employer shall nevertheless indemnify Executive as to
Expenses, damages, judgments, amounts paid in settlement, fines, penalties and
ERISA excise taxes with respect to any Proceeding to the full extent permitted
by any of these indemnity provisions that shall not have been invalidated or by
any applicable provision of Delaware law or the law of any other applicable
jurisdiction.
17. AMENDMENTS AND WAIVERS. No amendment, waiver, modification, termination or
cancellation of this indemnity shall be effective unless in writing and signed
by the party against whom enforcement is sought. The indemnification rights
afforded to Executive hereby are contract rights and may not be diminished,
eliminated or otherwise affected by amendments to Employer's Certificate of
Incorporation, Bylaws or agreements, including any directors' and officers'
liability insurance policies, whether the alleged actions or conduct giving rise
to indemnification hereunder arose before or after any such amendment. No waiver
of any provision of this indemnity shall be deemed or shall constitute a waiver
of any other provision hereof, whether or not similar, nor shall any waiver
constitute a continuing waiver.
18. SUBROGATION. In the event of any payment under this indemnity to or on
behalf of Executive, Employer shall be subrogated to the extent of such payment
to all of the rights of recovery of Executive against any person, firm,
corporation or other entity (other than Employer) and Executive shall execute
all papers requested by Employer and shall do any and all things that may be
necessary or desirable to secure such rights for Employer, including the
execution of such documents necessary or desirable to enable Employer to
effectively bring suit to enforce such rights.
19. SUBJECT MATTER AND PARTIES. The intended purpose of this indemnity is to
provide for indemnification and advancement of Expenses, and this indemnity is
not intended to affect any other aspect of any relationship between Executive
and Employer and is not intended to and shall not create any rights in any
person as a third party beneficiary hereunder.
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Exhibit 10.2
EXECUTIVE EMPLOYMENT AGREEMENT
(DAVIS)
Davis Executive Employment Agreement
<PAGE>
TABLE OF CONTENTS
PAGE
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RECITALS..................................................................... 1
AGREEMENT.................................................................... 1
1. General Duties of Employer and Executive................................ 1
2. Compensation and Benefits............................................... 2
3. Preservation of Business; Fiduciary Responsibility...................... 3
4. Term.................................................................... 3
5. Termination Other Than by Expiration of the Term........................ 3
6. Effect of Termination................................................... 4
7. Covenants of Confidentiality, Nondisclosure and Noncompetition.......... 7
8. Inventions.............................................................. 8
9. No Violation............................................................ 8
10. Return of Employer's Property........................................... 9
11. Injunctive Relief....................................................... 9
12. Dispute Resolution...................................................... 9
13. Miscellaneous........................................................... 10
APPENDIX I - Certain Definitions
EXHIBIT A - Indemnity Provisions
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<PAGE>
EXECUTIVE EMPLOYMENT AGREEMENT
THIS AGREEMENT, dated ______________, effective as of ____________, 1999
("Effective Date"), is made and entered into by and between LITRONIC INC., a
Delaware corporation ("Employer") and WILLIAM W. DAVIS, SR. ("Executive").
RECITALS
Employer desires that the Executive enter into an employment relationship
with Employer in order to provide the necessary leadership and senior management
skills that are important to the success of Employer. Employer believes that
obtaining the Executive's services as an employee of Employer and the benefits
of his business experience are of material importance to Employer and Employer's
stockholders.
AGREEMENT
NOW, THEREFORE, in consideration of Executive's employment by Employer and
the mutual promises and covenants contained herein, the receipt and sufficiency
of which is hereby acknowledged, Employer and Executive intend by this Agreement
to specify the terms and conditions of Executive's employment relationship with
Employer.
1. GENERAL DUTIES OF EMPLOYER AND EXECUTIVE.
1.1 Employer agrees to employ Executive and Executive agrees to accept
employment by Employer and to serve Employer in an executive capacity upon the
terms and conditions set forth herein. Employer hereby employs Executive as the
President and Chief Operating Officer of Employer as of the Effective Date,
reporting to the Board of Directors of Employer (the "Board"). Executive will
also serve as a member of the Board. Executive's duties and responsibilities
shall be those normally assumed by the President and Chief Operating Officer of
a publicly-owned company similarly situated to Employer, as well as such other
or additional duties, as may from time-to-time be assigned to Executive by the
Board. Such other or additional duties shall be consistent with the senior
executive functions set forth above.
1.2 While employed hereunder, Executive shall use his best efforts to obey
the lawful directions of the Board. Executive shall also use his best efforts to
promote the interests of Employer and to maintain and to promote the reputation
of Employer. While employed hereunder, Executive shall devote his full business
time, efforts, skills and attention to the affairs of Employer and faithfully
perform his duties and responsibilities hereunder.
1.3 While this Agreement is in effect, Executive may from time to time
engage in any activities that do not compete directly with Employer, provided
that such activities do not interfere with his performance of his duties.
Executive shall be permitted to (i) invest his personal assets as a passive
investor in such form or manner as Executive may choose in his discretion, (ii)
participate in various charitable efforts, and (iii) serve as a member of the
Board of Directors of other corporations which are not competitors of Employer.
Davis Executive Employment Agreement
<PAGE>
1.4 Executive shall perform his duties at the corporate office of Employer
located in Lanham, Maryland. Executive shall not be relocated to another
location more than thirty miles from Lanham, Maryland without his prior written
consent.
2. COMPENSATION AND BENEFITS.
2.1 As compensation for his services to Employer, Employer shall pay to
Executive an annual base salary of $175,000 during the first 12-month period
that this Agreement is in effect, payable in equal semimonthly payments in
accordance with the Employer's regular payroll policy for salaried employees
(the "Salary"). Thereafter, the Compensation Committee of the Board shall
perform an annual review of the Executive's Salary based on Executive's
performance of his duties and the Employer's other compensation policies. The
Compensation Committee may, at its sole discretion, increase (but not decrease)
the Salary after the first 12-month period that this Agreement is in effect.
2.2 In addition, Executive shall be entitled to an incentive bonus
("Incentive Bonus"), payable no later than March 31 of each year based on
Employer's earnings before interest and taxes (after adding back the
amortization of goodwill from Employer's acquisition of Pulsar Data Systems,
Inc.) (defined as "EBIT" for purposes of this Section 2.2) for the previous
fiscal year. The Incentive Bonus for fiscal year 1999 (payable on or before
March 31, 2000) shall be calculated on a pro forma basis in accordance with GAAP
as determined by Employer's Auditors as if the business combination of Employer
had occurred on January 1, 1999. If EBIT in any fiscal year during the term of
this Agreement exceeds $2,500,000, then Executive shall be entitled to an
Incentive Bonus of $100,000. For each additional $1,000,000 of annual EBIT,
Executive shall be entitled an additional $37,500 of Incentive Bonus (this
additional amount may only be earned by Employer's EBIT increasing in $1,000,000
increments, i.e., it shall not be prorated for amounts above the previous
threshold that are less than $1,000,000). Employer shall pay Executive a
prorated Incentive Bonus (the "Prorated Bonus") if this Agreement is terminated
for any reason other than for "Due Cause." The Prorated Bonus shall be based on
a fraction, the numerator of which is the number of calendar days during the
fiscal year during which Executive was employed prior to and including the
effective date of the termination of Executive's employment and the denominator
of which is 365.
2.3 Upon Executive's furnishing to Employer customary and reasonable
documentary support (such as receipts or paid bills) evidencing costs and
expenses incurred by him in the performance of his services and duties hereunder
(including, without limitation, travel and entertainment and cellular telephone
expenses) and containing sufficient information to establish the amount, date,
place and essential character of the expenditure, Executive shall be reimbursed
for such costs and expenses in accordance with Employer's normal expense
reimbursement policy.
2.4 Employer shall provide Executive with a luxury automobile satisfactory
to Executive (with monthly lease payments not to exceed $1,600), and shall pay
all maintenance and operating costs (including insurance) for that automobile.
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2.5 As long as this Agreement is in effect, Executive shall be entitled to
participate in the medical (including hospitalization), dental, life and
disability insurance plans, to the extent offered by Employer, and in amounts
consistent with the Employer's policy, for other senior executive officers of
Employer.
2.6 Executive shall have the right to participate in any additional
compensation, benefit, pension, stock option, stock purchase, 401(k) or other
plan or arrangement of Employer now or hereafter existing for the benefit of
other senior executive officers of Employer.
2.7 Executive shall be entitled to such vacation (but in no event less
than three weeks per year), holiday and other paid or unpaid leaves of absence
consistent with Employer's normal policies for other senior executive officers
of Employer or as otherwise approved by the Board. Executive shall be entitled
to accrue vacation time for one year. If he does not take the accrued vacation
during the next year, he shall be paid for the unused vacation at his Salary
rate then in effect.
3. PRESERVATION OF BUSINESS; FIDUCIARY RESPONSIBILITY.
Executive shall use his best efforts to preserve the business and
organization of Employer and to preserve the business relations of Employer. So
long as the Executive is employed by Employer, Executive shall observe and
fulfill proper standards of fiduciary responsibility attendant upon his service
and office.
4. TERM.
The term of this Agreement shall commence on the Effective Date and shall
end on __________, 2002, subject to earlier termination as set forth in Section
5, below. After the end of the initial term, this Agreement shall be subject to
successive one year renewals unless, at least 90 days prior to the expiration of
the initial term or any renewal term, either party gives written notice to the
other of his or its intention not to renew.
5. Termination Other Than by Expiration of the Term.
Employer or Executive may terminate Executive's employment under this
Agreement at any time, but only on the following terms:
5.1 Either Executive or Employer may terminate this Agreement in
accordance with Section 4.1.
5.2 Employer may terminate Executive's employment under this Agreement at
any time for "Due Cause" (as defined in Appendix I attached hereto and
incorporated herein by this reference) upon the good faith determination by the
Board that Due Cause exists for the termination of the employment relationship.
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5.3 If Executive is incapacitated by accident, sickness or otherwise so as
to render Executive mentally or physically incapable of performing the services
required under Section 1 of this Agreement for a period of 180 consecutive days,
and such incapacity is confirmed by the written opinion of two practicing
medical doctors licensed by and in good standing in the State of Maryland (one
selected by Employer and one by Executive), upon the expiration of such period
or at any time reasonably thereafter, Employer may terminate Executive's
employment under this Agreement upon giving Executive or his legal
representative written notice at least 30 days prior to the termination date,
subject to the provisions of Section 6.2, below. Executive agrees, after written
notice by the Board, to submit to examinations by such practicing medical
doctors. If such medical doctors do not agree as to whether Executive is
disabled, they shall promptly select a mutually acceptable third practicing
medical doctor to further evaluate Executive, whose conclusion shall be
rendered, in writing, within ten days of his or her selection. The conclusion of
the third practicing medical doctor shall be final and binding on Employer and
Executive.
5.4 This Agreement shall terminate immediately upon Executive's death,
subject to the provisions of Section 6.2, below.
5.5 Subject to the provisions of Section 6.3, below, Employer may
terminate Executive's employment under this Agreement at any time for any reason
whatsoever, even without Due Cause, by giving a written notice of termination to
Executive, in which case the employment relationship shall terminate immediately
upon the giving of such notice. If Employer terminates the employment of
Executive other than (i) pursuant to Section 5.2 for Due Cause, (ii) due to
incapacity pursuant to Section 5.3 or due to Executive's death pursuant to
Section 5.4, or (iii) Executive's Retirement (as defined in Appendix I attached
hereto and incorporated herein by this reference), then such action by Employer,
unless consented to in writing by Executive, shall be deemed to be a
constructive termination by Employer of Executive's employment (a "Constructive
Termination"), and, in such event, Executive shall be entitled to receive the
compensation set forth in Section 6.3 below.
5.6 Executive may terminate this Agreement at any time for "Good Reason"
(as defined in Appendix I attached hereto and incorporated herein by this
reference) within 30 days after Executive learns of the event or condition
constituting "Good Reason" and, in such event, shall be entitled to receive the
compensation set forth in Section 6.3 below.
6. EFFECT OF TERMINATION.
6.1 If the employment relationship is terminated (a) by Executive upon 90
days' written notice pursuant to Section 5.1, (b) by Employer for Due Cause
pursuant to Section 5.2, or (c) by Executive breaching this Agreement by
refusing to continue his employment and failing to give the requisite 90 days'
written notice, all compensation and benefits shall cease as of the date of
termination, other than: (i) those benefits that are provided by retirement and
benefit plans and programs specifically adopted and approved by Employer for
Executive that are earned and vested by the date of termination; (ii)
Executive's pro rata annual Salary (as in effect as of the date of termination,
payable in the manner as prescribed in the second sentence of Section 2.1)
through the date of termination; (iii) any stock options which have vested as of
the date of termination pursuant to the terms of the Agreement granting such
options; and (iv) accrued vacation as required by Maryland law.
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6.2 If Executive's employment relationship is terminated due to
Executive's incapacity pursuant to Section 5.3 or due to Executive's death
pursuant to Section 5.4, Executive or Executive's estate or legal
representative, will be entitled to (i) those benefits that are provided by
retirement and benefits plans and programs specifically adopted and approved by
Employer for Executive that are earned and vested at the date of termination, a
Prorated Bonus for the fiscal year in which incapacity or death occurs, and,
even though no longer employed by Employer, Executive shall continue to receive
the annual Salary compensation (as in effect as of the date of termination,
payable in the manner as prescribed in the second sentence of Section 2.1) for
six months following the date of termination, offset, however, by any payments
received by Executive as a result of any disability insurance maintained by
Employer for Executive's benefit.
6.3 In the event of a Constructive Termination or a termination of this
Agreement by Executive for Good Reason, then Employer shall:
(a) pay to Executive on the date of termination his Salary in effect as of
the date of termination through the end of the month during which such
termination occurs plus credit for any vacation earned but not taken;
(b) pay to Executive as severance pay Executive's Salary in effect as of
the date of termination for the greater of (i) the balance of the term
of this Agreement or (ii)an additional two years, payable in equal
semimonthly payments in accordance with the Employer's regular payroll
policy for salaried employees;
(c) pay to Executive the Prorated Bonus for the fiscal year during which
termination occurs;
(d) pay to or reimburse Executive any amounts due Executive pursuant to
Section 2.4 of this Agreement for a period of 12 months after the date
of termination; and
(e) maintain, at Employer's expense, in full force and effect, for
Executive's continued benefit, all medical and life insurance to which
Executive was entitled immediately prior to the date of termination (or
at the election of Executive in the event of a Change in Control,
immediately prior to the date of the Change in Control) until the
earliest of (i) 12 months or (ii) the date or dates that Executive's
continued participation in Employer's medical and/or life insurance
plans, as applicable, is not possible under the terms of such plans
(the earliest of (i) and (ii) is referred to herein as the "Benefits
Date"). If Employer's medical and/or life insurance plans do not allow
Executive's continued participation in such plan or plans, then
Employer will pay to Executive, in monthly installments, from the date
on which Executive's participation in such medical and/or life
insurance, as applicable, is prohibited until the Benefits Date, the
monthly premium or premiums which had been payable by Employer with
respect to Executive for such discontinued medical and/or life
insurance, as applicable.
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6.4 Anything in this Agreement to the contrary notwithstanding, if the
Auditors (as defined in Appendix I attached hereto and incorporated herein by
this reference) determine that any payment or distribution by Employer to or for
the benefit of Executive, whether paid or payable (or distributed or
distributable) pursuant to the terms of this Agreement or otherwise (a
"Payment"), would be nondeductible by Employer for federal income tax purposes
because of the application of Section 280G of the Code (as defined in Appendix I
attached hereto and incorporated herein by this reference), or because of the
application of any federal or state income tax law enacted after the date hereof
which restricts or limits the deductibility of compensation paid to an Executive
(a "Subsequent Law"), then the aggregate present value of the amounts payable or
distributable to or for the benefit of Executive pursuant to this Agreement (the
"Payments") shall be reduced (but not below zero) to the Reduced Amount. For
purposes of this Section 6.4, the "Reduced Amount" shall be an amount which
maximizes the aggregate amount of Payments without causing any Payment to be
nondeductible by Employer because of the application of Subsequent Law, or which
maximizes the aggregate present value of Payments without causing any Payment to
be nondeductible by Employer because of the application of Section 280G of the
Code. For purposes of this Section 6.4, present value shall be determined in
accordance with Section 280G(d)(4) of the Code and Income Tax Regulations
promulgated thereunder.
6.5 If the Auditors determine that any Payment would be nondeductible by
Employer because of the application of Section 280G of the Code, or because of
the application of Subsequent Law, then Employer shall promptly give notice to
that effect and a copy of the detailed calculation thereof and of the Reduced
Amount, and Executive may then elect, in his sole discretion, which and how much
of the Payments shall be eliminated or reduced (as long as after such election
the aggregate present value of the Payments equals the Reduced Amount) and shall
advise Employer in writing of his election within 20 days of his receipt of
notice. If no such election is made by Executive within such 20 day period, then
Employer may elect which and how much of the Payments shall be eliminated or
reduced (as long as after such election the aggregate present value of Executive
Payments equals the Reduced Amount) and shall notify Executive promptly of such
election. All determinations made by the Auditors under this Section 6.5 and
Section 6.4 shall be binding upon Employer and Executive and shall be made
within 60 days of Executive's termination of employment. As promptly as
practicable following such determination and the elections hereunder, Employer
shall pay to or distribute to or for the benefit of Executive such amounts as
are then due to him under this Agreement, as modified by Section 6.4 and this
Section 6.5, and shall promptly pay to or distribute for the benefit of
Executive in the future such amounts as become due to him under this Agreement.
6.6 If it is determined by the Auditors that Payments have been made by
Employer which should not have been made (an "Overpayment") or that additional
Payments which will not have been made by Employer could be due (an
"Underpayment"), consistent in each case with the calculation of the Reduced
Amount pursuant to Section 6.4, then the following actions are to be taken: If
the Auditors, based upon the assertion of a deficiency by the Internal Revenue
Service against Employer or Executive which the Auditors believe has a high
probability of success, determine that an Overpayment has been made, such
Overpayment shall be treated for all purposes as a loan to Executive which he
shall repay to Employer, together with interest at the applicable federal rate
provided for in Section 7872(f)(2)(A) of the Code. If the Auditors, based upon
controlling precedent, determine that an Underpayment has occurred, such
Underpayment shall promptly be paid by
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Employer to or for the benefit of Executive, together with interest at the
applicable federal rate provided for in Section 7872(f)(2)(A) of the Code.
6.7 Executive shall not be required to mitigate damages or the amount of
any payment provided for under this Agreement by seeking other employment or
otherwise, nor shall the amount of any payment provided for under this Agreement
be reduced by any compensation earned by Executive as the result of employment
by another Employer after the date of termination, or otherwise.
6.8 Except as expressly provided herein, the provisions of this Agreement,
and any payment or benefit provided for hereunder, shall not reduce any amounts
otherwise payable, or in any way diminish Executive's existing rights, or rights
which would accrue solely as a result of the passage of time, under any Employer
benefit plan, employment agreement or other contract, plan or arrangement.
6.9 Except as may be required pursuant to Section 6.4 above, the amount of
any payment provided under this Agreement shall not be reduced by reason of any
present value calculation.
6.10 In case of termination of this Agreement, compensation and benefits
shall be paid to the Executive as set forth in the applicable subsection of this
Section 6 and stock options granted to Executive, if any, shall be governed by
the provisions of all stock option agreements between Employer and Executive. In
the event of a Constructive Termination or a termination of this Agreement by
Executive for Good Reason, all other rights and benefits Executive may have
under the employee and/or executive benefit plans and arrangements of Employer
generally shall be determined in accordance with the terms and conditions of
such plans and arrangements.
7. Covenants of Confidentiality, Nondisclosure and Noncompetition.
7.1 During the term of this Agreement, Employer will provide to Executive
certain confidential and proprietary information owned by Employer as more fully
described below. Executive acknowledges that he occupies or will occupy a
position of trust and confidence with Employer, and that Employer would be
irreparably damaged if Executive were to breach the covenants set forth in this
Section 7.1. Accordingly, Executive agrees that he will not, without the prior
written consent of Employer, at any time during the term of this Agreement or
any time thereafter, except as may be required by competent legal authority or
as required by Employer to be disclosed in the course of performing Executive's
duties under this Agreement for Employer, use or disclose to any person, firm or
other legal entity, any confidential records, secrets or information obtained by
Executive during his employment hereunder related to Employer or any parent,
subsidiary or affiliated person or entity (collectively, "Confidential
Information"). Confidential Information shall include, without limitation,
information about Employer's inventions (as defined in Section 8.1 below),
customer lists and product pricing, data, know-how, formulae, processes, ideas,
past, current and planned product development, market studies, computer software
and programs, database and network technologies, strategic planning and risk
management. Executive acknowledges and agrees that all Confidential Information
of Employer and/or its affiliates will be received in confidence and as a
fiduciary of Employer. Executive will exercise utmost diligence to protect and
guard such Confidential Information.
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7.2 Executive agrees that he will not, without the express written consent
of the Board, take with him upon the termination of this Agreement, any document
or paper, or any photocopy or reproduction or duplication thereof, relating to
any Confidential Information.
7.3 Executive agrees that, while Executive is employed with Employer and
for a period of 24 months after the date of termination of this Agreement (the
"Restricted Period"), provided that Executive continues to be paid his Salary
(as in effect at the date of termination) during the Restricted Period, he will
not, either directly or indirectly, have an interest in any business (whether as
manager, operator, licensor, licensee, partner, 5% or greater equity holder,
employee, consultant, director, advisor or otherwise) competitive with Employer
or any of its business activities or solicit individuals or other entities that
are customers or competitors of Employer during the six-month period immediately
prior to the date of termination of this Agreement. Executive also agrees that,
for the Restricted Period, he will not, either directly or indirectly, solicit
any employee of Employer to terminate his employment with Employer.
7.4 For purposes of this Section 7, "Employer" shall include any of its
subsidiaries or any other entity in which it holds a 50% or greater equity
interest.
8. INVENTIONS.
8.1 Any and all inventions, product, discoveries, improvements, processes,
formulae, manufacturing methods or techniques, designs or styles, software
applications or programs (collectively, "Inventions") made, developed or created
by Executive, alone or in conjunction with others, during regular hours of work
or otherwise, during the term of Executive's employment with Employer and for a
period of two years thereafter that may be directly or indirectly related to the
business of, or tests being carried out by, Employer, or any of its
subsidiaries, shall be promptly disclosed by Executive to Employer and shall be
Employer's exclusive property.
8.2 Executive will, upon Employer's request and without additional
compensation, execute any documents necessary or advisable in the opinion of
Employer's legal counsel to direct the issuance of patents to Employer with
respect to Inventions that are to be Employer's exclusive property under this
Section 8 or to vest in Employer title to such Inventions; the expense of
securing any patent, however, shall be borne by Employer.
8.3 Executive will hold for Employer's sole benefit any Invention that is
to be Employer's exclusive property under this Section 8 for which no patent is
issued.
9. NO VIOLATION.
Executive represents that he is not bound by any Agreement with any former
employer or other party that would be violated by Executive's employment by
Employer.
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10. RETURN OF EMPLOYER'S PROPERTY.
Upon the termination of this Agreement or whenever requested by Employer,
Executive shall immediately deliver to Employer all property in his possession
or under his control belonging to Employer, in good condition, ordinary wear and
tear excepted.
11. INJUNCTIVE RELIEF.
Executive acknowledges that the breach, or threatened breach, by Executive
of the provisions of this Agreement shall cause irreparable harm to Employer,
which harm cannot be fully redressed by the payment of damages to Employer.
Accordingly, Employer shall be entitled, in addition to any other right or
remedy it may have at law or in equity, to seek an injunction or restraining
Executive from any violation or threatened violation of this Agreement.
12. DISPUTE RESOLUTION.
Subject to Section 11, all claims, disputes and other matters in
controversy ("dispute") arising, directly or indirectly out of or related to
this Agreement, or the breach thereof, whether contractual or noncontractual,
and whether during the term or after the termination of this Agreement, shall be
resolved exclusively according to the procedures set forth in this Section 12,
and not through resort to any judicial proceedings.
12.1 Neither party shall commence an arbitration proceeding pursuant to the
provisions of Subsection 12.2 below unless such party shall first give a written
notice (a "Dispute Notice") to the other party setting forth the nature of the
dispute. The parties shall attempt in good faith to resolve the dispute by
mediation under the American Arbitration Association Commercial Mediation Rules
in effect on the date of the Dispute Notice. If the parties cannot agree on the
selection of a mediator within 20 days after delivery of the Dispute Notice, the
mediator will be selected by the American Arbitration Association. If the
dispute has not been resolved by mediation within 60 days after delivery of the
Dispute Notice, then the dispute shall be determined by arbitration in
accordance with the provisions of Subsection 12.2 below.
12.2 Any dispute that is not settled by mediation as provided in Subsection
12.1 above shall be resolved by arbitration before a single arbitrator appointed
by the American Arbitration Association or its successor in Prince George's
County, Maryland. The determination of the arbitrator shall be final and
absolute. The arbitrator shall be governed by the duly promulgated rules and
regulations of the American Arbitration Association or its successor then in
effect, and the pertinent provisions of the laws of the State of Maryland
relating to arbitration. The decision of the arbitrator may be entered as a
final judgment in any court of the State of Maryland or elsewhere. The
prevailing party in any such arbitration shall also be entitled to recover
reasonable attorneys', accountants' and experts' fees and costs of suit in
addition to any other relief awarded such prevailing party.
13. MISCELLANEOUS.
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13.1 If any provisions contained in this Agreement is for any reason held
to be totally invalid or unenforceable, such provision will be fully severable,
and in lieu of such invalid or unenforceable provision there will be added
automatically as part of this Agreement a provision as similar in terms as may
be valid and enforceable.
13.2 All notices and other communications required or permitted hereunder
or necessary or convenience in connection herewith shall be in writing and shall
be deemed to have been given when mailed by registered mail or certified mail,
return receipt requested or hand delivered, as follows (provided that notice of
change of address shall be deemed given only when received):
If to Employer: Litronic Inc.
2030 Main Street, Suite 1250
Irvine, CA 92614
Attention: Chief Executive Officer
If to Executive: William W. Davis, Sr.
4390 Parliament Place, Suite R
Lanham, MD 20706
or to such other names or addresses as Employer or Executive, as the case may
be, shall designate by notice to the other party hereto in the manner specified
in this Subsection 13.2.
13.3 This Agreement shall be binding upon and inure to the benefit of
Employer, its successors, legal representatives and assigns, and Executive, his
heirs, executors, administrators, representatives, legatees and permitted
assigns. Executive agrees that his rights and obligations hereunder are personal
to him and may not be assigned without the express written consent of Employer.
If Executive should die while any amounts are due to him pursuant to this
Agreement, all such amounts shall be paid to Executive's devisee, legatee or
other designee, or if there be no such designee, to Executive's estate. Employer
will require any successor or assign (whether direct or indirect, by purchase,
merger, consolidation or otherwise) to all or substantially all of the business
and/or assets of Employer, by Agreement in form and substance satisfactory to
Executive and his legal counsel, expressly, absolutely and unconditionally to
assume and agree to perform this Agreement in the same manner and to the same
extent that Employer would be required to perform each of them if no such
succession or assignment had taken place. Any failure of Employer to obtain such
Agreement prior to the effectiveness of any such succession or assignment shall
be a material breach of this Agreement and shall entitle Executive to terminate
Executive's employment for Good Reason. As used in this Agreement, "Employer"
shall mean Employer as hereinbefore defined and any successor or assign to its
business and/or assets as aforesaid which executes and delivers the Agreement
provided for in this Section or which otherwise becomes bound by all the terms
and provisions of this Agreement by operation of law. If at any time during the
term of this Agreement Executive is employed by any corporation a majority of
the voting securities of which is then owned by Employer, "Employer" as used in
this Agreement shall in addition include such Employer. In such event, Employer
agrees that it shall pay or shall cause such Employer to pay any amounts owed to
Executive pursuant to this Agreement.
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13.4 This Agreement replaces and merges all previous agreements and
discussions relating to the same or similar subject matters between Executive
and Employer with respect to the subject matter of this Agreement. This
Agreement may not be modified in any respect by any verbal statement,
representation or Agreement made by any employee, officer, or representative of
Employer or by any written Agreement unless signed by an officer of Employer who
is expressly authorized by Employer to execute such document.
13.5 The laws of the State of Maryland will govern the interpretation,
validity and effect of this Agreement without regard to principles of conflicts
of law, the place of execution or the place for performance thereof, except that
the laws of the State of Delaware shall govern matters of indemnity set forth in
Exhibit A. Employer and Executive agree that the state and federal courts
situated in Prince George's County, Maryland shall have personal jurisdiction
over Employer and Executive to hear all disputes arising under this Agreement.
This Agreement is to be at least partially performed in Prince George's County,
Maryland and, as such, Employer and Executive agree that venue shall be proper
with the state or federal courts in Prince George's County, Maryland to hear
such disputes.
13.6 Executive and Employer shall execute and deliver any and all
additional instruments and agreements that may be necessary or proper to carry
out the purposes of this Agreement.
13.7 The descriptive headings of the several sections of this Agreement
are inserted for convenience only and do not constitute a party of this
Agreement.
13.8 This Agreement may be executed in one or more counterparts, all of
which shall be considered one and the same Agreement.
13.9 Executive acknowledges that Executive has had the opportunity to read
this Agreement and discuss it with advisors and legal counsel, if Executive has
so chosen. Executive also acknowledges the importance of this Agreement and that
Employer is relying on this Agreement in entering into an employment
relationship with Executive.
13.10 The Indemnity provisions attached as Exhibit A are hereby
specifically incorporated into and made a part of this Agreement.
The undersigned, intending to be legally bound, have executed this
Agreement on the date first written above, but effective as of ____________,
1999.
EMPLOYER: LITRONIC INC.
By:
----------------------------------
Kris Shah, Chief Executive Officer
EXECUTIVE:
----------------------------------
William W. Davis, Sr.
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APPENDIX I
ADDITIONAL DEFINITIONS
For purposes of this Agreement, the following additional capitalized terms
shall have the respective definitions set forth below:
AUDITORS. The term "Auditors" as used in this Agreement shall mean
Employer's independent auditors.
BENEFIT PLAN. The term "Benefit Plan" as used herein shall mean any benefit
plan or arrangement (including, without limitation, Employer's profit sharing or
stock option plans, if any, and medical, disability and life insurance plans) in
which Executive is participating (or any other plans providing Executive with
substantially similar benefits).
CHANGE IN CONTROL. A "Change in Control" of Employer shall be deemed to
have occurred if (A) there shall be consummated any consolidation or merger of
Employer in which Employer is not the continuing or surviving corporation or
pursuant to which all or substantially all of the shares of Employer's Common
Stock would be converted into cash, securities or other property, other than a
merger of Employer in which the holders of Employer's Common Stock immediately
prior to the merger have the same proportionate ownership of common stock of the
surviving corporation immediately after the merger; (B) there shall be
consummated any sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of all, or substantially all, of the assets of
Employer; (C) the shareholders of Employer approve any plan or proposal for the
liquidation or dissolution of Employer; (D) any "person" (as such term is used
in Sections 13(d) and 14(d) (2) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")), other than Executive, Kris Shah or any members of
their immediate families, shall become the beneficial owner (within the meaning
of Rule 13d-3 under the Exchange Act) of 30% or more of Employer's outstanding
Common Stock after the date hereof; (E) during any period of two consecutive
years, individuals who at the beginning of such period constitute the entire
Board shall cease for any reason to constitute a majority thereof unless the
election, or the nomination for election by Employer's shareholders, of each new
director was approved by a vote of at least two-thirds of the directors then
still in office who were directors at the beginning of the period or; (F) there
shall be any change of control of a nature required to be reported in response
to Item 6 (e) of Schedule 14A of Regulation 14A promulgated under the Securities
Exchange Act of 1934 or any successor regulation of substantially similar
import, regardless of whether Employer is subject to such reporting requirement.
CODE. The term "Code" as used in this Agreement shall mean the Internal
Revenue Code of 1986, as amended.
DUE CAUSE. The term "Due Cause" as used in this Agreement shall mean any of
the following events:
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(a) any intentional misapplication by Executive of Employer's funds or
other material assets, or any other act of dishonesty injurious to Employer
committed by Executive; or
(b) Executive's conviction of (i) a felony or (ii) a crime involving
moral turpitude; or
(c) Executive's use or possession of any controlled substance or
chronic abuse of alcoholic beverages, which use or possession the Board
reasonably determines renders Executive unfit to serve in his capacity as a
senior executive of Employer; or
(d) Executive's breach, nonperformance or nonobservance of any of the
terms of this Agreement, including but not limited to Executive's failure
to adequately perform his duties or comply with the reasonable directions
of the Board. Notwithstanding anything in the foregoing subsections (c) or
(d) to the contrary, Employer shall not terminate Executive unless the
Board first provides Executive with a written memorandum describing in
detail how his performance hereunder is not satisfactory and Executive is
given a reasonable period of time (not less than 30 days) to remedy the
unsatisfactory performance related by the Board to Executive in that
memorandum. A determination of whether Executive has satisfactorily
remedied such unsatisfactory performance shall be promptly made by a
majority of the disinterested directors of the Board at the end of the
period provided to Executive for such remedy and such determination shall
be final.
GOOD REASON. The term "Good Reason" as used in this Agreement shall mean
any of the following which occur without Executive's written consent:
(a) the assignment to Executive by the Board of duties substantially
inconsistent with Executive's position, duties, responsibilities or
status with Employer; a substantial change in Executive's titles or
offices; any removal of Executive from or any failure to reelect
Executive to any of his positions as an officer, except in connection
with the termination of his employment for disability or as a member
of the Board; Retirement; Executive's death; or by Executive other
than for Good Reason;
(b) a purported reduction by Employer in Executive's base salary to an
amount less than the greater of (i) the base salary as in effect on
the date hereof or (ii) 10% below the base salary in effect at the
time of the purported reduction;
(c) any failure by Employer to continue in effect any Benefit Plan;
(d) any failure by Employer to obtain the assumption of this Agreement by
any successor or assign of Employer;
(e) a failure by Employer to comply with any material provision of this
Agreement which has not been cured within 30 days after notice of such
noncompliance has been given by Executive to Employer, or if such
failure is not capable of being cured in such time, a cure shall not
have been diligently initiated by Employer within such 30 day period;
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Davis Executive Employment Agreement
<PAGE>
(f) a material reduction in the highest level of support services and
staff, office space and accouterments available to Executive during
the term of this Agreement and that which is necessary to perform any
additional duties assigned to Executive thereafter, which reduction is
not generally effective for all officers employed by Employer; or
(g) If Employer avails itself of, or is subjected by any third party to, a
proceeding in bankruptcy in which Employer is the named debtor, an
assignment by Employer for the benefit of its creditors, the
appointment of a receiver for Employer, or any other proceeding
involving insolvency or the protection of or from creditors and the
same has not been discharged or terminated within 90 days;
provided, however, that any of the foregoing actions shall not be
considered to be Good Reason if such action is undertaken by Employer as a
termination for Due Cause.
-3-
Davis Executive Employment Agreement
<PAGE>
EXHIBIT A
[INDEMNITY PROVISIONS]
1. DEFINITIONS. As used herein, the following terms shall have the meanings
set forth below:
"PROCEEDING" shall mean any threatened, pending or completed action, suit
or proceeding, whether brought in the name of Employer or otherwise and whether
of a civil, criminal, administrative or investigative nature, by reason of the
fact that Executive is or was an officer and/or a director of Employer, or is or
was serving at the request of Employer as a director, officer, employee or agent
of another enterprise, whether or not he is serving in such capacity at the time
any liability or Expense is incurred for which indemnification or advancement of
Expenses (as defined in subparagraph (b) below) is to be provided under these
indemnity provisions.
"EXPENSES" means, all costs, charges and expenses incurred in connection
with a Proceeding, including, without limitation, attorneys' fees, disbursements
and retainers, accounting and witness fees, travel and deposition costs,
expenses of investigations, judicial or administrative proceedings or appeals,
and any expenses of establishing a right to indemnification pursuant to this
Agreement or otherwise, including reasonable compensation for time spent by
Executive in connection with the investigation, defense or appeal of a
Proceeding or action for indemnification for which he is not otherwise
compensated by Employer or any third party; provided, however, that the term
Expenses includes only those costs, charges and expenses incurred with
Employer's prior consent, which consent shall not be unreasonably withheld; and
provided, further, that the term "Expenses" does not include (i) the amount of
damages, judgments, amounts paid in settlement, fines or penalties relating to
any Proceeding or (ii) excise taxes under the Employee Retirement Income
Security Act of 1974, as amended ("ERISA") relating to any Proceeding, either of
which are actually levied against Executive or paid by or on behalf of
Executive.
2. AGREEMENT TO SERVE. Executive agrees to continue to serve as and officer
and/or a director of Employer at the will of Employer for so long as Executive
is duly elected or appointed or until such time as Executive tenders a
resignation in writing or is terminated as an officer or director by Employer.
Nothing in these indemnity provisions shall be construed to create any right in
Executive to continued employment with Employer or any subsidiary or affiliate
of Employer. Nothing in these indemnity provisions shall affect or alter any of
the terms of any otherwise valid employment agreement or other agreement between
Executive and Employer relating to Executive's conditions and/or terms of
employment.
3. INDEMNIFICATION IN THIRD PARTY ACTIONS. Employer shall indemnify Executive
in accordance with the provisions of this Section 3 if Executive is a party to
or threatened to be made a party to or is otherwise involved in any Proceeding
(other than a Proceeding by or in the right of Employer to procure a judgment in
its favor), by reason of the fact that Executive is or was an officer and/or a
director of Employer, or is or was serving at the request of Employer as a
director, officer, employee or agent of another enterprise, against all
Expenses, damages, judgments, amounts paid in settlement, fines, penalties and
ERISA excise taxes actually and reasonably incurred by Executive in connection
with the defense or settlement of such Proceeding, to the fullest extent
permitted by Delaware law,
Davis Executive Employment Agreement
<PAGE>
whether or not Executive was the successful party in any such Proceeding;
provided that any settlement shall be approved in writing by Employer.
4. INDEMNIFICATION IN PROCEEDINGS BY OR IN THE RIGHT OF EMPLOYER. Employer
shall indemnify Executive in accordance with the provisions of this section if
Executive is a party to or threatened to be made a party to or is otherwise
involved in any Proceeding by or in the right of Employer to procure a judgment
in its favor by reason of the fact that Executive is or was an officer and/or a
director of Employer, or is or was serving at the request of Employer as a
director, officer, employee or agent of another enterprise, against all Expenses
actually and reasonably incurred by Executive in connection with the defense or
settlement of such Proceeding, to the fullest extent permitted by Delaware law,
whether or not Executive is the successful party in any such Proceeding.
Employer shall further indemnify Executive for any damages, judgments, amounts
paid in settlement, fines, penalties and ERISA excise taxes actually and
reasonably incurred by Executive in any such Proceeding described in the
immediately preceding sentence, provided either (i) the Proceeding is settled
with the approval of a court of competent jurisdiction, or (ii) indemnification
of such amounts is otherwise ordered by a court of competent jurisdiction in
connection with such Proceeding.
5. CONCLUSIVE PRESUMPTION REGARDING STANDARD OF CONDUCT. Executive shall be
conclusively presumed to have met the relevant standards of conduct required by
Delaware law for indemnification pursuant to these indemnity provisions, unless
a determination is made that Executive has not met such standards (i) by the
Board of Directors of Employer by a majority vote of a quorum thereof consisting
of directors who were not parties to such Proceeding, (ii) by the shareholders
of Employer by majority vote, or (iii) in a written opinion of Employer's
independent legal counsel. Further, the termination of any Proceeding by
judgment, order, settlement, conviction or upon a plea of nolo contendere or its
equivalent, shall not, of itself, rebut such presumption that Executive met the
relevant standards of conduct required for indemnification pursuant to these
indemnity provisions.
6. INDEMNIFICATION OF EXPENSES OF SUCCESSFUL PARTY. Notwithstanding any of the
other provisions hereof, to the extent that Executive has been successful on the
merits or otherwise in defense of any Proceeding or in defense of any claim,
issue or matter therein, Executive shall be indemnified against all Expenses
incurred in connection therewith to the fullest extent permitted by Delaware
law. For purposes of this paragraph, Executive will be deemed to have been
successful on the merits if the Proceeding is terminated by settlement or is
dismissed with prejudice.
7. ADVANCES OF EXPENSES. The Expenses incurred by Executive in connection with
any Proceeding shall be paid promptly by Employer in advance of the final
disposition of the Proceeding at the written request of Executive to the fullest
extent permitted by Delaware law; provided that Executive shall undertake in
writing to repay such amount to the extent that it is ultimately determined that
Executive is not entitled to indemnification by Employer.
8. PARTIAL INDEMNIFICATION. If Executive is entitled under any of these
indemnity provisions to indemnification by Employer for some or a portion of the
Expenses, damages, judgments, amounts paid in settlement, fines, penalties or
ERISA excise taxes actually and reasonably incurred by Executive in the
investigation, defense, appeal or settlement of any Proceeding but not, however,
for the total amount thereof, Employer shall nevertheless indemnify Executive
for the portion of such
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Davis Executive Employment Agreement
<PAGE>
Expenses, damages, judgments, amounts paid in settlement, fines, penalties or
ERISA excise taxes to which Executive is entitled.
9. INDEMNIFICATION PROCEDURE; DETERMINATION OF RIGHT TO INDEMNIFICATION.
(a) Promptly after receipt by Executive of notice of the commencement of
any Proceeding with respect to which Executive intends to claim indemnification
or advancement of Expenses pursuant to these indemnity provisions, Executive
will notify Employer of the commencement thereof. The omission to so notify
Employer will not relieve Employer from any liability which it may have to
Executive under these indemnity provisions or otherwise.
(b) If a claim for indemnification or advancement of Expenses under these
indemnity provisions is not paid by or on behalf of Employer within 30 days of
receipt of written notice thereof, Executive may at any time thereafter bring
suit in any court of competent jurisdiction against Employer to enforce the
right to indemnification or advancement of Expenses provided by these indemnity
provisions. It shall be a defense to any such action (other than an action
brought to enforce a claim for Expenses incurred in defending any Proceeding in
advance of its final disposition where the required undertaking, if any is
required, has been tendered to Employer) that Executive has failed to meet the
standard of conduct that makes it permissible under Delaware law for Employer to
indemnify Executive for the amount claimed. The burden of proving by clear and
convincing evidence that indemnification or advancement of Expenses is not
appropriate shall be on Employer. The failure of the directors or shareholders
of Employer or independent legal counsel to have made a determination prior to
the commencement of such Proceeding that indemnification or advancement of
Expenses are proper in the circumstances because Executive has met the
applicable standard of conduct shall not be a defense to the action or create a
presumption that Executive has not met the applicable standard of conduct.
(c) Executive's Expenses incurred in connection with any action concerning
Executive's right to indemnification or advancement of Expenses in whole or in
part pursuant to these indemnity provisions shall also be indemnified in
accordance with the terms of these indemnity provisions by Employer regardless
of the outcome of such action, unless a court of competent jurisdiction
determines that each of the material claims made by Executive in such action was
not made in good faith or was frivolous.
(d) With respect to any Proceeding for which indemnification is requested,
Employer will be entitled to participate therein at its own expense and, except
as otherwise provided below, to the extent that it may wish, Employer may assume
the defense thereof, with counsel satisfactory to Executive. After notice from
Employer to Executive of its election to assume the defense of a Proceeding,
Employer will not be liable to Executive under these indemnity provisions for
any Expenses subsequently incurred by Executive in connection with the defense
thereof, other than reasonable costs of investigation or as otherwise provided
below. Employer shall not settle any Proceeding in any manner which would impose
any penalty or limitation on Executive without Executive's prior written
consent. Executive shall have the right to employ counsel in any such
Proceeding, but the Expenses of such counsel incurred after notice from Employer
of its assumption of the defense thereof and Executive's approval of Employer's
counsel shall be at the expense of Executive, unless (i) the employment of
counsel by Executive has been authorized by Employer, (ii)
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Davis Executive Employment Agreement
<PAGE>
Executive shall have reasonably concluded that there may be a conflict of
interest between Employer and Executive in the conduct of the defense of a
Proceeding, or (iii) Employer shall not in fact have employed counsel to assume
the defense of a Proceeding, in each of which cases the Expenses of Executive's
counsel shall be at the expense of Employer. Notwithstanding the foregoing,
Employer shall not be entitled to assume the defense of any Proceeding brought
by or on behalf of Employer or as to which Executive has concluded that there
may be a conflict of interest between Employer and Executive.
10. RETROACTIVE EFFECT. Notwithstanding anything to the contrary contained in
these indemnity provisions, Employer's obligation to indemnify Executive and
advance Expenses to Executive shall be deemed to be in effect since the
Effective Date.
11. LIMITATIONS ON INDEMNIFICATION. No payments pursuant to these indemnity
provisions shall be made by Employer:
(a) to indemnify or advance Expenses to Executive with respect to actions
initiated or brought voluntarily by Executive and not by way of defense, except
with respect to actions brought to establish or enforce a right to
indemnification or advancement of Expenses under these indemnity provisions or
any other statute or law or otherwise as required under Delaware law, but such
indemnification or advancement of Expenses may be provided by Employer in
specific cases if approved by the Board of Directors by a majority vote of a
quorum thereof consisting of directors who are not parties to such action;
(b) to indemnify Executive for any Expenses, damages, judgments, amounts
paid in settlement, fines, penalties or ERISA excise taxes for which payment is
actually made to Executive under a valid and collectible insurance policy,
except in respect of any excess beyond the amount paid under such insurance;
(c) to indemnify Executive for any Expenses, damages, judgments, amounts
paid in settlement, fines, penalties or ERISA excise taxes for which Executive
has been or is indemnified by Employer or any other party otherwise than
pursuant to these indemnity provisions;
(d) to indemnify Executive for any Expenses, damages, judgments, fines or
penalties sustained in any Proceeding for an accounting of profits made from the
purchase or sale by Executive of securities of Employer pursuant to the
provisions of Section 16(b) of the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated thereunder or similar provisions of
any federal, state or local statutory law;
(e) to indemnify Executive for any Expenses, damages, judgments, amounts
paid in settlement, fines, penalties or ERISA excise taxes in connection with
any Proceeding where a court of competent jurisdiction has determined that (i)
Executive failed to act in good faith and in a manner reasonably believed to be
in or not opposed to the best interest of Employer, or (ii) with respect to any
Proceeding which is of a criminal nature, Executive had reasonable cause to
believe his conduct was unlawful; or
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Davis Executive Employment Agreement
<PAGE>
(f) if a court of competent jurisdiction shall enter a final order,
decree or judgment to the effect that such indemnification or advancement of
Expenses hereunder is unlawful under the circumstances.
12. LIMITATION OF ACTIONS AND RELEASE OF CLAIMS. Notwithstanding anything to
the contrary contained herein, no legal action shall be brought and no cause of
action shall be asserted by or on behalf of Employer, any affiliate or
subsidiary of Employer or any other enterprise that Executive was serving as a
director, officer, employee or agent at the request of Employer against
Executive, or Executive's spouse, heirs, executors of administrators after the
expiration of two years from the date Executive ceases (for any reason) to serve
in any one or more of the capacities covered by this Agreement, and any claim or
cause of action of Employer, its affiliates or subsidiaries or any such other
enterprise shall be extinguished and deemed released unless asserted by the
filing of a legal action within such two-year period.
13. MAINTENANCE OF D&O INSURANCE.
(a) Upon Executive's request, Employer hereby agrees to maintain in full
force and effect, at its sole cost and expense, directors' and officers'
liability insurance ("D&O Insurance") by an insurer, in an amount and with a
deductible reasonably acceptable to Executive, covering the period during which
Executive is serving in any one or more of the capacities covered by these
indemnity provisions and for so long thereafter as Executive shall be subject to
any possible claim or threatened, pending or completed Proceeding by reason of
the fact that Executive is serving in any of the capacities covered by these
indemnity provisions.
(b) In all policies of D&O Insurance to be maintained pursuant to
Paragraph 13(a) above, Executive shall be named as an insured in such a manner
as to provide Executive with the greatest rights and benefits available under
such policy.
(c) Notwithstanding the foregoing, Employer shall have no obligation to
maintain D&O Insurance if Employer determines, in good faith, that (i) such
insurance cannot be obtained on terms which are commercially reasonable, (ii)
the premium costs for such insurance is significantly disproportionate to the
amount of coverage provided, (iii) the coverage provided by such insurance is
limited by exclusions so as to provide an insufficient benefit, or (iv)
Employer, after using best efforts, is otherwise unable to obtain such
insurance.
14. INDEMNIFICATION HEREUNDER NOT EXCLUSIVE. The indemnification and
advancement of Expenses provided by these provisions shall not be deemed to
limit or preclude any other rights to which Executive may be entitled under
Employer's Certificate of Incorporation, Employer's Bylaws, any agreement, any
vote of shareholders or disinterested directors of Employer, Delaware law, or
otherwise.
15. SUCCESSORS AND ASSIGNS. These indemnity provisions shall be binding upon,
and shall inure to the benefit of (i) Executive and Executive's heirs, devisees,
legatees, personal representatives, executors, administrators and assigns and
(ii) Employer and its successors and assigns, including any transferee of all or
substantially all of Employer's assets and any successor or assign of Employer
by merger or by operation of law.
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Davis Executive Employment Agreement
<PAGE>
16. SEVERABILITY. Each of these indemnity provisions is a separate and distinct
agreement and independent of the other, so that if any provision hereof shall be
held to be invalid or unenforceable for any reason, such invalidity or
unenforceability shall not affect the validity or enforceable of the other
provisions hereof. To the extent required, any of these indemnity provisions may
be modified by a court of competent jurisdiction to preserve its validity and to
provide Executive with the broadest possible indemnification and advancement of
Expenses permitted under Delaware law. If any of these indemnity provisions or
any portion thereof is invalidated on any ground by any court of competent
jurisdiction, then Employer shall nevertheless indemnify Executive as to
Expenses, damages, judgments, amounts paid in settlement, fines, penalties and
ERISA excise taxes with respect to any Proceeding to the full extent permitted
by any of these indemnity provisions that shall not have been invalidated or by
any applicable provision of Delaware law or the law of any other applicable
jurisdiction.
17. AMENDMENTS AND WAIVERS. No amendment, waiver, modification, termination or
cancellation of this indemnity shall be effective unless in writing and signed
by the party against whom enforcement is sought. The indemnification rights
afforded to Executive hereby are contract rights and may not be diminished,
eliminated or otherwise affected by amendments to Employer's Certificate of
Incorporation, Bylaws or agreements, including any directors' and officers'
liability insurance policies, whether the alleged actions or conduct giving rise
to indemnification hereunder arose before or after any such amendment. No waiver
of any provision of this indemnity shall be deemed or shall constitute a waiver
of any other provision hereof, whether or not similar, nor shall any waiver
constitute a continuing waiver.
18. SUBROGATION. In the event of any payment under this indemnity to or on
behalf of Executive, Employer shall be subrogated to the extent of such payment
to all of the rights of recovery of Executive against any person, firm,
corporation or other entity (other than Employer) and Executive shall execute
all papers requested by Employer and shall do any and all things that may be
necessary or desirable to secure such rights for Employer, including the
execution of such documents necessary or desirable to enable Employer to
effectively bring suit to enforce such rights.
19. SUBJECT MATTER AND PARTIES. The intended purpose of this indemnity is to
provide for indemnification and advancement of Expenses, and this indemnity is
not intended to affect any other aspect of any relationship between Executive
and Employer and is not intended to and shall not create any rights in any
person as a third party beneficiary hereunder.
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Davis Executive Employment Agreement
<PAGE>
Exhibit 10.3
PROMISSORY NOTE
---------------
$210,822 Newport Beach, CA
December 12, 1994
FOR VALUE RECEIVED, the undersigned, DRIL-TRON, INC., a California
corporation, promises to pay to the order of KRIS SHAH the sum of Two Hundred
Ten Thousand Eight Hundred Twenty-Two Thousand Dollars ($210,822), without
interest. This Note shall be due and payable on or before December 31, 1998.
The undersigned may prepay this Note in whole or in part at any time without
penalty.
The occurrence of any of the following events without the holder's
prior written consent, which consent shall not be unreasonably withheld, shall
result in the entire unpaid balance of the principal of this Note becoming
immediately due and payable without notice to the undersigned:
(a) Sale or assignment of all or substantially all of the
operating assets of the undersigned;
(b) Liquidation or dissolution of the undersigned; or
(c) Merger or consolidation of the undersigned with any other
corporation.
If this Note is not paid when due, the undersigned promises to pay all
costs of collection, including reasonable attorneys' fees, incurred by the
holder hereof whether or not suit or action is filed.
This Note shall be construed in accordance with the laws of the State
of California.
DRIL-TRON, INC.,
a California corporation
By: /S/ KRIS SHAH
---------------------------
Kris Shah
President
<PAGE>
Exhibit 10.4
COMMERCIAL GUARANTY
BORROWER: DAVIS HOLDING COMPANY
C/O PULSAR DATA SYSTEMS, INC. 3000 PHILADELPHIA WAY SUITE H
LANHAM, MD 20706
LENDER: WILMINGTON TRUST COMPANY
C/L W H MAJOR
RODNEY SQUARE NORTH
1100 NORTH MARKET STREET
WILMINGTON, DE 19890
GUARANTOR:
PULSAR DATA SYSTEMS, INC.
5000 PHILADELPHIA WAY SUITE H
LANHAM, MD 20706
================================================================================
================================================================================
============================================================
AMOUNT OF GUARANTY. THIS IS A GUARANTY OF PAYMENT OF THE NOTE, INCLUDING WITHOUT
LIMITATION THE PRINCIPAL NOTE AMOUNT OF TWO MILLION THREE HUNDRED SIXTY THOUSAND
8 00/100 DOLLARS ($2,360.000.00).
GUARANTY. FOR GOOD AND VALUABLE CONSIDERATION, PULSAR DATA SYSTEMS, INC.
("GUARANTOR") ABSOLUTELY AND UNCONDITIONALLY GUARANTEES AND PROMISES TO PAY TO
WILMINGTON TRUST COMPANY ("LENDER") OR ITS ORDER, IN LEGAL TENDER OF THE UNITED
STATES OF AMERICA, THE INDEBTEDNESS (AS THAT TERM IS DEFINED BELOW) OF DAVIS
HOLDING COMPANY ("BORROWER") TO LENDER ON THE TERMS AND CONDITIONS SET FORTH IN
THIS GUARANTY.
DEFINITIONS. The following words shall have the following meanings when used in
this Guaranty:
BORROWER. The word "Borrower" means DAVIS HOLDING COMPANY
GUARANTOR. The word "Guarantor" means PULSAR DATA SYSTEMS, INC
GUARANTY. The word "Guaranty" moans this Guaranty made by Guarantor for the
benefit of Lender dated JUNE 23, 1995
INDEBTEDNESS. The word "Indebtedness" means the Note, including (a) all
principal, (b) all interest, (c) all late charges, (d) all loan fees and loan
charges, and (e) all collection costs and expenses relating to the Note or to
any collateral for the Note Collection costs and expenses include without
limitation all of Lender's reasonable attorneys' fees and Lender's legal
expenses, including court costs and fifteen percent (15%) of the principal plus
accrued interest as attorneys' fees, if any sums owing under this Guaranty are
collected by or through an attorney-at-law, whether or not suit is instituted,
and reasonable attorneys' fees and legal expenses for bankruptcy
<PAGE>
06-15-1995 COMMERCIAL GUARANTY Page 2
(CONTINUED)
================================================================================
proceedings (including efforts to modify or vacate any automatic stay or
injunction), appeals, and any anticipated post-judgment collection services.
LENDER. The word "Lender" means WILMINGTON TRUST COMPANY, its successors and
assigns
NOTE. The word "Note" means the promissory note or credit agreement dated June
23, 1995, In the original principal amount of $2,360,000.00 from Borrower to
Lender, together with all renewals of, extensions of, modifications of,
refinancings of, consolidations of, and substitutions for the promissory note or
agreement
RELATED DOCUMENTS. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages, deeds of
trust, and all other instruments, agreements and documents, whether now or
hereafter existing, executed in connection with the Indebtedness
MAXIMUM LIABILITY. THE MAXIMUM LIABILITY OF GUARANTOR UNDER THIS GUARANTY SHALL
NOT EXCEED AT ANY ONE TIME THE AMOUNT OF THE INDEBTEDNESS DESCRIBED ABOVE, PLUS
ALL COSTS AND EXPENSES OF (A) ENFORCEMENT OF THIS GUARANTY AND (B) COLLECTION
AND SALE OF ANY COLLATERAL SECURING THIS GUARANTY.
The above limitation on liability is not a restriction on the amount of the
Indebtedness of Borrower to Lender either in the aggregate or at any one time.
If Lender presently holds one or more guaranties, or hereafter receives
additional guaranties from Guarantor, the rights of Lender under all guaranties
shall be cumulative. This Guaranty shall not (unless specifically provided below
to the contrary) affect or invalidate any such other guaranties The liability of
Guarantor will be the aggregate liability of Guarantor under the terms of this
Guaranty and any such other unterminated guaranties
NATURE OF GUARANTY. Guarantor intends to guarantee at all times the performance
and prompt payment when due, whether at maturity or earlier by reason of
acceleration or otherwise, of all Indebtedness within the limits set forth in
the preceding section of this Guaranty
DURATION OF GUARANTY. This Guaranty will take effect when received by Lender
without the necessity of any acceptance by Lender, or any notice to Guarantor or
to Borrower, and will continue in full force until all Indebtedness shall have
been fully and finally paid and satisfied and all other obligations of Guarantor
under this Guaranty shall have been performed in full Release of any other
guarantor or termination of any other guaranty of the Indebtedness shall not
affect the liability of Guarantor under this Guaranty A revocation received by
Lender from any one or more Guarantors shall not affect the liability of any
remaining Guarantors under this Guaranty
GUARANTOR'S AUTHORIZATION TO LENDER. Guarantor authorizes Lender, WITHOUT NOTICE
OR DEMAND AND WITHOUT LESSENING GUARANTOR'S LIABILITY UNDER THIS GUARANTY, FROM
<PAGE>
06-15-1995 COMMERCIAL GUARANTY Page 3
(CONTINUED)
================================================================================
TIME TO TIME: (A) TO MAKE ONE OR MORE ADDITIONAL SECURED OR UNSECURED LOANS TO
BORROWER, TO LEASE EQUIPMENT OR OTHER GOODS TO BORROWER, OR OTHERWISE TO EXTEND
ADDITIONAL CREDIT TO BORROWER; (B) TO ALTER, COMPROMISE, RENEW, EXTEND,
ACCELERATE, OR OTHERWISE CHANGE ONE OR MORE TIMES THE TIME FOR PAYMENT OR OTHER
TERMS OF THE INDEBTEDNESS OR ANY PART OF THE INDEBTEDNESS, INCLUDING INCREASES
AND DECREASES OF THE RATE OF INTEREST ON THE INDEBTEDNESS; EXTENSIONS MAY BE
REPEATED AND MAY BE FOR LONGER THAN THE ORIGINAL LOAN TERM; (C) TO TAKE AND HOLD
SECURITY FOR THE PAYMENT OF THIS GUARANTY OR THE INDEBTEDNESS, AND EXCHANGE,
ENFORCE, WAIVE, FAIL OR DECIDE NOT TO PERCENT, AND RELEASE ANY SUCH SECURITY,
WITH OR WITHOUT THE SUBSTITUTION OF NEW COLLATERAL; (D) TO RELEASE, SUBSTITUTE,
AGREE NOT TO SUE, OR DEAL WITH ANY ONE OR MORE OF BORROWER'S SURETIES,
ENDORSERS, OR OTHER GUARANTORS ON ANY TERMS OR IN ANY MANNER LENDER MAY CHOOSE;
(E) TO DETERMINE HOW, WHEN AND WHAT APPLICATION OF PAYMENTS AND CREDITS SHALL BE
MADE ON THE INDEBTEDNESS; (F) TO APPLY SUCH SECURITY AND DIRECT THE ORDER OR
MANNER OF SALE THEREOF, INCLUDING WITHOUT LIMITATION, ANY NON-JUDICIAL SALE
PERMITTED BY THE TERMS OF THE CONTROLLING SECURITY AGREEMENT OR DEED OF TRUST,
AS LENDER IN ITS DISCRETION MAY DETERMINE; (G) TO SELL, TRANSFER, ASSIGN, OR
GRANT PARTICIPATIONS IN ALL OR ANY PART OF THE INDEBTEDNESS; AND (H) TO ASSIGN
OR TRANSFER THIS GUARANTY IN WHOLE OR IN PART.
GUARANTOR'S REPRESENTATIONS AND WARRANTIES. Guarantor represents and warrants to
Lender that (a) no representations or agreements of any kind have been made to
Guarantor which would limit or qualify in any way the terms of this Guaranty;
(b) this Guaranty is executed at Borrower's request and not at the request of
Lender; (c) Guarantor has not and will not, without the prior written consent of
Lender, sell, lease, assign, encumber, hypothecate, transfer, or otherwise
dispose of all or substantially all of Guarantor's assets, or any interest
therein; (d) Lender has made no representation to Guarantor as to the
creditworthiness of Borrower; (e) upon Lender's request, Guarantor will provide
to Lender financial and credit information in form acceptable to Lender, and all
such financial information provided to Lender is true and correct in all
material respects and fairly presents the financial condition of Guarantor as of
the dabs thereof, and no material adverse change has occurred in the financial
condition of Guarantor since the dab of the financial statements; and (f)
Guarantor has established adequate means of obtaining from Borrower on a
continuing basis information regarding Borrower's financial condition Guarantor
agrees to keep adequately informed from such means of any fads, events, or
circumstances which might in any way affect Guarantor's risks under this
Guaranty, and Guarantor further agrees that, absent a request for information,
Lender shall have no obligation to disclose to Guarantor any information or
documents acquired by Lender in the course of its relationship with Borrower
GUARANTOR'S WAIVERS. Except as prohibited by applicable law, Guarantor waives
any right to require Lender (a) to continue extending money or to extend other
credit to Borrower; (b) to make any presentment, protest, demand, or notice of
any kind, including notice of any nonpayment of the Indebtedness or of any
nonpayment related to any collateral, or notice of any
<PAGE>
06-15-1995 COMMERCIAL GUARANTY Page 4
(CONTINUED)
================================================================================
action or nonaction on the part of Borrower, Lender, any surety, endorser, or
other guarantor in connection with the Indebtedness or in connection with the
creation of new or additional loans or obligations; (c) to resort for payment or
to proceed directly or at once against any person, including Borrower or any
other guarantor; (d) to proceed directly against or exhaust any collateral held
by Lender from Borrower, any other guarantor, or any other person; (e) to give
notice of the terms, time, and place of any public or private sale of personal
property security held by Lender from Borrower or to comply with any other
applicable provisions of the Uniform Commercial Code; (f) to pursue any other
remedy within Lender's power; or (g) to commit any ad or omission of any kind,
or at any time, with respect to any matter whatsoever.
If now or hereafter (a) Borrower shall be or become insolvent, and (b) the
Indebtedness shall not at all times until paid be fully secured by collateral
pledged by Borrower, Guarantor hereby forever waives and relinquishes in favor
of Lender and Borrower, and their respective successors, any claim or right to
payment Guarantor may now have or hereafter have or acquire against Borrower, by
subrogation or otherwise, so that at no time shall Guarantor be or become a
"creditor" of Borrower within the meaning of 11 U S C section 547(b), or any
successor provision of the Federal bankruptcy laws.
Guarantor also waives any and all rights or defenses arising by reason of (a)
any "one action" or "anti-deficiency" law or any other law which may prevent
Lender from bringing any action, including a claim for deficiency, against
Guarantor, before or after Lender's commencement or completion of any
foreclosure action, either judicially or by exercise of a power of sale; (b) any
election of remedies by Lender which destroys or otherwise adversely affects
Guarantor's subrogation rights or Guarantor's rights to proceed against Borrower
for reimbursement, including without limitation, any loss of rights Guarantor
may suffer by reason of any law limiting, qualifying, or discharging the
Indebtedness; (c) any disability or other defense of Borrower, of any other
guarantor, or of any other person, or by reason of the cessation of Borrower's
liability from any cause whatsoever, other than payment in full in legal tender,
of the Indebtedness; (d) any right to claim discharge of the Indebtedness on the
basis of unjustified impairment of any collateral for the Indebtedness; (e) any
statute of limitations, if at any time any action or suit brought by Lender
against Guarantor is commenced there is outstanding Indebtedness of Borrower to
Lender which is not barred by any applicable statute of limitations; or (f) any
defenses given to guarantors at law or in equity other than actual payment and
performance of the Indebtedness. If payment is made by Borrower whether
voluntarily or otherwise, or by any third party, on the Indebtedness and
thereafter Lender Is forced to remit the amount of that payment to Borrower's
trustee in bankruptcy or to any similar person under any federal or stab
bankruptcy law or law for the relief of debtors, the Indebtedness shall be
considered unpaid for the purpose of enforcement of this Guaranty.
Guarantor further waives and agrees not to assert or claim at any time any
deductions to the amount guaranteed under this Guaranty for any claim of setoff,
counterclaim, counter demand, recoupment or similar right, whether such claim,
demand or right may be asserted by the Borrower, the Guarantor, or both
<PAGE>
06-15-1995 COMMERCIAL GUARANTY Page 5
(CONTINUED)
================================================================================
GUARANTOR'S UNDERSTANDING WITH RESPECT TO WAIVERS. Guarantor warrants and agrees
that each of the waivers set forth above is made with Guarantor's full knowledge
of its significance and consequences and that, under the circumstances, the
waivers are reasonable and not contrary to public policy or law If any such
waiver is determined to be contrary to any applicable law or public policy, such
waiver shall be effective only to the extent permitted by law or public policy.
SUBORDINATION OF BORROWER'S DEBTS TO GUARANTOR. Guarantor agrees that the
Indebtedness of Borrower to Lender, whether now existing or hereafter created,
shall be prior to any claim that Guarantor may now have or hereafter acquire
against Borrower, whether or not Borrower becomes insolvent Guarantor hereby
expressly subordinates any claim Guarantor may have against Borrower, upon any
account whatsoever, to any claim that Lender may now or hereafter have against
Borrower. In the event of insolvency and consequent liquidation of the assets of
Borrower, through bankruptcy, by an assignment for the benefit of creditors, by
voluntary liquidation, or otherwise, the assets of Borrower applicable to the
payment of the claims of both Lender and Guarantor shall be paid to Lender and
shall be first applied by Lender to the Indebtedness of Borrower to Lender
Guarantor does hereby assign to Lender all claims which it may have or acquire
against Borrower or against any assignee or trustee in bankruptcy of Borrower;
provided however, hereafter evidencing any debts or obligations of Borrower to
Guarantor shall be marked with legend that the same are subject to this Guaranty
and shall be delivered to Lender. Guarantor agrees, and Lender hereby is
authorized, in the name of Guarantor, from time to time to execute and file
financing statements and continuation statements and to execute such other
documents and to take such other actions as Lender deems necessary or
appropriate to perfect, preserve and enforce its rights under this Guaranty.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Guaranty:
AMENDMENTS. This Guaranty, together with any Related Documents, constitutes the
entire understanding and agreement of the parties as to the matters set forth in
this Guaranty. No alteration of or amendment to this Guaranty shall be effective
unless given in writing and signed by the party or parties sought to be charged
or bound by the alteration or amendment.
APPLICABLE LAW. This Guaranty has been delivered to Lender and accepted by
Lender in the Stab of Delaware. This Guaranty shall be governed by and construed
in accordance with the laws of the Stab of Delaware.
ATTORNEYS' FEES; EXPENSES. Guarantor agrees to pay upon demand all of Lender's
costs and expenses, including reasonable attorneys' fees and Lender's legal
expenses, incurred in connection with the enforcement of this Guaranty. Lender
may pay someone eke to help enforce this Guaranty, and Guarantor shall pay the
costs and expenses of such enforcement. Costs and expenses include Lender's
reasonable attorneys' fees and legal expenses whether or not there is a lawsuit,
including reasonable attorneys' fees and legal expenses for bankruptcy
proceedings (and including efforts to modify or vacate any automatic stay or
injunction), appeals, and any
<PAGE>
06-15-1995 COMMERCIAL GUARANTY Page 6
(CONTINUED)
================================================================================
anticipated post-judgment collection services. Guarantor also shall pay all
court costs and such additional fees as may be directed by the court.
NOTICES. All notices required to be given by either party to the other under
this Guaranty shall be in writing and shall be effective when actually delivered
or when deposited with a nationally recognized overnight courier, or when
deposited in the United States mail, first class postage prepaid, addressed to
the party to whom the notice is to be given at the address shown above or to
such other addresses as either party may designate to the other in writing. If
there is more than one Guarantor, notice to any Guarantor will constitute notice
to all Guarantors. For notice purposes, Guarantor agrees to keep Lender informed
at all times of Guarantor's current address.
INTERPRETATION. In all cases where there is more than one Borrower or Guarantor,
then all words used in this Guaranty in the singular shall be deemed to have
been used in the plural where the context and construction so require; and where
there is more than one Borrower named in this Guaranty or when this Guaranty is
executed by more than one Guarantor, the words "Borrower" and "Guarantor"
respectively shall mean all and any one or more of them. The words "Guarantor,"
"Borrower," and "Lender" include the heirs, successors, assigns, and transferees
of each of them. Caption headings in this Guaranty are for convenience purposes
only and are not to be used to interpret or define the provisions of this
Guaranty. If a court of competent jurisdiction finds any provision of this
Guaranty to be invalid or unenforceable as to any person or circumstance, such
finding shall not render that provision invalid or unenforceable as to any other
persons or circumstances, and all provisions of this Guaranty in all other
respects shall remain valid and enforceable. If any one or more of Borrower or
Guarantor are corporations or partnerships, it is not necessary for Lender to
inquire into the powers of Borrower or Guarantor or of the officers, directors,
partners, or agents acting or purporting to act on their behalf, and any
Indebtedness made or a created in reliance upon the professed exercise of such
powers shall be guaranteed under this Guaranty.
WAIVER. Lender shall not be deemed to have waived any rights under this Guaranty
unless such waiver is given in writing and signed by Lender. No delay or
omission on the part of Lender in exercising any right shall operate as a waiver
of such right or any other right. A waiver by Lender of a provision of this
Guaranty shall not prejudice or constitute a waiver of Lender's right otherwise
to demand strict compliance with that provision or any other provision of this
Guaranty. No prior waiver by Lender, nor any course of dealing between Lender
and Guarantor, shall constitute a waiver of any of Lender's rights or of any of
Guarantor's obligations as to any future transactions. Whenever the consent of
Lender is required under this Guaranty, the granting of such consent by Lender
in any instance shall not constitute continuing consent to subsequent instances
where such consent is required and in all cases such consent may be granted or
withheld in the sole discretion of Lender.
LIMITATION ON GUARANTY. NOTWITHSTANDING ANY OTHER PROVISION OF THIS GUARANTY,
- -----------------------
THE LIABILITY OF GUARANTOR UNDER THIS GUARANTY SHALL NOT EXCEED THE AMOUNT WHICH
WOULD RENDER THIS GUARANTY UNENFORCEABLE, VOID OR VOIDABLE UNDER (S)548 OF THE
BANKRUPTCY CODE
<PAGE>
06-15-1995 COMMERCIAL GUARANTY Page 7
(CONTINUED)
================================================================================
OR BY APPLICATION OF ANY FRAUDULENT TRANSFER OR FRAUDULENT CONVEYANCE STATUTE.
IN THE EVENT THAT THE GUARANTOR SHALL CLAIM THAT THE AMOUNT OF ITS LIABILITY
HEREUNDER IS LESS THAN THE AMOUNT OF THE INDEBTEDNESS, THE BURDEN OF PROOF WITH
RESPECT TO THE AMOUNT OF SUCH LIABILITY SHALL REST WITH GUARANTOR IN LIGHT OF
THE FACT THAT THE INFORMATION CONCERNING AND CIRCUMSTANCES OF THE FINANCIAL
CONDITION OF SUCH GUARANTOR ARE MORE READILY AVAILABLE TO AND UNDER THE CONTROL
OF SUCH GUARANTOR.
WAIVER OF RIGHT TO TRIAL BY JURY. IN RECOGNITION OF THE HIGHER COSTS AND DELAY
- ---------------------------------
WHICH MAY RESULT FROM A JURY TRIAL, GUARANTOR AND LENDER WAIVE ANY RIGHT TO
TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (1) ARISING
HEREUNDER, OR (2) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE
DEALINGS OF THE PARTIES HERETO WITH RESPECT HERETO OR ANY OTHER INSTRUMENT,
DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH, IN EACH CASE
WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER SOUNDING IN CONTRACT OR
TORT OR OTHERWISE; AND EACH PARTY HEREBY AGREES AND CONSENTS THAT ANY SUCH
CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT
A JURY, AND THAT ANY PARTY HERETO MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF
THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES
HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY.
WAIVER AND SUBORDINATION. GUARANTOR IRREVOCABLY WAIVES, DISCLAIMS AND
- -------------------------
RELINQUISHES ALL CLAIMS AGAINST BORROWER WHICH GUARANTOR OTHERWISE HAS OR WOULD
HAVE BY VIRTUE OF HAVING EXECUTED THIS GUARANTY, SPECIFICALLY INCLUDING BUT NOT
LIMITED TO ALL RIGHTS OF INDEMNITY, CONTRIBUTION OR EXONERATION. IN THE EVENT OF
THE PAYMENT BY GUARANTOR TO LENDER OF ANY AMOUNT WHATSOEVER AND THE RESULTANT
SUBROGATION OF GUARANTOR TO THE RIGHTS OF LENDER BY REASON OF SUCH PAYMENT, THE
AMOUNT OF THE REMAINING INDEBTEDNESS OF BORROWER TO LENDER AFTER THE PAYMENTS BY
GUARANTOR PURSUANT TO THIS GUARANTY SHALL HAVE PRIORITY OVER ANY CLAIM THAT
GUARANTOR MAY HAVE AGAINST BORROWER, WHETHER OR NOT BORROWER IS AT SUCH TIME OR
THEREAFTER BECOMES INSOLVENT. GUARANTOR FURTHER EXPRESSLY SUBORDINATES ANY CLAIM
AGAINST BORROWER UPON ANY ACCOUNT WHATSOEVER TO ANY CLAIM THAT LENDER MAY HAVE
AGAINST BORROWER AT ANY TIME AND FOR ANY REASON.
EACH UNDERSIGNED GUARANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS
GUARANTY AND AGREES TO ITS TERMS. IN ADDITION, EACH GUARANTOR UNDERSTANDS THAT
THIS GUARANTY IS EFFECTIVE UPON GUARANTOR'S EXECUTION AND DELIVERY OF THIS
GUARANTY TO LENDER AND THAT THE GUARANTY WILL CONTINUE UNTIL TERMINATED IN THE
MANNER SET FORTH IN THE SECTION TITLED "DURATION OF
<PAGE>
06-15-1995 COMMERCIAL GUARANTY Page 8
(CONTINUED)
================================================================================
GUARANTY." NO FORMAL ACCEPTANCE BY LENDER IS NECESSARY TO MAKE THIS GUARANTY
EFFECTIVE. THIS GUARANTY IS DATED JUNE 23, 1996.
GUARANTOR:
PULSAR DATA SYSTEMS, INC.
BY: /S/ WILLIAM W. DAVIS (SEAL)
-----------------------------
WILLIAM W. DAVIS, SR., PRESIDENT/CEO
BY: /S/ LILLIAN DAVIS (SEAL)
-----------------------------
LILLIAN A. DAVIS, EXECUTIVE VICE PRESIDENT
====================================================================
<PAGE>
EXHIBIT 10.5
WILMINGTON TRUST
BUSINESS LOAN AGREEMENT
<TABLE>
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials
$22,000,000.00 07-24-1995 10 0777 938
- ---------------------------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Borrower: PULSAR DATA SYSTEMS, INC. Lender: WILMINGTON TRUST COMPANY
5000 PHILADELPHIA WAY SUITE H C/L WH MAJOR
LANHAM, MD 20706 RODNEY SQUARE NORTH
1100 NORTH MARKET STREET
WILMINGTON, DE 19890
================================================================================
THIS BUSINESS LOAN AGREEMENT between PULSAR DATA SYSTEMS, INC. ("Borrower") and
WILMINGTON TRUST COMPANY ("Lender") is made and executed on the following terms
and conditions. Borrower has received prior commercial loans from Lender or has
applied to Lender for a commercial loan or loans and other financial
accommodations, including those which may be described on any exhibit or
schedule attached to this Agreement. All such loans and financial
accommodations, together with all future loans and financial accommodations from
Lender to Borrower, are referred to in this Agreement individually as the "Loan"
and collectively as the "Loans." Borrower understands and agrees that: (a) in
granting, renewing, or extending any Loan, Lender is relying upon Borrower's
representations, warranties and agreements, as set forth in this Agreement; (b)
the granting, renewing, or extending of any Loan by Lender at all times shall be
subject to Lender's sole judgment and discretion; and (c) all such Loans shall
be and shall remain subject to the following terms and conditions of this
Agreement.
TERM. This Agreement shall be effective as of July 24, 1995, and shall continue
thereafter until all Indebtedness of Borrower to Lender has been performed in
full and the parties terminate this Agreement in writing.
DEFINITIONS. The following words shall have the following meanings when used in
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All
references to dollar amounts shall mean amounts in lawful money of the United
States of America.
AGREEMENT. The word "Agreement" means this Business Loan Agreement, as
this Business Loan Agreement may be amended or modified from time to time,
together with all exhibits and schedules attached to this Business Loan
Agreement from time to time.
BORROWER. The word "Borrower" means PULSAR DATA SYSTEMS, INC. The word
"Borrower" also includes, as applicable, all subsidiaries and affiliates of
Borrower as provided below in the paragraph titled "Subsidiaries and
Affiliates."
<PAGE>
07-24-1995 BUSINESS LOAN AGREEMENT Page 2
(Continued)
CERCLA. The word "CERCLA" means the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended.
COLLATERAL. The word "Collateral" means and includes without limitation
all property and assets granted as collateral security for a Loan, whether
real or personal property, whether granted directly or indirectly, whether
granted now or in the future, and whether granted in the form of a security
interest, mortgage, deed of trust, assignment, pledge, chattel mortgage,
chattel trust, factor's lien, equipment trust, conditional sale, trust
receipt, lien, charge, lien or title retention contract, lease or
consignment intended as a security device, or any other security or lien
interest whatsoever, whether created by law, contract, or otherwise.
ERISA. The word "ERISA" means the Employee Retirement Income Security Act
of 1974, as amended/
EVENT OF DEFAULT. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below in the section
titled "EVENTS OF DEFAULT."
GRANTOR. The word "Grantor' means and includes without limitation each and
all of the persons or entities granting a Security Interest in any
Collateral for the Indebtedness, including without limitation all Borrowers
granting such a Security Interest.
GUARANTOR. The word "Guarantor" means and includes without limitation each
and all of the guarantors, sureties, and accommodation parties in
connection with any Indebtedness.
INDEBTEDNESS. The word "Indebtedness" means and includes without
limitation all Loans, together with all other obligations, debts and
liabilities of Borrower to Lender, or any one or more of them, as well as
all claims by Lender against Borrower, or any one or more of them; whether
now or hereafter existing, voluntary or involuntary, due or not due,
absolute or contingent, liquidated or unliquidated; whether Borrower may be
liable individually or jointly with others; whether Borrower may be
obligated as a guarantor, surety, or otherwise; whether recovery upon such
Indebtedness may be or hereafter may become barred by any statute of
limitations; and whether such Indebtedness may be or hereafter may become
otherwise unenforceable.
LENDER. The word "Lender" means WILMINGTON TRUST COMPANY, its successors
and assigns.
LOAN. The word "Loan" means and includes without limitation any and all
commercial loans and financial accommodations from Lender to Borrower,
whether now or hereafter existing, and however evidenced, including without
limitation those loans and financial
<PAGE>
07-24-1995 BUSINESS LOAN AGREEMENT Page 3
(Continued)
accommodations described herein or described on any exhibit or schedule
attached to this Agreement from time to time.
NOTE. The word "Note" means and includes without limitation Borrower's
promissory note or notes, in any, evidencing Borrower's Loan obligations in
favor of Lender, as well as any substitute, replacement or refinancing note
or notes therefor.
PERMITTED LIENS. The words "Permitted Liens" mean: (a) liens and security
interests securing indebtedness owned by Borrower to Lender; (b) liens for
taxes, assessments, or similar charges either not yet due or being
contested in good faith; (c) liens of materialmen, mechanics, warehousemen,
or carriers, or other like liens arising in the ordinary course of business
and security obligations which are not yet delinquent; (d) purchase money
liens or purchase money security interests upon or in any property acquired
or held by Borrower in the ordinary course of business to secure
indebtedness outstanding on the date of this Agreement or permitted to be
incurred under the paragraph of this Agreement titled "Indebtedness and
Liens"; (e) liens and security interests which, as of the date of this
Agreement, have been disclosed to and approved by the Lender in writing;
and (f) those liens and security interests which in the aggregate
constitute an immaterial and insignificant monetary amount with respect to
the net value of Borrower's assets.
RELATED DOCUMENTS. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages, deeds
of trust, and all other instruments, agreements and documents, whether now
or hereafter existing, executed in connection with the indebtedness.
SECURITY AGREEMENT. The words "Security Agreement" mean and include
without limitation any agreements, promises, covenants, arrangements,
understandings or other agreements, whether created by law, contract, or
otherwise, evidencing, governing, representing, or creating a Security
Interest.
SECURITY INTEREST. The words "Security Interest" mean and include without
limitation any type of collateral security, whether in the form of a lien,
charge, mortgage, deed of trust, assignment, pledge, chattel mortgage,
chattel trust, factor's lien, equipment trust, conditional sale, trust
receipt, lien or title retention contract, lease or consignment intended as
a security device, or any other security or lien interest whatsoever,
whether created by law, contract, or otherwise.
SARA. The word "SARA" means the Superfund Amendments and Reauthorization
Act of 1996 as now or hereafter amended.
<PAGE>
07-24-1995 BUSINESS LOAN AGREEMENT Page 4
(Continued)
CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make the initial
Loan Advance and each subsequent Loan Advance under this Agreement shall be
subject to the fulfillment to Lender's satisfaction of all of the conditions set
forth in this Agreement and in the Related Documents.
LOAN DOCUMENTS. Borrower shall provide to Lender in form satisfactory to
Lender the following documents for the Loan: (a) the Note; (b) Security
Agreements granting to Lender security interests in the Collateral; (c)
Financing Statements perfecting Lender's Security Interests; (d) evidence
of insurance as required below; and (e) any other documents required under
this Agreement or by Lender or its counsel, including without limitation
any guaranties described below.
BORROWER'S AUTHORIZATION. Borrower shall have provided in form and
substance satisfactory to Lender properly certified resolutions, duly
authorizing the execution and delivery of this Agreement, the Note and the
Related Documents, and such other authorizations and other documents and
instruments as Lender or its counsel, in their sole discretion, may
require.
PAYMENT OF FEES AND EXPENSES. Borrower shall have paid to Lender all fees,
charges, and other expenses which are then due and payable as specified in
this Agreement or any Related Document.
REPRESENTATIONS AND WARRANTIES. The representations and warranties set
forth in this Agreement, in the Related Documents, and in any document or
certificate delivered to Lender under this Agreement are true and correct.
NO EVENT OF DEFAULT. There shall not exist at the time of any advance a
condition which would constitute an Event of Default under this Agreement.
REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as
of the date of this Agreement, as of the date of each disbursement of Loan
proceeds, as of the date of any renewal, extension or modification of any Loan,
and at all times any indebtedness exists:
ORGANIZATION. Borrower is a corporation which is duly organized, validly
existing, and in good standing under the laws of the State of Delaware and
is validly existing and in good standing in all states in which Borrower is
doing business. Borrower has the full power and authority to own its
properties and to transact the businesses in which it is presently engaged
or presently proposes to engage. Borrower also is duly qualified as a
foreign corporation and is in good standing in all states in which the
failure to so qualify would have a material adverse effect on its
businesses or financial condition.
<PAGE>
07-24-1995 BUSINESS LOAN AGREEMENT Page 5
(Continued)
AUTHORIZATION. The execution, delivery, and performance of this Agreement
and all Related Documents by Borrower, to the extent to be executed,
delivered or performed by Borrower, have been duly authorized by all
necessary action by Borrower; do not require the consent or approval of any
other person, regulatory authority or governmental body; and do not
conflict with, result in a violation of, or constitute a default under (a)
any provision of its articles of incorporation or organization, or bylaws,
or any agreement or other instrument binding upon Borrower or (b) any law,
governmental regulation, court decree, or order applicable to Borrower.
FINANCIAL INFORMATION. Each financial statement of Borrower supplied to
Lender truly and completely disclosed Borrower's financial condition as of
the date of the statement, and there has been no material adverse change in
Borrower's financial condition subsequent to the date of the most recent
financial statement supplied to Lender. Borrower has no material
contingent obligations except as disclosed in such financial statements.
LEGAL EFFECT. This Agreement constitutes, and any instrument or agreement
required hereunder to be given by Borrower when delivered will constitute,
legal, valid and binding obligations of Borrower enforceable against
Borrower in accordance with their respective terms.
PROPERTIES. Except as contemplated by this Agreement or as previously
disclosed in Borrower's financial statements or in writing to Lender and as
accepted by Lender, and except for property tax liens for taxes no
presently due and payable, Borrower owns and has good title to all of
Borrower's properties free and clear of all Security Interests, and has not
executed any security documents or financing statements relating to such
properties. All of Borrower's properties are titled tin Borrower's legal
name, and Borrower has not used, or filed a financing statement under, any
other name for at least the last five (5) years.
HAZARDOUS SUBSTANCES. The term "hazardous waste," "hazardous substance,"
"disposal," "release," and "threatened release," as used in this Agreement,
shall have the same meanings as set forth in the "CERCLA," "SARA," the
Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq.,
the Resource Conservation and Recovery Act, 49 U.S.C. Section 69801, et
seq., or other applicable state or Federal laws, rules or regulations
adopted pursuant to any of the foregoing. Except as disclosed to and
acknowledged by Lender in writing, Borrower represents and warrants that:
(a) During the period of Borrower's ownership of the properties, there has
been no use, generation, manufacture, storage, treatment, disposal,
release, or threatened release of any hazardous waste or substance on,
under, about or from the properties by any prior owners or occupants of any
of the properties, or (ii) any actual or threatened litigation or claims of
any kind by any person relating to such matters. (C) Neither Borrower nor
any tenant, contractor, agent or other authorized user of any of the
properties shall use, generate, manufacture, store, treat, dispose of, or
release any
<PAGE>
07-24-1995 BUSINESS LOAN AGREEMENT Page 6
(Continued)
hazardous waste or substance on, about or from any of the properties; and
any such activity shall be conducted in compliance with all applicable
federal, state, and local laws, regulations, and ordinances, including
without limitation those laws, regulations and ordinances described above.
Borrower authorizes Lender and its agents to enter upon the properties to
make such inspections and tests as Lender may deem appropriate to determine
compliance of the properties with this section of the Agreement. Any
inspections or tests made by Lender shall be at Borrower's expense and for
Lender's purposes only and shall not be construed to create any
responsibility or liability on the part of Lender to Borrower or to any
other person. The representations and warranties contained herein are based
on Borrower's due diligence in investigating the properties for hazardous
waste and hazardous substances. Borrower hereby (a) releases and waives any
future claims against Lender for indemnity or contribution in the event
Borrower becomes liable for cleanup or other costs under any such laws, and
(b) agrees to indemnify and hold harmless Lender against any and all
claims, losses, liabilities, damages, penalties, and expenses which Lender
may directly or indirectly sustain or suffer resulting from a breach of
this section of the Agreement or as a consequence of any use, generation,
manufacture, storage, disposal, release or threatened release occurring
prior to Borrower's ownership or interest in the properties, whether or not
the same was or should have been known to Borrower. The provisions of this
section of the Agreement, including the obligation to indemnify, shall
survive the payment of the indebtedness and the termination or expiration
of this Agreement and shall not be affected by Lender's acquisition of any
interest in any of the properties, whether by foreclosure or otherwise.
LITIGATION AND CLAIMS. No litigation, claim, investigation, administrative
proceeding or similar action (including those for unpaid taxes) against
Borrower is pending or threatened, and no other event has occurred which
may materially adversely affect Borrower's financial condition or
properties, other than litigation, claims, or other events, if any, that
have been disclosed to and acknowledged by Lender in writing.
TAXES. To the best of Borrower's knowledge, all tax returns and reports of
Borrower that are or were required to be filed, have been filed, and all
taxes, assessments and other governmental charges have been paid in full,
except those presently being or to be contested by Borrower in good faith
in the ordinary course of business and for which adequate reserves have
been provided.
LIEN PRIORITY. Unless otherwise previously disclosed to Lender in writing,
Borrower has not entered into or granted any Security Agreements, or
permitted the filing or attachment of any Security Interests on or
affecting any of the Collateral directly or indirectly securing repayment
of Borrower's Loan and Note, that would be prior or that may in any way be
superior to Lender's Security Interests and rights in and to such
Collateral.
<PAGE>
07-24-1995 BUSINESS LOAN AGREEMENT Page 7
(Continued)
BINDING EFFECT. This Agreement, the Note, all Security Agreements directly
or indirectly securing repayment of Borrower's Loan and Note and all of the
Related Documents are binding upon Borrower as well as upon Borrower's
successors, representatives and assigns, and are legally enforceable in
accordance with their respective terms.
COMMERCIAL PURPOSES. Borrower intends to use the Loan proceeds solely for
business or commercial related purposes.
EMPLOYEE BENEFIT PLANS. Each employee benefit plan as to which Borrower
may have any liability complies in all material respects with all
applicable requirements of law and regulations, and (i) no Reportable Event
nor Prohibited Transaction (as defined in ERISA) has occurred with respect
to any such plan, (ii) Borrower has not withdrawn from any such plan or
initiated plan or initiated steps to do so, and (iii) no steps have bene
taken to terminate any such plan.
LOCATION OF BORROWER'S OFFICES AND RECORDS. Borrower's place of business,
or Borrower's Chief executive office, if Borrower has more than one place
of business, is located at 5000 PHILADELPHIA WAY SUITE H, LANHAM, MD 20706.
Unless Borrower has designated otherwise in writing this location is also
the office or offices where Borrower keeps its records concerning the
Collateral.
INFORMATION. All information heretofore or contemporaneously herewith
furnished by Borrower to Lender for the purposes of or in connection with
this Agreement or any transaction contemplated hereby is, and all
information hereafter furnished by or on behalf of Borrower to Lender will
be, true and accurate in every material respect on the date as of which
such information is dated or certified; and none of such information is or
will be incomplete by omitting to state any material fact necessary to make
such information not misleading.
SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Borrower understands and
agrees that Lender, without independent investigation, is relying upon the
above representations and warranties in extending Loan Advances to
Borrower. Borrower further agrees that the foregoing representations and
warranties shall be continuing in nature and shall remain in full force and
effect until such time as Borrower's Indebtedness shall be paid in full, or
until this Agreement shall be terminated in the manner provided above,
whichever is the last to occur.
AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while
this Agreement is in effect, Borrower will:
<PAGE>
07-24-1995 BUSINESS LOAN AGREEMENT Page 8
(Continued)
LITIGATION. Promptly inform Lender in writing of (a) all material adverse
changes in Borrower's financial condition, and (b) all existing and all
threatened litigation, claims, investigations, administrative proceedings
or similar actions affecting Borrower or any Guarantor which would
materially affect the financial condition of Borrower or the financial
condition of any Guarantor.
FINANCIAL RECORDS. Maintain its books and records in accordance with
generally accepted accounting principles, applied on a consistent basis,
and permit Lender to examine and audit Borrower's books and records at all
reasonable times.
FINANCIAL STATEMENTS. Furnish Lender with, as soon as available, but in no
event later than ninety (90) days after the end of each fiscal year,
Borrower's balance sheet and income statement for the year ended, audited
by a certified public accountant satisfactory to Lender. All financial
reports required to be provided under this Agreement shall be prepared in
accordance with generally accepted accounting principles, applied on a
consistent basis, and certified by Borrower as being true and correct.
ADDITIONAL INFORMATION. Furnish such additional information and
statements, lists of assets and liabilities, agings of receivables and
payables, inventory schedules, budgets, forecasts, tax returns, and other
reports with respect to Borrower's financial condition and business
operations as Lender may request from time to time.
INSURANCE. Maintain fire and other risk insurance, public liability
insurance, and such other insurance as Lender may require with respect to
Borrower's properties and operations, in form, amounts, coverages and with
insurance companies reasonably acceptable to Lender. Borrower, upon request
of Lender, will deliver to Lender from time to time the policies or
certificates of insurance in form satisfactory to Lender, including
stipulations that coverages will not be cancelled or diminished without at
least twenty (20) days' prior written notice to Lender. Each insurance
policy also shall include an endorsement providing that coverage in favor
of Lender will not be impaired in any way by any act, omission or default
of Borrower or any other person. In connection with all policies covering
assets in which Lender holds or is offered a security interest for the
Loans, Borrower will provide lender with such loss payable or other
endorsements as Lender may require.
INSURANCE REPORTS. Furnish to Lender, upon request of Lender, reports on
each existing insurance policy showing such information as Lender may
reasonably request, including without limitation the following: (a) the
name of the insurer; (b) the risks insured; (c) the amount of the policy;
(d) the properties insured; (e) the then current property values on the
basis of which insurance has been obtained, and the manner of determining
those values; and (f) the expiration date of the policy. In addition, upon
request of Lender (however not more often than annually), Borrower will
have an independent appraiser satisfactory to Lender
<PAGE>
07-24-1995 BUSINESS LOAN AGREEMENT Page 9
(Continued)
determine, as applicable, the actual cash value or replacement cost of any
Collateral. The cost of such appraisal shall be paid by Borrower.
GUARANTIES. Prior to disbursement of any Loan proceeds, furnish executed
guaranties of the Loans in favor of Lender, on Lender's forms, and in the
amounts and by the guarantors named below:
Guarantors Amounts
---------- -------
WILLIAM W. DAVIS, SR. $22,000,000.00
LILLIAN A DAVIS $22,000,000.00
OTHER AGREEMENTS. Comply with all terms and conditions of all other
agreements, whether now or hereafter existing, between Borrower and any
other party and notify Lender immediately in writing of any default in
connection with any other such agreements.
LOAN PROCEEDS. Use all Loan proceeds solely for Borrower's business
operations, unless specifically consented to the contrary by Lender in
writing.
TAXES, CHARGES AND LIENS. Pay and discharge when due all of its
indebtedness and obligations, including without limitation all assessments,
taxes, governmental charges, levies and liens, of every kind and nature,
imposed upon Borrower or its properties, income, or profits, prior to the
date on which penalties would attach, and all lawful claims that, if
unpaid, might become a lien or charge upon any of Borrower's properties,
income, or profits. Provided however, Borrower will not be required to pay
and discharge any such assessment, tax, charge, levy, lien or claim so long
as (a) the legality of the same shall be contested in good faith by
appropriate proceedings, and (b) Borrower shall have established on its
books adequate reserves with respect to such contested assessment, tax,
charge, levy, lien, or claim in accordance with generally accepted
accounting practices. Borrower, upon demand of Lender, will furnish to
Lender evidence of payment of the assessments, taxes, charges, levies,
liens and claims and will authorize the appropriate governmental official
to deliver to Lender at any time a written statement of any assessments,
taxes, charges, levies, liens and claims against Borrower's properties,
income or profits.
PERFORMANCE. Perform and comply with all terms, conditions, and provisions
set forth in this Agreement and in the Related Documents in a timely
manner, and promptly notify Lender if Borrower learns of the occurrence of
any event which constitutes an Event of Default under this Agreement or
under any of the Related Documents.
OPERATIONS. Maintain executive and management personnel with substantially
the same qualifications and experience as the present executive and
management personnel; provide written notice to Lender of any change in
executive and management personnel; conduct its
<PAGE>
07-24-1995 BUSINESS LOAN AGREEMENT Page 10
(Continued)
business affairs in a reasonable and prudent manner and in compliance with
all applicable federal, state and municipal laws, ordinances, rules and
regulations respecting its properties, charters, businesses and operations,
including without limitation, compliance with the American With
Disabilities Act and will all minimum funding standards and other
requirements of ERISA and other laws applicable to Borrower's employee
benefit plans.
INSPECTION. Permit employees or agents of Lender at any reasonable time to
inspect any and all Collateral for the Loan or Loans and Borrower's other
properties and to examine or audit Borrower's books, accounts, and records
and to make copies and memoranda of Borrower's books, accounts, and
records. If Borrower now or at any time hereafter maintains any records
(including without limitation computer generated records and computer
software programs for the generation of such records) in the possession of
a third party, Borrower, upon request of Lender, shall notify such party to
permit Lender free access to such records at all reasonable times and to
provide Lender with copies of any records it may request, all at Borrower's
expense.
COMPLIANCE CERTIFICATE. Unless waived in writing by Lender, provide Lender
at least annually and at all the time of each disbursement of Loan proceeds
with a certificate executed by Borrower's chief financial officer, or other
officer or person acceptable to Lender, certifying that the representations
and warranties set forth in this Agreement are true and correct as of the
date of the certificate and further certifying that, as of the date of the
certificate, no Event of Default exists under this Agreement.
ENVIRONMENTAL COMPLIANCE AND REPORTS. Borrower shall comply in all
respects with all environmental protection federal, state and local laws,
statutes, regulations and ordinances; not cause or permit to exist, as a
result of an intentional or unintentional action or omission on its part or
on the part of any third party, on property owned and/or occupied by
Borrower, any environmental activity where damage may result to the
environment, unless such environmental activity is pursuant to an din
compliance with the conditions of a permit issued by the appropriate
federal, state or local governmental authorities; shall furnish to Lender
promptly and in any event within thirty (30) days after receipt thereof a
copy of any notice, summons, lien, citation, directive, letter or other
communication from any governmental agency or instrumentality concerning
any intentional or unintentional action or omission on Borrower's part in
connection with any environmental activity whether or not there is damage
to the environment and/or other natural resources.
ADDITIONAL ASSURANCES. Make, execute and deliver to Lender such promissory
notes, mortgages, deeds of trust, security agreements, financing
statements, instruments, documents and other agreements as Lender or its
attorneys may reasonably request to evidence and secure the Loans and to
perfect all Security Interests.
<PAGE>
07-24-1995 BUSINESS LOAN AGREEMENT Page 11
(Continued)
RECOVERY OF ADDITIONAL COSTS. If the imposition of or any change in any law,
rule, regulation or guideline, or the interpretation or application of any
thereof by any court or administrative or governmental authority (including any
request or policy not having the force of law) shall impose, modify or make
applicable any taxes (except U.S. federal, state or local income or franchise
taxes imposed on Lender), reserve requirements, capital adequacy requirements or
other obligations which would (a) increase the cost to Lender for extending or
maintaining the credit facilities to which this Agreement relates, (b) reduce
the amounts payable to Lender under this Agreement or the Related Documents, or
(c) reduce the rate of return on Lender's capital as a consequence of Lender's
obligations with respect to the credit facilities to which this Agreement
relates, then Borrower agrees to pay Lender such additional amounts as will
compensate Lender therefor, within five (5) days after Lender's written demand
for such payment, which demand shall be accompanied by an explanation of such
imposition or charge and a calculation in reasonable detail of the additional
amounts payable by Borrower, which explanation and calculations shall be
conclusive in the absence of manifest error.
NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this
Agreement is in effect, Borrower shall not, without the prior written consent of
Lender:
INDEBTEDNESS AND LIENS. (a) Except for trade debt incurred in the normal
course of business and indebtedness to Lender contemplated by this
Agreement, create, incur or assume indebtedness for borrowed money,
including capital leases, (b) except as allowed as a Permitted Lien, sell,
transfer, mortgage, assign, pledge, lease, grant a security interest in, or
encumber any of Borrower's assets, or (c) sell with recourse any of
Borrower's accounts, except to Lender.
CONTINUITY OF OPERATIONS. (a) Engage in any business activities
substantially different than those in which Borrower is presently engaged,
(b) cease operations, liquidate, merge, transfer, acquire or consolidate
with any other entity, change ownership, change its name, dissolve or
transfer or sell Collateral out of the ordinary course of business, (c) pay
any dividends on Borrower's stock (other than dividends payable in its
stock), provided, however that notwithstanding the foregoing, but only so
long as no Event of Default has occurred and is continuing or would result
from the payment of dividends, if Borrower is a "Subchapter S Corporation"
(as defined in the Internal Revenue Code of 1966, as amended), Borrower may
pay cash dividends on its stock to its shareholders from time to time in
amounts necessary to enable the shareholders to pay income taxes and make
estimated income tax payments to satisfy their liabilities under federal
and state law which arise solely from their status as Shareholders of a
Subchapter S Corporation because of their ownership of shares of stock of
Borrower, or (d) purchase or retire any of Borrower's outstanding shares or
alter or amend Borrower's capital structure.
<PAGE>
07-24-1995 BUSINESS LOAN AGREEMENT Page 12
(Continued)
LOANS, ACQUISITIONS AND GUARANTIES. (a) Loan, invest in or advance money
or assets, (b) purchase, create or acquire any interest in any other
enterprise or entity, or (c) incur any obligation as surety or guarantor
other than in the ordinary course of business.
CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to
Borrower, whether under this Agreement or under any other agreement, Lender
shall have no obligation to make Loan Advances or to disburse Loan [REST OF
PARAGRAPH ILLEGIBLE].
EVENT OF DEFAULT. [PARAGRAPH ILLEGIBLE].
ILLEGIBLE.
OTHER DEFAULTS. Failure of Borrower or any Grantor to comply with or to
perform when due any other term, obligation, covenant or condition
contained in this Agreement or in any of the Related Documents, or failure
of Borrower to comply with or to perform any other term, obligation,
covenant or condition contained in any other agreement between Lender and
Borrower.
DEFAULT IN FAVOR OF THIRD PARTIES. Should Borrower or any Grantor default
under any loan, extension of credit, security agreement, purchase or sales
agreement, or any other agreement, in favor of any other creditor or person
that may materially affect any of Borrower's property or Borrowers' or any
Grantor's ability to repay the Loans or perform their respective
obligations under this Agreement or any of the Related Documents.
FALSE STATEMENTS. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Borrower or any Grantor under this
Agreement or the Related Documents is false or misleading in any material
respect at the time made or furnished, or becomes false or misleading at
any time thereafter.
DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related
Documents ceases to be in full force and effect (including failure of any
Security Agreement to create a valid and perfected Security Interest) at
any time or for any reason.
INSOLVENCY. The dissolution or termination of Borrower's existence as a
going business, the insolvency of Borrower, the appointment of a receiver
for any part of Borrower's property, any assignment for the benefit of
creditors, any time of creditor workout, or the commencement of any
proceeding under any bankruptcy or insolvency laws by or against Borrower.
CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method,
<PAGE>
07-24-1995 BUSINESS LOAN AGREEMENT Page 13
(Continued)
by any creditor of Borrower, any creditor of any Grantor against any
collateral securing the indebtedness, or by any governmental agency. This
includes a garnishment, attachment, or levy on or of any of Borrower's
deposit accounts with Lender.
EVENTS AFFECTING GUARANTOR. Any of the proceeding events occurs with
respect to any Guarantor of any of the indebtedness or any Guarantor dies
or becomes incompetent, or revokes or disputes the validity of, or
liability under, any Guaranty of the indebtedness.
CHANGE IN OWNERSHIP. Any change in ownership of twenty-five percent (25%)
or more of the common stock of Borrower.
ADVERSE CHANGE. A material adverse change occurs in Borrower's financial
condition, or Lender believes the prospect of payment or performance of the
indebtedness is impaired.
EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except
where otherwise provided in this Agreement or the Related Documents, all
commitments and obligations of Lender under this Agreement or the Related
Documents or any other agreement immediately will terminate (including any
obligation to make Loan Advances or disbursements), and, at Lender's option, all
indebtedness immediately will become due and payable, all without notice of any
kind to Borrower, except that in the case of an Event of Default of the type
described in the "Insolvency" subsection above, such acceleration shall be
automatic and not optional. In addition, Lender shall have all the rights and
remedies provided in the Related Documents or available at law, in equity, or
otherwise. Except as may be prohibited by applicable law, all of Lender's
rights and remedies shall be cumulative and may be exercised singularly or
concurrently. Election by Lender to pursue any remedy shall not exclude pursuit
of any other remedy, and an election to make expenditures or to take action to
perform an obligation of Borrower or of any Grantor shall not affect Lender's
right to declare a default and to exercise its rights and remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement.
AMENDMENTS. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to the
matters set forth in this Agreement. No alteration of or amendment to this
Agreement shall be effective unless given in writing and signed by the
party or parties sought to be charged or bound by the alteration or
amendment.
APPLICABLE LAW. This Agreement has been delivered to Lender and accepted
by Lender in the State of Delaware. If there is a lawsuit, Borrower agrees
upon Lender's request to submit to the jurisdiction of the courts of NEW
CASTLE County, the State of Delaware. Lender and Borrower hereby waive the
right to any jury trial in any action, proceeding, or
<PAGE>
07-24-1995 BUSINESS LOAN AGREEMENT Page 14
(Continued)
counterclaim brought by either Lender or Borrower against the other. This
Agreement shall be governed by and construed in accordance with the laws of
the State of Delaware.
CAPTION HEADINGS. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the provisions
of this Agreement.
MULTIPLE PARTIES; CORPORATE AUTHORITY. All obligations of Borrower under
this Agreement shall be joint and several, and all references to Borrower
shall mean each and every Borrower. This means that each of the Borrowers
signing below is responsible for all obligations of this Agreement.
CONSENT TO LOAN PARTICIPATION. Borrower agrees and consents to Lender's
sale or transfer, whether now or later, of one or more participation
interests in the Loans to one or more purchasers, whether related or
unrelated to Lender. Lender may provide, without any limitation
whatsoever, to any one or more purchasers, or potential purchasers, any
information or knowledge Lender may have about Borrower or about any other
matter relating to the Loan, and Borrower hereby waives any rights to
privacy it may have with respect to such matters. Borrower additionally
waives any and all notices of sale of participation interests, as well as
all notices of any repurchase of such participation interests. Borrower
also agrees that the purchasers of any such participation interests will be
considered as the absolute owners of such interests in the Loans and will
have all the rights granted under the participation agreement or agreements
governing the sale of such participation interests. Borrower further
waives all rights of offset or counterclaim that it may have now or later
against Lender or against any purchaser of such participation interest and
unconditionally agrees that either Lender or such purchaser may enforce
Borrower's obligation under the Loans irrespective of the failure or
insolvency of any holder of any interest in the Loans. Borrower further
agrees that the purchaser of any such participation interests may enforce
its interests irrespective of any personal claims or defenses that Borrower
may have against Lender.
COSTS AND EXPENSES. Borrower agrees to pay upon demand all of Lender's
expenses, including without limitation reasonable attorneys' fees, incurred
in connection with the preparation, execution, enforcement, modification
and collection of this Agreement or in connection with the Loans made
pursuant to this Agreement. Lender may pay someone else to help collect
the Loans and to enforce this Agreement, and Borrower will pay that amount.
This includes, subject to any limits under applicable law, Lender's
reasonable attorneys' fees and Lender's legal expenses, whether or not
there is a lawsuit, including reasonable attorneys' fees for bankruptcy
proceedings (including efforts to modify or vacate any automatic stay or
injunction), appeals, and any anticipated post-judgment collection
services. Borrower also will pay any court costs, in addition to all other
sums provided by law.
<PAGE>
07-24-1995 BUSINESS LOAN AGREEMENT Page 15
(Continued)
NOTICES. All notices required to be given under this Agreement shall be
given in writing, may be sent by telefacsimille, and shall be effective
when actually delivered or when deposited with a nationally recognized
overnight courier or deposited in the United States mail, first class,
postage prepaid, addressed to the party to whom the notice is to be given
at the address shown above. Any party may change its address for notices
under this Agreement by giving formal written notice to the other parties,
specifying that the purpose of the notice is to change the party's address.
To the extent permitted by applicable law, if there is more than one
Borrower, notice to any Borrower will constitute notice to all Borrowers.
For notice purposes, Borrower agrees to keep Lender informed at all times
of Borrower's current address(es).
SEVERABILITY. If a court of competent jurisdiction finds any provision of
this Agreement to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible, any
such offending provision shall be deemed to be modified to be within the
limits of enforceability or validity; however, if the offending provision
cannot be so modified, it shall be stricken and all other provisions of
this Agreement in all other respects shall remain valid and enforceable.
SUBSIDIARIES AND AFFILIATES OF BORROWER. To the extent the context of any
provisions of this Agreement makes it appropriate, including without
limitation any representation, warranty or covenant, the word "Borrower" as
used herein shall include all subsidiaries and affiliates of Borrower.
Notwithstanding the foregoing however, under no circumstances shall this
Agreement be construed to require Lender to make any Loan or other
financial accommodation to any subsidiary or affiliate of Borrower.
SUCCESSORS AND ASSIGNS. All covenants and agreements contained by or on
behalf of Borrower shall bind its successors and assigns and shall inure to
the benefit of Lender, its successors and assigns. Borrower shall not,
however, have the right to assign its rights under this Agreement or any
interest therein, without the prior written consent of Lender.
SURVIVAL. All warranties, representations, and covenants made by Borrower
in this Agreement or in any certificate or other instrument delivered by
Borrower to Lender under this Agreement shall be considered to have been
relied upon by Lender and will survive the making of the Loan and delivery
to Lender of the Related Documents, regardless of any investigation made by
Lender or on Lender's behalf.
TIME IS OF THE ESSENCE. Time is of the essence in the performance of this
Agreement.
WAIVER. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender. No
delay or omission on the part of
<PAGE>
07-24-1995 BUSINESS LOAN AGREEMENT Page 16
(Continued)
Lender in exercising any right shall operate as a waiver of such right or
any other right. A waiver by Lender of a provision of this Agreement shall
not prejudice or constitute a waiver of Lender's right otherwise to demand
strict compliance with that provision or any other provisions of this
Agreement. No prior waiver by Lender, nor any course of dealing between
Lender and Borrower, or between Lender and any Grantor, shall constitute a
waiver of any of Lender's rights or of any obligations of Borrower or of
any Grantor as to any future transactions. Whenever the consent of Lender
is required under this Agreement, the granting of such consent by Lender in
any instance shall not constitute continuing consent in subsequent
instances where such consent is required, and in all cases such consent may
be granted or withheld in the sole discretion of Lender.
<PAGE>
07-24-1995 BUSINESS LOAN AGREEMENT Page 17
(Continued)
BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOAN
AGREEMENT, AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF JULY
24, 1995.
BORROWER:
PULSAR DATA SYSTEMS, INC.
<TABLE>
<S> <C>
By: /S/ WILLIAM W. DAVIS, SR. (SEAL) By: /S/ LILLIAN A. DAVIS (SEAL)
------------------------------------- ----------------------------------------
WILLIAM W. DAVIS, SR. PRESIDENT LILLIAN A DAVIS, EXECUTIVE VICE PRESIDENT
</TABLE>
LENDER:
WILMINGTON TRUST COMPANY
By: [AUTHORIZED SIGNATORY]
--------------------------
Authorized Officer
<PAGE>
EXHIBIT 10.6
WILMINGTON TRUST
COMMERCIAL SECURITY AGREEMENT
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials
$22,000,000.00 07-24-1995 10 0777 938
- -----------------------------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan
or item.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Borrower: PULSAR DATA SYSTEMS, INC. Lender: WILMINGTON TRUST COMPANY
5000 PHILADELPHIA WAY SUITE H C/L WH MAJOR
LANHAM, MD 20706 RODNEY SQUARE NORTH
1100 NORTH MARKET STREET
WILMINGTON, DE 19890
THIS COMMERCIAL SECURITY AGREEMENT is entered into between PULSAR DATA SYSTEMS,
INC. (referred to below as "Grantor"); and WILMINGTON TRUST COMPANY (referred to
below as "Lender"). For valuable consideration, Grantor grants to Lender a
security interest in the collateral to secure the Indebtedness and agrees that
Lender shall have the rights stated in this Agreement with respect to the
Collateral, in addition to all other rights which Lender may have by law.
DEFINITIONS. The following words shall have the following meanings when used in
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All
references to dollar amounts shall mean amounts in lawful money of the United
States of America.
AGREEMENT. The word "Agreement" means this Commercial Security Agreement,
as this Commercial Security Agreement may be amended or modified from time
to time, together with all exhibits and schedules attached to this
Commercial Security Agreement from time to time.
COLLATERAL. The word "Collateral" means the following described property
of Grantor, whether now owned or hereafter acquired, whether now existing
or hereafter arising, and wherever located:
All inventory, accounts, general intangibles and equipment, together
with the following specifically described property:
ALL RECORDS OF ANY KIND RELATING TO ANY OF THE FOREGOING; ALL
PROCEEDS RELATING TO ANY OF THE FOREGOING (INCLUDING INSURANCE,
GENERAL INTANGIBLES AND OTHER ACCOUNTS PROCEEDS).
<PAGE>
07-24-1995 COMMERCIAL SECURITY AGREEMENT Page 2
(Continued)
In addition, the word "Collateral" includes all the following, whether now
owned or hereafter acquired, whether now existing or hereafter arising, and
wherever located:
(a) All attachments, accessions, accessories, tools, parts, supplies,
increases, and additions to and all replacements of and substitutions for
any property described above.
(b) All products and produce of any of the property described in this
Collateral section.
(c) All accounts, contract rights, general intangibles, instruments,
rents, monies, payments, and all other rights, arising out of a sale,
lease, or other disposition of any of the property described in this
Collateral section.
(d) All proceeds (including insurance proceeds) from the sale,
destruction, loss, or other disposition of any of the property described in
this Collateral section.
(e) All records and data relating to any of the property described in
this Collateral section, whether in the form of a writing, photograph,
microfilm, microfiche, or electronic media, together with all of Grantor's
right, title, and interest in and to all computer software required to
utilize, create, maintain, and process any such records or data on
electronic media.
EVENT OF DEFAULT. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below in the section
titled "Events of Default."
GRANTOR. The word "Grantor" means PULSAR DATA SYSTEMS, INC., its
successors and assigns.
GUARANTOR. The word "Guarantor" means and includes without limitation each
and all of the guarantors, sureties, and accommodation parties in
connection with the Indebtedness and their personal representatives,
successors and assigns.
INDEBTEDNESS. The word "Indebtedness" means the Indebtedness evidenced by
the Note, including all principal, interest, and fees, costs, and expenses,
if any, together with all modifications of and renewals, replacements and
substitutions for any of the foregoing.
LENDER. The word "Lender" means WILMINGTON TRUST COMPANY, its successors
and assigns.
<PAGE>
07-24-1995 COMMERCIAL SECURITY AGREEMENT Page 3
(Continued)
NOTE. The word "Note" means the note or credit agreement dated July 24,
1995, in the principal amount of $22,000,000.00 from Grantor to Lender,
together with all modifications of and renewals, replacements, and
substitutions for the note or credit agreement.
RELATED DOCUMENTS. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages, deeds
of trust, and all other instruments, agreements and documents, whether now
or hereafter existing, executed in connection with the Indebtedness.
OBLIGATIONS OF GRANTOR. Grantor warrants and covenants to Lender as follows:
PERFECTION OF SECURITY INTEREST. Grantor agrees to execute such financing
statements and to take whatever other actions are requested by Lender to
perfect and continue Lender's security interest in the Collateral. Upon
request of Lender, Grantor will deliver to Lender any and all of the
documents evidencing or constituting the Collateral, and Grantor will note
Lender's interest upon any and all chattel paper if not delivered to Lender
for possession by Lender. Grantor hereby appoints Lender as its
irrevocable attorney-in-fact for the purpose of executing any documents
necessary to perfect or to continue the security interest granted in this
Agreement. Lender may at any time, and without further authorization from
Grantor, file a carbon, photographic or other reproduction of any financing
statement or of this Agreement for use as a financing statement. Grantor
will reimburse Lender for all expenses for the perfection and the
continuation of the perfection of Lender's security interest in the
Collateral. Grantor promptly will notify Lender before any change in
Grantor's name including any change to the assumed business names of
Grantor. This is a continuing Security Agreement and will continue in
effect even though all or any part of the Indebtedness is paid in full and
even though for a period of time Grantor may not be indebted to Lender.
NO VIOLATION. The execution and delivery of this Agreement will not
violate any law or agreement governing Grantor or to which Grantor is a
party, and its certificate or articles of incorporation and bylaws do not
prohibit any term or condition of this Agreement.
ENFORCEABILITY OF COLLATERAL. To the extent the Collateral consists of
accounts, chattel paper, or general intangibles, the Collateral is
enforceable in accordance with its terms, is genuine, and complies with
applicable laws concerning form, content and manner of preparation and
execution, and all persons appearing to be obligated on the Collateral have
authority and capacity to contract and are in fact obligated as they appear
to be on the Collateral. At the time any account becomes subject to a
security interest in favor of Lender, the account shall be a good and valid
account representing an undisputed, bona fide Indebtedness incurred by the
account debtor, for merchandise held subject to delivery instructions or
theretofore shipped or delivered pursuant to a contract of sale, or for
services
<PAGE>
07-24-1995 COMMERCIAL SECURITY AGREEMENT Page 4
(Continued)
theretofore performed by Grantor with or for the account debtor; there
shall be no setoffs or counterclaims against any such account; and no
agreement under which any deductions or discounts may be claimed shall have
been made with the account debtor except those disclosed to Lender in
writing.
LOCATION OF THE COLLATERAL. Grantor, upon request of Lender, will deliver
to Lender in form satisfactory to Lender a schedule of real properties and
Collateral locations relating to Grantor's operations, including without
limitation the following: (a) all real property owned or being purchased by
Grantor; (b) all real property being rented or leased by Grantor; (c) all
storage facilities owned, rented, leased, or being used by Grantor; and (d)
all other properties where Collateral is or may be located. Except in the
ordinary course of its business, Grantor shall not remove the Collateral
from its existing locations without the prior written consent of Lender.
REMOVAL OF COLLATERAL. Grantor shall keep the Collateral (or to the extent
the Collateral consists of intangible property such as accounts, the
records concerning the Collateral) at Grantor's address shown above, or at
such other locations as are acceptable to Lender. Except in the ordinary
course of business, including the sales of inventory, Grantor shall not
remove the Collateral from its existing locations without the prior written
consent of Lender. To the extent that the Collateral consists of vehicles,
or other titled property, Grantor shall not take or permit any action which
would require application for certificates of title for the vehicles
outside the State of Maryland, without the prior written consent of Lender.
TRANSACTIONS INVOLVING COLLATERAL. Except for inventory sold or accounts
collected in the ordinary course of Grantor's business, Grantor shall not
sell, offer to sell, or otherwise transfer or dispose of the Collateral.
While Grantor is not in default under this Agreement, Grantor may sell
inventory, but only in the ordinary course of its business and only to
buyers who qualify as a buyer in the ordinary course of business. A sale
in the ordinary course of Grantor's business does not include a transfer in
partial or total satisfaction of a debt or any bulk sale. Grantor shall
not pledge, mortgage, encumber or otherwise permit the Collateral to be
subject to any lien, security interest, encumbrance, or charge, other than
the security interest provided for in this Agreement, without the prior
written consent of Lender. This includes security interests even if junior
in right to the security interests granted under this Agreement. Unless
waived by Lender, all proceeds from any disposition of the Collateral (for
whatever reason) shall be held in trust for Lender and shall not be
commingled with any other funds; provided however, this requirement shall
not constitute consent by Lender to any sale or other disposition. Upon
receipt, Grantor shall immediately deliver any such proceeds to Lender.
TITLE. Grantor represents and warrants to Lender that it holds good and
marketable title to the Collateral, free and clear of all liens and
encumbrances except for the lien of this Agreement. No financing statement
covering any of the Collateral is on file in any public
<PAGE>
07-24-1995 COMMERCIAL SECURITY AGREEMENT Page 5
(Continued)
office other than those which reflect the security interest created by this
Agreement or to which Lender has specifically consented. Grantor shall
defend Lender's rights in the Collateral against the claims and demands of
all other persons.
COLLATERAL SCHEDULES AND LOCATIONS. As often as Lender shall require, and
insofar as the Collateral consists of accounts and general intangibles,
Grantor shall deliver to Lender schedules of such Collateral, including
such information as Lender may require, including without limitation names
and addresses of account debtors and agings of accounts and general
intangibles. Insofar as the Collateral consists of inventory and
equipment, Grantor shall deliver to Lender, as often as Lender shall
require, such lists, descriptions, and designations of such Collateral as
Lender may require to identify the nature, extent, and location of such
Collateral. Such information shall be submitted for Grantor and each of
its subsidiaries or related companies.
MAINTENANCE AND INSPECTION OF COLLATERAL. Grantor shall maintain all
tangible Collateral in good condition and repair. Grantor will not commit
or permit damage to or destruction of the Collateral or any part of the
Collateral. Lender and its designated representatives and agents shall
have the right at all reasonable times to examine, inspect, and audit the
Collateral wherever located.
TAXES, ASSESSMENTS AND LIENS. Grantor will pay when due all taxes,
assessments and liens upon the Collateral, its use or operation, upon this
Agreement, upon any promissory note or notes evidencing the Indebtedness,
or upon any of the other Related Documents. Grantor may withhold any such
payment or may elect to contest any lien if Grantor is in good faith
conducting an appropriate proceeding to contest the obligation to pay and
so long as Lender's interest in the Collateral is not jeopardized in
Lender's sole opinion. If the Collateral is subjected to a lien which is
not discharged within fifteen (15) days, Grantor shall deposit with Lender
cash, a sufficient corporate surety bond or other security satisfactory to
Lender in an amount adequate to provide for the discharge of the lien plus
any interest, costs, reasonable attorneys' fees or other charges that could
accrue as a result of foreclosure or sale of the Collateral. In any
contest Grantor shall defend itself and Lender and shall satisfy any final
adverse judgment before enforcement against the Collateral. Grantor shall
name Lender as an additional obligee under any surety bond furnished in the
contest proceedings.
COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS. Grantor shall comply promptly
with all laws, ordinances, rules and regulations of all governmental
authorities, now or hereafter in effect, applicable to the ownership,
production, disposition, or use of the Collateral. Grantor may contest in
good faith any such law, ordinance or regulation and withhold compliance
during any proceeding, including appropriate appeals, so long as Lender's
interest in the Collateral, in Lender's opinion, is not jeopardized.
<PAGE>
07-24-1995 COMMERCIAL SECURITY AGREEMENT Page 6
(Continued)
HAZARDOUS SUBSTANCES. Grantor represents and warrants that the Collateral
never has been, and never will be so long as this Agreement remains a lien
on the Collateral, used for the generation, manufacture, storage,
transportation, treatment, disposal, release or threatened release of any
hazardous waste or substance, as those terms are defined in the
Comprehensive Environmental Response, Compensation, and Liability Act of
1980, as amended, 42 U.S.C. Section 9601, et seq. ("CERCLA"), the Superfund
Amendments and Reauthorization Act of 1986, Publ L. No. 99-499 ("SARA"),
the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et
seq., the Resource Conservation and Recovery Act, 49 U.S.C. Section 6901,
et seq., or other applicable state or Federal laws, rules, or regulations
adopted pursuant to any of the foregoing. The terms "hazardous waste" and
"hazardous substance" shall also include, without limitation, petroleum and
petroleum by-products or any fraction thereof and asbestos. The
representations and warranties contained herein are based on Grantor's due
diligence in investigating the Collateral for hazardous wastes and
substances. Grantor hereby (a) releases and waives any future claims
against Lender for indemnity or contribution in the event Grantor becomes
liable for cleanup or other costs under any such laws, and (b) agrees to
indemnify and hold harmless Lender against any and all claims and losses
resulting from a breach of this provision of this Agreement. This
obligation to indemnify shall survive the payment of the Indebtedness and
the satisfaction of this Agreement.
MAINTENANCE OF CASUALTY INSURANCE. Grantor shall procure and maintain all
risks insurance, including without limitation fire, theft and liability
coverage together with such other insurance as Lender may require with
respect to the Collateral, in form, amounts, coverages and basis acceptable
to lender and issued by a company or companies acceptable to Lender.
Grantor, upon request of Lender, will deliver to Lender from time to time
the policies or certificates of insurance in form satisfactory to Lender,
including stipulations that coverages will not be cancelled or diminished
without at least twenty (20) days' prior written notice to Lender and not
including any disclaimer of the insurer's liability for failure to give
such a notice. Each insurance policy also shall include an endorsement
providing that coverage in favor of Lender will not be impaired in any way
by any act, omission or default of Grantor or any other person. In
connection with all policies covering assets in which Lender holds or is
offered a security interest, Grantor will provide Lender with such loss
payable or other endorsements as Lender may require. If Grantor at any
time fails to obtain or maintain any insurance as required under this
Agreement, Lender may (but shall not be obligated to) obtain such insurance
as Lender deems appropriate, including if it so chooses "single interest
insurance," which will cover only Lender's interest in the Collateral.
APPLICATION OF INSURANCE PROCEEDS. Grantor shall promptly notify Lender of
any loss or damage to the Collateral. Lender may make proof of loss if
Grantor fails to do so within fifteen (15) days of the casualty. All
proceeds of any insurance on the Collateral, including accrued proceeds
thereon, shall be held by Lender as part of the Collateral. If Lender
consents to repair or replacement of the damaged or destroyed Collateral,
Lender shall, upon
<PAGE>
07-24-1995 COMMERCIAL SECURITY AGREEMENT Page 7
(Continued)
satisfactory proof of expenditure, pay or reimburse Grantor from the
proceeds for the reasonable cost of repair or restoration. If Lender does
not consent to repair or replacement of the Collateral, Lender shall retain
a sufficient amount of the proceeds to pay all of the Indebtedness, and
shall pay the balance to Grantor. Any proceeds which have not been
disbursed within six (6) months after their receipt and which Grantor has
not committed to the repair or restoration of the Collateral shall be used
to prepay the Indebtedness.
INSURANCE REPORTS. Grantor, upon request of Lender, shall furnish to
Lender reports on each existing policy of insurance showing such
information as Lender may reasonably request including the following: (a)
the name of the insurer; (b) the risks insured; (c) the amount of the
policy; (d) the property insured; (e) the then current value on the basis
of which insurance has been obtained and the manner of determining that
value; and (f) the expiration date of the policy. In addition, Grantor
shall upon request by Lender (however not more often than annually) have an
independent appraiser satisfactory to Lender determine, as applicable, the
cash value or replacement cost of the Collateral.
GRANTOR'S RIGHT TO POSSESSION AND TO COLLECT ACCOUNTS. Until default and except
as otherwise provided below with respect to accounts, Grantor may have
possession of the tangible personal property and beneficial use of all the
Collateral and may use it in any lawful manner not inconsistent with this
Agreement or the Related Documents, provided that Grantor's right to possession
and beneficial use shall not apply to any Collateral where possession of the
Collateral by Lender is required by law to perfect Lender's security interest in
such Collateral. Until otherwise notified by Lender, Grantor may collect any of
the Collateral consisting of accounts. At any time and even though no Event of
Default exists, Lender may exercise its rights to collect the accounts and to
notify account debtors to make payments directly to Lender for application to
the Indebtedness. If Lender at any time has possession of any Collateral,
whether before or after an Event of Default, Lender shall be deemed to have
exercised reasonable care in the custody and preservation of the Collateral if
Lender takes such action for that purpose as Grantor shall request or as Lender,
in Lender's sole discretion, shall deem appropriate under the circumstances, but
failure to honor any request by Grantor shall not of itself be deemed to be a
failure to exercise reasonable care. Lender shall not be required to take any
steps necessary to preserve any rights in the Collateral against prior parties,
nor to protect, preserve or maintain any security interest given to secure the
Indebtedness.
EXPENDITURES BY LENDER. If not discharged or paid when due, Lender may (but
shall not be obligated to) discharge or pay any amounts required to be
discharged or paid by Grantor under this Agreement, including without limitation
all taxes, liens, security interests, encumbrances, and other claims, at any
time levied or placed on the Collateral. Lender also may (but shall not be
obligated to) pay all costs for insuring, maintaining and preserving the
Collateral. All such expenditures incurred or paid by Lender for such purposes
will then bear interest at the rate charged under the Note from the date
incurred or paid by Lender to the date of repayment by Grantor. All such
expenses shall become a part of the Indebtedness and, at Lender's option, will
(a) be payable on
<PAGE>
07-24-1995 COMMERCIAL SECURITY AGREEMENT Page 8
(Continued)
demand, (b) be added to the balance of the Note and b e apportioned among and be
payable with any installment payments to become due during either (i) the term
of any applicable insurance policy or (ii) the remaining term of the Note, or
(c) be treated as a balloon payment which will be due and payable at the Note's
maturity. This Agreement also will secure payment of these amounts. Such
[illegible] shall be in addition to all other rights and remedies to which
Lender may be entitled upon the occurrence of an Event of Default.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:
DEFAULT ON INDEBTEDNESS. Failure of Grantor to make any payment when due
on the Indebtedness.
[PARAGRAPH ILLEGIBLE]
CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-
help,[illegible] or any other method by any creditor of Grantor or by any
governmental agency against the Collateral or any other collateral
[illegible] Indebtedness. This includes a garnishment of any of Grantor's
deposit accounts with Lender.
[illegible] INDEBTEDNESS. Any of the [illegible] events occurs with
respect to any Guarantor of any of the Indebtedness or such Guarantor
[illegible].
[illegible] CHANGE. A material adverse change occurs in [illegible]
condition or Lender believes the prospect of payment or [illegible] of the
Indebtedness is impaired.
RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default occurs under this
Agreement, at any time thereafter, Lender shall have all the rights of a secured
party under the Maryland Uniform Commercial Code. In addition and without
limitation, Lender may exercise any one or more of the following rights and
remedies:
[illegible] INDEBTEDNESS. Lender may desire the entire Indebtedness,
including any prepayment penalty which Grantor would be required to pay
[illegible] and payable, without notice.
[illegible] COLLATERAL. Lender may require Grantor to deliver to Lender
all or any portion of the Collateral and any and all certificates of title
and other documents relating to the Collateral. Lender may require Grantor
to assemble the Collateral and make it available to Lender at a place to be
designated by Lender. Lender also shall full power to enter upon the
property of Grantor to take possession of and remove the [illegible].
<PAGE>
07-24-1995 COMMERCIAL SECURITY AGREEMENT Page 9
(Continued)
[illegible] THE COLLATERAL. Lender shall have full power to sell,
[illegible] with the Collateral or proceeds thereof in its own name or that
of Grantor. Lender may sell the Collateral at public [illegible]. Unless
the Collateral threatens to decline speedily in value or is of a type
customarily sold on a [illegible] after which any private sale or any other
[illegible] met if such notice is given at least ten (10) days before the
time of the [illegible]. All [illegible] relating to the [illegible] of
the Collateral, including without limitation the expenses of retaking,
holding, insuring,[illegible] for sale and selling the Collateral, shall
become a part of the Indebtedness secured by this Agreement and shall be
payable on demand, with interest at the Note rate from date of expenditure
until repaid.
APPOINT RECEIVER. To the extent permitted by applicable law, Lender shall
have the following rights and remedies regarding the appointment of a
receiver: (a) Lender may have a receiver appointed as a matter of right,
(b) the receiver may be an employee of Lender and may serve without bond,
and (c) all fees of the receiver and his or her attorney shall become part
of the Indebtedness secured by this Agreement and shall be payable on
demand, with interest at the Note rate from date of expenditure until
repaid.
COLLECT REVENUES, APPLY ACCOUNTS. Lender, either itself or through a receiver,
may collect the payments, rents, income and revenues from the Collateral.
Lender may at any time in its discretion transfer any Collateral into its own
name or that of its nominee and receive the payments, rents, income and revenues
therefrom and hold the same as security for the Indebtedness or apply it to
payment of the Indebtedness in such order of preference as Lender may determine.
Insofar as the Collateral consists of accounts, general intangibles, insurance
policies, instruments, [illegible], Lender may [illegible] receipt for, settle,
compromise, adjust, sue for, foreclose, or [illegible] on the Collateral as
Lender may determine, whether or not [illegible] or Collateral is then due. For
these purposes, Lender may, on behalf of and in the name of Grantor, [illegible]
address to Grantor; change any address to which mail and payments are to be
sent; and endorse notes, checks, drafts, money orders, [illegible], instruments
and items pertaining to payment, shipment, or storage of any Collateral. To
facilitate collection, Lender may notify account debtors and obligors on any
Collateral to make payments directly to Lender.
OBTAIN DEFICIENCY. If Lender chooses to sell any or all of the Collateral,
Lender may obtain a judgment against Grantor for any deficiency remaining on the
Indebtedness due to Lender after application of all amounts received from the
exercise of the rights provided in this Agreement. Grantor shall be liable for a
deficiency even if the transaction described in this subsection is a sale of
accounts or chattel paper.
Other Rights and Remedies. Lender shall have all the rights and remedies of a
secured creditor under the provisions of the Uniform Commercial Code, as may be
amended from time to time. In addition, Lender shall have and may exercise any
or all other rights and remedies it may have available at law, in equity, or
otherwise.
<PAGE>
07-24-1995 COMMERCIAL SECURITY AGREEMENT Page 10
(Continued)
Cumulative Remedies. All of Lender's rights and remedies, whether evidenced by
this Agreement or the Related Documents or by any other writing, shall be
cumulative and may be exercised singularly or concurrently. Election by Lender
to pursue any remedy shall not exclude pursuit of any other remedy, and an
election to make expenditures or to take action to perform an obligation of
Grantor under this Agreement, after Grantor's failure to perform, shall not
[illegible] Lender's right to declare a default and to exercise its remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:
Amendment. This Agreement, together with any Related Documents, constitutes the
entire understanding and agreement of the parties as to the matters set forth in
this Agreement. NO alteration of or amendment to this Agreement shall be
effective unless given in writing and signed by the party or parties [illegible]
or bound by the [illegible].
Applicable Law. This Agreement shall be governed by, [illegible] and enforced
in accordance with the laws of the State of Maryland. LENDER AND GRANTOR EACH
HEREBY WAIVE TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO WHICH LENDER OR
GRANTOR MAY BE PARTIES, ARISING OUT OF, OR IN ANY WAY PERTAINING TO, THIS
AGREEMENT. IT IS AGREED THAT THIS WAIVER CONSTITUTES A WAIVER OF TRIAL BY JURY
OF ALL CLAIMS AGAINST ALL PARTIES TO SUCH ACTIONS OR PROCEEDINGS. THIS WAIVER
IS KNOWINGLY, WILLINGLY AND VOLUNTARILY MADE BY LENDER AND GRANTOR, AND LENDER
AND GRANTOR EACH HEREBY REPRESENT THAT [illegible] HAVE BEEN MADE BY ANY
INDIVIDUAL TO INDUCE THIS WAIVER OF TRIAL BY JURY OR TO IN ANY WAY MODIFY OR
[illegible] ITS EFFECT. GRANTOR FURTHER REPRESENTS THAT GRANTOR HAS BEEN
REPRESENTED IN THE SIGNING OF THIS AGREEMENT AND IN THE MAKING OF THIS WAIVER BY
INDEPENDENT LEGAL COUNSEL, SELECTED OF GRANTOR'S OWN FREE WILL, AND THAT GRANTOR
HAS HAD THE OPPORTUNITY TO DISCUSS THE WAIVER WITH COUNSEL.
Attorneys' Fees; Expenses. Grantor agrees that if Lender hires an attorney to
help enforce this Agreement or to collect any sums owing under this Agreement,
Grantor will pay, subject to any limits under applicable law, Lender's
reasonable attorneys fees, and all of Lender's other collection expenses,
Caption Headings. Caption headings in this Agreement and for convenience
purposes only and are not to be used to interpret or define the provisions of
this Agreement.
[illegible]; Corporate Authority. All obligations of Grantor under this
Agreement shall be joint and several, and all references to Grnator [illegible]
below is responsible for all obligations in this Agreement.
<PAGE>
07-24-1995 COMMERCIAL SECURITY AGREEMENT Page 11
(Continued)
[illegible]. may be sent by facsimile, and shall be effective [illegible]
actually delivered [illegible] recognized overnight courier or deposited as
certified or registered mail in the United States mail, [illegible] to whom the
notice is to be given at the address shown above, [illegible] formal written
notice to the other parties, specifying that the [illegible] applicable law. If
there is more than one Grantor, notice to any Grantor will constitute notice to
all Grantors. For notice purposes, Grantor agrees to keep Lender informed at
all times of Grantor's current address(es).
Power of Attorney. Grantor hereby appoints Lender as its true and lawful
attorney-in-fact, irrevocably, with full power of substitution to do the
following: (a) to demand, collect [illegible] or other property which may now
or hereafter become [illegible] all claims, instruments, receipts, checks,
drafts or warrants [illegible] under the Collateral, and, in the place and stead
of Grantor, to [illegible] claims or to take any action or institute or take
part in any proceedings, either in its own [illegible] of Grantor, or otherwise,
which in the discretion of Lender may seem to be [illegible] or advisable. This
power is given as security for the Indebtedness, and the authority hereby
conferred is and shall be irrevocable and shall remain in full force and effect
until renounced by Lender.
Severability. If a court of competent jurisdiction finds any provision of this
Agreement to be invalid or unenforceable as to any person or circumstance, such
finding shall not render that provision invalid or unenforceable as to any other
person or circumstances. If feasible, any such offending provision shall be
deemed to be modified to be within the limits of enforceability or validity;
however, if the offending provision cannot be so modified, it shall be stricken
and all other provisions of this Agreement in all other respects shall remain
valid and enforceable.
Successor Interests. Subject to the limitations set forth above on transfer of
the Collateral, this Agreement shall be binding upon and inure to the benefit of
the parties, their successors and assigns.
Waiver. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender. No delay
or omission on the part of Lender in exercising any right shall operate as a
waiver of such right or any other right. A waiver by Lender of a provision of
this Agreement shall not prejudice or constitute a waiver of Lender's right
otherwise to demand strict compliance with that provision or any other provision
of this Agreement. No prior waiver by Lender, nor any course of dealing between
Lender and Grantor, shall constitute a waiver of any of Lender's rights or of
any of Grantor's obligations as to any future transactions. Whenever the consent
of the Lender is required under this Agreement, the granting of such consent by
Lender in any instance shall not constitute continuing consent to subsequent
instances where such consent is required and in all cases such consent may be
granted or withheld in the sole discretion of Lender.
GRANTOR ACNKOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS COMMERCIAL SECURITY
AGREEMENT, AND GRANTOR AGREES TO ITS TERMS. THIS AGREEMENT IS DATED JULY 24,
1995.
<PAGE>
07-24-1995 COMMERCIAL SECURITY AGREEMENT Page 12
(Continued)
GRANTOR:
PULSAR DATA SYSTEMS, INC.
By: /S/ William W. Davis, Sr. (SEAL) By: /S/ LILLIAN A. DAVIS (SEAL)
----------------------------------- ----------------------------------
WILLIAM W. DAVIS, SR., PRESIDENT LILLIAN A. DAVIS,
EXECUTIVE VICE PRESIDENT
LENDER:
WILMINGTON TRUST COMPANY
By: [AUTHORIZED SIGNATORY]
----------------------
Authorized Officer
<PAGE>
Exhibit 10.7
COMMERCIAL GUARANTY
===============================================================================
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PRINCIPAL LOAN DATE MATURITY LOAN NO. CALL COLLATERAL ACCOUNT OFFICER INITIALS
10 5100 2405008 938
- ------------------------------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan
or item.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
BORROWER: DAVIS HOLDING COMPANY, INC. LENDER: WILMINGTON TRUST COMPANY
5000 PHILADELPHIA WAY, SUITE H C/L W H MAJOR
LANHAM, DE 20706 RODNEY SQUARE NORTH
1100 NORTH MARKET STREET
WILMINGTON, DE 19890
================================================================================
AMOUNT OF GUARANTY. THIS IS GUARANTY OF PAYMENT OF THE NOTE, INCLUDING WITHOUT
LIMITATION THE PRINCIPAL NOTE AMOUNT OF TWO MILLION EIGHT HUNDRED THOUSAND &
00/100 DOLLARS ($2,800,000.00)
GUARANTY. FOR GOOD AND VALUABLE CONSIDERATION, PULSAR DATA SYSTEMS,
INC."GUARANTOR") ABSOLUTELY AND UNCONDITIONALLY GUARANTEES AND PROMISES TO PAY
TO WILMINGTON TRUST COMPANY ("LENDER") OR ITS ORDER, IN LEGAL TENDER OF THE
UNITED STATES OF AMERICA, THE INDEBTEDNESS (AS THAT TERM IS DEFINED BELOW) OF
DAVIS HOLDING COMPANY, INC. ("BORROWER") TO LENDER ON THE TERMS AND CONDITIONS
SET FORTH IN THIS GUARANTY.
DEFINITIONS. The following words shall have the following meanings when used in
this Guaranty:
BORROWER. The word "Borrower" means DAVIS HOLDING COMPANY, INC.
GUARANTOR. The word "Guarantor" means PULSAR DATA SYSTEMS, INC.
GUARANTY. The word "Guaranty" means this Guaranty made by Guarantor for
the benefit of Lender dated October 23, 1995
INDEBTEDNESS. The word "Indebtedness" means the Note, including (a) all
principal, (b) all interest, (c) all late charges, (d) all loan fees and
charges, and (e) all collection costs and expenses relating to the Note or
to any collateral for the Note or to any collateral for the Note.
Collection costs and expenses include without limitation all of Lender's
reasonable attorneys' fees and Lender's legal expenses, whether or not suit
is instituted, and reasonable attorneys' fees and legal expenses for
bankruptcy proceedings (including efforts to modify or vacate any automatic
stay or injunction), appeals, and any anticipated post-judgment collection
services.
LENDER. The word "Lender" means WILMINGTON TRUST COMPANY, its successors
and assigns.
NOTE. The word "Note" means the promissory note or credit agreement dated
October 23, 1995, IN THE ORIGINAL PRINCIPAL AMOUNT OF $2,800,000.00 from
Borrower to Lender, together with all renewals of, extensions of,
modifications of, refinancing of, consolidations of , and substitutions
for the promissory note or agreement.
RELATED DOCUMENTS. The word "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages, deeds
of trust, and all other instruments, agreements, documents, whether now or
hereafter existing, executed in connection with the Indebtedness.
MAXIMUM LIABILITY. THE MAXIMUM LIABILITY OF GUARANTOR UNDER THIS GUARANTY SHALL
NOT EXCEED AT ANY ONE TIME THE AMOUNT T OF THE INDEBTEDNESS DESCRIBED ABOVE,
PLUS ALL COSTS AND EXPENSES OF (A) ENFORCEMENT OF THIS GUARANTY AND (B)
COLLECTION AND SALE OF ANY COLLATERAL SECURING THIS GUARANTY.
<PAGE>
COMMERCIAL GUARANTY 2
(CONTINUED)
================================================================================
The above limitation on liability is not a restriction on the amount of the
Indebtedness of Borrower to Lender either in the aggregate or at any one time.
If Lender presently holds one or more guaranties, or hereafter receives
additional guaranties from Guarantor, the rights of Lender under all guaranties
shall be cumulative. This Guaranty shall not (unless specifically provided
below to the contrary) affect or invalidate any such other guaranties. The
liability of Guarantor will be the aggregate liability of Guarantor under the
terms of this Guaranty and any such other unterminated guaranties.
NATURE OF GUARANTY. Guarantor intends to guarantee at all times the performance
and prompt payment when due, whether at maturity or earlier by reason of
acceleration or otherwise, of all Indebtedness within the limits set forth in
the preceding section of the Guaranty.
DURATION OF GUARANTY. This Guaranty will take effect when received by Lender
without the necessity of any acceptance by Lender, or any notice to Guarantor or
to Borrower, and will continue in full force until all Indebtedness shall have
been fully and finally paid and satisfied and all other obligations of Guarantor
under this Guaranty shall have been performed in full. Release of any other
guarantor or termination of any other guaranty of the Indebtedness shall not
affect the liability of Guarantor under this Guaranty. A revocation received by
Lender from any one or more Guarantors shall not affect the liability of any
remaining Guarantors under this Guaranty.
GUARANTOR'S AUTHORIZATION TO LENDER. GUARANTOR AUTHORIZES LENDER, WITHOUT
NOTICE OR DEMAND AND WITHOUT LESSENING GUARANTOR'S LIABILITY UNDER THIS
GUARANTY, FROM TIME TO TIME: (A) TO MAKE ONE OR MORE ADDITIONAL SECURED OR
UNSECURED LOANS TO BORROWER, TO LEASE EQUIPMENT OR OTHER GOODS TO BORROWER, OR
OTHERWISE TO EXTEND ADDITIONAL CREDIT TO BORROWER; (B) TO ALTER, COMPROMISE,
RENEW, EXTEND ACCELERATED, OR OTHERWISE CHANGE ONE OR MORE TIMES THE TIME FOR
PAYMENT OR OTHER TERMS OF THE INDEBTEDNESS OR ANY PART OF THE INDEBTEDNESS,
INCLUDING INCREASES AND DECREASES OF THE RATE OF INTEREST ON THE INDEBTEDNESS;
EXTENSIONS MAY BE REPEATED AND MAY BE FOR LONGER THAN THE ORIGINAL LOAN TERM;
(C) TO TAKE AND HOLD SECURITY FOR THE PAYMENT OF THIS GUARANTY OR THE
INDEBTEDNESS, AND EXCHANGE, ENFORCE, WAIVE, SUBORDINATE, FAIL RO DECIDE NOT TO
PERFECT, AND RELEASE ANY SUCH SECURITY, WITH OR WITHOUT THE SUBSTITUTION OR NEW
COLLATERAL; (D) TO RELEASE, SUBSTITUTE, AGREE NOT TO SUE, OR DAL WITH ANY ONE OR
MORE OF BORROWER'S SURETIES, ENDORSERS, OR OTHER GUARANTORS ON ANY TERMS OF IN
ANY MANNER LENDER MAY CHOOSE; (E) TO DETERMINE HOW, WHEN AND WHAT APPLICATION OF
PAYMENTS AND CREDITS SHALL BE MADE ON THE INDEBTEDNESS; (F) TO APPLY SUCH
SECURITY AND DIRECT THE ORDER OR MANNER OF SALE THEREOF, INCLUDING WITHOUT
LIMITATION, ANY NONJUDICIAL SALE PERMITTED BY THE TERMS OF THE CONTROLLING
SECURITY AGREEMENT OR DEED OF TRUST, AS LENDER IN ITS DISCRETION MAY DETERMINE;
(G) TO SELL, TRANSFER, ASSIGN, OR GRANT PARTICIPATIONS IN ALL OR ANY PARTY OF
THE INDEBTEDNESS; AND (H) TO ASSIGN OR TRANSFER THIS GUARANTY IN WHOLE OR IN
PART.
GUARANTOR'S REPRESENTATIONS AND WARRANTIES. Guarantor represents and warrants
to Lender that (a) no representations or agreements of any kind have been made
to Guarantor which would limit or quality in any way the terms of this Guaranty;
(b) this Guaranty is executed at Borrower's request and not at the request of
Lender; (c) Guarantor has not and will not, without the prior written consent of
Lender, sell, lease, assign, encumber, hypothecate, transfer, or otherwise
dispose of all or substantially all of Guarantor's assets, or any interest
therein; (d) Lender has made no representation to Guarantor as to the
creditworthiness of Borrower; (e) upon Lender's request, Guarantor will provide
to Lender financial and credit information in form acceptable to Lender, and all
such financial information provided to Lender is true and correct in all
material respects ad fairly present the financial condition of Guarantor as of
the dates thereof, and no material adverse change has occurred in the financial
condition of Guarantor since the date of the financial statements; and (F)
Guarantor has established adequate means of obtaining from Borrower on a
continuing basis information regarding Borrower's financial condition.
Guarantor agrees to keep adequately informed from such means of any facts,
events, or circumstances which might in any way affect Guarantor's risks under
this Guaranty, and Guarantor further agrees that, absent a request for
information, Lender shall have no obligation to disclose to Guarantor any
information or documents acquired by Lender in the course of its relationship
with Borrower.
GUARANTOR'S WAIVERS. Except as prohibited by applicable law, Guarantor waives
any right to require Lender (a) continue lending money or to extend other credit
to Borrower; (b) to make any presentment, protest, demand, or notice of any
kind, including notice of any nonpayment of the Indebtedness or of any
nonpayment related to any collateral, or notice of any action or nonaction on
the part of the Borrower, Lender, any surety, endorser, or other guarantor in
connection with the Indebtedness or in connection with the creation of new or
additional loans obligations; (c) to resort for payment or to proceed directly
or at once against any person, including Borrower or any other guarantor; (d) to
proceed directly against or exhaust any collateral held by Lender from Borrower,
any other guarantor, or any other person; (e) to give notice of the terms, time,
and place of any public or private sale of personal
<PAGE>
COMMERCIAL GUARANTY 3
(CONTINUED)
================================================================================
property security held by Lender from Borrower or to comply with any other
applicable provisions of the Uniform Commercial Code; (f) to pursue any other
remedy within Lender's power; or (g) to commit any act or omission of any kind,
or at any time, with respect to any matter whatsoever.
If now or hereafter (a) Borrower shall be or become insolvent, and (b) the
Indebtedness shall not at all times until paid be fully secured by collateral
pledged by Borrower, Guarantor hereby forever waives and relinquishes in favor
of Lender and Borrower, and their respective successors, any claim or right to
payment Guarantor may now have or hereafter have or acquires against Borrower,
by subrogation or otherwise, so that at no time shall Guarantor be or become a
"creditor" of Borrower within the meaning of 11 U.S.C. section 547(b), or any
successor provision of the Federal bankruptcy laws.
Guarantor also waives any and all rights or defenses arising by reason of (a)
any "one action" or "anti-deficiency" law or any other law which may prevent
Lender from bringing any action, including a claim for deficiency, against
Guarantor, before or after Lender's commencement or completion of any
foreclosure action, either judicially or by exercise of a power of sale; (b) any
election of remedies by Lender with destroys or otherwise adversely affects
Guarantor's subrogation rights or Guarantor's rights to proceed against Borrower
for reimbursement, including without limitation, any loss of rights Guarantor
may suffer by reason of any law limiting, qualifying, or discharging the
Indebtedness; (c) any disability or other defense of Borrower, of any other
guarantor, or of any other person, or by reason of the cessation of Borrower s
liability from any cause whatsoever, other than payment in full in legal tender,
of the Indebtedness; (d) any right to claim discharge of the Indebtedness on the
basis of unjustified impairment of any collateral for the Indebtedness; (e) any
statute of limitations, if at any time any action or suit brought by Lender
against Guarantor is commenced there is outstanding Indebtedness of Borrower to
Lender which is not barred by any applicable statute of limitations; or (t) any
defenses given to guarantors at law or an equity other than actual payment and
performance of the Indebtedness. It payment is made by Borrower, whether
voluntarily or otherwise, or by any third party, on the Indebtedness and
thereafter Lender is forced to remit the amount of that payment to Borrowers
trustee in bankruptcy or to any similar person under any federal or state
bankruptcy law or law for the relief of debtors, the Indebtedness shall be
considered unpaid for the purpose of enforcement of this Guaranty.
Guarantor further waives and agrees not to assert or claim at any time any
deductions to the amount guaranteed under this Guaranty for any claim of setoff,
counterclaim, counter demand, recoupment or similar right, whether such claim,
demand or right may be asserted by the Borrower, the Guarantor, or both.
GUARANTORS UNDERSTANDING WITH RESPECT TO WAIVERS. Guarantor warrants and agrees
that each of the waivers set forth above is made with Guarantor s full knowledge
of its significance and consequences and that, under the circumstances, the
waivers are reasonable and not contrary to public policy or law. If any such
waiver is determined to be contrary to any applicable law or public policy, such
waiver shall be effective only to the extent permitted by law or public policy.
SUB0RDINATION OF BORROWERS DEBTS TO GUARANTOR. Guarantor agrees that the
Indebtedness of Borrower to Lender, whether now existing or hereafter created,
shall be prior to any claim that Guarantor may now have or hereafter acquire
against Borrower, whether or not Borrower becomes insolvent. Guarantor hereby
expressly subordinates any claim Guarantor may have against Borrower, upon any
account whatsoever, to any claim that Lender may now or hereafter have against
Borrower. In the event of insolvency and consequent liquidation of the assets
of Borrower, through bankruptcy, by an assignment for the benefit of creditors,
by voluntary liquidation, or otherwise, the assets of Borrower applicable to the
payment of the claims of both Lender and Guarantor shall be paid to Lender and
shall be first applied by Lender to the Indebtedness of Borrower to Lender.
Guarantor does hereby assign to Lender all claims which it may have or acquire
against Borrower or against any assignee or trustee in bankruptcy of Borrower;
provided however, that such assignment shall be effective only for the purpose
of assuring to Lender full payment in legal tender of the Indebtedness. If
Lender so requests, any notes or credit agreements now or hereafter evidencing
any debts or obligations of Borrower to Guarantor shall be marked with a legend
that the same are subject to this Guaranty and shall be delivered to Lender.
Guarantor agrees, and Lender hereby is authorized, in the name of Guarantor,
from time to time to execute and file financing statements and continuation
statements and to execute such other documents and to take such other actions as
Lender deems necessary or appropriate to perfect, preserve and enforce its
rights under this Guaranty.
CONFESSION OF JUDGMENT. Guarantor hereby irrevocably authorizes and empowers any
attorney--at-law to appear in any court of record and to confess judgment
against Guarantor for the unpaid amount of this Guaranty as evidenced by an
affidavit signed by an officer of Lender setting forth the amount then due, plus
attorneys tees as provided in this Guaranty, plus costs of suit, and to release
all errors, and waive all rights of appeal. It a copy of this Guaranty, verified
by an affidavit, shall have been filed in the
<PAGE>
COMMERCIAL GUARANTY 4
(CONTINUED)
================================================================================
proceeding, it will not be necessary to file the original as a warrant of
attorney. Guarantor waives the right to any say of execution and the benefit of
all exemption laws now or hereafter in effect. No single exercise of the
foregoing warrant and power to confess judgment will be deemed to exhaust the
power whether or not any such exercise shall be held by any court to be invalid
voidable or void; but the power will continue undiminished and may be exercised
from time to time as Lender may elect until all amounts owing on this Guaranty
have been paid in full.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Guaranty:
AMENDMENTS. This Guaranty together with any Related Documents constitutes
the entire understanding and agreement of the parties as to the masers set
forth in this Guaranty. No alteration of or amendment to this Guaranty
shall be effective unless given in writing and signed by the party or
parties sought to be charged or bound by the alteration or amendment.
APPLICABLE LAW. This Guaranty has been delivered to Lender and accepted by
Lender in the Stab of Delaware. It there is a lawsuit Guarantor agrees upon
Lenders request to submit to the jurisdiction of the courts of NEW CASTLE
County Stab of Delaware. Lender and Guarantor hereby waive the right to any
jury trial in any action proceeding or counterclaim brought by either
Lender or Guarantor against the other. This Guaranty shall be governed by
and construed in accordance with the laws of the Stab of Delaware.
ATTORNEYS FEES; EXPENDS. Guarantor agrees to pay upon demand all of Lender
s costs and expenses including reasonable attorneys fees and Lenders legal
expenses incurred in connection with the enforcement of this Guaranty.
Lender may pay someone else to help enforce this Guaranty, and Guarantor
shall pay the costs and expenses of such enforcement. Costs and expenses
include Lender s reasonable attorneys lees and legal expenses whether or
not there is a lawsuit including reasonable attorneys tees and legal
expenses for bankruptcy proceedings (and including efforts to modify or
vacate any automatic stay or injunction) appeals and any anticipated post-
judgment collection services. Guarantor also shall pay all court costs and
such additional lees as may be directed by the court.
NOTICES. All notices required to be given by either party to the other
under this Guaranty shall be in writing may be sent by telefacsimile, and
shall be effective when actually delivered or when deposited with a
nationally recognized overnight courier or when deposited in the United
States mail first class postage prepaid addressed to the party to whom the
notice is to be given at the address shown above or lo such other addresses
as either party may designate to the other in writing. If there is more
than one Guarantor notice to any Guarantor will constitute notice to all
Guarantor For notice purposes Guarantor agrees to keep Lender informed at
all times of Guarantor s current address.
INTERPRETATION. In all cases where there is more than one Borrower or
Guarantor, then all words used in this Guaranty in the singular shall be
deemed to have been used in the plural where the context and construction
so require; and where there is more than one Borrower named in this
Guaranty or when this Guaranty is executed by more than one Guarantor, the
words "Borrower" and "Guarantor" respectively shall mean all and any one or
more of them. The words "Guarantor," "Borrower," and "Lender" include the
heirs, successors, assigns, and transferees of each of them. Caption
headings in this Guaranty are for convenience purposes only and are not to
be used to interpret or define the provisions of this Guaranty. If a court
of competent jurisdiction finds any provision of this Guaranty to be
invalid or unenforceable as to any persons or circumstances, such finding
shall not render that provision invalid or unenforceable as to any other
persons or circumstances, and all provisions of this Guaranty in all other
respects shall remain valid and enforceable. If any one or more of
Borrower or Guarantor are corporations or partnerships, it is not necessary
for Lender to inquire into the powers of Borrower or Guarantor or of the
officers, directors, partners, or agents acting or purporting to act on
their behalf, and any Indebtedness made or created in reliance upon the
professed exercise of such powers shall be guaranteed under this Guaranty.
WAIVER. Lender shall not be deemed to have waived any rights under this
Guaranty unless such waiver is given in writing and signed by Lender. No
delay or omission on the part of Lender in exercising any right shall
operate as a waiver of such right or any other right. A waiver by Lender
of a provision of this Guaranty shall not prejudice or constitute a waiver
of Lender's right otherwise to demand strict compliance with that provision
or any other provision of this Guaranty. No prior waiver by Lender, nor
any course of dealing between Lender and Guarantor, shall constitute a
waiver of any of Lender's rights or of any of Guarantor's obligations as to
any future transactions. Whenever the consent of Lender is required under
<PAGE>
COMMERCIAL GUARANTY 5
(CONTINUED)
================================================================================
this Guaranty, the granting of such consent by Lender in any instance shall
not constitute continuing consent to subsequent instances where such
consent is required and in all cases such consent may be granted or
withheld in the sole discretion of Lender.
LIMITATION ON GUARANTY. Notwithstanding any other provision of this Guaranty,
the liability of Guarantor under this Guaranty shall not exceed the amount which
would render this Guaranty unenforceable, void or voidable under 548 of the
Bankruptcy Code or by application of any Fraudulent Transfer or Fraudulent
Conveyance statue. In the event that Guarantor shall claim that the amount of
its liability hereunder is less than the amount of the Indebtedness, the burden
of proof with respect to the amount of such liability shall not constitute
continuing consent to subsequent instances where such consent is required and in
all cases such consent may be granted or withheld in the sole discretion of
Lender.
WAIVER OF RIGHT TO TRIAL BY JURY. In recognition of the higher costs and delay
which may result from a jury trial, guarantor and lender waive any right to
trial by jury of any claim, demand, action or cause of action (1) arising
hereunder, or (2) in any way connected with or related or incidental to the
dealings of the parties hereto with respect hereto or any other instrument,
document or agreement executed or delivered in connection herewith, in each case
whether now existing or hereafter arising, and whether sounding in contract or
tort or otherwise; and each party hereby agrees and consents that any such
claim demand, action or cause of action shall be decided by court trial without
a jury, and that any party hereto may file an original counterpart or a copy of
this section with any court as written evidence of the consent of the parties
hereto to the waiver of their right to trial by jury.
WAIVER AND SUBORDINATION. Guarantor irrevocably waives, disclaims and
relinquishes all claims against Borrower which Guarantor otherwise has or would
have by virtue of having executed this Guaranty, specifically including but not
limited to all rights of indemnity, contribution or exoneration.. In the event
of the payment by Guarantor to Lender of any amount whatsoever and the resultant
subrogation of Guarantor to the rights of Lender by reason of such payment, the
amount of the remaining Indebtedness of Borrower to Lender after the payments by
Guarantor pursuant to this Guaranty shall have priority over any claim that
Guarantor may have against Borrower, whether or not Borrower is at such time or
thereafter becomes insolvent. Guarantor further expressly subordinates any
claim against Borrower upon any account whatsoever to any claim that Lender may
have against Borrower at any time and for any reason.
EACH UNDERSIGNED GUARANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS
GUARANTY AND AGREES TO ITS TERMS. IN ADDITION, EACH GUARANTOR UNDERSTANDS THAT
THIS GUARANTY IS EFFECTIVE UPON GUARANTOR'S EXECUTION AND DELIVERY OF THIS
GUARANTY TOP LENDER AND THAT THE GUARANTY WILL CONTINUE UNTIL TERMINATED IN THE
MANNER SET FORTH IN THE SECTION TITLED "DURATION OF GUARANTY." NO FORMAL
ACCEPTANCE BY LENDER IS NECESSARY TO MAKE THIS GUARANTY EFFECTIVE. THIS
GUARANTY IS DATED OCTOBER 23, 1995.
GUARANTOR:
PULSAR DATA SYSTEMS, INC.
BY: /S/ WILLIAM H. DAVIS, SR.
--------------------------------
WILLIAM H. DAVIS, SR., PRESIDENT
================================================================================
<PAGE>
Exhibit 10.8
PURCHASE ORDER NO. I BV000
Loral Federal Systems Company
9500 Godwin Drive, Manassas. VA 22110
Date: 17 November 1995
Seller: Litronic Industries Payment Terms: Net 30 Days
2950 Redhill Avenue
Costa Mesa, CA 92626
Attn: Mr. Jim Prohaska
1. PARTIES/TYPE OF CONTRACT
This Firm Fixed Price, Indefinite Delivery Indefinite Quantity Blanket Purchase
Order between Loral Federal Systems - Manassas. (hereafter referred to as
"Buyer") located at 9500 Godwin
Drive, Manassas, Virginia, and Litronic Industries, (hereinafter referred to as
"Seller") located at 2950 Redhill Avenue, Costa Mesa, California is placed on
the basis set forth herein.
The Buyer's procurement representative is the only person authorized to approve
changes to the terms and conditions or the requirements of the Purchase Order.
If the Seller complies with any order, direction, interpretation. approval. or
disapproval, conditional approval, or determination (written or oral), from
someone other than the Buyer's procurement representative, it shall be at
Seller's own risk and Buyer shall not he liable for any increased cost or delay
in performance in accordance with the requirements set forth herein. The Seller
shall ensure that all Seller's personnel are aware of this provision.
Buyer is a signatory to the Defense Industry Initiatives on Business Conduct and
Ethics (DII).
The Seller agrees to indemnify Buyer [or any amounts required to he paid to the
United States Government by virtue of the Seller's violation of Public Law 100-
67') (see FAR 52.203-10(c)). This applies to Purchase Orders over $25,000 or
Purchase Order modifications over $25,000.
2. PRODUCT/SERVICES
Seller will provide articles. services and/or data as set forth in Schedule A
attached hereto.
3. REQUIREMENTS/DATA
This is a rated order certified for national defense use. and Seller shall
follow all requirements of the Defense Priorities and Allocations System
Regulation (15 CFR Part 350). Seller accepts said
<PAGE>
rating unless rejected in writing within 10 days if "DO" rating, or S days if
"DX" rating from the date of order receipt.
Government Contract Number: F01620-95-D-0001.
DPAS Rating: None
4. PERIOD OF PERFORMANCE AND/OR DELIVERY SCHEDULE
Work under this Purchase Order shall commence on November 17, 1995 and continue
through November 16, 1997. The Buyer reserves the right to extend this purchase
order for up to six (6) additional consecutive one (I) year periods or any
portion thereof.
All articles, services and/or data shall be delivered to the following Buyer
location unless otherwise specified on the Buyer's Release Order:
Loral Federal Systems Company
9500 Godwin Drive
Manassas, Va. 22110
A. Transportation Routing Guidelines (Continental United States/CONUS): Seller
shall ship according to its best commercial practice. Freight charges are
included in the price of the products and title will pass at the receiving area
of the "Ship to Address" identified on Buyer's blanket release order. If Buyer
directs Seller to ship to an address other than the above stated address, the
Seller is required to provide Buyer with a copy (facsimile or electronic copy)
of the shippers "Bill of Lading", signed by the receiving location, and the
corresponding packing slip.
B. Packing Slip
Seller shall submit a packing slip with each shipment of supplies against this
Purchase Order/Release. At a minimum. the packing slip shall contain the
following information:
1) The Governments Delivery Order Number
2) Loral's Purchase Order Number/Release Number
3) Itemized list of supplies within the shipment
4) List of back-order items remaining to be delivered
5) Date of shipment
5. CONSIDERATION AND PAYMENT
SELLER'S OBLIGATION
2
<PAGE>
During the period of performance. Seller agrees to provide such services, data
or articles as Buyer may, from time to time, order during the life of this
Purchase Order at such prices or rates as identified in Schedule "A".
RELEASES
Releases against this Purchase Order shall be made on LFSC's standard order
release form, issued in numerical sequence, referencing this Purchase Order
number. Buyer shall be obligated only to the extent of such Releases as are
actually issued against this Order.
PRODUCT COMMITMENT AND PREFERENTIAL PRICING
(a) In consideration for the prices quoted, Buyer hereby agrees that all PCMCIA
Reader/Writers required and ordered by the Buyer for the DMS Program will be
provided by the Seller. This exclusivity is valid fur two (2) years from the
date of this purchase order and may be extended on a year by year basis at the
option of the Buyer.
(b) Notwithstanding subparagraph (a) above, Buyer may procure and sell
alternative or substitute PCMCIA Reader/Writers for the DMS Program in the
following circumstances: (1) if Seller's product is no lunger technically
compliant or market price competitive; (2) when required to do so by Buyer's
prime contract; or (3) when requested to do so by the Government. In the event
of circumstances (1). (2). or (3) above. Buyer will provide Seller the
opportunity to demonstrate to Loral that Seller's PCMCIA Reader/Writers will
provide the Government with the overall best value.
6. INVOICING
All invoice originals and one copy shall be submitted to the following
Loral Federal Systems Company (LFSC)
PO Box 190
Oswego, NY 13827-0190
Attn: Accounts Payable
INVOICES
Each invoice submitted for payment shall indicate complete Purchase Order and
Release number and be set up in accordance with the items specified in the
release issued against this Blanket Purchase Order. Payment terms are Net 30
Days from receipt of invoice at the above address.
7. TERMS AND CONDITIONS
This Purchase Order is subject to the following terms and conditions:
3
<PAGE>
LFS Terms and Conditions Litronic/DMS, November 10, 1995
Confidential Disclosure Agreement (CDA) Nu. 348-XX and Supplements issued
thereunder.
8. SPECIAL PROVISIONS
8.1 WARRANTY
The Seller shall provide its commercial warranty for a period of one (1) year
for products delivered under this purchase order. Warranty will start 30 days
after receipt of the product. Seller agrees to pass its warranty through to the
Buyer, the Buyer's maintenance provider, and the Government.
Product found defective during the warranty period will be returned to the
Seller at Seller's expense. Product return shipments shall require Seller to
provide a return authorization number to the Buyer or Buyer's authorized
representative prior to shipment.
Defective product returned to Seller for warranty repair, shall be repaired or
replaced at Seller's option, and returned to the Buyer no greater than 30 days
from receipt of malfunctioning product at Seller's facility.
8.2 PRICE PASS THROUGH TO MAINTENANCE PROVIDER
The Seller shall provide the products listed in Schedule "A" of this purchase
under directly to Buyer's Maintenance Provider at the prices contained within
this purchase order.
8.3 COMMERCIALLY AVAILABLE NEW HARDWARE MODELS AND VERSIONS OF COMMERCIAL
SOFTWARE
For each new commercially released hardware and software component currently
included in the approved product baseline. the Seller shall notify the Buyer in
writing within 45 days of the new release for possible incorporation into the
product baseline.
Seller agrees to continue to provide on 3.5" diskettes, the latest released
versions of all cryptologic libraries and device drivers as applicable to CIPG
1.5 for the following software/hardware platforms and others as required and
made available.
Operating System Hardware Platform
- ------------------------------------------------------------------------------
MS Dos 6.2 386+ (ie. 3896,486,586, etc.
- ------------------------------------------------------------------------------
Widows 3.11 386+
Windows for Workgroups 3.11 using MS DOS 6.2
- ------------------------------------------------------------------------------
4
<PAGE>
SCO Open Server 3.0 386+
- ------------------------------------------------------------------------------
Secureware SCO -SCO CMW+ 2.4 386+
- ------------------------------------------------------------------------------
Windows NT Client 3.51 386+
- ------------------------------------------------------------------------------
Windows NT Client 3.51 IBM Power PC
- ------------------------------------------------------------------------------
Windows NT Server 3.51 386+
- ------------------------------------------------------------------------------
Windows NT Server 3.51 IBM Power PC
- ------------------------------------------------------------------------------
Windows NT Client 3.51 DEC ALPHA
- ------------------------------------------------------------------------------
Windows NT Client 3.51 MIPS
- ------------------------------------------------------------------------------
MAC OS 7.5 68020+
- ------------------------------------------------------------------------------
HP/UX 9.04 and 9.05 PA-RISC
- ------------------------------------------------------------------------------
HP/UX 10.0 PA-RISC
- ------------------------------------------------------------------------------
8.4 COMMERCIAL NON-AVAILABILITY OF HARDWARE AND SOFTWARE COMPONENTS
For any occurrence of commercial non-availability of a commercial component
currently included in Seller's products identified on Schedule A, the Seller
shall propose in writing within 15 calendar days, a substitute commercial
component(s) (if available) for incorporation into the product baseline. If
there is no substitute commercial component available, the Seller shall propose
a solution that maintains the approved functional baseline and results in
minimal impact to the remaining commercial components currently included in the
approved product baseline.
8.5 CONFIGURATION CONTROL
Seller shall not make changes to the configuration of any items contained within
Schedule A that affect form, fit or function of the product without the prior
written approval of the Buyer. Any proposed changes to form, fit or function
shall require that Seller advise Buyer in writing including a detailed
description of the change with anticipated performance impact.
8.6 REPLACEMENT OF PRODUCTS
The Buyer reserves the right to require the Seller to replace any product(s)
which has been submitted for repair service three times in any six month period,
excluding repairs due to Buyer or Government fault or negligence. The Buyer
shall bear no additional cost for such replacements. All replacement products
shall have a new serial number and include a product warranty.
5
<PAGE>
8.7 END-OF-LIFE NOTIFICATION
Seller shall notify Buyer ninety (90 days in advance of Seller's decision to
terminate the production or availability of any products provided under this
purchase order. All new products for consideration by Buyer shall he forwarded
as a notification package which shall include a product overview and technical
specifications and if available, sample product for acceptance testing.
Seller's notification shall include: Manufacturer s part number, new pan
number, last date to order, last date of delivery, reason the product is being
obsoleted.
8.8 FAR 52.245-2 GOVERNMENT PROPERTY (FIXED PRICE CONTRACTS)
Government Property clause FAR 52-245-2 is incorporated herein by this
reference. Seller is not authorized to acquire and/or fabricate any Special
Tooling or Special Test Equipment during the performance of this contract.
8.9 VIRGINIA EXEMPTION-RESALE
This purchase order is exempt from sales tax due to resale: Loral Federal
Systems Company Virginia account number 001617306-1.
9. ORDER OF PRECEDENCE
In the event of an inconsistency in this Purchase Order, unless otherwise
provided herein, the inconsistency shall be resolved by giving precedence in the
following order: a) Purchase Order Including Special Provisions b) LFS Terms
and Conditions e) All other documents
10. ACCEPTANCE
This Purchase Order is the entire agreement between Buyer and Seller. It
supersedes all prior agreements, oral or written and all other communications
relating to the subject matter of this Purchase Order.
Any terms contained in Seller invoices, acknowledgments, shipping instructions
or other forms that are inconsistent with or different from this Purchase Order
shall be void and of no effect.
This Purchase Order is executed in duplicate originals as of the date specified
on page one.
Please sign and return this Purchase Order to Buyer within ten (10) working days
after receipt.
LFS - Manassas Litronic Industries
9500 Godwin Drive 43088 Wintergrove Drive
Manassas, VA 22110 Ashburn, VA 22011
6
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/s/ JAMES E. GREEN /s/ JAMES S. PROHASKA
- --------------------------------- ---------------------------------
Name: James E. Green Name: James S. Prohaska
/s/ Sr. Contracts Administrator /s/ Director Business Development
- --------------------------------- ---------------------------------
Nov 17, 1995 Nov 17, 1995
- --------------------------------- ---------------------------------
Date Date
/s/ KRIS SHAH, PRESIDENT & CEO
---------------------------------
Kris Shah, President & CEO
Nov 17, 1995
---------------------------------
Date
7
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LFSC TERMS AND CONDITIONS
LITRONIC / DMS, November 17, 1995
1. AGREEMENT DOCUMENTS
This Purchase Order (PO) and any attachments are the complete agreement between
Buyer and Seller. Additional provisions contained in any attachment shall apply
in addition to and take precedence over provisions set forth herein. No other
document, including Seller's proposal, quotation or acknowledgment forms, shall
be a part of this agreement, even if referred to, unless specifically agreed to
by Buyer in writing. No right that Buyer has regarding this PO may be waived or
modified except in writing by Buyer.
2. TERMS OF PAYMENT
Terms of payment and discount arrangements agreed upon must appear in this PO.
Calculations shall be from the date Buyer receives an acceptable invoice.
3. PACKAGES
Packages/shipping documents must bear Buyer's PO number, line item number and
show quantity or gross and net weights.
4. TRANSPORTATION
Routing - As indicated in Transportation Routing Guidelines in this PO
F.O.B. - Unless otherwise specified, ship collect F.O.B. origin.
Prepaid Transportation - (when specified) Charges must be supported by a paid
freight bill or equivalent.
Cartage - No charge allowed unless authorized by Buyer
Premium Transportation - No charge allowed unless authorized by Buyer
Insurance - No charge allowed unless authorized by Buyer
Consolidation - Unless otherwise instructed, consolidate all daily shipments to
one destination on one bill of lading.
5. SELLER PERFORMANCE
Deleted
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6. INSPECTION OF GOODS
Buyer may return product(s) that do not conform to its specifications, as agreed
to by the Seller, and/or are not free from defects in materials and workmanship.
Buyer will obtain Seller return authorization prior to returning non-conforming
products. Payment shall not constitute an acceptance of the goods nor impair
Buyer's right to inspect or any of its remedies.
7. GOVERNING LAW
New York law shall govern this PO. However, all Federal clauses contained in
this PO or incorporated by reference shall be construed and interpreted in
accordance with Federal law including, but not limited to, burden of proof and
calculation of damages.
8. COMPLIANCE WITH LAWS AND REGULATIONS
Seller shall submit all certifications required by Buyer under this PO and shall
at all times, at its own expense, comply with all applicable Federal, State and
local laws, ordinances, administrative orders, rules or regulations.
9. GIFTS
Seller shall not make or offer a gratuity or gift of any kind to Buyer's
employees or their families. Seller should note that the providing of gifts or
attempting to provide gifts under government subcontracts may be a violation of
the Anti-Kickback Act of 1986 (4 U.S.C. 51-58).
10. TAXES
Seller shall pay all sales and use taxes, including personal property taxes, if
any, unless otherwise agreed in writing.
11. PRICE
If price is not stated in this PO, Seller agrees that the rates and charges
under this PO shall not exceed those offered to others for similar work,
services, or products.
12. RESERVATION OF RIGHTS
Buyer's failure to enforce at any time or for any period any one or more of the
terms of this PO shall not be a waiver of them or of Buyer's right to enforce
all terms and conditions of this PO. If any provision of this PO is held to be
invalid, illegal or unenforceable by a court of competent jurisdiction, the
validity, legality, and enforceability of the remaining provisions shall remain
in full force and effect.
9
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13. NOTIFICATION OF CONFLICTS
The Seller shall notify the Buyer immediately, in writing, of any conflicts
(obvious, apparent or potential) between any of the documents specified herein.
Recommendations for correction, or resolution of conflict shall accompany such
notification. Correction and/or clarification of any of the documents specified
herein shall be done between the parties in writing, and no implementation of
such correction, resolution, clarification or interpretation shall be
accomplished without Buyer's written authorization.
14. BUYER FURNISHED DATA AND MATERIALS
All data and materials furnished by Buyer to Seller under this PO including
drawings, specifications and written information and Buyer-owned parts and/or
Buyer-owned tools and equipment shall be used solely for the work to be
performed under this PO. Seller shall repair and maintain all tools at its own
expense unless agreed to otherwise. Seller agrees to promptly return all such
data and materials upon completion of the work or termination of this PO. Seller
agrees to return all materials in the same condition as delivered to Seller,
reasonable wear and tear excepted.
15. NOTICE OF DELAY
Seller agrees to immediately notify Buyer in writing of any actual or potential
delay in Seller's performance under this PO. Such notice shall, at a minimum,
describe the cause, effect, duration and corrective action proposed by Seller to
address the problem. Seller shall give prompt written notice to the Buyer of all
changes to such conditions.
16. PUBLICITY
Seller shall not, without first obtaining Buyer's prior written consent,
advertise or otherwise disclose or publish the fact that Seller has furnished or
agreed to furnish goods or services to Buyer under this PO. The Seller further
agrees to include this or an equivalent provision in any subcontract awarded as
a result of this PO.
17. CONFIDENTIAL INFORMATION
Seller shall not at any time, even after the expiration or termination of this
PO, use or disclose to any person for any purpose other than to perform this PO,
any information it receives, directly or indirectly from Buyer in connection
with this PO, except information that is or becomes publicly available, or is
rightfully received by Seller from a third party without restriction. Upon
request by Buyer, Seller shall return to Buyer all documentation and other
material containing such information.
10
<PAGE>
To the extent that seller discloses to the buyer any information that it deems
to be confidential or proprietary, such disclosure must be done pursuant to, and
shall be governed by, the separately negotiated Confidential Disclosure
Agreement between the parties.
18. PATENTS AND COPYRIGHTS
Seller shall settle or defend, at its expense, and pay all finally awarded
costs, fines, attorney fees and damages (including royalties for semiconductor
chip products), resulting from all proceedings or claims against Buyer, its
parent, its subsidiaries and affiliates and their respective customers, for
infringement by the goods furnished under this PO, or by any use thereof, of
patents (including utility models and registered designs), copyrights, and
protection provided for semiconductor chip products (or similar intellectual
property rights), now or hereafter existing in the United States and any other
country where Seller, its subsidiaries or affiliates have furnished or furnish
similar goods. Seller shall notify Buyer if Seller is or becomes aware of any
right of, or protection accorded to a third party as set forth above that might
affect Seller's ability to provide goods under this PO or limit Buyer's freedom
to use or sell such goods anywhere in the world. Buyer shall provide notice to
Seller of any such proceeding or claim of which it becomes aware. Buyer may
actively participate in any such proceedings at its own expense. Seller shall
have no liability for the combination of the goods furnished hereunder with
apparatus not provided or proposed by Seller, or for required compliance by
Seller with written specifications furnished by Buyer if such infringement
cannot be avoided by the Seller in complying with such specifications. This
provision states the entire rights and obligations of the Seller and Buyer
regarding infringement and shall survive expiration or termination of this PO.
19. EXPORT OF TECHNICAL DATA
Seller shall not, nor shall Seller authorize or permit its employees, agents or
subcontractors to disclose, export or re-export any Buyer information, or any
process, product or service that is produced under this PO, without prior
notification to Buyer and complying with all applicable Federal, State and local
laws, regulations and ordinances, including the regulations of the U.S.
Department of Commerce and/or the U.S. Department of State. In addition, Seller
agrees to immediately notify Buyer if Seller is listed in the Table of Denial
Orders published by the Department of Commerce, or if Seller's export privileges
are otherwise denied, suspended or revoked in whole or in part.
With respect to Seller's products, Buyer agrees to comply with all applicable
United States export laws and regulations.
20. INDEMNITY
Seller shall indemnify and defend Buyer against all claims, demands, actions,
suits, or causes of action arising from any act or omission of Seller, its
agents, subcontractors or employees in the performance of any of its obligations
under this PO.
11
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21. INDEPENDENT CONTRACTOR
Seller is and shall remain an independent contractor with respect to all
performance rendered under this PO. Neither Seller nor any employee of Seller
shall be considered an employee or agent of Buyer for any purpose. Seller and
its employees shall have no authority to bind or make commitments on behalf of
Buyer for any purpose and shall not hold itself or themselves out as having such
authority. Seller assumes full responsibility for its actions and the actions of
its personnel. Seller shall have sole responsibility for the supervision, daily
direction and control, payment of salary (including withholding of income taxes
and social security), worker's compensation, disability benefits and the like of
its personnel. Seller assumes full responsibility for the acts of all of its
subcontractors.
22. ASSIGNMENT
Seller may not assign this PO without Buyer's specific written permission. Any
attempt by Seller to assign any of the rights, duties or obligations under this
PO is void.
23. SUBCONTRACTORS
Seller shall not subcontract the work to be performed under this PO without
Buyer's consent in writing, but Seller may purchase goods and services it
normally purchases to perform the work.
24. DISPUTES
Any dispute under this PO which is not settled by agreement of the parties may
be settled by appropriate legal or equitable proceedings before any court of
competent jurisdiction. It is understood and agreed that if any such dispute is
litigated, it shall be for the purpose of obtaining a judicial determination of
the question of law and/or fact, which is fair and reasonable; provided,
further, that pending resolution of any such dispute by settlement or final
judgment (including disputes not yet in litigation), Seller shall proceed in
accordance with Buyer's written directions.
25. DEPARTMENT OF DEFENSE EMPLOYEES
Seller warrants that no individual who is a former officer or employee of the
U.S. Department of Defense (DoD) who (a) left DoD service on or after April 16,
1987, and (b) served in a civilian position for which the rate of pay is equal
to or greater than the minimum rate of pay for Grade GS-13; or served in the
Armed Forces in a pay grade of 0-4 or higher, shall be employed or compensated
for services rendered under this PO within two years after they left service in
DoD, without specific written approval by Buyer. If Seller requests such
approval, Seller shall provide Buyer with any information needed to comply with
10 USCA 2397 (b) and (c).
26. WAGES AND HOURS
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<PAGE>
Seller shall maintain Worker's Compensation or Employers' Liability Insurance in
statutory amounts. Seller warrants that in the performance of this PO, Seller
has complied with ail of the provisions of the Fair Labor Standards Act of 1938
of the United States, as amended.
27. MINORITY AND WOMEN-OWNED BUSINESSES
Seller represents to Buyer that it has an active program to provide
opportunities for participation in its procurement process to minority and
women-owned businesses.
28. LIMITATION OF LIABILITY
Other than as expressly stated in this PO, Buyer shall not be liable for any
consequential (including lost profits or savings) or incidental damages based on
any breach or default of this PO.
29. INDEMNIFICATION FOR DEFECTIVE COST OR PRICING DATA
Seller agrees to furnish Buyer cost or pricing data under this PO if this PO
exceeds the established threshold or if otherwise requested by Buyer and also
agrees to furnish Buyer cost or pricing data for all modifications to the PO
involving aggregate increases and/or decreases in costs, plus applicable profits
exceeding the established threshold unless the price is (1) based on adequate
price competition; (2) based on established catalog or market prices of
commercial items sold in substantial quantities to the general public; or (3)
set by law or regulation. Seller agrees to furnish Buyer all information
required by Buyer to support any claimed exemption. In addition, if Seller is
required to furnish Buyer cost or pricing data under this PO, Seller agrees that
FAR Part 31, "Contract Cost Principles and Procedures" shall apply.
If Seller furnishes Buyer cost or pricing data and if Buyer's Customer (the U.S.
Government, Government prime contractor or a Government subcontractor)
determines that the price of Buyers contract with the Customer is reduced
because such price was overstated due to the Seller or any of Seller's lower
tier subcontractor's furnishing to Buyer cost or pricing data that was not
accurate, complete and current, then in addition to any other remedy provided by
law or under this PO, Seller agrees to indemnify and hold Buyer harmless to the
full extent of any loss, damage or expense resulting from such failure.
30. TERMINATION FOR CONVENIENCE
Buyer shall have the right to terminate this PO in whole or in part for
convenience regardless of dollar value in accordance with the provisions of FAR
52.249-2 (Fixed Price) or 52.249-6 (Cost Reimbursement) specifically
incorporated herein by reference, modified, however, by deleting paragraph (c)
or (d) and (I) thereof and further modified by deleting all references to one
(1) year as specified in paragraph (d) or (e), substituting therefor the period
of six (6) months.
13
<PAGE>
Title to all complete work and work in process under this PO shall pass to Buyer
immediately upon receipt by the Seller of Buyer's Notice of Termination, or as
otherwise directed by Buyer.
Buyer's right to terminate for convenience is available when the Buyer's
customer terminates Buyer's prime contract in whole or in part such that the
Seller's scope of work under this subcontract is eliminated from Buyer's prime
contract in whole or in part.
31. TERMINATION FOR DEFAULT
Buyer may, at its option, terminate all or part of this PO upon thirty (30) days
written notice in the event that (a) Seller fails to deliver in accordance with
the delivery requirement set forth in the PO; (b) the articles, services and/or
data delivered fail to conform to any provision or requirement of this PO; (c)
Seller so fails to make progress as to endanger performance of the PO; (d)
Seller's financial condition becomes unsatisfactory to Buyer; (e) Seller
otherwise breaches or defaults in the performance of any provision or
requirement of this PO. During the notice period, Seller has the opportunity to
cure and/or propose corrective actions that would result in satisfactory
performance on the contract. Acceptability of any such proposal shall be at the
sole discretion of the Buyer. Any corrective action proposal shall be completed
and presented to Buyer within 10 days of notice.
Upon receipt of such termination notice, Seller shall advise Buyer of the extent
to which performance has been completed through such date and if required by
Buyer, Seller shall deliver in a manner prescribed by Buyer whatever articles
and/or data exist. Seller shall be paid only for work received and retained by
the Buyers subject to a setoff and/or payment to Buyer of damages or losses
incurred by Buyer.
- - If after termination, it is determined that the Seller was not in default, or
that the default was excusable, the rights and obligations of the parties shall
be the same as if the PO has been terminated for convenience.
32. SPECIAL TOOLING AND SPECIAL TEST EQUIPMENT
Seller shall not incur any liability or cost for Special Tooling and Special
Test Equipment until and unless Buyer has notified Seller in writing that
consent to acquire -- or fabricate Special Tooling and Special Test Equipment
has been obtained.
Acquisition of Special Tooling and Special Test Equipment, if any, will be in
accordance with FAR 52.245-17 and 52.245-18, respectively, and any additional
terms as may be stated in this PO.
33. APPROVALS BY BUYER
14
<PAGE>
Whenever the PO provides for submittal of preliminary design, components or
other items for review by Buyer, such approval or concurrence shall not be
construed as a determination by Buyer as to the adequacy of said design,
component or item, nor as an agreement that the designs, components, or
items satisfy the requirements of this PO. Such approval or concurrence is
solely for the purpose of ensuring Buyer's awareness of Seller's general
approach and progress in meeting the requirements under this PO.
Notwithstanding, Seller remains responsible for correcting any errors or
deficiencies existing in the submitted design, component, or other items
and for meeting all requirements of this PO.
34. RESIDENCY OF PERSONNEL
In order to assess Seller's performance under this PO, Buyer may station
technical or other personnel at Seller's facilities. Seller agrees to make
available to Buyer's personnel all reasonable assistance including office
equipment, space and clerical help at no additional cost to Buyer.
35. NOTIFICATION OF DEBARMENT/SUSPENSION
By acceptance of this PO either in writing or by performance, Seller
certifies that as of the date of award of this PO neither the Seller, nor
any of its principals, is debarred, suspended, or proposed for debarment by
the Federal Government. Further, Seller shall provide immediate written
notice to the Buyer in the event that during performance of this PO the
Seller or any of its principals is debarred, suspended, or proposed for
debarment by the Federal Government.
36. QUALITY ASSURANCE
The Buyer, and/or personnel authorized by Buyer, shall have the right, at
all reasonable times, to visit Seller's facilities or such parts thereof as
may be engaged in work relating to this PO in order to verify that Seller's
performance is in accordance with all requirements of this PO. In addition,
the Buyer, and/or personnel authorized by Buyer, shall have the right, at
all reasonable times, to visit the facilities of the Seller's lower-tier
subcontractors or such parts thereof as may be engaged in work relating to
this PO. The Seller shall include a like provision in all related lower-
tier subcontracts. Nothing herein shall give the Buyer the right to issue
direct orders or instructions to Seller's lower-tier subcontractors. Seller
shall be furnished prior notice of any planned visit.
37. CHANGES
Buyer may at any time by written order, make changes within the general
scope of this PO including but not limited to the following: (i) drawings,
designs, or specifications; (ii) method of shipment or packing; (iii) place
of inspection, delivery or acceptance; and
15
<PAGE>
(iv) the amount of Buyer or third party furnished property. If such changes
cause an increase or decrease in the cost of or the time required for the
performance of any part of the work under this PO, whether changed or not
changed by any such written order, an equitable adjustment shall be made in
the price or delivery schedule or both and the PO shall be modified in
writing accordingly. Any claim for equitable adjustment by the Seller under
this clause must be asserted within 30 days from the date of receipt by the
Seller of the notification of change. Where the cost of property made
obsolete or excess as a result of a change is included in Seller's claim
for equitable adjustment pursuant to this clause, Buyer shall have the
right to prescribe the manner of disposition of such property. Failure to
agree to any equitable adjustment shall be a dispute concerning a question
of fact within the meaning of the "Disputes" provision of this PO.
38. FEDERAL ACQUISITION REGULATION REFERENCES
The text of all FAR/DFAR/NASA clauses referred to in this PO shall be that
in effect on the date of the prime contract or if no prime contract number
is cited, text shall be that in effect on the date of this PO. The
following FAR, DFAR and NASA clauses are incorporated by reference and
Seller agrees that the following definitions shall apply in interpreting
these provisions, except where the context requires different construction:
"Government" shall mean Buyer, "Contracting Officer" shall mean Buyer's
Procurement Representative and "Contractor" shall mean Seller. The above
definitions shall apply except for those clauses concerning audit and
access to records where the Seller has expressly denied Buyer access.
To the extent that a clause incorporated by reference below by its nature
or terms is meant to apply only to work performed on a fixed price or cost
reimbursement basis, then such clause shall only apply to fixed-price or
cost reimbursable efforts under this PO, as applicable. Similarly, to the
extent that a clause incorporated by reference below by its nature or terms
is meant to apply only to the provision of supplies or the provision of
services, then such clause shall apply only to the provision of supplies or
services under this PO, as applicable.
FAR References:
52.202-1 Definitions (SEP 91)
52.203-1 Officials Not to Benefit (APR 84)
52.203-10 Price or Fee Adjustment for Illegal or Improper Activity (SEP 90)
52203-12 Limitation on Payments to Influence Certain Federal Transactions
(JAN 90)
52.203-3 Gratuities (APR 84)
52 203-5 Covenant Against Contingent Fees (APR 84)
52.203-4 Restrictions on Subcontractor Sales to the Government (JUL 85)
52.203-7 Anti-Kickback Procedures (OCT 88)
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52.203-8 Procurement Integrity (NOV 90)
52.204-2 Security Requirements (APR 84)
52.208-1 Required Sources for Jewel Bearings and Related Items (APR 84)
52.209-6 Protecting the Government's Interest when Subcontracting with
Contractors Debarred, Suspended, or Proposed for Debarment
(NOV 92)
52.209-7 Organizational Conflicts of Interest Certificate-Marketing
Consultants (NOV 91)
52.210-5 New Material (APR 84)
52.212-13 Stop-Work Order (Fixed Price) (AUG 89)
52.212-13 (Alt.1) Stop-Work Order (Cost Reimbursable) (APR 84)
52.215-1 Examination of Records by Comptroller General (FEB 93)
52.215-2 Audit-Negotiation (FEB 93)
52.215-22 Price Reduction for Defective Cost or Pricing Data (DEC 91)
52.215-23 Price Reduction for Defective Cost or Pricing Data Modification
(DEC 91)
52 215-24 Subcontractor Cost or Pricing Data (DEC 91)
52 215-25 Subcontractor Cost or Pricing Data - Modifications (DEC 91)
52.215-26 Integrity of Unit Prices (if in excess of $25,00) (APR 91)
52.216-11 Cost Contract - No Fee (CLIN 009) (APR 84)
52.216-18 Ordering (CLINs 002 thru 008) (APR 84)
(Para (a), insert, "from date of award for a period of eight (8)
years, if options exercised")
52.216-19 Delivery-Order Limitations (CLINs 002 thru 008) (APR 84)
(Para (a) Minimum order - $0
para (b) Maximum order:
1) Single item - $
2) Combination of items
3) Series of orders - 10 calendar days,
para (d), insert, "14")
52.216-22 Indefinite Quantity (CLINs 002,003 and 005 thru 008) (APR 84)
(Para (d) insert "102 months")
52.216-7 Allowable Cost and Payment (CLINs 001 and 009) (JUL 91)
52.216-8 Fixed Fee (CLIN 001) (APR 84)
52.217-9 Option to Extend the Term of the Contract (MAR 89)
(Para (a) insert "30 days"
Para (c) insert "eight years plus six months to physically
complete existing delivery orders")
52.219-13 Utilization of Women-Owned Small Businesses (if in excess of
$25,000) (AUG 86)
52.219-8 Utilization of Small Business Concerns and Small Disadvantaged
Business Concerns (if in excess of $10,000) (FEB 90)
52.219-9 Small Business and Small Disadvantaged Business Subcontracting
Plan (if in excess of $500,000) (JAN 91)
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52.220-3 Utilization of Labor Surplus Area Concerns (if in excess of
$25,000) (APR 84)
52.220-4 Labor Surplus Area Subcontracting Program (if in excess of -
$500,000) (APR 84)
52.222-1 Notice to the Government of Labor Disputes (APR 84)
52.222-21 Certificate of Nonsegrated Facilities (if in excess of $10,000)
(APR 84)
52.222-26 Equal Opportunity (APR 84)
52.222-29 Notification of Visa Denial (APR 84)
52.222-35 Affirmative Action for Special Disabled and Vietnam Era Veterans
(if in excess of $10,000) (APR 84)
52.222-36 Affirmative Action for Handicapped Workers (if in excess of
$2,500) (APR 84)
52.222-37 Employment Reports on Special Disabled Veterans and Veterans of
the Vietnam Era (if in excess of $10,000) (JAN 88)
52.222-4 Contract Work Hours and Safety Standards Act - Overtime
Compensation (MAR 86)
52.223-2 Clean Air and Water (if in excess of $100,00) (APR 84)
52.223-3 Hazardous Material Identification and Material Safety Data
(NOV 91)
52.223-5 Certification Regarding a Drug-Free Workplace (JUL 90)
52.223-6 Drug-Free Workplace (JUL 90)
52.225-10 Duty-Free Entry (APR 84)
52.225-11 Restrictions on Certain Foreign Purchases (MAY 92)
52.225-3 Buy American Act - Supplies (JAN 89)
52.225-7 Balance of Payments Program (APR 84)
52.225-9 Buy American Act - Trade Agreements Act - Balance of Payments
Program (MAY 86)
52.226-1 Utilization of Indian Organizations and Indian-Owned Economic
Enterprises (AUG 91)
52.227-1 Authorization and Consent (APR 84)
52.227-10 Filing of Patent Applications - Classified Subject Matter
(APR 84)
52.227-11 Patent Rights - Retention by the Contractor (Short Form)
(applicable to small business) (JUN 89)
52.227-12 Patent Rights - Retention by the Contractor (Long Form)
(applicable to large business) (JUN 8 9)
52.227-14 Rights in Data - General (JUN 87)
52.227-19 Commercial Computer Software - Restricted Rights (JUN 87)
52.227-2 Notice and Assistance Regarding Patent and Copyright Infringement
(APR 84)
52.227-3 Patent Indemnity (APR 84)
52.227-6 Royalty Information ((APR 84)
52.227-9 Refund of Royalties (APR 84)
52.228-5 Insurance -- Work on a Government Installation (SEP 89)
52.229-3 Federal, State, and Local Taxes (JAN 91)
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52.229-5 Taxes -- Contracts Performed in U.S. Possessions or Puerto Rico
(APR 84)
52.229-4 Taxes--Foreign Fixed-Price Contracts (JAN 91)
52.229-4 Taxes--Foreign Cost-Reimbursement Contracts (MAR 90)
52.232-11 Extras (APR 89)
52.232-17 Interest (JAN 91)
52.232-22 Limitation of Funds (APR 84) (CLINs 001 and 009)
52.232-7 Payments under Time-and-Materials and Labor-Hour Contracts
(APR 84) (CLIN 004) Alternate II (JAN 86)
52.237-2 Protection of Government Buildings, Equipment and Vegetation
(APR 84)
52.242-1 Notice of Intent to Disallow Costs (APR 84) (CLINs 001 and 009)
52.242-13 Bankruptcy (APR 91)
52.243-1 Changes -- Fixed-Price (AUG 87) (CLINs 002,003,005 thru 008)
Alternation II (APR 84)
52.243-2 Changes - Cost-Reimbursement (AUG 87) (CLINs 001 and 009)
Alternation II (APR 84)
52.243-3 Changes -- Time-and-Materials or Labor-Hours (AUG 87) (CLIN 004)
52.243-7 Notification of Changes (APR 84)
(Para (b), insert"ones')
52.244-1 Subcontracts (Fixed-Price Contracts (APR 91) (CLINs 002 thru 008)
52.244-2 Subcontracts (Cost-Reimbursement and Letter Contracts) (JUL 85)
(CLINs 001 and 009) Alternate I (APR 85)
52.244-3 Subcontracts (Time-and-Materials and Labor-Hour Contracts)
(APR 85) (CLIN 004)
52.244-5 Competition in Subcontracting (APR 84)
52.245-2 Government Property (DEC 89) (CLINs 002 thru 008)
52.245-5 Government Property (Cost Reimbursement, Time-and Material, or
Labor Hour Contracts) (JAN 86) (CLINs 001,004 and 009)
52.246-2 Inspection of Supplies -- Fixed-Price (JUL 85) (CLINs 0002, 0003
and 0008)
52.246-4 Inspection of Services - Fixed Price (FEB 92) (CLINs 0005, 0006,
0007)
52.246-5 Inspection of Services - Cost Reimbursable (APR 84) (CLINs 0001,
0009)
52.246-6 Inspection~of Services - Time & Material/Labor Hour (JAN 86)
(CLIN 0004)
52.246-15 Certificate of Conformance (APR 84) (CLINs 0002 and 0003)
52.246-16 Responsibility for Supplies (APR 84) (CLINs 0002 and 0003)
52.247-63 Preference for U.S.-Flag Air Carriers (APR 84)
52.247-64 (Alt I, Alt II) - Preference for Privately Owned U.S. Flag
Commercial Vessels (APR 84)
52 249-14 Excusable Delays (APR 84) (CLINs 001 and 004)
52 249-6 Termination (Cost Reimbursement) (Alt V) (APR 84) (CLINs 001,004
and 009)
19
<PAGE>
52.249-8 Default (Fixed-Price Supply and Service) (APR 84) (CLINs 002,
003,005 thru 008)
52.253-1 Computer Generated Forms (JAN 91)
The following DFAR provisions shall also apply in addition to or in lieu of the
FAR provisions set forth herein if work for the Department of Defense is
involved.
252.203-7000 Statutory Prohibition on Compensation to Former
Department of Defense Employees (DEC 91)
252.203-7001 Special Prohibition on Employment (if over $25,000)
(APR 93)
252 203-7002 Display of DoD Hotline Poster (DEC 91)
252 203-7003 Prohibition Against Retaliatory Personnel Actions
(APR 92)
252.204-7000 Disclosure of Information (DEC 91)
252.204-7003 Control of Government Personnel Work Product (APR 92)
252.205-7000 Provision of Information To Cooperative Agreement
Holders
252.209-7000 Acquisitions from Subcontractors Subject to On-Site
Inspection Under the Intermediate-Range Nuclear Forces
(INF) Treaty (DEC 91)
252.211 -7015 Technical Data and Computer Software - Commercial Items
(MAY 91)
252.211 -7017 Certification of Technical Data and Computer Software
Conformity Commercial Items (MAY 91)
252.215-7000 Pricing Adjustments (DEC 91)
252.219-7003 Small Business and Small Disadvantaged Business
Subcontracting (DoD Contracts) (MAY 94)
252.223-7004 Drug-Free Workforce (SEP 88)
252.223-7006 Prohibition on Storage and Disposal of Toxic and
Hazardous Materials (APR 93)
252.225-7001 Buy American Act and Balance of Payments (JAN 94)
(CLINs 002 and 003)
252.225-7002 Qualifying Country Sources as Subcontractors (DEC 91)
252.225-7007 Trade Agreements Act (DEC 91)
252.225-7010 Duty-Free Entry - Additional Provisions (DEC 91)
252 225-7012 Preference for Certain Domestic Commodities (MAY 94)
252 225-7014 & (Alt I) Preference for Domestic Specialty Metals
(DEC 91)
252.225-7025 Foreign Source Restrictions (APR 93)
252.225-7026 Reporting of Overseas Subcontracts (if over $100,000)
(APR 93)
252.225-7031 Secondary Arab Boycott of Israel (JUN 92)
252.225.7009 Duty-Free Entry -- Qualifying Country End Products and
Supplies (DEC 91)
252.227-7000 Non-Estoppel (OCT 66)
252.227-7013 Rights in Technical Data and Computer Software
(OCT 88)
252.227-7018 Restrictive Markings on Technical Data (OCT 88)
20
<PAGE>
252.227-7019 Identification of Restricted Rights Computer Software
(APR 88)
252.227-7026 Deferred Delivery of Technical Data or Computer
Software (APR 88)
252.227-7027 Deferred Ordering of Technical Data or Computer
Software (APR 88)
252.227-7029 Identification of Technical Data (APR 88)
252.227-7030 Technical Data - Withholding of Payment (OCT 88)
NOTE: Payment withholding has been decreased from ten
percent (10%) to five percent (5%)
252.227-7031 Data Requirements (OCT 88)
252.227-7037 Validation of Restrictive Markings on Technical Data
(APR 88)
252.228-7005 Accident Reporting and Investigation Involving
Aircraft, Missiles, and Space Launch Vehicles
252 231-7000 Supplemental Cost Principles (DEC 91)
252 231-7001 Penalties of Unallowable Costs (MAY 94) (CLINs 001 and
009)
252.232-7006 Reduction or Suspension of Contract Payments Upon
Finding of Fraud (AUG 92)
252.233-7000 Certification of Claims and Requests for Adjustment or
Relief (MAY 94)
252.243-7000 Engineering Change Proposals (MAY 94) (For CLIN 001
substitute the following for the last sentence in para (b)
of the clause: "Change orders issued under the Changes
clause of this contract are not an authorization to exceed
the estimated cost in the schedule unless there is a
statement in the change order or other contract
modification, increasing the estimated cost.")
252.243-7001 Pricing of Contract Modifications (DEC 91) (CLINs 002
thru 008)
252.246-7000 Material Inspection and Receiving Report (DEC 91)
252.246-7001 Warranty of Data (DEC 91) Alternate II (DEC 91)
252.247-7023 Transportation of Supplies by Sea (DEC 91)
252 247-7024 Notification of Transportation of Supplies by Sea
(DEC 91)
252 249-7001 Notification of Substantial Impact on Employment if
over $500,000) (DEC 91)
The following Air Force Supplements to the FAR provisions shall also apply in
addition to or in lieu of the FAR provisions set forth herein if work for the
Air Force is involved:
5352.204-9000 Notice of Gov't Security Activity (SEP 85)
5352.204-9001 Visitor Group Security Agreements (JAN 90)
5352.210-9000 Elimination of Class I Ozone Depleting Substances (MAY 93)
5352.216-9001 Payment of Fee (JUL 92)
5352.216-9002 Award Fee, AFMC Far Sup (JUL 92)
5352.219-9001 Incorporation of Subcontracting Plan (JUL 92)
5352.223-9000 Safety & Accident Prevention (APR 84)
21
<PAGE>
5352.228-9500 Insurance Clause Implementation (JUL 93)
5352.232-9502 Limitation of Funds (DEC 84)
5352.239-9501 Contractor Sponsored Modifications (MAR 93)
5352.239-9504 Segregation of Costs
5352.243-9501 Not-To-Exceed Cost Agreement (DEC 84)
22
<PAGE>
To: FAX --IBMAIL
From: John Rice LOCKHEED MARTIN FEDERAL SYSTEMS
1801 State Route 17C
Oswego, New York USA 13827
Subject: (O) Litronics Name Change
Dick....
Subject: Name Change
Reference: Purchase Orders
This letter is to notify you that Loral Federal Systems is now part of Lockheed
Martin Corporation and will hereafter be doing business as Lockheed Martin
Federal Systems, Inc. The name identified in our purchase order(s) is (are)
hereby changed to reflect this transition.
This change does not affect the legal entity which previously existed does
result in the name change reflected.
All invoicing and deliveries in support of the current contractual agreements
shall refer to Lockheed Martin Federal Systems, Inc.
Thank you for your cooperation in this matter, and be assured that all other
aspects of our business relationship remain intact.
Regards,
---------------- ----------------
John Rice
International/Overseas Procurement
TEL: 607 751-6542 / FAX 607 751-6038
Internet: [email protected]
23
<PAGE>
Lockheed Martin Federal Systems
1801 State Route 17C, Owego, NY 13627-3998
LOCKHEED MARTIN
BUSINESS CREDIT APPLICATION INFORMATION
Date_________________
Mailing Address: Lockheed Martin Federal Systems - Owego
Accounts Payable
P.O. Box 190
Owego, NY 13827-0190
Trade (Credit) References: Phone: Person to Contact:
- -------------------------- ------ ------------------
Endicott Precision (607) 754-7076 Ron Oliveira
1328-30 Campville Road
Endicott, NY 13760
The Matco Electronics Group (607) 729-8973 James T. Matthews
320 N. Jensen Road
Vestal NY 13850
Amphenol Interconnect Products (607) 786-4214 Robert Jahn
20 Valley Street
Endicott, NY 13760
Bank Reference: Phone: Person to Contact:
- --------------- ------ ------------------
Bank of America, Illinois (312) 828-3094 Pat Nakano
Lockheed Martin Federal Systems is a division of Lockheed Martin Corporation,
and the Lockheed Martin Group tax ID# is: 133751580.
Other credit information may be accessed through Dun and Bradstreet; DUNS
number: 00-164-2719.
Any further inquires in this regard should be referred to J. J. Repasky at
(607)751-2231.
Signatures of Applicants:
24
<PAGE>
/S/ JOHN J. REPASKY /S/ ALLEN G. JORGENSEN
- ----------------------------------- --------------------------------
J. J. Repasky A. G. Jorgensen
LMFS Accounts Payable Manager LMFS Procurement Manager
25
<PAGE>
PURCHASE ORDER NUMBER IBV000
LITRONIC INDUSTRIES
SCHEDULE A
11/17/95
===============================================================================
CONTRACT CLIN# TYPE OEM DESCRIPTION OEM PART NO. UNIT PRICE
===============================================================================
H0013 External SCSI ARGUS/2102 050-1016 $188.36
- -------------------------------------------------------------------------------
H0014 External Parallel ARGUS/2202 050-1017 $160.36
- -------------------------------------------------------------------------------
H0015 Internal ARGUS/2000 050-1012 $ 80.36
- -------------------------------------------------------------------------------
LEAD TIMES FOR PRODUCT (First 60 Days After Contract Award):
======================================
QUANTITY ORDERED DELIVERY LEAD TIME
======================================
1 - 199 60 Days
--------------------------------------
200 - 1000 75 Days
--------------------------------------
1001 + 90 Days
--------------------------------------
LEAD TIMES FOR PRODUCT (61 + Days After Contract Award):
======================================
QUANTITY ORDERED DELIVERY LEAD TIME
======================================
1 - 199 20 Days
--------------------------------------
200 - 500 45 Days
--------------------------------------
501 - 1000 60 Days
--------------------------------------
1001 + 90 Days
--------------------------------------
NOTE: All lead times are stated in days after receipt of delivery order at
Litronic.
26
<PAGE>
LFS TERMS AND CONDITIONS
LITRONIC / DMS, NOVEMBER 17, 1995
TABLE OF CONTENTS
1. AGREEMENT DOCUMENT
2. TERMS OF PAYMENT
3. PACKAGES
4. TRANSPORTATION
5. SELLER PERFORMANCE
6. INSPECTION OF GOODS
7. GOVERNING LAW
8. COMPLIANCE WITH LAWS AND REGULATIONS
9. GIFTS
10. TAXES
11. PRICE
12. RESERVATION OF RIGHTS
13. NOTIFICATION OF CONFLICTS
14. BUYER FURNISHED DATA AND MATERIALS
15. NOTICE OF DELAY
16. PUBLICITY
17. CONFIDENTIAL INFORMATION
18. PATENTS AND COPYRIGHTS
19. EXPORT OF TECHNICAL DATA
20. INDEMNITY
21. INDEPENDENT CONTRACTOR
27
<PAGE>
LFS TERMS AND CONDITIONS
LITRONIC / DMS, NOVEMBER 17, 1995
22. ASSIGNMENT
23. SUBCONTRACTORS
24. DISPUTES
25. DEPARTMENT OF DEFENSE EMPLOYEES
26. WAGES AND HOURS
27. MINORITY AND WOMEN-OWNED BUSINESSES
28. LIMITATION OF LIABILITY
29. INDEMNIFICATION FOR DEFECTIVE COST OR PRICING DATA
30. TERMINATION FOR CONVENIENCE
31. TERMINATION FOR DEFAULT
32. SPECIAL TOOLING AND SPECIAL TEST EQUIPMENT
33. APPROVALS BY BUYER
34. RESIDENCY OF PERSONNEL
35. NOTIFICATION OF DEBARMENT/SUSPENSION
36. QUALITY ASSURANCE
37. CHANGES
38. FEDERAL ACQUISITION REGULATION REFERENCES
28
<PAGE>
EXHIBIT 10.9
LOAN AND SECURITY AGREEMENT
This Loan and Security Agreement (this "Agreement"), dated as of June 27,
1996, is entered into by and between Litronic Industries, Inc., a California
corporation (the "Company"), and Fidelity Funding of California, Inc., a
California corporation ("Fidelity"). In consideration of the mutual covenants
and agreements contained herein, the Company and Fidelity hereby agree as
follows:
Section 1. Definitions and Construction.
1.1. When used herein, the following terms shall have the following
meanings:
"Account" means the right of the Company to payment for goods sold or
leased or for services rendered which is not evidenced by an instrument or
chattel paper, whether or not earned by performance.
"Account Debtor" means the Person obligated to make payment on an Account.
"Affiliate" means, with respect to any Person, any other Person that
directly or indirectly controls, or is controlled by or under common control
with, such Person.
"Applicable Rate" means, as applicable, the Revolving Loan Rate, the Fixed
Asset Loan Rate, the Standby Facility Rate or the Real Estate Contract Rate.
"Borrowing Base" means an amount equal to the sum, determined by Fidelity
from time to time in its sole discretion, of (a) 85% of the face amount of
Eligible Accounts, plus at Fidelity's option, (b) the lesser of (i) $600,000 or
(ii) 50% of the value of Eligible Inventory.
"Borrowing Base Certificate" means a certificate in the form attached
hereto as Exhibit A, duly executed by an authorized officer of the company.
"Cash Collateral" has the meaning given to it in Section 10.
"Collateral" means all Personal Property Collateral and all Real Property.
"Concentration Limit" means, as of any date, an amount equal to 20% of the
face amount of Accounts outstanding on such date; provided that with respect o
Accounts owed by the United States or any department or instrumentality thereof,
"Concentration Limits means, as of any date, an amount equal to 50% of the face
amount of such Accounts outstanding on such date.
"Current Assets" means, as of any date, only those assets of the Company
that may, in the ordinary course of business, be converted into cash within a
period of one year from such date, but excluding (a) amounts due from employees,
officers, shareholders or directors of the company, (b) prepaid expenses for
services or for supplies that are not purchased for resale, and (c) amounts due
from Affiliates of the Company.
<PAGE>
"Current Liabilities" means, as of any date, all obligations of the Company
that are due within one year from such date.
"Debt" means, with respect to any Person, all indebtedness, obligations and
liabilities of such Person, including without limitation: (a) all liabilities
which would be reflected on a balance sheet of such Person prepared in
accordance with GAAP, (b) all obligations of such Person in respect of any
guaranty of a Debt or another Person, or (c) all obligations, indebtedness and
liabilities secured by any lien on or security interest in any property or
assets of such Person.
"Debt Coverage Ratio" means, for any period of three consecutive calendar
months, the ratio of EBITDA for such period to the sum of Interest Expense for
such period plus the Principal Repayment. For purposes of this definition, the
term "Principal Repayment" means, as of any date, the Current Liabilities as of
such date divided by four.
"EBITDA" means, for any period, the sum (determined without duplication, on
a consolidated basis and in accordance with GAAP) of (a) the Company's net
income (or net loss) for such period (including gains and losses from sales of
assets in the ordinary course of business) before provision for income taxes,
(b) the Interest Expense of the Company for such period, and (c) depreciation,
amortization and all other non-cash charges of the Company during such period to
the extent deducted in determining such net income.
"Eligible Accounts" means, at the time of determination thereof, all
Accounts other than (i) any Account which is payable more than 30 days from
invoice date, (ii) any Account which has been outstanding for more than 90 days
from invoice date, (iii) any Account as to which Fidelity does not have a valid
and perfected, first priority security interest, (iv) to the extent that the
aggregate outstanding Accounts owed by any single Account Debtor exceeds the
Concentration Limit, any Account owed by such Account Debtor, (v) any Account
that is owed by an Account Debtor that is an Affiliate of the Company or an
officer or employee of the Company, (vi) any Account that arises out of a sale
made or services performed outside of the Untied States or that is owed by an
Account Debtor located outside the United States, (vii) any Account that is owed
by a creditor or supplier of the Company or with respect to which any defense,
counterclaim or right of set off has been asserted, (viii) any Account owed by
an Account Debtor if more than 25% (in dollar amount) of such Account Debtor's
Accounts are 90 or more days past due, (ix) any Account that is owed by the
United States or any department, agency or instrumentality thereof, unless the
right to payment under such Account is assigned to Fidelity as Collateral in
full compliance with the Assignment of Claims Act of 1940, as amended (31 U.S.C.
3727) and (x) any Account that has not been approved by Fidelity, in its sole
and absolute discretion, for including in the Borrowing Base.
"Eligible Inventory" means, at the time of determination, all raw materials
and finished goods that are part of the Company's Inventory, valued at the lower
of cost or market value, that (i) are owned by the Company, are located in the
United States of America and, if located on leased or mortgaged premises, are
subject to the terms of a lien waiver letter executed by the
2
<PAGE>
landlord or mortgagee of such premises if deemed necessary by Fidelity in its
sole discretion, (ii) are ready for sale, and are not, in the opinion of
Fidelity, damages, obsolete or otherwise not readily salable at full value,
(iii) have been held in Inventory for not more than 120 days, (iv) are not on
lease or consignment or furnished under any contract of service from or to any
Person, (v) are subject o an enforceable, first priority, perfected security
interest in favor of Fidelity, (vi) are not the subject of an invoice giving
rise to an Eligible Account, and (vii) have been approved by Fidelity, in its
sole and absolute discretion for including in the Borrowing Base.
"Eligible Machinery and Equipment" means, at the time of determination, all
machinery and equipment, valued at the lower of cost or liquidation value, that
(i) are owned by the Company, are located in the United States of America and,
if located on leased or mortgaged premises, are subject to the terms of a lien
waiver letter executed by the landlord or mortgagee of such premises if deemed
necessary by Fidelity in its sole discretion, (ii) are not on lease or
consignment to any Person, (iii) are subject to an enforceable, first priority,
perfected security interest in favor of Fidelity, (iv) are not, in the opinion
of Fidelity, damages or obsolete, (v) are not fixtures, and (vi) have been
approved by Fidelity, in its sole and absolute discretion for inclusion in the
Borrowing Base.
"Environmental Laws" means any and all federal, state, local and foreign
statutes, laws, regulations, rules, orders, licenses, agreements or other
governmental restrictions relating to the environment or to emissions,
discharges or releases of pollutants or industrial, toxic or hazardous
substances into the environment, or otherwise relating to the manufacture,
processing, treatment, transport or handling of pollutants or industrial, toxic
or hazardous substances.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, together with all rules and regulations promulgated
with respect thereto.
"ERISA Plan" means any pension benefit plan subject to Title IV of ERISA
maintained by the Company or any Affiliate thereof with respect to which the
Company has a fixed or contingent liability.
"Event of Default" has the meaning given it in Section 12.
"Fixed Asst Loan" has the meaning given to it in Section 3.
"Fixed Asset Loan Amount" means the lesser of (a) $1,000,000 or (ii) 85% of
the forced liquidation value of the eligible Machinery and Equipment as
determined by an appraisal satisfactory to Fidelity.
"Fixed Asst Loan Maturity Date" means the earlier to occur of (a) the Fixed
Asset Loan Term Date or (b) the last day of the Term.
3
<PAGE>
"Fixed Asset Loan Rate" means a rate of interest equal to the lesser of (a)
the Prime Rate in effect from time to time plus three percent (3%) per annum and
(b) the maximum rate permitted by applicable law. The Fixed Asset Loan shall be
automatically increased or decreased, as the case may be, without notice to the
Company from time to time as of the effective date of each change in the Prime
Rate.
"Fixed Asset Loan Term Date" means the date which is five years from the
date hereof.
"GAAP" means generally accepted accounting principles and practices as
promulgated by the American Institute of Certified Public Accountants, applied
on a basis consistent with past practices.
"Indemnified Claims" means any and all claims, demands, actions, causes of
action, judgments, liabilities, damages and consequential damages, penalties,
fines, costs, fees, expenses and disbursements (including, without limitation,
fees and expenses of attorneys and other professional consultants and experts in
connection with any investigation or defense) of every kind, known or unknown,
existing or hereafter arising, foreseeable or unforeseeable, which may be
imposed upon, threatened or asserted against or incurred or paid by any
Indemnified Person at any time and from time to time, because of, resulting from
, in connection with or arising out of any transaction, act, omission, event or
circumstance in any way connected with the Collateral or the Transaction
Documents (including but not limited to enforcement of Fidelity's rights
thereunder or the defense of Fidelity's actions thereunder), excluding with
respect to any Indemnified Persons, any of the foregoing resulting from such
Indemnified Person's gross negligence or willful misconduct.
"Indemnified Persons" means Fidelity and its officers, directors,
shareholders, employees, attorneys, representatives and Affiliates.
"Intangible Assets" means such of the Company's assets as are treated as
intangible pursuant to GAAP, including without limitation: (a) obligations owing
by officers, directors, shareholders, employees, subsidiaries, Affiliates or any
Person in which any such officer, director, shareholder, employee, subsidiary,
or Affiliate owns any interest and (b) any asset which is intangible or lacks
intrinsic or marketable value or collectability, including but not limited to;
goodwill, noncompetition agreements, patents, copyrights, trademarks,
franchises, organization or research and development costs.
"Interest Expense" means, for any period, all interest charges paid or
accrued by the Company during such period.
"Inventory" means all goods, now owned or hereafter acquired by the
Company, wherever located, that are held for sale or lease or are to be
furnished under any contract of service (including, but not limited to raw
materials, work in process, finished goods and materials used or consumed in the
manufacture or production thereof, goods in which the
4
<PAGE>
Company has an interest in mass or a joint or other interest or rights of any
kind, and goods which have been returned to or repossessed or stopped in transit
by the Company).
"Late Payment Rate" means a per annum rate of interest equal to the lesser
of (a) the Applicable Rate plus four percent (4%) and (b) the maximum rate
permitted by applicable law.
"Mortgage" means the Deed of Trust, Assignment of Rents, Security Agreement
and Fixture Filing dated of even date herewith by and among the Company, First
American Title Insurance Company, as trustee, and Fidelity, as beneficiary.
"Obligations" means all indebtedness, obligations and liabilities of the
Company to Fidelity arising under the Transactions Documents, and all other
indebtedness, obligations and liabilities of the Company to Fidelity, whether
presently existing or hereafter arising, direct or indirect, primary or
secondary, joint or several, fixed or contingent, and whether originally payable
to Fidelity or to a third party and subsequently acquired by Fidelity.
"Person" means any individual, corporation, joint venture, partnership,
trust, unincorporated organization or governmental entity or agency.
"Personal Property Collateral" has the meaning given it in Section 9.
"Prime Rate" means the rate per annum published from time to time by The
Wall Street Journal as the base rate for corporate loans at large commercial
banks (or, if more than one such rate is published, the higher or highest of the
rates so published). If such rate is no longer published by The Wall Street
Journal, then Fidelity shall, in its sole discretion substitute the base or
prime rate for corporate loans at a large commercial bank for the base rate
published in The Wall Street Journal. Such rate may not necessarily be the
lowest or best rate actually charged to any customer of such commercial bank.
"Real Estate Loan" has the meaning given to it in Section 4.
"Real Estate Loan Amount" means the lesser of (a) $2,200,000 or (ii) 75% of
the appraised value of the Real Property as determined by an appraisal performed
in accordance with the provision of Section 6.1.
"Real Estate Loan Maturity Date" means the earlier to occur of (a) the Real
Estate Term Date or (b) the last day of the Term.
"Real Estate Loan Rate" means a rate of interest equal to the lesser of (a)
the Prime Rate in effect from time to time plus three and one-half percent
(3.5%) per annum and (b) the maximum rate permitted by applicable law. The Real
Estate Loan Rate shall be automatically increased or decreased, as the case may
be, without notice to the Company from time to time as of the effective date of
each change in the Prime Rate.
5
<PAGE>
"Real Estate Term Date" means the date which is seven years from the date
hereof.
"Real Property" means the Company's administrative office, manufacturing,
research and development facility located at 2950 Redhill Avenue, Costa Mesa,
California.
"Remittance Address" means the address designated in writing by Fidelity.
"Revolver Advance" has the meaning given to it in Section 2.1.
"Revolver Commitment" means $2,500,000.
"Revolving Loan Rate" means a rate of interest equal to the lesser of (a)
the Prime Rate in effect from time to time plus two percent (2%) per annum and
(b) the maximum rate permitted by applicable law. The Revolving Loan Rate shall
be automatically increased or decreased, as the case may be, without notice to
the Company from time to time as of the effective date of each change in the
Prime Rate.
"Shareholders Equity" means, as of any date, the shareholders' equity of
the Company as of such date determined in accordance with GAAP.
"Standby Facility" has the meaning given it in Section 3A.1.
"Standby Facility Amount" means $250,000.
"Standby Facility Maturity Date" means the earlier to occur of (a) the
Standby Facility Term Date or (b) the last day of the Term.
"Standby Facility Rate" means a rate of interest equal to the lesser of (a)
the Prime Rate in effect from time to time plus three percent (3%) per annum and
(b) the maximum rate permitted by applicable law. The Standby Facility Rate
shall be automatically increased or decreased, as the case may be, without
notice to the Company from time to time as of the effective date of each change
in the Prime Rate.
"Standby Facility Term Date" means the date which is five years from the
date hereof.
"Tangible Net Worth" means, as of any date, the amount obtained by
subtracting the Company's Intangible Assets as of such date from the sum of (i)
the Company's Shareholders' Equity as of such date plus (ii) all obligations for
borrowed money owed by the Company to its shareholders, provided that such
obligations have been subordinated to the Obligations on terms satisfactory to
Fidelity in its sole discretion.
"Term" has the meaning given to it in Section 14.4.
6
<PAGE>
"Termination Event" means (a) the occurrence with respect to any ERISA Plan
of (i) a reportable event described in Sections 4043(b)(5) of ERISA or (ii) any
other reportable event described in Section 4043(b) of ERISA other than a
reportable event not subject to the provision for 30-day notice to the Pension
Benefit Guaranty Corporation pursuant to a waiver by such corporation under
Section 4043(a) of ERISA or (b) the withdrawal of the Company or any Affiliate
of the Company from any ERISA Plan during a plan year in which it was a
"substantial employer" as defined in Section 4001(a)(2) of ERISA, or (c) any
event or condition which might constitute grounds under Section 4042 of ERISA
for the termination of, or the appointment of a trustee to administer, any ERISA
Plan.
"Transactions Documents" means this Agreement, the Mortgage, and all other
documents and instruments executed and delivered in connection therewith.
"UCC" means the Uniform Commercial Code as in effect in the applicable
jurisdiction.
"Working Capital" means, as of any date, the excess of Current Assets over
Current Liabilities as of such date, provided that any Revolver Advances
outstanding as of such date shall, for purposes of the calculation of Working
Capital be treated as Current Liabilities regardless of their characterization
under GAAP.
1.2. Terms defined in the UCC and used but not defined herein shall have
the meanings ascribed to them in the UCC.
1.3. References herein to a particular agreement, instrument or document
also shall be deemed to refer to and include all renewals, extensions and
modifications of such agreement, instrument or document. All addenda, exhibits
and schedules attached to this Agreement are a part hereof for all purposes.
Words in the singular form shall be construed to include the plural and vice
versa, unless the context otherwise requires.
1.4. All interest accruing on the outstanding Revolver Advances shall be
calculated on the basis of actual days elapsed (including the first but
excluding the last day) plus three (3) business days and a year of 360 days.
All interest otherwise accruing hereunder shall be calculated on the basis of
actual days elapsed (including the first but excluding the last day) and a year
of 360 days. Unless otherwise expressly provided herein or unless Fidelity
otherwise consents, all financial statements and reports furnished to Fidelity
hereunder shall be prepared, and all financial computations and determinations
pursuant hereto shall be made, in accordance with GAAP. All payments received
by Fidelity after its internally established time for closing business on any
business day shall be applied as of the next succeeding business day. Any
payment which is due on a day which is not a business day shall instead be
deemed to be due on the next succeeding business day, and interest thereon shall
accrue and be payable at the then applicable rate during the time of such
extension. Fidelity's records in respect of loans advanced, accrued interest,
payments received and applied and other matters in respect of calculation of the
amount of the Obligations shall be deemed conclusive absent demonstration of
error. All
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statements of account rendered by Fidelity to the Company relating to principal,
accrued interest or costs owing by the Company under this Agreement shall be
presumed to be correct and accurate unless, within 30 days after receipt
thereof, the Company shall notify Fidelity in writing of any claimed error
therein.
Section 2. Revolver Advances.
2.1. Subject to the terms of this Agreement, including, without
limitation, Section 6, Fidelity shall make advances to the Company (each a
"Revolver Advance and collectively the "Revolver Advances") from time to time
during the Term; provided, however, that the aggregate principal amount of
Revolver Advances outstanding at any time shall not exceed the lesser of (i)
Borrowing Base determined by Fidelity from time to time and (ii) the Revolver
Commitment. Ech Revolver Advance must be greater than or equal to $5,000 or
must equal the unadvanced portion of the Borrowing Base. The Company hereby
agrees to repay to Fidelity all Revolver Advances made to the Company hereunder,
together with interest thereon, in the manner provided herein. The principal
owing hereunder in respect of the Revolver Advances at any given time shall
equal the aggregate amount of Revolver Advances made hereunder minus all
principal payments on the Revolver Advances received by Fidelity hereunder.
Subject to the terms and conditions hereof, the Company may borrow, repay and
reborrow Revolver Advances under this Agreement.
2.2 Each request by the Company to Fidelity for a Revolver Advance
hereunder must be in writing or promptly confirmed in writing. Each such
written request or confirmation shall be accompanied by a "Borrowing Base
Certificate" in the form attached hereto as Exhibit "A," together with (i) one
copy of an invoice for each Account described in such Borrowing Base Certificate
and evidence of shipment of the sale of goods or services covered thereby, (ii)
any necessary waivers and releases for labor, services, equipment or material of
the Company or any other Person on Fidelity's form, and (iii) a schedule of
Eligible Inventory, setting forth the location of all such Inventory, including
Eligible Inventory not in the possession of the Company and the name of the
Person in possession thereof.
2.3. Promptly after receiving each Borrowing Base Certificate, Fidelity
shall, based upon such Borrowing Base Certificate and such other information
available to Fidelity, redetermine the Borrowing Base, which redetermination
shall take effect immediately and remain in effect until the next such
redetermination. If all conditions precedent to any Revolver Advance requested
have been met, Fidelity will on the date requested make such Revolver Advance
available to the Company by wire transfer to the account designated in writing
by the Company. In the event Fidelity does not receive an appropriately
completed Borrowing Base Certificate, Fidelity shall have no obligation to
redetermine the Borrowing Base or make any additional Revolver Advances
hereunder.
2.4. If the aggregate unpaid principal balance of the Revolver Advances
exceeds the Borrowing Base at any time, the Company shall, upon receipt of
notice thereof from Fidelity,
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<PAGE>
immediately repay the principal of the Revolver Advances in an amount at least
equal to such excess. Any principal repaid pursuant to this Section 2.4. shall
be in addition to, and not in lieu of, all payments otherwise required to be
paid under the Transaction Documents.
2.5. The aggregate unpaid principal balance of the Revolver Advances shall
bear interest at the Revolving Loan Rate in effect from time to time. All
accrued and unpaid interest on the Revolver Advances shall be due and payable by
the Company to Fidelity on the last day of each calendar month.
2.6. The aggregate unpaid principal balance of the Revolver Advances plus
all accrued but unpaid interest thereon shall be payable by the Company to
Fidelity on the last day of the Term.
Section 3. Fixed Asset Loan.
3.1. Subject to the terms and conditions hereof, including, without
limitation, Section 6, Fidelity agrees to make a loan to the Company in an
amount equal to the Fixed Asset Loan Amount. The Company hereby agrees to repay
to Fidelity the Fixed Asset Loan, together with interest thereon, in the manner
provided herein. The principal owing hereunder in respect of the Fixed Asset
Loan at any given time shall equal the Fixed Asset Loan Amount minus all
principal payments on the Fixed Asset Loan received by Fidelity hereunder.
3.2. If upon receipt of any appraisal of the Eligible Machinery and
Equipment (or upon such other information then available to Fidelity) Fidelity
determines that the liquidation value of the Eligible Machinery and Equipment is
less than the outstanding principal balance of the Fixed Asset Loan, the Company
shall, upon receipt of notice thereof from Fidelity, immediately repay the
principal of the Fixed Asset Loan in an amount at least equal to such excess.
Any principal repaid pursuant to this Section 3.2 shall be in addition to, and
not in lieu of, all payments otherwise required to be paid under the Transaction
Documents.
3.3. The aggregate unpaid principal balance of the Fixed Asset Loan shall
bear interest at the Fixed Asset Loan Rate in effect from time to time. All
accrued and unpaid interest on the Fixed Asset Loan shall be due and payable by
the Company to Fidelity on the last day of each calendar month.
3.4. Prior to the Fixed Asset Loan Maturity Date, principal of the Fixed
Asset Loan shall be payable in monthly installments, due and payable on the last
day of each calendar month, in an amount which would amortize the principal of
the Fixed Asset Loan in full on the Fixed Asset Loan Term Date, which amounts
shall be set forth in a schedule prepared by Fidelity and provided to the
Company. The aggregate principal balance of the Fixed Asset Loan plus all
accrued but unpaid interest thereon shall be due and payable by the Company to
Fidelity on the Fixed Asset Loan Maturity Date.
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<PAGE>
Section 3A. Standby Facility.
3A.1. Subject to the terms and conditions hereof, including, without
limitation, Section 6, Fidelity agrees to make a loan to the Company in an
amount equal to the Standby Facility Amount. The Company hereby agrees to repay
to Fidelity the Standby Facility, together with interest thereon, in the manner
provided herein. The principal owing hereunder in respect of the Standby
Facility at any given time shall equal the Standby Facility Amount minus all
principal payments on the Standby Facility received by Fidelity hereunder.
3A.2. The aggregate unpaid principal balance of the Standby Facility shall
bear interest at the Standby Facility Rate in effect from time to time. All
accrued and unpaid interest on the Standby Facility shall be due and payable by
the Company to Fidelity on the last day of each calendar month.
3A.3. Prior to the Standby Facility Maturity Date, principal of the
Standby Facility shall be payable in monthly installments, due and payable on
the last day of each calendar month, in an amount which would amortize the
principal of the Standby Facility in full on the Standby Facility Term Date,
which amounts shall be set forth in a schedule prepared by Fidelity and provided
to the Company. The aggregate principal balance of the Standby Facility plus
all accrued but unpaid interest thereon shall be due and payable by the Company
to Fidelity on the Standby Facility Maturity Date.
Section 4. Real Estate Loan.
4.1. Subject to the terms and conditions hereof, including, without
limitation, Section 6, Fidelity agrees to make a loan to the Company in an
amount equal to the Real Estate Loan Amount. The Company hereby agrees to repay
to Fidelity the Real Estate Loan, together with interest thereon, in the manner
provided herein. The principal owing hereunder in respect of the Real Estate
Loan at any given time shall equal the Real Estate Loan Amount minus all
principal payments on the Real Estate Loan received by Fidelity hereunder.
4.2. The aggregate unpaid principal balance of the Real Estate Loan shall
bear interest at the Real Estate Loan Rate in effect from time to time. All
accrued and unpaid interest on the Real Estate Loan shall be due and payable by
the Company to Fidelity on the last day of each calendar month.
4.3. Beginning one year after the date hereof and prior to the Real Estate
Loan Maturity Date, principal shall be payable in monthly installments, due and
payable on the last day of each calendar month, in an amount which would
amortize the principal of the Real Estate Loan in full on the Real Estate Loan
Term Date, which amounts shall be set forth in a schedule prepared by Fidelity
and provided to the Company. The aggregate principal balance of the Real Estate
Loan plus all accrued but unpaid interest thereon shall be due and payable by
the Company to Fidelity on the Real Estate Loan Maturity Date.
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<PAGE>
Section 5. Fees.
5.1. The Company shall pay to Fidelity an annual commitment fee in the
amount of $44,000, payable on the date hereof and on each anniversary of the
date hereof during the Term; provided that when the Real Estate Loan has bene
repaid in full, the commitment fee shall be reduced to 1% of sum of (i) the
Revolver Commitment and (ii) the then outstanding principal balance of the Fixed
Asset Loan (prorated during the year in which such reduction occurs). The
Company hereby authorizes Fidelity, at its sole discretion, to deduct the
commitment fee from any Advance hereunder.
5.2. As consideration for Fidelity's commitment to advance funds hereunder
the Company shall pay to Fidelity a minimum usage fee (in this section called
the "Minimum Usage Fee") of not less than $15,000 for each calendar month (or
fraction thereof, on a prorated basis) during the Term. In the event that the
income earned by Fidelity during any calendar month (or fraction thereof on a
prorated basis) pursuant to Sections 2.5 and 5.3 is less than the Minimum Usage
Fee, the Company shall pay to Fidelity the difference between the amount so
earned by Fidelity and the Minimum Usage Fee, regardless of Fidelity's prior
compensation. The Minimum Usage Fee for each calendar month shall be due and
payable on the first day of the next calendar month.
5.3. The Company shall pay to Fidelity a monthly servicing fee in an
amount equal to .13% of the average monthly outstanding balance of the Revolver
Advances for each calendar month. The monthly servicing fee for each calendar
month shall be due and payable on the first day of the next calendar month.
5.4. In addition to, and not in lieu of, any termination fee required by
Section 14.4, the Company shall pay to Fidelity a liquidation fee (in this
section called the "Liquidation Fee") in the amount of two percent (2%) of the
face amount of each Eligible Account included in the Borrowing Base that is
outstanding at any time during the Liquidation Period (as defined below) and
that Fidelity collects following collection efforts by Fidelity and excluding
collections in the ordinary course of business (i.e. paid within 30 days). The
Liquidation Fee shall be payable on the date on which Fidelity collects the
applicable Eligible Account. For purposes of this section, the term
"Liquidation Period" means a period beginning on the earliest of (i) the date of
commencement against or by the Company of any voluntary or involuntary case
under the federal Bankruptcy Code, (ii) the date of any general assignment by
the Company for the benefit of its creditors; (iii) the date of any appointment
or taking possession by a receiver, liquidator, assignee, custodian or similar
official of all or a substantial part of the Company's assets, or (iv) the date
of the cessation of business of the Company and ending on the date on which
Fidelity has actually received all fees, costs, expenses and other amounts owing
to it hereunder.
5.5. Contemporaneously with the execution and delivery hereof, the Company
shall pay to Fidelity (i) a fee of $12,000 to cover the costs of the
negotiation, preparation, execution and delivery of the Transaction Documents,
including the fees, if any, of outside legal counsel,
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<PAGE>
and (ii) costs of preparation of mortgage on the Real Property and a review of
the title commitment and title insurance policy on the Real Property. In
addition, the Company shall pay or reimburse Fidelity upon demand for all other
costs and expenses incurred by Fidelity in connection with its due diligence
review of the Company and the closing of the transactions contemplated hereby
and all reasonable attorney's fees, court costs and other expenses incurred by
Fidelity (whether or not litigation is commenced or judgment issued, and if
litigation is commenced whether at trial or any appellate level) in connection
with the enforcement by Fidelity of this Agreement or any other Transaction
Document, the protection or enforcement of Fidelity's interest in the
Collateral, the collection by Fidelity of the Collateral, or the representation
of Fidelity in connection with any bankruptcy case or insolvency proceeding
involving the Company, the Collateral, or any Account Debtor, including, without
limitation, any representation involving relief rom a stay motion, a cash
collateral dispute, an assumption or rejection motion or a dispute concerning
any proposed disclosure statement and plan proposed in any such proceeding.
5.6. Fidelity shall be entitled to collect upon demand its normal and
customary charges for the following routine services provided or obtained in the
course of performing its functions with respect to the Collateral: lock box
charges and wire transfers.
5.7. All interest, fees and other amounts due to Fidelity pursuant to this
Section 5 shall be payable on demand, and may, in Fidelity's sole discretion, be
deducted from Revolver Advances or paid from the Cash Collateral. All past due
amounts owed hereunder, including but not limited to, past due interest, fees
and other amounts, that are not paid when due shall bear interest from the date
due until paid at the Late Payment Rate.
Section 6. Conditions Precedent to the Loans.
6.1. Fidelity shall not be obligated to make the Fixed Asset Loan, the
Real Estate Loan, the Standby Facility or any Revolver Advance hereunder
(including the first) until it shall have received the following documents, duly
executed in form and substance satisfactory to Fidelity and its counsel:
(a) continuing unconditional and absolute guaranty by Kris Shah of all
Obligations;
(b) a certificate executed by the President and the Secretary of the
Company certifying (i) the names and signatures of the officers of the Company
authorized to execute Transaction Documents, (ii) the resolutions duly adopted
by the Board of Directors of the Company authorizing the execution of this
Agreement and the other Transaction Documents, and (iii) correctness and
completeness of the copy of the bylaws of the Company attached thereto;
(c) a certificate executed by the President and the Chief Financial Officer
of the Company certifying the satisfaction of the conditions set forth in
Section 7;
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(d) certificates regarding the due formation, valid existence and good
standing of the Company in the state of its organization issued by the
appropriate governmental authorities in such jurisdiction;
(e) a release executed by the Bank of Yorba Linda releasing all liens and
security interests of the Bank of Yorba Linda in the Collateral;
(f) a release executed by Finova releasing all liens and security interests
of Finova in the Collateral;
(g) endorsements naming Fidelity as an additional insured or loss payee, as
appropriate, on all liability insurance and all property insurance policies of
the Company;
(h) a satisfactory appraisal of the Real Property by an appraiser
acceptable to Fidelity;
(i) a satisfactory appraisal of the eligible Machinery and Equipment dated
within one month of the date hereof by an appraiser acceptable to Fidelity;
(j) a commitment for title insurance on the Real Property, acceptable to
Fidelity;
(k) the Mortgage;
(l) a Subordination Agreement executed by Kris Shah (the "Subordination
Agreement").
6.2. Fidelity shall not be obligated to make the Fixed Asset Loan, the
Real Estate Loan, the Standby Facility or any Revolver Advance hereunder
(including the first), unless (i) all representations and warranties made by the
Company in the Transaction Documents are true on and as of the date of the
making of the Fixed Asset Loan, the Real Estate Loan, the Standby Facility or
such Revolver Advance as if such representations and warranties had been made as
of the date thereof, (ii) the Company has performed and complied with all
agreements and conditions required in the Transactions Documents to be performed
or complied with by it on or prior to such date, (iii) no Event of Default or
any event or circumstance that, with the passage of time, the giving of notice
or both, would become an Event of Default shall have occurred, (iv) the making
of the Fixed Asset Loan, the Real Estate Loan, the Standby Facility or such
Revolver Advance shall not be prohibited by any law or any regulation or any
order of any court or governmental agency or authority, (v) the Company shall
have not repudiated or made any anticipatory breach of any of its obligations
under any Transaction Document, and (vi) Fidelity shall have approved the Fixed
Asset Loan, the Real Estate Loan, the Standby Facility or such Revolver Advance
in its sole discretion.
Section 7. The Company's Representations and Warranties. The Company
represents and warrants to Fidelity on the date hereof, and shall be deemed to
represent and warrant to
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Fidelity on the date on which the Fixed Asset Loan, the Real Estate Loan, the
Standby Facility or any Revolver Advance is made to the Company hereunder, that:
7.1. The Company is a corporation duly organized, validly existing and in
good standing under the laws of the state of its incorporation, with all
requisite power and authority to execute, deliver and perform its obligations
under this Agreement and the other Transaction Documents to which it is a party
and to conduct its business as presently conducted. The Company is duly
qualified and authorized to do business as a foreign corporation ans is in good
standing in all states in which such qualification and good standing are
necessary for the conduct by the Company of its business or the performance by
the Company of its obligations hereunder. The execution, delivery and
performance by the Company of this Agreement and the other Transaction Documents
to which it is a party do not and will not constitute (a) a violation of any
applicable law or the Company's articles or certificate of incorporation or
bylaws or (b) a material breach of any other document, agreement or instrument
to which the Company is a party or by which the Company is bound. This
Agreement and the other Transactions Documents to which the Company is a party
have been duly authorized, executed and delivered by the Company, and are legal,
valid and binding obligations of the Company enforceable against the Company in
accordance with their terms. No consent of, approval by, registration or filing
with or authorization from any governmental authority or agency is required in
connection with the execution, delivery or performance by the Company of this
Agreement or the other Transaction Documents to which it is a party.
7.2. None of the Eligible Accounts, the Eligible Inventory, the Eligible
Machinery and Equipment, the Real Property or any other Collateral is subject to
any lien, encumbrance, security interest or other claim of any kind or nature,
except for those liens that will be released upon the funding of the first
advance hereunder. The Company has not transferred, sold, pledged or given a
security interest in any of its Accounts, Inventory, machinery or equipment to
anyone other than Fidelity. There are no financing statements on file in any
public office governing any property of the Company of any kind, real or
personal, in which the Company is named in or has signed as the debtor, except
the financing statement or statements filed or to be filed in respect of this
Agreement or those statements on file that were disclosed in writing by the
Company to Fidelity prior to the execution and delivery of this Agreement.
7.3. The Company is the sole owner and holder of, and has good and
defensible title to, all Collateral.
7.4. The amount of each Eligible Account is due and owing to the Company
and represents an accurate statement of a bona fide sale, delivery and
acceptance of Inventory or performance of service by the Company to or for an
Account Debtor. The terms for payment of the Eligible Accounts are 30 days from
date of invoice and the payment of the Eligible Accounts is not contingent upon
the fulfillment by the Company of any further performance of any nature
whatsoever. There are no set-offs, allowances, discounts, deductions,
counterclaims against the Eligible Accounts or any claims by Account Debtors, of
any kind whatsoever, valid or invalid,
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<PAGE>
that have been or may be asserted as a basis for refusing to pay an Eligible
Account, in whole or in part, either at the time it is accepted by Fidelity for
inclusion in the Borrowing Base or prior to the date it is to be paid. To the
best of the Company's knowledge, each Account Debtor's business is solvent. The
Company has served or caused to be served any and all preliminary notices
required by law to perfect or enforce any mechanic's lien or stop notice or
bonded stop notice for the Eligible Accounts and the information contained in
those notices is true and correct to the best of the Company's knowledge.
7.5. The address set forth below the Company's signature hereon is, and
for at least the last six months has been, the Company's mailing address, its
chief executive office, its principal place of business, the office where all of
the books and records concerning the Eligible Accounts are maintained and the
location of all Collateral. Prior to January 4, 1995, the Company's legal name
was Dril-Tron, Inc. The Company does not transact business, and has not
transacted business during the past five years, under any trade, fictitious or
assumed name, other than Dril-Tron, Inc. and those set forth under the Company's
signature hereon. During the past five years, the Company has not been a party
to a merger or consolidation and has not acquired all or substantially all of
the assets of any Person.
7.6. The Company has filed all tax reports and returns required to be
filed by it and has paid, when due and payable, all federal, state and local
taxes and governmental charges imposed upon the Company.
7.7. The Company is in compliance with ERISA, and is not required to
contribute to any "multiemployer plan" as defined in Section 4001 of ERISA. The
Company has conducted its business in material compliance with all applicable
laws, including but not limited to, applicable Environmental Laws, and maintains
and is in compliance with all licenses and permits required under any such laws
to conduct its business and perform its obligations hereunder. The Company doe
snot have any known material contingent liability under any Environmental Law.
7.8. The application made by the Company to Fidelity in connection with
this Agreement and the statements made therein and in any materials furnished in
connection therewith are true and correct as of the date hereof. All financial
statements furnished by the Company to Fidelity in connection with such
application were prepared in accordance with GAAP and fairly present the
financial condition and results of operations of the Company as of the dates and
for the periods indicated therein.
7.9. There is no fact which the Company has not disclosed to Fidelity in
writing which could materially adversely affect the properties, business or
financial condition of the Company, or any of the Collateral, or which it is
necessary to disclose in order to keep the foregoing representations and
warranties from being misleading.
Section 8. Covenants of the Company. From the date hereof and until the
payment and performance is full of all of the Obligations, the Company covenants
with Fidelity that:
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8.1. The Company shall preserve and maintain its corporate existence, good
standing and authority to transact business in all jurisdiction where necessary
for the proper conduct of its business, and shall maintain all of its
properties, rights, privileges and franchises necessary in the normal conduct of
its business.
8.2. The Company shall permit Fidelity and its representatives, including
any appraisers, auditors and accountants selected by Fidelity, to inspect any of
the Collateral at any time during normal business hours. In addition, Fidelity
shall have the right, from time to time, to audit the Company's books and
records upon reasonable notice to the Company; provided that so long as no Event
of Default has occurred and is continuing, Fidelity shall not conduct more than
one audit per calendar quarter. The Company shall pay all costs associated with
any such audits at the rate of $700 per day per auditor plus reasonable out-of-
pocket expenses.
8.3. The Company shall maintain its books and records in accordance with
GAAP. The Company shall furnish Fidelity, upon request, such information and
statements as Fidelity shall request from time to time regarding the Company's
business affairs, financial condition and results of its operations. Without
limiting the generality of the foregoing, the Company shall provide Fidelity, on
or prior to the last day of each month, unaudited consolidated and consolidating
financial statements with respect to the prior month and, within 90 days after
the end of each of the Company's fiscal years, audited annual consolidated
financial statements and such certificates relating to the foregoing as Fidelity
may request including, without limitation, a monthly certificate from the
president and chief financial officer of the Company stating whether any events
of Defaults have occurred and stating in detail the nature thereof. The Company
shall provide Fidelity a Borrowing Base Certificate, appropriately completed and
with all attachments, at any time that Fidelity shall request and on or before
the last day of any calendar week in which the company does not request a
Revolver Advance. In addition, the Company shall furnish to Fidelity upon
request a current listing of all open and unpaid accounts payable and accounts
receivable, names, addresses and contact persons for Account Debtors, and such
other items of information that Fidelity may deem necessary or appropriate from
time to time. The Company immediately shall notify Fidelity in writing upon
becoming aware of the existence of any condition or circumstance that
constitutes an Event of Default or that would, with the giving of notice, the
passage of time or both, constitute an Event of Default. Any such written
notice shall specify the nature of such condition or circumstance, the period of
the existence thereof and the action that the Company proposes to take with
respect thereto.
8.4. The Company promptly shall notify Fidelity of any attachment or any
other legal process levied against the Company and any action, suit, proceeding
or other similar claim of $25,000 or more initiated against the Company.
8.5. The Company shall keep and maintain adequate insurance by insurers
acceptable to Fidelity with respect to its business and all Collateral, provided
that in no event shall such insurance coverage be less than the coverage set
forth on Exhibit "B." Fidelity agrees that as to the Collateral in existence as
of the date hereof, the coverage set forth on Exhibit "B" is
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<PAGE>
satisfactory. Such insurance shall cover loss, damages and liability of amounts
not less than reasonably requested by Fidelity and shall include, at a minimum,
business interruption insurance, insurance for workers compensation, general
premises liability, fire, casualty, theft and all risk. The Company shall cause
Fidelity to be an additional insured and loss payee under all policies of
insurance covering any of the Collateral, to the extent of Fidelity's interest.
The Company shall deliver copies of each insurance policy to Fidelity upon
request.
8.6. The Company shall file all tax reports and returns required to be
filed by it in the manner and at the times required by applicable law, and shall
pay all federal, state and local taxes and charges imposed upon the Company when
due.
8.7. The Company shall comply with ERISA and shall not become required to
contribute to any "multiemployee plan" as defined in Section 4001 of ERISA. The
Company shall conduct its business in material compliance with all applicable
laws, and shall maintain and comply with all licenses and permits required under
any such laws to conduct its business and perform its obligations hereunder.
Without limiting the generality of the foregoing, the Company shall comply in
all material respects with all Environmental Laws now or hereafter applicable to
the Company and shall obtain, at or prior to the time required by applicable
Environmental Laws, all environmental, health and safety permits, licenses and
other authorizations necessary for its operations. The Company promptly shall
furnish to Fidelity all written notices of violation, complaints, penalty
assessments, suits or other proceedings received by the Company with respect to
any alleged violation of or non-compliance with any Environmental Laws.
8.8. The Company shall maintain a Tangible Net Worth of not less than (i)
a negative $100,000 at any time after the date hereof, and (ii) the sum of a
negative $100,000 plus the greater of (A) $750,000 or (B) the net income of the
Company for its fiscal year 1996 at any time after December 30, 1996.
8.9. The Company shall maintain an Debt Coverage Ratio (determined as of
the last day of each calendar month) of not less than 1.5 to 1.0.
8.10. The Company shall at all times maintain Working Capital of not less
than (i) a negative $750,000 at any time after the date of the first funding
hereunder and (ii) a negative $250,000 at any time after December 30, 1996.
8.11. The Company shall not grant, create or allow to exist any security
interest, lien or other encumbrance on any of the collateral other than (i) the
lien and security interest granted to Fidelity herein, (ii) the existing
security interest of Phoenixcor on equipment of the Company, and (iii) purchase
money security interests in equipment of the Company at to which the Company has
given Fidelity written notice. The Company shall not execute any financing
statement in favor of any Person other than Fidelity, except a continuation
statement in favor of Phoenixcor or the holder of such a purchase money security
interest. The Company shall not
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<PAGE>
change its mailing address, chief executive office, principal place of business
or place where such records are maintained, open any new place of business,
close any existing place of business or change the location of any of the
Collateral or transact business under any trade, fictitious or assumed name
other than those set forth under the company's signature hereon without
providing at least 30 days' prior written notice to Fidelity.
8.12. The Company shall not accept any returns or grant any allowance or
credit (other than those returns, allowances and credits accepted or granted in
the ordinary course of the Company's business) to any Account Debtor without
notice to and the prior written approval of Fidelity. The Company shall provide
to Fidelity for each Account Debtor on Eligible Accounts a weekly report, in for
and substance satisfactory to Fidelity, itemizing all such returns and allowance
made during the previous week with respect to such Eligible Accounts.
8.13. The Company shall not incur, directly, or indirectly, any
obligations for borrowed money or otherwise under any promissory note, bond,
indenture or similar instrument, or in connection with the obligations of any
Person (whether by guaranty, suretyship, purchase or repurchase agreement or
agreement to make investments or otherwise), other than in favor of Fidelity or
Kris Shah, provided that, pursuant to the Subordination Agreement, any
obligations for borrowed money owed by the Company to Kris Shah shall be
expressly subordinated to the Obligations, in the normal and ordinary course of
the Company's business.
8.14. The Company shall not use any of the funds paid to the Company
hereunder directly or indirectly for personal, family, household or agricultural
purposes.
8.15. The Company shall not directly or indirectly become liable in
connection with the obligations of any Person, whether by guarantee, surety,
endorsement (other than endorsement of negotiable instruments for collection in
the ordinary course of business), agreement to purchase or repurchase, agreement
to make investments, agreement to provide funds or maintain working capital, or
any agreement to assure a creditor against loss, other than in favor of
Fidelity.
8.16. The Company shall not discontinue, or make any material change in,
its business as currently established, or enter any new or different line of
business not directly related to the Company's existing line of business.
8.17. The Company shall not make any loans or advances to or for the
benefit of any officer, director or shareholder of the Company except advances
for routine expense allowances in the ordinary course of business. The Company
shall not make any loans or advances to or for the benefit of any Affiliate of
the Company. The Company shall not make any payment on any obligation owing to
any officer, director, shareholder or Affiliate of the Company other than
payments to Kris Shah that are permitted under the Subordination Agreement.
8.18. The Company shall not purchase or otherwise acquire assets from any
Person outside the ordinary course of business of the Company.
18
<PAGE>
8.19. The Company shall not invest in or otherwise purchase or acquire the
securities of any Person.
8.20. The Company shall not sell or dispose of any of its assets other
than the sale of Inventory in the ordinary course of business, and the Company
shall not dissolve or liquidate or become a party to any merger or consolidation
with any Person.
Section 9. Personal Property Collateral. In order to secure the payment
of all Obligations, the Company hereby grants to Fidelity a security interest in
and lien upon all of the Company's right, title and interest in and to (a) all
Accounts, contract rights and general intangibles, receivables and claims
whether now or hereafter arising, all guaranties and security therefor and all
of the Company's right title and interest in the goods purchased and represented
thereby including all of the Company's rights in and to returned goods and
rights of stoppage in transit, replevin and reclamation as unpaid vendor; (b)
all Inventory and all accessions thereto and products thereof and documents
therefor; (c) all equipment and machinery, wherever located and whether now or
hereafter existing, and all parts thereof, accessions thereto, and replacements
therefor and all documents and general intangibles covering or relating thereto;
(d) except to the extent prohibited by law or contract, all books and records
pertaining to the foregoing, including but not limited to computer programs,
data, certificates, records, circulation lists, subscriber lists, advertiser
lists, supplier lists, customer lists, customer and supplier contracts, sales
orders, and purchasing records; and (e) all proceeds of the foregoing
(collectively, the "Personal Property Collateral"). The Company agrees to
comply with all appropriate laws in order and to take all actions necessary or
desirable in Fidelity's judgment to perfect Fidelity's security interest in and
to the Personal Property Collateral, to execute any financing statement or
additional documents as Fidelity may request and to deliver to Fidelity a list
of all locations of its Inventory, equipment and machinery and landlord and or
mortgagee lien waivers with respect to each site where Inventory, equipment or
machinery is located and which is either leased by the Company or has been
mortgaged by the Company, upon request by Fidelity.
Section 10. Collection. Each invoice representing an Account shall state
on its face that amounts payable thereunder are payable only at the Remittance
Address. Fidelity shall have the right at any time, either before or after the
occurrence of an Event of Default and without notice to the Company, to notify
any or all Account Debtors on the Personal Property Collateral of the assignment
of the Personal Property Collateral to Fidelity and to direct such Account
Debtors to make payment of all amounts due or to become due to the Company
directly to Fidelity, and to the extent permitted by law, to enforce collection
of any Personal Property Collateral and to adjust, settle or compromise the
amount or payment thereof. So long as no Event of Default or event that, with
the passage of time, the giving of notice or both, would become an Event of
Default has occurred and is continuing, all collections of Personal Property
Collateral or any other evidences of payment received by Fidelity shall be
applied by Fidelity to the payment of the Obligations of the Company to Fidelity
whether or not then due and any remaining funds shall be delivered to the
Company. Upon the occurrence of an Event of Default or an event that, with the
passage of time, the giving of notice or both, would become an Event of
19
<PAGE>
Default, any such remaining funds may be held by Fidelity as cash collateral
("Cash Collateral") until all Obligations have been paid in full and Fidelity
has not further obligation to advance funds to the Company. All amounts and
proceeds (including instruments and writings) received by the Company in respect
of the Personal Property Collateral shall be received in trust for the benefit
of Fidelity hereunder, shall be segregated from other funds of the Company and
shall be promptly paid over to Fidelity in the same form as received (with any
necessary endorsement) to be applied in the same manner as payments received
directly by Fidelity.
Section 11. Power of Attorney. The Company grants to Fidelity an
irrevocable power of attorney coupled with an interest authorizing and
permitting Fidelity, at its option, with or without notice to the Company, to do
any or all of the following: (a) endorse the name of the Company on any checks
or other evidences of payment whatsoever that may come into the possession of
Fidelity regarding Personal Property Collateral, including checks received by
Fidelity pursuant to Section 10 hereof; (b) receive, open and forward any mail
addressed to the Company and put Fidelity's address on any statements mailed to
Account Debtors; (c) upon the occurrence of an Event of Default, pay, settle,
compromise, prosecute or defend any action, claim, conditional waiver and
release, or proceeding relating to Personal Property Collateral; (d) upon the
occurrence of an Event of Default, notify, in the name of the Company, the U.S.
Post Office to change the address for delivery of mail addressed to the Company
to such address as Fidelity may designate (provided that Fidelity shall turn
over to the Company all such mail not relating to Personal Property Collateral);
(e) upon the occurrence of an Event of Default, verify, sign, acknowledge,
record, file for recording, serve as required by law, any claim of mechanic's
lien, stop notice or bonded stop notice in the sole and absolute discretion of
Fidelity relating to any Personal Property Collateral; (f) upon the occurrence
of an Event of Default, insert all recording or service information in any
mechanic's lien or assignment of rights under stop notice/bonded stop notice
which the Company has signed in connection with this Agreement, recorded or
served to enforce payment of the Personal Property Collateral; (g) execute and
file on behalf of the Company any financing statement, amendment thereto or
continuation thereof (i) deemed necessary or appropriate by Fidelity to protect
Fidelity's interest in and to the Personal Property Collateral or (ii) required
or permitted under any provision of this Agreement; and (h) upon the occurrence
of an Event of Default, do all other things necessary and proper in order to
carry out this Agreement. The authority granted to Fidelity herein is
irrevocable until this Agreement is terminated and all amounts due to Fidelity
hereunder have been paid in full.
Section 12. Default. An event of default ("Event of Default") shall be
deemed to have occurred hereunder, Fidelity shall have no further obligation to
make any further Revolver Advances and may immediately exercise its rights and
remedies with respect to the Collateral under this Agreement, the Uniform
Commercial Code and applicable law, upon the happening of one or more of the
following:
(a) The Company shall fail to pay as and when due any amount owed by the
Company to Fidelity, whether hereunder or otherwise.
20
<PAGE>
(b) The Company shall breach any covenant or agreement made herein or in
any other Transaction Document or any warranty or representation made herein or
in any other Transaction Document shall be untrue when made, and in either case,
the same shall not be cured to Fidelity's satisfaction within ten days after
such covenant or agreement is breached or such representation or warranty is
made; provided that if any such breach is impossible to remedy within ten days,
so long as the Company has undertaken(within the initial ten day cure period)
the steps necessary to remedy such breach and the Company diligently continues
to take all steps necessary to cure such failure, the ten day cure period will
be extended, but in no event shall the cure period exceed sixty days.
(c) Any report, certificate, schedule, financial statement, profit and loss
statement or other statement furnished by the Company, or by any other person on
behalf of the Company, to Fidelity is not true and correct in any material
respect.
(d) There shall be commenced by the Company or any guarantor of the
Obligations any voluntary case under the federal Bankruptcy Code, or the Company
or any guarantor of the Obligations shall make an assignment for the benefit of
its creditors, or of a receiver or custodian shall be appointed for the Company
or any guarantor of the Obligations for a substantial portion of its assets.
(e) There shall be commenced against the Company or any guarantor of the
Obligations any involuntary case under the federal Bankruptcy Code, which
remains undismissed for a period of sixty days.
(f) The Company shall become insolvent in that its debts are greater than
the fair value of its assets, or the Company is generally not paying its debts
as they become due.
(g) Any involuntary lien, garnishment, attachment or the like shall be
issued against or shall attach to the Collateral and the same is not released
within ten days.
(h) An event or circumstance shall have occurred which has or may result in
a material adverse change in the Company's financial condition, business or
operations.
(i) The Company shall have a federal or state tax lien filed against any of
its properties, or shall fail to pay any federal or state tax when due, or shall
fail to file any federal or state tax form or report as and when due.
(j) Either (i) any "accumulated funding deficiency" (as defined in Section
412(a) of the Internal Revenue Code of 1986, as amended) in excess of $25,000
exists with respect to any ERISA Plan, or (ii) any Termination Event occurs with
respect to any ERISA Plan and the then current value of such ERISA Plan's
benefit liabilities exceeds the then current value of such ERISA Plan's assets
available for the payment of such benefit liabilities by more than $25,000.
21
<PAGE>
(k) The Company suffers the entry against its final judgment for the
payment of money in excess of $35,000.
(l) Fidelity believes that the prospect for payment or performance of the
Obligations has become impaired.
(m) Any guarantor of the Obligations shall repudiate his, her or its
obligations in respect of such guaranty.
(n) Kris Shah, his spouse, the blood relatives of Kris Shah and any trusts
for the exclusive benefit of any blood relatives of Kris Shah, Kris Shah, his
spouse or lineal descendants cease to own or control in the aggregate at least
51% of the outstanding capital stock of the Company.
(l) Fidelity believes that the prospect for payment or performance of the
Obligations has become impaired.
(m) Any guarantor of the Obligations shall repudiate his, her or its
obligations in respect of such guaranty.
(n) Kris Shah, his spouse, the blood relatives of Kris Shah and any trusts
for the exclusive benefit of any blood relatives of Kris Shah, Kris Shah, his
spouse of lineal descendants cease to own or control in the aggregate at least
51% of the outstanding capital stock of the Company.
Upon the occurrence of an Event of Default described in subsections (d) or (e)
of this section, all of the Obligations owing by the Company to Fidelity under
any of the Transaction Documents shall thereupon immediately due and payable,
without demand, presentment, notice of demand or of dishonor and nonpayment, or
any other notice of declaration of any kind, all of which are hereby expressly
waived by the Company. During the continuation of any other Event of Default,
Fidelity, at anytime and from to time to time, may declare any or all of the
Obligations owing by the Company to Fidelity under any of the Transaction
Documents immediately due and payable, all without notice or declaration of any
kind, all of which are hereby expressly waived by the Company. After any such
acceleration (whether automatic or due to declaration by Fidelity), any
obligation of Fidelity to make any further Revolver Advances or loans of any
kind under this Agreement or any other agreement with the Company shall
terminate. All Revolver Advances hereunder are subject to approval by Fidelity
in its sole discretion, and may be declined in whole or in part, without prior
notice to the Company, whether or not an Event of Default may then be in
existence.
Section 13. Remedies and Application of Proceeds.
22
<PAGE>
13.1. In addition to, and with limitation of, the foregoing provisions of
this Agreement, if an Event of Default shall have occurred and be continuing,
Fidelity may from time to time in its discretion, without limitation and without
notice except as expressly set forth herein: (A) exercise in respect of the
Collateral, in addition to other rights and remedies provided for herein, under
the other Transaction Documents or otherwise available to it, all the rights and
remedies of a secured party on default under the UCC (whether or not the UCC
applies to the affected Collateral); (b) require the Company to, and the Company
hereby agrees that it will at its expense, assemble all or part of the
Collateral as directed by Fidelity and make it available to Fidelity at a place
to be designated by Fidelity that is reasonably convenient to both parties; (c)
reduce its claim to judgment or foreclose or otherwise enforce, in whole or in
part, the security interest created hereby by any available judicial procedure;
(d) dispose of, at its office, on the premises or the Company or elsewhere, all
or any part of the Collateral, as a unit or in parcels, by public or private
proceedings; (e) buy the Collateral, or any part thereof, at any public sale, or
at any private sale if the Collateral is of a type customarily sold in a
recognized market or is of a type that is the subject to widely distributed
standard price quotations; (f) apply by appropriate judicial proceedings for
appointment of a receiver for the Collateral, or any part thereof, and
the Company hereby consents to any such appointment; and (g) at its discretion,
retain the Collateral in satisfaction of the Obligations whenever the
circumstances are such that Fidelity is entitled to do so under the UCC or
otherwise. The Company agrees that, to the extent notice of sale shall be
required by law, unless a longer period of notice is prescribed by law, at least
five days' notice to the Company of the time and place of any public sale or the
time after which any private sale is to be made shall constitute reasonable
notification. Fidelity shall not be obligated to make any sale of Collateral
regardless of whether any notice of sale has been given. Fidelity may adjourn
any public or private sale from time to time by announcement at the time and
place fixed therefor, and such sale may, without further notice, be made at the
time and place to which it was so adjourned.
13.2. If any Event of Default shall have occurred and be continuing,
Fidelity may in its discretion apply any Cash Collateral, and any cash proceeds
received by Fidelity in respect of any sale of, collection from, or other
realization upon all or any part of the Collateral, to any or all of the
following in such order as Fidelity may elect: (a) the repayment of all or any
portion of the Obligations; (b) the repayment of reasonable costs and expenses,
including reasonable attorneys' fees and legal expenses, incurred by Fidelity in
connection with (i) the administration of this Agreement, (ii) the custody,
preservation, use or operation of, or the sale of, collection from, or other
realization upon, any Collateral, (iii) the exercise or enforcement of any of
the rights of Fidelity hereunder, or (iv) the failure of the Company to perform
or observe any of the provisions hereof; (c) the payment or other satisfaction
of any liens and other encumbrances upon any of the Collateral; (d) the
reimbursement of Fidelity for the amount of any obligations of the Company paid
or discharged by Fidelity, and of any expenses of Fidelity payable by the
Company hereunder or under the other Transaction Documents; (e) by holding the
same as Collateral; (f) the payment of any other amounts required by applicable
law (including, without limitation, Part 5 of Article 9 of the UCC or any
successor or similar applicable statutory
23
<PAGE>
provision); and (g) by delivery to the Company or to whomsoever shall be
lawfully entitled to receive the same or as a court of competent jurisdiction
shall direct.
Section 14. Miscellaneous.
14.1. In the event that the Company commits any act or omission that
prevents or unreasonably interferes with (a) Fidelity's exercise of the rights
and privileges arising under the power of attorney granted in Section 11 of this
Agreement or (b) Fidelity's perfection of or levy upon the security interest
granted in the Collateral, including any seizure of any Collateral, the Company
acknowledges that such conduct evils cause immediate, severe, incalculable and
irreparable harm and injury, and agrees that such conduct shall constitute
sufficient grounds to entitle Fidelity to an injunction, writ of possession, or
other applicable relief in equity, and to make such application for such relief
in any court of competent jurisdiction, without any prior notice to the Company.
14.2. All rights, remedies and powers granted to Fidelity in this
Agreement, or in any other instrument or agreement given by the Company to
Fidelity or otherwise available to Fidelity in equity or at law, are cumulative
and may be exercised singularly or concurrently with such other rights as
Fidelity may have. These rights may be exercised from time to time as to all or
any part of the Collateral as Fidelity in its discretion may determine. In the
event that Fidelity elects to purchase the Eligible Accounts hereunder, such
transaction shall constitute a purchase of Accounts under the UCC, and the
Company shall be deemed to have sold, assigned, transferred, conveyed and
delivered to Fidelity, as absolute owner, all of the rights, title and interest
of the Company in and to all Eligible Accounts. No waiver by Fidelity of its
rights and remedies shall be effective unless the waiver is in writing and
signed by Fidelity. A waiver by Fidelity of a right or remedy under this
Agreement or any other Transaction Document on one occasion shall not be deemed
to be a waiver of such right or remedy on any subsequent occasion. A Revolver
Advance by Fidelity during the-continuation of an Event of Default shall not
obligate Fidelity to make any further Revolve. Advances during the continuation
of such Event of Default.
14.3. Any notice or communication with respect to this Agreement or any
other Transaction Document shall be given in writing, sent by (i) personal
delivery, (ii) expedited delivery service with proof of delivery, (iii) United
States mail, postage prepaid, registered or certified mail, or (iv) prepaid
telegram, telex or telecopy, addressed to each party hereto at its address set
forth below its signature hereon or to such other address or to the attention of
such other Person as hereafter shall be designated in writing by the applicable
party sent in accordance herewith. Any such notice or communication shall be
deemed to have been given either at the time of personal delivery or, in the
case of delivery service or mail, as of the date of first attempted delivery at
the address and in the manner provided herein, or in the case of telegram, telex
or telecopy, upon receipt The Company hereby agrees that Fidelity may publicize
the transaction contemplated by this Agreement in newspapers, trade and similar
publications including, without limitation, the publication Of a "tombstone".
24
<PAGE>
14.4. The term of this Agreement shall be for one year from the date
hereof (the original term, and any extension thereof made by Fidelity pursuant
to this section, are herein called the "Term"); provided, however, that Fidelity
may extend the term hereof for additional one-year periods, if Fidelity elects
to do so in its sole discretion, by notifying the Company in writing at least 30
days before the end of the term then in effect; and provided further that
Fidelity may terminate this Agreement at any time effective immediately upon the
occurrence of an Event of Default. The Company acknowledges that it shall have
no right to terminate this Agreement prior to the end of the Term, that
termination of this Agreement at any time prior to the end of the Term would
result in the loss by Fidelity of benefits under this Agreement and that the
damages incurred by Fidelity as a result of such termination would be difficult
and impractical to ascertain. Therefore, in the event this Agreement is
terminated prior to the end of the Term for any reason or the Fixed Asset Loan
is repaid in full (no termination fee shall be due solely as a result of the
prepayment of the Real Estate Loan), the Company shall pay to Fidelity an early
termination fee in an amount equal to (x) the average monthly accrued interest
and fees earned by Fidelity hereunder prior to the date of termination
multiplied by (y) the number of months remaining in the Term as of the date of
termination, but in no event shall such early termination fee exceed the maximum
amount permitted by applicable law. Any termination of this Agreement shall not
affect Fidelity's security interest in the Collateral, and this Agreement shall
continue to be effective, until all Obligations have been paid in full.
14.5. Fidelity agrees that, so long as no Event of Default has occurred
and is continuing, upon receipt by Fidelity of payment in full of the
outstanding principal balance of the Real Estate Loan, together with interest
thereon, Fidelity shall at the expense of the Company execute and deliver such
instruments and documents as the Company may reasonably request to release the
Mortgage.
14.6. Each and every provision, condition, covenant and representation
contained in this Agreement is, and shad be construed, to be a separate and
independent covenant and agreement. If any term or provision of this Agreement
shall to any extent be invalid or unenforceable, the remainder of the Agreement
shall not be affected thereby.
14.7. The Company hereby indemnifies and agrees to hold harmless and
defend all Indemnified Persons from and against any and all Indemnified Claims.
THE FOREGOING INDEMNIFICATION SHALL APPLY WHETHER OR NOT SUCH INDEMNIFIED CLAIMS
ARE IN ANY WAY OR TO ANY EXTENT OWNED, IN WHOLE OR IN PART, UNDER ANY CLAIM OR
THEORY OF STRICT LIABILITY, OR ARE CAUSED, IN WHOLE OR IN- PART, BY ANY
NEGLIGENT ACT OR OMISSION OF ANY INDEMNIFIED PERSON.
If any Indemnified Claim is asserted against any Indemnified Person, such
Indemnified Person shall promptly notify the Company (but the failure to so
promptly 'notify the Company shall not affect the Company's obligations under
this section unless such failure materially prejudices the Company's right to
participate in the contest of such Indemnified Claim). The Company shall have
the obligation to assume the defense thereof, including the employment of
25
<PAGE>
Advisors to Lake the lead role in asserting claims and defenses common to both
the Company and the various Indemnified Persons ("Lead Advisors"), provided that
all Persons chosen to be Lead Advisors must be consented to by Fidelity, which
consent will not be unreasonably withheld. If Lead Advisors are employed and
consented to in accordance with the preceding sentence, each Indemnified Person
shall nonetheless have the right to employ its own Advisors and to determine its
own defense of such action in any case, but the fees and expenses of such
Advisors shall be at the expense of such Indemnified Person except to the extent
that: (i) the employment of such Advisors shall have been authorized in writing
by the Company, or (ii) such Indemnified Person's counsel shall have reasonably
concluded that there appear to be claims or defenses available to it which are
not shared by the Company and such Advisors are engaged in reasonable efforts to
assert such claims and defense, in either of which events the reasonable fees
and expenses of such Indemnified Person shall be born by the Company. No
Indemnified Person shall settle or compromise any Indemnified Claim for which
the Company may be liable for payment hereunto nor shall the Company settle or
compromise any Indemnified Claim for which any Indemnified Person may be liable
for payments in addition to those actually and concurrently made by the Company,
without the consent of the other, which consent shall not be unreasonably
withheld. As used herein the term "Advisors" means attorneys, accountants,
experts, and other advisors.
Except as specifically provided in this section, the Company waives all
notices from any Indemnified Person. The provisions of this Section 14.7 shall
survive the termination of this Agreement.
14.8. All grants, covenants and agreements contained in this Agreement
shall bind and inure to the benefit of the parties hereto 2nd their respective
successors and assigns; provided, however, that the Company may not delegate or
assign any of its duties or obligations under this agreement without the prior
written consent of Fidelity. FIDELITY RESERVES THE RIGHT TO ASSIGN ITS RIGHTS
AND OBLIGATIONS UNDER THIS AGREEMENT IN WHOLE OR IN PART TO ANY PERSON OR
ENTITY. Without limiting the generality of the foregoing, Fidelity may from
tirade to time grant participations in 211 or any part of the Obligations to
arty Person on such terms and conditions as may be determined by Fidelity in its
sole and absolute discretion, provided that the grant of such participation
shall not relieve Fidelity of its obligations hereunder nor create any
additional obligation of the Company.
14.9. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA WITHOUT REFERENCE TO THE
RULES THEREFORE RELATING TO CONFLICTS OF LAW. THE COMPANY HEREBY IRREVOCABLY
SUBMITS ITSELF TO THE EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL COURTS
LOCATED IN CALIFORNIA AND AGREES AND CONSENTS THAT SERVICE OF PROCESS MAY BE
MADE UPON IT IN ANY LEAL PROCEEDING RELATING TO THIS AGREEMENT, ANY BORROWING
HEREUNDER OR ANY OTHER RELATIONSHIP BETWEEN FIDELITY AND THE COMPANY BY ANY
MEANS ALLOWED UNDER STATE AND FEDERAL LAW. ANY LEGAL PROCEEDING ARISING OUT OF
OR IN ANY WAY RELATED TO THIS
26
<PAGE>
AGREEMENT, ANY BORROWING HEREUNDER OR ANY OTHER RELATIONSHIP BETWEEN FIDELITY
AND THE COMPANY SHALL BE BROUGHT AND LITIGATED EXCLUSIVELY IN ANY ONE OF THE
STATE OR FEDERAL COURTS LOCATED IN THE STATE OF CALIFORNIA HAVING JURISDICTION.
THE PARTIES HERETO HEREBY WAIVE AND AGREE NOT TO ASSERT, BY WAY OF MOTION, AS A
DEFENSE OR OTHERWISE, THAT ANY SUCH PROCEEDING IS BROUGHT IN AN INCONVENIENT
FORUM OR THAT THE VENUE THEREOF IS IMPROPER.
14.10. EACH OF THE COMPANY AND FIDELITY HEREBY (A) IRREVOCABLY WAIVES, TO
THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY
JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY AT ANY TIME AMUSING OUT
OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED
HEREBY OR ASSOCIATED HEREWITH; (B) IRREVOCABLY WAIVES, TO THE MAXIMUM EXTENT NOT
PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY SUCH
LITIGATION ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES, OR DAMAGES
OTHER TERN, OR IN ADDITION TO, ACTUAL DAMAGES; (C) CERTIFIES TEAT NO PARTY
HERETO NOR ANY REPRESENTATIVE OR AGENT OR COUNSEL FOR ANY PARTY HERETO HAS
REPRESENTED, EXPRESSLY OR OTHERWISE, OR IMPLIED THAT SUCH PARTY WOULD NOT, IN
THE EVENT OF LITIGATION, SEEK-TO ENFORCE THE FOREGOING WAIVERS, AND (D)
ACKNOWLEDGES THAT IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT
AND THE TRANSACTIONS CONTEMPLATED HEREBY, AMONG OTHER THINGS, THE MUTUAL WAIVERS
AND CERTIFICATIONS CONTAINED IN THIS PARAGRAPH.
14.11. THIS AGREEMENT, THE SECURITY DOCUMENTS DESCRIBED HEREBY AND
THE ACKNOWLEDGMENT DELIVERED IN CONNECTION HEREWITH SET FORTH THE ENTIRE
UNDERSTANDING AND AGREEMENT OF THE PARTIES HERETO WITH RESPECT TO THE
TRANSACTIONS CONTEMPLATED HEREIN AND MAY NOT BE CONTRADICTED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF TEE PARTIES. NO
MODIFICATION OR AMENDMENT OF OR SUPPLEMENT TO THIS AGREEMENT OR TO SUCH
ACKNOWLEDGMENT SELL BE VALID OR EFFECTIVE UNLESS THE SAME IS IN WRITING AND
SIGNED BY THE PARTY AGAINST WHOM IT IS SOUGHT TO BE ENFORCED.
14.12. Fidelity hereby acknowledges that the Company is considering
incorporating the Company's divisions, INTERCON and INFOSEC, into separate
corporations and filing registration statements with the Securities and Exchange
Commission or other similar governmental authority. In the event the Company
proceeds with its plans to so incorporate and publicly register its divisions,
the Company and Fidelity shall enter into discussions concerning any waivers or
consents that may be required to effect such incorporation and public
registration.
27
<PAGE>
The undersigned have entered into this Agreement as of the date first
written above.
FIDELITY FUNDING OF
CALIFORNIA, INC. LITRONIC INDUSTRIES, INC.
a California corporation a California corporation
By: [AUTHORIZED SIGNATORY] By: /S/ KRIS SHAH
---------------------------------------
Name: Kris Shah
Title: President
Mailing Address:
275 East Baker Street, Suite A 2950 Redhill Avenue
Costa Mesa, California 92626 Costa Mesa, California 92626
Street Address:
Same Same
Trade, Fictitious and Assumed Names
Used by the Company
-------------------------------------------
28
<PAGE>
Exhibit 10.10
FIRST AMENDMENT TO
LOAN AND SECURITY AGREEMENT
---------------------------
This First Amendment to Loan and Security Agreement (this "Amendment") is
made and entered into effective as of June 27, 1997, by and between Litronic
Industries, Inc., a California corporation (the "Company"), and Fidelity
Funding, Inc., a Texas corporation ("Fidelity").
A. The Company and Fidelity Funding of California, Inc. ("FFOC") have
entered into that certain Loan and Security Agreement (the "Original
Agreement"), dated as of June 27, 1996, and FFOC has assigned all of its right,
title and interest in, to and under the Original Agreement to Fidelity. The
Original Agreement as amended by this Amendment is referred to herein as the
"Agreement." Capitalized terms used but not defined in this Amendment shall
have the meanings given to them in the Original Agreement.
B. The Company and Fidelity desire to amend the Original Agreement and,
in connection therewith, hereby agree as follows:
1. Amendment to Section 14.4. The first sentence of Section 14.4 of
-------------------------
the Agreement is hereby amended to read in its entirety as follows:
"The term of this Agreement shall expire on February 28, 1998 (the
original term, and any extension thereof made by Fidelity pursuant to this
section, are herein called the "Term"); provided, however, that Fidelity
may extend the term hereof for additional one-year periods, if Fidelity
elects to do so in its sole discretion, by notifying the Company in writing
at least 30 days before the end of the term then in effect; and provided
further that Fidelity may terminate this Agreement at any time effective
immediately upon the occurrence of an Event of Default."
2. Commitment Fee. Notwithstanding Section 5.1 of the Original
--------------
Agreement, the commitment fee payable under such Section on June 27, 1997, shall
be $29,333.36.
3. Amendment of Section 5.2. Section 5.2 of the Original Agreement
------------------------
hereby is amended to read in its entirety as follows:
"5.2 As consideration for Fidelity's commitment to advance funds
hereunder, the Company shall pay to Fidelity a minimum usage fee (in this
section called the "Minimum Usage Fee") of not less than $8,700 for each
calendar month (or fraction thereof, on a prorated basis) during the Term.
In the event that the income earned by Fidelity during any calendar month
(or fraction thereof on a prorated basis) pursuant to Sections 2.5 and 5.3
is less than the Minimum Usage Fee, the Company shall pay to Fidelity the
difference between the amount so earned by Fidelity and the Minimum Usage
Fee, regardless of Fidelity's prior compensation. The Minimum Usage Fee
for each calendar month shall be due and payable on the first day of the
next calendar month.
<PAGE>
4. Payment of Costs. The Company shall pay Fidelity a document
----------------
preparation fee of $500, which shall cover all costs and expenses incurred by
Fidelity, in connection with the negotiation, preparation, execution and
delivery of this Amendment and the consummation of the transactions contemplated
hereby. The Company hereby authorizes Fidelity, in its sole discretion, to
deduct such fee from any Advance made by Fidelity under the Agreement after the
date hereof or the Cash Collateral.
5. Representations and Warranties of the Company. In order to
---------------------------------------------
induce Fidelity to enter into this Amendment, the Company represents and
warrants to Fidelity that:
(a) The representations and warranties contained in Section 7 of the
Original Agreement are true and correct at and as of the time of the
effectiveness hereof.
(b) The Company is duly authorized to execute, deliver and perform
its obligations under this Amendment an dis and will continue to be duly
authorized to perform its obligations under the Original Agreement as
amended hereby. The Company has duly taken all corporate action necessary
to authorize the execution and delivery of this Amendment and to authorize
the performance of the obligations of the Company hereunder.
(c) The execution and delivery by the Company of this Amendment, the
performance by the Company of its obligations hereunder and the
consummation of the transactions contemplated hereby do not and will not
conflict with any provision of law, statute, rule or regulation or of the
articles of incorporation and bylaws of the Company, or of any material
agreement, judgment, license, order or permit applicable to or binding upon
the Company, or result in the creation of any lien, charge or encumbrance
upon any assets or properties of the Company. Except for those which have
been duly obtained, no consent, approval, authorization or order of any
court or governmental authority or third party is required in connection
with the execution and delivery by the Company of this Amendment or to
consummate the transactions contemplated hereby.
(d) The Agreement (including this Amendment) has been duly executed
and delivered by the Company and is a legal and binding instrument and
agreement of the Company, enforceable against the Company in accordance
with its terms, except as limited by bankruptcy, insolvency and similar
laws and by general principles of equity.
(e) No Event of Default or any event that, with the giving of notice,
the passage of time or both, would constitute an Event of Default has
occurred or is continuing.
2
<PAGE>
6. Miscellaneous.
-------------
(a) This Amendment shall not be effective until Kris Shah and
Geraldine Shah acknowledge there consent hereto in the form attached
hereto.
(b) The Agreement is hereby ratified and confirmed in all respects.
The execution, delivery and effectiveness of this Amendment shall not,
except as expressly provided herein, operate as a waiver of any right,
power or remedy of Fidelity under the Agreement nor constitute a waiver of
any provision thereof.
(c) All representations, warranties, covenants and agreements of the
Company herein shall survive the execution and delivery of this Amendment
and the performance hereof and shall further survive until the Agreement is
terminated.
(d) This Amendment may be separately executed in counterparts and by
the different parties hereto in separate counterparts, each of which when
so executed shall be deemed to constitute one and same Amendment.
IN WITNESS WHEREOF, the Company and Fidelity have executed this Amendment
as of the date first written above.
FIDELITY: THE COMPANY:
FIDELITY FUNDING, INC., LITRONIC INDUSTRIES, INC.,
a Texas corporation a California corporation
By: /S/ MICHAEL D. HADDAD By: /S/ KRIS SHAH
-------------------------- ---------------------------
Michael D. Haddad Kris Shah
President President
3
<PAGE>
CONSENT AND AGREEMENT
---------------------
Each of the undersigned hereby consents to the provisions of this Amendment
and the transactions contemplated herein and hereby ratifies and confirms the
general continuing guaranty dated as of June 27, 1996, made by Kris Shah for the
benefit of FFOC, and agrees that his or her obligations and covenants thereunder
are unimpaired hereby and shall remain in full force and effect.
/s/ Kris Shah
--------------------------------------
Kris Shah
/s/ Geraldine M. Shah
--------------------------------------
Geraldine Shah
The undersigned hereby consents to the provisions of this Amendment and the
transactions contemplated therein and hereby ratifies and confirms the
subordination agreement, dated as of June 27, 1996, made by him for the benefit
of FFOC relating to the Company, and agrees that his obligations and covenants
thereunder are unimpaired hereby and shall remain in full force and effect.
/s/ Kris Shah
--------------------------------------
Kris Shah
4
<PAGE>
EXHIBIT 10.11
AWARD/CONTRACT
1. This contract is rated order under DPAS (15CFR 350)
Rating DO:S10
Page 1 of Pages 34
2. Contract (Proc. Inst. Indent.) NO. MDA904-97-C-0424
3. Effective date 27 June '97
4. Requisition/purchase request/project no. 16-97-2093-0000
Issued by Code H98230 Maryland Procurement Office, 9800 Savage Road, FANX III,
Fort George G. Meade, MD 20755-6000 Attn: Margaret L. Miller, (N141)
6. Administered by (If other than Item 5) CODE
7. Name and Address of Contractor (No., street, county, State and ZIP Code)
Litronic Industries, Attention: James Prohaska, 43088 Winter Grove Drive,
Ashburn, VA 22011 (703-729-1700) and U.S. Small Business Administration, 409
3/rd/ Street, S.W., Washington, DC 20416
Code
Facility Code
8. Delivery FOB Origin X other (see below)
9. Discount for prompt payment NET 30
10. Submit invoices (4 copies unless otherwise specified) to the address shown
in: Item See Section G.4
11. Ship to/mark for See Section F.4
12. Payment will be made by contracts -- Accounts Payable Finance and
Accounting Office, P.O. Box 400, Ft. Meade, MD 20755-6000 (410) 684-7538 Code
H98230
13. Authority for using other than full and open competition: X 10 U.S.C.
-----
2304(c) (6) and 10 U.S.C. 637(a) ___ 41 U.S.C. 253(c)( )
14. Accounting and appropriation data see Section G.1
15A. Item No.:
15B. Supplies/services
15C. Quality
15D. Unit
15E. Unit Price
15F. Amount
This is a firm fixed price level of effort award fee type contract
This contract is subject to the Prompt Payment Act, Public Law 97-177, as
amended.
15G. Total amount of contract $369,736.00
16. Table of Contents
(X) SEC. Description Page(s) (X) SEC. Description Page(s)
Part I - The Schedule Part II - Contract clauses
X A Solicitation/contract form 1-2
X B Supplies or services and prices/costs 3
X C Description/specs./work statement 4
X D Packaging and marking 4
X E Inspection and acceptance 5
X F Delivers or performance 6-7
X G Contract administration data 8-11
X H Special contract requirements 11-21
<PAGE>
Part II - Contract clauses
X I Contract clauses 22-33
Part III - List of documents, exhibits and other attach.
X J List of attachments 34
Part IV - representations and instructions
K Representations, certifications and other statements of offerors
L Instrs., cond., and notices to offerors
M Evaluation factors for award
Contracting Officer will complete item 17 or 18 as applicable
17. X Contractor's negotiated agreement (Contractor is required to sign this
document and return 3 copies to issuing office.) Contractor agrees to furnish
and deliver all items or perform all the service set forth or otherwise
identified above and on any continuation sheets for the consideration stated
herein. The rights and obligations of the parties to this contract shall be
subject to and governed by the following documents: (a) this award/contract, (b)
the solicitation, if any, and (c) such provisions, representations,
certifications, and specifications, as are attached or incorporated by reference
herein. (Attachments are listed herein)
18. ____ Award (Contractor is not required to sign this document.) You offer on
Solicitation Number _________________ including the additions or changes made by
you which additions or changes are set forth in full above, is hereby accepted
as to the items listed above and on any continuation sheets. This award
consummates the contract which consists of the following documents: (a) the
Government solicitation and your offer, and (b) this award/contract. No further
contractual document is necessary.
19A. Name and title of signer (Type or print) See page two
19B. Contractor/Offeror By (Signature of person authorized to sign)
19C Date signed
20A. Name and title of contracting officer (Type or print) See page two
20B. United States of America By (Signature of Contracting Officer)
20C. Date Signed
NSN 7540-01-152-8069
Standard Form 26 (Rev 4) Prescribed by GSA
<PAGE>
MDA904-97-C-0424
3 of 34
SECTION B - SUPPLIES OR SERVICES AND PRICES COSTS
B.1 SUPPLIES/SERVICES
CLIN SUPPLIES/SERVICES
000l The contractor shall furnish UNIT QTY UNIT PRICE TOTAL
the necessary materials, facilities, HRS 3425 XXX $312,707.00
equipment, supplies and services $421,116.00
of skilled professional, technical
and support personnel to fulfill the
requirements set forth in the Statement
of Work entitled, "Multi Level
Information System Security Initiative
Crypto Card System Analysis and Library
and Driver Architecture and Development,"
dated IO January 1997 and the documents
referenced in Section C. The contractor's
management shall provide for the effective
timely and integrated implementation of
contract requirements.
0001AA Program Manager X XX $ 118.06 XXXX
0001AB Sr. Electrical Eng. X XX $ 75.41 XXXX
0001AC Electronic Technician X XX $ 69.32 XXXX
0001AD Systems Analyst X XX $ 75.38 XXXX
0001AE Sr. Software Engineer X XX $ 98.38 XXXX
0001AF Software Engineer X XX $ 62.60 XXXX
Total Amount CLIN 0001 Not-To-Exceed $312.707.00
0002. Award Fee Pool, to be For the Period $31,271.00
determined in
accordance with the Award Fee Plan for Multi-
Level Information System Security Initiative
Crytp Card System Analysis and Library and Driver
Architecture and Development, dated 10 June 1997
(Rev. 2). There shall be one evaluation of
performance at the end of the period of performance
(Date of contract award through 30 September 1997.)
If the Government exercises the options to extend
the term of the contract, there shall be an evaluation
of performance at the conclusion of each option
year. The contractor is authorized to bill for up to
50% of the available award fee ($15,635.50), on a
monthly basis in equal amounts of $3,908.88.
0003 TRAVEL For The Job Not-To-Exceed $ 15,000.00
(Includes Applicable Burdens)
0004 OTHER DIRECT COSTS For The Job Not-To-Exceed $ 10,758.00
(Includes Applicable Burdens)
0005 Data in accordance with the Contact For The Lot Not-Separately Priced
Data Item Requirements List (CDRL)
Dated 13 February 1997.
<PAGE>
MDA904-97-C-0424
4 of 34
NOTE 1: OTHER DIRECT COSTS (ODCs) shall be reimbursed at actual costs plus
applicable burdens. ODCs are non fee bearing.
NOTE 2: TRAVEL shall be reimbursed at cost. Lodging shall be reimbursed at
actual costs; meals and incidental expenses shall be reimbursed at the
applicable flat rate. The total of lodging, meals, and incidental expenses shall
not exceed the established rate for each location set forth in the "Federal
Travel Regulations (FTR);" the Joint Travel Regulations," Volume 2 (JTR); and
the Standardized Regulation (Government Civilians Foreign Areas), Section 9'5,"
as applicable. These costs shall be directly chargeable to this contract in
accordance with the contractor's established method of distributing such costs.
First class travel shall not be reimbursed. Contractor shall be reimbursed for
coach rates only. Travel is non fee bearing. Invoices which request
reimbursement of travel expenses must be accompanied by airline ticket subs,
hotel/motel receipts, and rental car receipts.
SECTION C - DESCRIPTION/SPECIFICATION/WORK STATEMENTS
C. I Statement of Work entitled, "Multi Level Information System Security
Initiative, Crypto Card System Analysis and Library and Driver Architecture and
Development," dated 10 January 1997.
C.2 Contract Data Requirements List, DD Form 1423, dated 13 February 1997.
C.3 Award Fee Plan (Revision 2), dated 10 June 1997.
SECTION D - PACKAGING AND MARKING
D. l 352.247-9002 PACKAGING AND PACKING (OCT 1993)
Packaging and packing shall be in accordance with the contractor's best
commercial practice for domestic shipment to insure safe arrival at destination.
(End of clause)
D.2 352.247-9003 MARKING OF DOCUMENTS (SEP 1994)
(a) All Contractor-generated technical reports shall bear the statement "Not
Releasable to the Defense Technical Information Center per DoD Directive
3200.12."
(b) In addition to the above marking all unclassified technical reports
photographs, drawings, schematics, design circuits and description of equipment
designed and/or produced under the contact shill be marked with the legend
"DISTRIBUTION LIMITED TO U.S. GOVERNMENT AGENCIES ONLY, THIS DOCUMENT CONTAINS
NSA INFORMATION (APPLICABLE DATE). REQUEST FOR THIS DOCUMENT MUST BE REFERRED TO
THE DIRECTOR, NSA." Where SF Form 298 is required to accompany a document, the
legend shall be entered in Block 12a thereof.
<PAGE>
MDA904 97-C-0424
5 of 34
(c) The Contractor shall be responsible for inserting the appropriate
application date in the aforementioned legend. This date shall be the date upon
which the document was completed.
SECTION E - INSPECTION AND ACCEPTANCE
E. l REFERENCED CLAUSES - The following contract clauses pertinent to this
section are hereby incorporated by reference:
FAR CLAUSES
CLAUSE NO. TITLE
52.246-4 Inspection of Services - Fixed Price (AUG 1996)
52.246-16 Responsibility for Supplies (APR 1984)
E.2 352.246-9003 NOTICE: MATERIAL AND WORKMANSHIP (OCT 1993)
All material incorporated in the work shall be new and the work shall be
performed in a skillful and workmanlike efficient manner. Both materials and
workmanship shall be subject to the inspection of the Contracting Officer or his
duly authorized representative who may require the Contractor to correct
defective workmanship or materials without cost to the Government. (End of
clause)
E.3 INSPECTION AND ACCEPTANCE
a. Preliminary inspection of the work called for herein shall be conducted at
the contractor's facilities or the site of the sponsoring Agency by the
Contracting Officer or his duly designated Contracting Officer's
Representative(s). Such inspections may be conducted from time to time and at
any time upon prior notification by the Government that such an inspection is to
occur.
b. Final inspection and acceptance of the work and all deliverables will be
conducted at destination by the Contracting Officer or duly authorized Agency
personnel. (End of clause)
<PAGE>
MDA904-97-C-04'4
6 of 34
SECTION F - DELIVERIES OR PERFORMANCE
F.1 REFERENCED CLAUSES - The following contract clauses pertinent to this
section arc hereby incorporated by reference:
FAR CLAUSES
CLAUSE NO. TITLE
52.212- 13 Stop Work Order (AUG 1989)
52.247-34 F.O.B. Destination (NOV 1991)
52.247-54 Diversion of Shipment Under F.O.B. Destination Contracts (MAR
1989)
F.2 352.247-9000 NOTICE: F.O.B. DESTINATION (OCT 1993)
Supplies shall be shipped F.O.B. destination with delivery service required to
the consignee's receiving dock.
(End of clause)
F.3 352.215-9011 PLACE OF PERFORMANCE (OCT 93)
Unless the written approval of the Contracting Officer is obtained in advance,
the work herein shall not be performed at any facility other than the
contractor's plants located at Costa Mesa. CA. and Ashburn. VA, or the site of
-----
the sponsoring Agency.
(End of Clause)
F.4 352.247-9006 SHIPPING INSTRUCTIONS - DORSEY ROAD (SEP 19964
Supplies shall be shipped to the following:
Dorsey Road Warehouse
1472 Dorsey Rd, Doors 1, 2 or 3
Hanover, MD 21076
Attn: S71 Receiving Officer
REF: MDA904-97-C-0424
NOTE: Schedule shipments to arrive at destination from 7:00 AM to 2:30 PM
Monday through Friday, excluding Federal holidays. Call 410-691 -2735 no less
than 24 hours in advance of delivery if any pallet will exceed 60" in height or
2000 lbs in weight so that the receiving personnel will be prepared to accept
your shipment.
(End of clause)
<PAGE>
M DA904-97-C-0424
7 of 34
F.5 352.247-9009 SHIPPING INSTRUCTIONS - TECHNICAL DATA (MAR 1996)
Technical Data shall be shipped F.O.B. Destination to:
Director, National Security Agency
Chief, Central Security Service
Attn: (See Block 14 of DD 1423)
9800 Savage Road
Fort George G. Meade, MD 20755-6000
REF: MDA904-97-C-0424
NOTE: Schedule shipments to arrive at destination from 7:00 AM to 12:00 Noon
Monday through Friday, excluding Federal holidays. Shipments will not be
accepted on Saturday or Sunday.
F.6 352.211-9004 PERIOD OF PERFORMANCE (OCT 1990) - ALTERNATE III (OCT 1990)
This contract shall extend from the date of contract award to 30 September 1997,
unless performance is sooner terminated under the contract. However. the
Government reserves the right to exercise the option to renew the contract for
up to TWO (2) years, as set forth elsewhere in this contract.
<PAGE>
MDA904-97-C-04'4
8 of 34
SECTION G - CONTRACT ADMINISTRATION DATA
G.1 ACCOUNTING AND APPROPRIATION DATA
ACR: Obligate
--------
AA: 977/80400.4500 574E51 999-2520 S18119 03200106 1X 0000
X22 120B
PR: 16-97-2093-0000
Obligated for CLINs 0001, 0003 and 0004 $338.465.00
Obligated for Provisional Award Fee Payments $ 15,635.50
Obligated for Future Award Fee Payments $ 15,635.50
Total Amount Obligated $369,736.00
G.2 352.216-9007 NOTICE: AWARD FEE FUNDING (JUL 1993)
Funds in the amount of $ 15,635.50 have been obligated under this contract
towards future award fee determinations but are not available for the Contractor
to bill against or incur costs against. Obligated award fee funds identified
above will be released to the Contractor via subsequent modifications after the
Government has rendered an award fee determination in accordance with the Award
Fee Plan currently in force under this contract. Upon receipt of the
aforementioned modifications, the Contractor is authorized to bill for the
earned fee.
G.3 352.242-9002 CONTRACT ADMINISTRATION DATA (OCT 1993)
The Procuring Contracting Officer will retain all administration functions under
this contract.
(End of clause)
G.4 352.216-9003 INVOICING AND PAYMENT (OCT 1993)
INVOICES SHALL BE submitted to:
CONTRACTS - ACCOUNTS PAYABLE
FINANCE AND ACCOUNTING OFFICE
PO BOX 400 (MDA904-97-C-0424)
FT MEADE MD 20755-6000
Through:
William Nace, X22, FANX III
Contracting Officer's Representative
MDA904-97-C-0424
9800 Savage Road
Fort George G. Meade, MD 20755-6000
<PAGE>
M DA904-97-C-0424
9 of 34
Copy to:
MARYLAND PROCUREMENT OFFICE
ATTN: N 141 (MDA904-97-C-0424)
9800 SAVAGE RD
FT MEADE MD 20755-6720
NOTE: Invoices are subject to verification by the Contracting Officer's
Representative(s) (CORs) that the actual expenses for the billing period have
been incurred.
G.5 INVOICING AND PAYMENT
Invoices shall be submitted monthly by the contractor and shall include at a
minimum:
a. Period of Performance covered by the invoice.
b. Number of Labor Hours, by category, expended on the contract and covered by
the invoice.
c. The contractor shall be paid by multiplying the hourly rate set forth in
Section B by the number of direct labor hours performed. Final payment shall be
subject to verification by the Government as to the actual amount of effort
applied by the contractor in the performance therein.
NOTE 1: Contractor requests for Travel reimbursement shall be accompanied by
airline, hotel and rental car receipts.
NOTE 2: Contractor requests for Other Direct Cost Reimbursements shall be
accompanied by vendor receipts/invoices.
G.6 352.242-9001 CONTRACTING OFFICER'S REPRESENTATIVE (OCT 1993)
(a) The Contracting Officer may appoint one or more Government employees as
Contracting Officer's Representatives (COR) for technical purposes applicable to
this contract. "Technical" is restricted to scientific, engineering, or field-
of-discipline matters directly applicable to the work performed by the
Contractor under the requirements of this contract.
(b) The appointment(s) will be in writing, signed by the Contracting Officer,
and will set forth the authority granted to and the limitations on the COR. Two
copies of the letter of appointment will be provided to the Contractor who shall
acknowledge receipt of the appointment by immediately signing and returning one
copy of the letter. Such signing shall represent the Contractor's
acknowledgement of the limited authority of the COR.
(c) When, in the opinion of the contractor, the COR or anyone else requests
effort outside of the existing scope of the contract, the contractor shall
promptly notify the Contracting Officer in writing. No action shall be taken by
the contractor under such direction until the Contracting Officer has issued a
contractual change or otherwise resolved the issue.
(d) Appointments may be changed or revoked by the Contracting Officer. The
Contracting Officer will notify the Contractor, in writing of any such changes
or revocations. (End of clause)
<PAGE>
M DA904-97-C-04'4
10 of 34
G.7 352.229-9001 MD TAX EXEMPTION NUMBER (APR 1989)
Certain transactions which occur pursuant to this contract. for examples the
purchase of materials or supplies, may be exempt from the imposition of state or
local taxes. It is the contractor's responsibility to determine whether any
transactions under the contract are exempt under the particular tax statute and
to take advantage of any applicable exemptions. In addition, it may be useful
for the contractor to inform the taxing authorities that the Maryland
Procurement Office (MPO) is a federal government agency. In Maryland, it may be
useful to inform Maryland taxing authorities that the MPO has been assigned
Maryland State Tax Exemption Certificate Number 3000500 4.
(End of clause)
G.8 352.232-9025 NOTICE OF PROMPT PAYMENT ACT APPLICABILITY (OCT 1993)
This contract is subject to the Prompt Payment Act, Public Law 97- 177, as
amended.
(End of clause)
G.9 352.229-9000 NOTICE OF TAXATION (SEP 94)
The Contractor shall provide the Contracting Officer with written notice of any
proposed tax assessments, exemptions, exclusions or refunds which could increase
or decrease costs or liabilities to the contractor and/or the Government. The
notice shall be submitted in sufficient time to provide the Government a
meaningful opportunity to assert its immunity, participate in negotiations or
litigation with the taxing authority concerning the applicability of the tax,
and/or adjust the parties' liability for costs according to the increase or
decrease in tax.
(End of Clause)
G.10 352.229-9001 CONTRACTOR LIABILITY FOR STATE AND LOCAL TAXES (SEP 1994)
-----
Generally, the contractor is liable for payment of state or local taxes on this
contract to the same extent that it would be liable for such taxes on a contract
with a non-governmental entity. Although it may be useful for the contractor to
inform the taxing authorities that the Maryland Procurement Office (MPO) is a
federal government agency, this fact alone does not in and of itself create a
tax exemption for the contractor. While some transactions undertaken by the
contractor pursuant to this contract may be exempt from a state or local tax, it
is the contractor's responsibility to identify such exemption under the
applicable statute. and to resolve the applicability of such with state or local
taxing authorities.
(End of Clause)
G.l l 352.232-9012 SMALL DISADVANTAGED BUSINESS CONCERN PAYMENTS (JUN 1994)
-----
In accordance with DFARS 232.905(2), this award is made to a small disadvantaged
business concern and is subject to payment as quickly as possible after receipt
of a proper invoice by our Finance and Accounting Office.
<PAGE>
M DA904-97-C-0424
11 of 34
G.12 352.932-9020 ALLOCATION OF CONTACT COSTS (OCT 1993)
It is anticipated that this contract will be supported by two or more fund
citations. Therefore, all invoices submitted for payment shall allocate costs
based on the Accounting Classification References (ACR) tasks defined in
Section B. An invoice not properly allocated shall be considered an improper
invoice under the Prompt Payment Act.
SECTION H - SPECIAL CONTRACT REQUIREMENTS
H.1 352.204-9OOl DISCLOSURE OF INFORMATION - CONTRACT (SEP 1996)
(a) DFARS 252.204-7000 and this clause shall govern any disclosure of
information regarding this contract. In using information authorized by this
clause, the contractor (i) shall not disclose any information concerning the
sponsorship of this contract, or (ii) the nature of the Government's interest
in and application of the subject matter of this contract unless this type of
information is expressly allowed to be disclosed by paragraph (b) and/or (c)
below, or by written approval of the cognizant Contracting Officer.
(b) The information listed below may be disclosed in proposals to United States
Government Agencies in response to requests for past performance assessments:
When this information is completed at time of contract award, the document shall
be marked "FOR OFFICIAL USE ONLY." If any of the information that follows
changes in your disclosure, the Contracting Officer must be notified in writing
of the change.
CONTRACT NUMBER: (complete at award) _____________________
CONTRACT TYPE: (complete at award) _______________________
AWARD DATE: (complete at award) _________________________
GOVERNMENT CONTRACTING ACTIVITY:
MARYLAND PROCUREMENT OFFICE
9800 SAVAGE ROAD
FORT GEORGE G. MEADE, MD 20755-6000
ORIGINAL CONTRACT VALUE: (complete at award) ___________________
CURRENT OR COMPLETED CONTRACT VALUE: (contractor may update)
_______________________
PERIOD OF PERFORMANCE: from: (complete at award) _______________
to: (contractor may update) _______________________
COMPETITIVE/NONCOMPETITIVE/FOLLOW-ON (circle, underline or highlight appropriate
description)
PROGRAM TITLE: (complete at award) ______________________
CONTACT EFFORT DESCRIPTION: (unclassified - as provided in solicitation package
and completed as part of the award document)
PLACE OF PERFORMANCE: (complete at award) ______________________
POINTS OF CONTACT/PHONE NUMBER:
Contracting Officer: (complete at award) (contractor may update) ____________
Program Manager: (complete at award) (contractor may update) ________________
<PAGE>
MDA904-97-C-0424
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(e) For additional disclosures which require specific prior approval by the
Contracting Officer, one authorization to use any specific information has been
approved by the Contracting Officer, the contractor is authorized to reuse such
specific information without obtaining additional authorizations from the
Contracting Officer. The contractor shall maintain a log of the additional uses
and submit a copy of the log to the Contracting Officer when each additional
disclosure is made.
(End of clause)
H.2 352.904-90l0 NOTICE: CONTRACT ADMINISTRATION AND CLOSEOUT GUIDANCE (AUG
1996)
The following guidance is provided for your use in administering and closing out
the contract. When the contract is complete, the contractor shall initiate final
accounting and disposition. This shall be done in accordance with the following
instructions. If a portion of the instructions are not applicable to this
contract, then disregard that portion.
(a) Government Furnished Property/Documents.
(1) The cognizant property administration office (Defense Contract Management
Command (DCMC), Office of Naval Research (ONR), and/or L14) is designated to
administer the maintenance by the contractor of official Government Property
Records for all Government property/documents. See Section G - Contract
Administration Data for the cognizant office for this contract.
(2) The contractor shall sign (1) copy of the shipping or inspection document
acknowledging receipt of property/documents and forward same to the designated
property administrator.
(3) At the end of the contracts the contractor shall submit the Government
Furnished Property/Documents Inventory Schedule, requesting disposition, to the
cognizant office. The cognizant property administration office shall then obtain
the disposition instructions from the Contracting Officer's Representative
(COR), and they will forward them to the contractor. The contractor shall
provide the cognizant office with a declaration that all Government furnished
property/documents have been accounted for or expended (disposition is complete)
in the performance of the contract. The cognizant property administration office
will provide the Maryland Procurement Office (MPO) and the COR with the
appropriate releases.
(b) Contractor Acquired Property. At the end of the contract, the contractor
shall submit the Contractor Acquired Property list, requesting disposition to
the cognizant property administration office. This office will then obtain the
disposition instructions from the COR and then will forward them to the
contractor. The contractor shall provide the cognizant office with a declaration
that Contractor Acquired Property has been dispositioned as requested. The
cognizant property administration office will provide the MPO and the COR with
the appropriate releases.
(c) Plant Clearance. The cognizant property administration office is
automatically delegated plant clearance procedures.
<PAGE>
MDA904-97-C-0424
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(d) Classified Material/Documents (DD254 on the contract). The
disposition/retention action of classified holding should be initiated pursuant
to paragraphs 5.1 and 5.m of the Industrial Security Manual. The inventory,
shall be submitted to the Director, NSA/CSS. ATTN:_(the applicable COR with
office designator), 9800 Savage Road, Ft. George G. Meade. Maryland 20755 6000.
After compliance with the COR's disposition instructions, the contractor shall
submit evidence of compliance, certified by the CSSO, to the MPO (ATTN: N 1_
(Contracting Officer's name)), Maryland Procurement Office, 9800 Savage Road.
Fort George G. Meade, MD 207556000), with a courtesy copy to S41 and the COR.
(e) Report of Inventions and Subcontracts (Form DD882). Pursuant to the Patent
Rights Clause of this contract, the contractor shall submit the DD Form 882 to
the Director, NSA/CSS, ATTN: (the applicable COR with office designator),9800
Savage Road, Ft. George G. Meade, Maryland 20755-6000, with a courtesy copy to
the MPO (ATTN: N 141 (Contracting Officer's name), Maryland Procurement Office,
9800 Savage Road, Fort George G. Meade, MD 207556000).
(f) Final Payment.
( 1 ) For contracts requiring final DCAA audit, the contractor shall submit the
final voucher with release and assignment documentation to the cognizant Defense
Contract Audit Agency (DCAA) office for processing in accordance with FAR 4.804
(within I 80 days).
(2) For all contracts not requiring final DCAA audit, the contractor shall
submit the final invoice, DD250, to the COR for processing.
(g) Contract Data Requirements List (CDRL) - DD Form 1423. If not previously
provided to the COR, the contractor shall provide the COR with status of the
documentation for final resolution. This shall be submitted to the Director,
NSA/CSS, ATTN :_ (the applicable COR with the of fine designator). 9800 Savage
Road, Ft. George G. Meade, Maryland 20755-600, with a courtesy copy to the MPO
(ATTN: Nl_(Contracting Officer's name), Maryland Procurement Office, 9800
Savage Road, Fort George G. Meade, MD 20755-6000).
(h) Quick Closeout.
( 1 ) The contractor shall review the contract for applicability of the Quick
Close Out Procedures, in accordance with the FAR 42.708, and determine if this
method applies. If applicable, the contractor may request, in writing, Quick
Close Out authorization from the CO.
(2) The MPO will authorize Quick Closeout Procedures, if applicable. The
Contractor shall then submit a copy of the letter, the final voucher, etc.,
directly to the cognizant DCAA office (see Section G).
(End of notice)
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H.3 352.215-9000 NOTICE: incorporation OF SECTION K BY REFERENCE (OCT 1993)
----
In accordance with FAR 15.406- 1 (b), Part IV of the Uniform Contract Format
shall not be physically included in the contract, but Section K.
Representations, Certifications, and Other Statements of Offerors (as completed
by the Contractor) shall be deemed incorporated by reference in the contract.
(End of clause)
H.4 352.244-9001 NOTICE: SUBCONTRACTING WITH CANADIAN CONTRACTORS (OCT 1993)
----------
Provided the sponsoring Government Activity is not disclosed. the Offeror is not
prohibited from subcontracting with Canadian Contractors unless the work to be
performed under any resulting contract is classified in nature.
Federal Acquisition Regulation (FAR). Part 44, Subcontracting Policies and
Procedures, particularly Subpart 44.2 - Consent to Subcontract, applies.
In addition to those clauses which the prime contractor is normally required to
insert in subcontracts, the following must be included, as required.
FAR 52.225-11 Restrictions on Certain Foreign Purchases (APR 91)
DFARS 252.225-7026 Reporting of Overseas Subcontracts (DEC 1991)
(End of Notice)
H.5 352.290-9006 UTILIZATION OF PROJECT PERSONNEL (OCT 1993)
Any technical personnel who, during the performance of the contract, are
assigned by the Contractor to replace the technical personnel identified by the
Contractor in his technical proposal (or during negotiations) for work on the
Project shall possess at least the same technical qualifications and be capable
of assuring satisfactory performance of the work required by this contract.
H.6 .352.227-9001 SOFTWARE CERTIFICATION (OCT 1993)
The Contractor certifies that, to the best of its knowledge and belief, software
provided under this contract does not contain any malicious code. program, or
other internal component (e.g., computer virus) which could damage, destroy, or
alter software, firmware, or hardware or which could reveal any data or other
information accessed through or processed by the software. Further, the
Contractor shall immediately inform the Contracting Officer upon reasonable
suspicion that any software provided hereunder may cause the harm described
above.
(End of clause)
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H.7 352.243-9000 NOTICE: UNAUTHORIZED CHANGE ORDERS (APR 1989)
The Contracting Officer (CO) may appoint a Contracting Officer's Representative,
Inspector, or other technical representative. No order, statement or conduct of
any such person shall constitute a change under the "Changes" clause of this
contract or entitle the Contractor to an equitable adjustment of the contract
price or delivery schedule under that or any other clause. No appointee of the
CO is acting within the limits of his/her authority when he/she attempts to
change the contract. The contract shall not be changed except by issuance of a
written change order signed by the CO. No representative of the CO shall be
authorized to issue a written change order under the "Changes" clause of this
contract.
H.8 IMPORTANT NOTICE
(a) The Contractor shall not accept any instruction issued by any person other
than the Contracting Officer or the Contracting Officer's Representative(s)
(CORs) acting within the limits of their authority. CORs will be designated in
writing to the Contractor, and the scope of their authority will be set forth
therein.
(b) No information, other than that which may bc contained in an authorized
amendment to the contract duly issued by the Contracting Officer will be
considered as grounds for deviation from any stipulation of the contract, the
specifications, or reference drawings.
H.9 SUBCONTRACTS
The contractor shall not enter into a subcontract involving the type of work
specified herein without obtaining, in advance, the written approval of the
Contacting Officer and subject to the conditions that he may prescribe.
H.10 352.204-9009 ACQUISITION OF COMSEC EQUIPMENT. COMPONENTS, AND PARTS OUTSIDE
THE UNITED STATES (OCT 1993)
(a) Definitions
(1) "COMSEC equipment", as used in this clause, means equipment designed to
provide security to telecommunications by converting information to a form
unintelligible to an unauthorized interceptor and by reconverting such
information to its original form for authorized recipients, as well as equipment
designed specifically to aid in, or as an essential element of, the conversion
process. COMSEC equipment is crypto-equipment, crypto-ancillary equipment, cryp-
to-production equipment, and authentication equipment.
(2) "Component", as used in this clause, means any assembly or subassembly
incorporated directly into an end product. An assembly is a group of parts,
elements, subassemblies and circuits assembled as a separately removable item of
COMSEC equipment. A subassembly is a major subdivision of an assembly.
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(3) "Part", as used in this clause, means any single unassembled element of a
major or mi nor subassembly, accessory, or attachment which is not normally
subject to disassembly without the destruction or the impairment of the design
use.
(4) "Contractor", as used in this clause, means the supplier of the end item and
associated support items to the Government under the terms of a specific
contract.
(5) "Subcontractor", as used in this clause, means a person or business that
contracts to provide some service or material necessary for the performance of
another's contract.
(6) "Vendor", as used in this clause, means a person or agency that sells
supplies or materials to a Contractor or subcontractor.
(7) "United States", as used in this clause, means all areas under the
territorial sovereignty of the United States (U.S.) and the Trust Territory of
the Pacific Islands.
(b) No subcontracts or purchase orders which involve design, manufacture,
production, assembly, inspection, or test in a location not in the U.S., of
COMSEC equipment, components, or parts, which are not covered by a specification
or standard listed in MIL-P-11268, MIL-E-16400, or MIL-E-5400 shall be made
under this contract without the prior written approval of the Contracting
Officer. The Contractor further agrees to include this clause in any or all
subcontracts or purchase orders he may let pursuant to this contract for COMSEC
equipment, components, or parts, except those subcontracts/purchase orders for
which waiver is required (i.e., non-US sources). Under no circumstances will
any custom large scale integrated circuit or likeness thereof be sent outside
the U.S. for any reason.
(c) Requests for permission to deviate from the requirements of paragraph (b)
will be handled on a case-by-case basis through the Contracting Officer. Each
waiver request must provide a strong and compelling reason why the waiver should
be granted in addition to the benefit the Government would gain by the granting
of a waiver. Furthermore, prior to the approval of any waiver, the Contractor
shall demonstrate to the Government through submission of an acceptable
Anonymity Plan (data item Dl-NDTl-80566), that procedures are in place to ensure
that the off shore vendor remains unaware of the relationship between the prime
contractor and the Department of Defense and/or Maryland Procurement Office
(MPO). As a minimum, the following conditions will be imposed if a waiver is
granted:
(1) Purchase orders and drawings provided to a subcontractor or vendor outside
the United States shall not carry any identification that reveals a contractor
relationship with the Department of Defense and the MPO. This restriction
includes the Contractor's prime contract number with the Government and
98230/ONXXXXXX parts identification numbers.
(2) The prime contractor, when required to mark items with the manufacturer's
code 98230 or drawing numbers ONXXXXXX, shall only mark these items at a
facility located within the U.S. Marking parts with ON markings and the 98230
code specifics that the parts are for MPO use only. lf parts marked with the MPO
identification code (including rejects and parts not usable for MPO programs)
are allocated for non-MPO programs or for resale to other customers then
markings as
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associated with the MPO identification code must be removed from the parts
before the parts are sent to non-MPO programs or other customers.
(3) The Government has the right to an equitable adjustment to the contract
price as consideration for granting approval to acquire COMSEC equipment.
components and parts from sources outside the United States (unless the waiver >
as granted prior to contract award).
H.l l 352.204-9008 CONTROL OF COMMUNICATIONS SECURITY (COMSEC) MATERIAL (OCT
-------
1993)
- -----
The accountable COMSEC material produced under the contract, or provided as
Government Furnished Property. will be distributed through COMSEC distribution
channels. The Contractor shall establish a COMSEC account, nominate a custodian
and alternate custodian. and control the material in accordance with procedures
specified in the "COMSEC Supplement to the Industrial Security Manual for
Safeguarding information" dated April 1975. Existing COMSEC accounts established
as a result of previous or other contracts may be used.
H.12 352.227-9004 YEAR 2000 COMPLIANCE - NON-COMMERCIAL ITEMS (JAN 1997)
Definition: INFORMATION TECHNOLOGY means any equipment or interconnected system
or subsystem of equipment, that is used in the automatic acquisition, storage,
manipulation, management, movement, control, display, switching, interchange,
transmission, or reception of data or information. This is for equipment used by
the government directly or is used by a contractor under a contract with the
Agency which (1) requires the use of such equipment, or (2) requires the use, to
a significant extent, of such equipment in the performance of a service of the
furnishing of a product. Information technology includes computers, ancillary
equipment, software, firmware and similar procedures, services (including
support services), and related resources. lt does NOT include any equipment that
is acquired by a Federal Contractor incidental to a Federal contract.
The contractor warrants that each non-commercial item of information technology
delivered or developed under this contract and listed below shall be able to
accurately process date data (including but not limited to: calculating,
comparing, and sequencing) from, into and between the twentieth and twenty-first
centuries, including Leap year calculations, when used in accordance with the
item documentation provided by the contractor, provided that all listed or
unlisted items (e.g., hardware, software, firmware) used in combination with
such listed item properly exchange date data with it. The words "listed below"
refer to products that the offeror has identified as being Year 2000 compliant
in response to the procuring agency's specifications. If the contract requires
that specific listed items must perform as a system in accordance with the
foregoing warranty, then that warranty shall apply to those listed items as a
system. he duration of this warranty and the remedies available to the
Government for breach of this warranty shall be as defined ins and subject to,
the terms and limitations of any general warranty provisions of this contract.
Nothing in this warranty shall be construed to limit any rights or remedies the
Government may otherwise have under this contract with respect to defects other
than Year '000 performance.
<PAGE>
MDA904-97-C-0494 18 of 34
H.13 352.217-9001 OPTION TO EXTEND THE TERM OF THE CONTRACT (OCT 1993)
(a) The Government may unilaterally extend the term of this contract by written
notice to the Contractor within 60 days following the President's signing of the
annual Appropriations Act or October 1st whichever is later, for each
respective option provided that the Contracting Officer has given preliminary
notice in writing, to the Contractor of the Government's intent to renew at
least (0 days prior to the expiration date of the current period of performance.
Such preliminary notice will not be deemed to commit the Government to renewals.
If the Government exercises this right to renew the contract, as renewed shall
be deemed to include this option clause. The total duration of this contract,
including the exercise of any option to renew under this clause, shall not
exceed 36 months.
(b) The composition of the total man-hours of direct labor and other direct
costs for each option is as follows:
OPTION YEAR 1 - FISCAL YEAR 1998 (I October 1997 - 30 September 1998)
CLIN SUPPLIES/SERVICES UNIT QTY UNIT PRICE TOTAL
0001 The contractor shall furnish the HRS 11,400 XXX $ 1.071,465.00
necessary materials, facilities, equipment,
supplies and services of skilled professional,
technical and support personnel to fulfill the
requirements set forth in the Statement Of Work
entitled, "Multi Level Information System Security
Initiative Crypto Card System Analysis and
Library and Driver Architecture and Development,"
dated 10 January 1997 and the documents referenced
in Section C. The contractor's management shall
provide for the effective timely and integrated
implementation of contract requirements.
0001AA Program Manager X XX $118.06 XXXX
0001AB Sr. Electrical Eng. X XX $ 75.41 XXXX
0001AC Electronic Technician X XX $ 69.32 XXXX
0001AD Systems Analyst X XX $ 75.38 XXXX
0001AE Sr. Software Engineer X XX $ 98.38 XXXX
0001AF Software Engineer X XX $ 62.60 XXXX
Total Amount CLIN 0001 Not-To-Exceed $1,071,465.00
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0002 Award Fee Pool, to be determined in accordance For the Period $l07,147.00
with the Award Fee Plan for Multi-Level Information
System Security Initiative Crypt Card System
Analysis and Library and Driver Architecture and
Development, dated 10 June 1997 (Rev .2). There
shall be one evaluation of performance al the
end of the period of performance (Date of
contract award through 30 September 1997.) If
the Government exercises the options to extend
the term of the contract, there shall be an
evaluation of performance at the conclusion of
each option year. The contractor is authorized
to bill for Up to 50% of the available award fee
($53,573.50), on a monthly basis in equal amounts
of $4,464.46.
0003 TRAVEL For The Job Not-To-Exceed $50,000.00
(Includes Applicable Burdens)
0004 OTHER DIRECT COSTS For The Job Not-To-Exceed $12,500.00
(Includes Applicable Burdens)
0005 Data in accordance with the For the Lot Not-Separately Priced
Contact Data Item Requirements List
(CDRL) Dated 13 February 1997.
OPTION YEAR 2 - FISCAL YEAR 1999 (I October 1998 - 30 September 1999)
CLIN SUPPLIES/SERVICE UNIT QTY UNIT PRICE TOTAL
0001 The contractor shall furnish the HRS 6838 XXX $645,526.00
necessary materials, facilities, equipment,
supplies and services of skilled professional,
technical and support personnel to fulfill
the requirements set forth in the Statement of
Work entitled, "Multi Level Information System
Security Initiative Crypto Card System Analysis and
Library and Driver Architecture and Development,"
dated 10 January 1997 and the documents
referenced in Section C. The contractor's management
shall provide for the effective timely and integrated
implementation Of contract requirements.
0001AA Program Manager X XX $l 18.06 XXXX
0001AB Sr. Electrical Eng. X XX $ 75.41 XXXX
0001AC Electronic Technician X XX $ 69.32 XXXX
0001AD Systems Analyst X XX $ 75.38 XXXX
0001AE Sr. Software Engineer X XX $ 98.38 XXXX
0001AF Software Engineer X XX $ 62.60 XXXX
Total Amount CLIN 0001 Not-To-Exceed $645,526.00
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0002 /\ward Fee Pool, to be determined in For the Period $64,553.00
accordance with the Award Fee Plan [or
Multi-Level Information System Security
Initiative Crypt Card System Analysis and
Library and Driver Architecture and
Development, dated 10 June 1997 (Rev. 2).
There shall be one evaluation of performance
at the end of the period or performance (Date of
contract award through 30 September 1997.) If the
Government exercises the options to extend the term
of the contract, there shall be an evaluation of
performance at the conclusion of each option
year. The contractor is authorized to bill for up to 50% of
the available award fee ($32,276.50), on a monthly basis
in equal amounts of $2,689.71.
0003 TRAVEL For The Job Not-To-Exceed $32,000.00
(Includes Applicable Burdens)
0004 OTHER DIRECT COSTS For The Job Not-To-Exceed $ 6,400.00
(Includes Applicable Burdens)
0005 Data in accordance with the For The Lot Not-Separately Priced
Contact Data Item Requirements List
(CDRL) Dated 13 February 1997.
NOTE 1: OTHER DIRECT COSTS (ODCs) shall be reimbursed at actual costs plus
applicable burdens. ODCs are non fee bearing.
NOTE 2: TRAVEL shall be reimbursed at cost. Lodging shall be reimbursed at
actual costs; meals and incidental expenses shall be reimbursed at the
applicable flat rate. The total of lodging, meals, and incidental expenses shall
not exceed the established rate for each location set forth in the "Federal
Travel Regulations (FTR);" the "Joint Travel Regulations," Volume 2 (JTR); and
the Standardized Regulation (Government Civilians Foreign Areas), Section 925,"
as applicable. These costs shall be directly chargeable to this contract in
accordance with the contractor's established method of distributing such costs.
First class travel shall not be reimbursed. Contractor shall be reimbursed for
coach rates only. Travel is non fee bearing. Invoices which request
reimbursement of travel expenses must bc accompanied by airline ticket subs,
hotel/motel receipts, and rental car receipts.
H.14 Contractor Participation in Contractor Performance Evaluation Assessments.
This contract will be subject to periodic Contractor Performance Evaluation
Assessments. In accordance with FAR 42.1502, the Maryland Procurement Office
maintains a database on Contractor past performance applicable to all contracts
over $500,000. Information on the performance of this contract will be
maintained in the database and updated on a yearly basis (if contract period of
performance exceeds one year) and at the completion of the contract. The
Contractor's participation in this process, in terms of review of the Contractor
Performance Evaluation Assessment form, shall not cause an increase in the
estimated cost/price of this
<PAGE>
contract. Any costs which are anticipated to be expended towards participation
in this review process should be (have been) proposed in the initial price of
this contract.
<PAGE>
MDA904-97-C-0424
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H.15 DELINQUENT AWARD FEE MODIFICATION PENALTY
The Contracting Officer shall issue a contract modification identifying the
results of the fee determination official's findings for each performance
evaluation period in accordance with a schedule set forth in the current Award
Fee Plan as cited in the contract. If a contract modification is not issued in
compliance with the time frame specified in the Award Fee Plan, the contractor
shall be entitled to interest on the determined award fee amount for that
specific period at the rate established by the secretary of the Treasury under
Section 12 of the Contract Disputes Act of 1978 (41 U.S.C. 611) that is in
effect on the modification issuance date. This rate is referred' to as the
"Treasury Rate", and is published in the FEDERAL REGISTER semiannually or about
January 1 and July 1. The interest on any late award fee determination amount
will be calculated using the following formula from the first day after the
expiration of the time frame specified in the current Award Fee Plan through the
actual date of the contract modification identifying what award fee has been
earned for that specific period. In the event that provisional billing has been
authorized under the contract, the Government shall only be liable for interest
on the balance between the final Award Fee determination for the specified
period and what has been authorized under the Provisional Billing clause.
Notwithstanding the above the Government shall not be liable for any interest
penalty that is in excess of the sum total of the Award Fee available in the
current evaluation period and the unearned Award Fee from the prior evaluation
period at the time of the contract modification.
However, in the event that the Government has exercised an option or renewed the
contract into a subsequent fiscal year, where annual appropriations (O&M funds)
were utilized to fund the action, the Government's liability for any interest
penalty in the first evaluation period of that year shall be restricted to the
amount of the Award Fee available in the first evaluation period ONLY.
Subsequent Award Fee modifications for evaluation periods during that fiscal
year shall be subject to aforementioned terms where the Government's liability
for interest will be restricted to the sum total of the amount of Award Fee
available in the current evaluation period and the unearned Award Fee from the
prior evaluation period.
Current Treasury Rate % x No. of days Govt. is delinquent x (Amount of Award Fee
earned # of Annual Calendar Days (Beyond 60 Calendar Days) in the period -
Amount of Provisional Award Fee authorized for the period)
IF
Available Award Fee in the Period $250,000
Amount authorized for Provisional Billing 50.00% $125,000
Amount Earned in the Period 90.00% $225,000
Award Fee Plan Modification Time Frame 60
Government Days Late (beyond 60 days) 60
Current Treasury Rate 5.50%
CALCULATION:
[(5.5% / 360) X 60] X (225,000 - 125,000) = 916.67
(End of Clause)
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SECTION I - CONTRACT CLAUSES
l.l REFERENCED CLAUSES. The following contract clauses pertinent to this
section are hereby incorporated by reference:
CLAUSE NO. TITLE
FAR CLAUSES
52.202-1 DEFINITIONS (SEP 1991)
52.203-5 Covenant Against Contingent Fees (APR 1984)
52.203-6 Restriction on Subcontractor Sales to the Government (JUL 1985)
52.203-7 Anti-Kickback Procedures (OCT 1988)
52.203-8 Cancellation, Rescission, and Recovery of Funds for Illegal or
Improper Activity (JAN 1997))
52.203-10 Price or Fee Adjustment for Illegal or Improper Activity
(SEP 1990)
52.204-4 Contractor Establishment Code (MAY 1995)
52.209-6 Protecting the Government's Interest When Subcontracting With
Contractors Debarred, Suspended, or Proposed for Debarment (NOV
1992)
52.211-5 New Material (MAY 1995)
52 211-15 Defense Priority and Allocation Requirements (SEP 1990)
52 215-33 Order of Precedence (JAN 1986) 52.219-8 Utilization of Small
Business
Concerns and Small Disadvantaged Business Concerns (OCT 1995)
52.222-4 Contract Work Hours and Safety Standards Act - Overtime
Compensation (JUL 1995)
52.225-11 Restrictions on Certain Foreign Purchases (OCT 1996)
52.232-1 Payments (APR 1984)
52.232-11 Extras (APR 1984)
52.232-17 Interest (JUN 1996)
52.232-23 Assignment of Claims (JAN 1986)
52.233-3 Protest After Award (AUG 1996)
52.242-13 Bankruptcy (JUL 1995)
52.249-8 Default (Fixed Price Supply and Service) (APR 1984?
52.253-1 Computer Generated Forms (JAN 1991)
DFARS CLAUSES
252.203-7001 Special Prohibition on Employment (NOV 1995)
252.204-7003 Control of Government Personnel Work Product (APR 1992)
252.20F7000 Acquisition From Subcontractors Subject to On-Site
Inspection Under the
Intermediate-Range Nuclear Forces (INF) Treaty (NOV 1995)
252.223-7004 Drug-Free Work Force (SEP 1988)l
252.225-7012 Preference for Certain Domestic commodities (NOV 1995)
252.225-7016 Restriction on Acquisition of Ball and Roller Bearings (SEP 1996)
252.225-7031 Secondary Arab Boycott of Israel (JUN 1992)
252.231-7000 Supplemental Cost Principles (DEC 1991)
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MDA904-97-C-0424
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252.232-7006 Reduction or Suspension of Contract Payments Upon Finding of
Fraud (AUG 1992)
252.243-7001 Pricing of Contract Modifications (DEC 1991)
252.247-7023 Transportation of Supplies by Sea (NOV 1995
1.2 52.252-2 CLAUSES INCORPORATED BY REFERENCE (JUN 1988)
This contract incorporates one or more clauses by reference with the same force
and effect as if they were given in full text. Upon request, the Contracting
Officer will make their full text available.
(End of clause)
1.3 52.232-33 MANDATORY INFORMATION FOR ELECTRONIC FUNDS TRANSFER PAYMENT (AUG
1996)
(a) Method of payment. Payments by the Government under this contract, including
invoice and contract financing payments, may be made by check or electronic
funds transfer (EFT) at the option of the Government. If payment is made by EFT,
the Government may, at its option, also forward the associated payment
information by electronic transfer. As used in this clause, the term EFT" refers
to the funds transfer and may also include the information transfer.
(b) Mandatory submission of Contractor's EFT information.
(1) The Contractor is required, as a condition to any payment under this
contract, to provide the Government with the information required to make
payment by EFT as described in paragraph (d) of this clause, unless the payment
office determines that submission of the information is not required. However,
until January 1, 1999, in the event the Contractor certifies in writing to the
payment office that the Contractor does not have an account with a financial
institution or an authorized payment agent, payment shall be made by other than
EFT. For any payments to be made after January 1, 1999, the Contractor shall
provide EFT information as described in paragraph (d) of this clause.
(2) If the Contractor provides EFT information applicable to multiple contracts,
the Contractor shall specifically state the applicability of this EFT
information in terms acceptable to the payment office.
(e) Contractor's EFT information. Prior to submission of the first request for
payment (whether for invoice or contract financing payment) under this contract,
the Contractor shall provide the information required to make contract payment
by EFT, as described in paragraph (d) of this clause, directly to the Government
payment office named in this contract. If more than one payment office is named
for the contract, the Contractor shall provide a separate notice to each office.
In the event that the EFT information changes, the Contractor shall be
responsible for providing the changed information to the designated payment
office(s).
(d) Required EFT information. The Government may make payment by EFT through
either an Automated Clearing House (ACH) subject to the banking laws of the
United States or the Federal Reserve Wire Transfer System at the Government's
option. The Contractor shall provide
<PAGE>
MDA904-97-C-0424
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the following information for both methods in a form acceptable to the
designated payment office. The Contractor may supply this data for this or
multiple contracts (sec paragraph (b) of this clause).
(1) The contract number to which this notice applies.
(2) The Contractor's name and remittance address, as stated in the contract, and
account number at the Contractor's financial agent.
(3) The signature (manual or electronic, as appropriate), title, and telephone
number of the Contractor official authorized to provide this information.
(4) For ACH payments only:
(i) Name, address, and 9-digit Routing Transit Number of the Contractor's
financial agent.
(ii) Contractor's account number and the type of account (checking, saving, or
lockbox).
(5) For Federal Reserve Wire Transfer System payments only:
(i) Name, address, telegraphic abbreviation, and the 9-digit Routing Transit
Number for the Contractor's financial agent.
(ii) If the Contractor's financial agent is not directly on-line to the Federal
Reserve Wire Transfer System and, therefore, not the receiver of the wire
transfer payment, the Contractor shall also provide the name, address, and 9-
digit Routing Transit Number of the correspondent financial institution
receiving the wire transfer payment.
(e) Suspension of payment.
(1) Notwithstanding the provisions of any other clause of this contract, the
Government is not required to make any payment under this contract until after
receipt, by the designated payment office, of the correct EFT payment
information from the Contractor or a certificate submitted in accordance with
paragraph (b) of this clause. Until receipt of the correct EFT information, any
invoice or contract financing request shall be deemed not to be a valid invoice
or contact financing request as defined in the Prompt Payment clause of this
contract.
(2) If the EFT information changes after submission of correct EFT information,
the Government shall begin using the changed EFT information no later than the
30th day after its receipt to the extent payment is made by EFT. However, the
Contractor may request that no further payments be made until the changed EFT
information is implemented by the payment office. If such suspension would
result in a late payment under the Prompt Payment clause of this contract, the
Contractor's request for suspension shall extend the due date for payment by the
number of days of the suspension.
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MDA904-97-C-0494
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(f) Contractor EFT arrangements. The Contractor shall designate a single
financial agent capable of receiving and processing the electronic funds
transfer using the EFT methods described in paragraph (d) of this clause. The
Contractor shall pay all fees and charges for receipt and processing of
transfers.
(g) Liability for uncompleted or erroneous transfers.
(1) If an uncompleted or erroneous transfer occurs because the Government failed
to use the Contractor-provided EFT information in the correct manner, the
Government remains responsible for (i) making a correct payment, (ii) paying any
prompt payment penalty due, and (iii) recovering any erroneously directed funds.
(2) If an uncompleted or erroneous transfer occurs because Contractor-provided
EFT information was incorrect at the time of Government release of the EFT
payment transaction instruction to the Federal Reserve System, and (i) If the
funds are no longer under the control of the payment office, the Government is
deemed to have made payment and the Contractor is responsible for recovery of
any erroneously directed funds; or
(ii) If the funds remain under the control of the payment office, the Government
retains the right to either make payment by mail or suspend the payment in
accordance with paragraph (e) of this clause.
(h) EFT and prompt payment.
(1) A payment shall be deemed to have been made in a timely manner in accordance
with the Prompt Payment clause of this contract if, in the EFT payment
transaction instruction given to the Federal Reserve System, the date specified
for settlement of the payment is on or before the prompt payment due date,
provided the specified payment date is a valid date under the rules of the
Federal Reserve System.
(2) When payment cannot be made by EFT because of incorrect EFT information
provided by the Contractor, no interest penalty is due after the date of the
uncompleted or erroneous payment transaction, provided that notice of the
defective EFT information is issued to the Contractor within 7 days after the
Government is notified of the defective EFT information.
(i)EFT and assignment of claims. If the Contractor assigns the proceeds of this
contract as provided for in the Assignment of Claims clause of this contract,
the assignee shall provide the assignee EFT information required by paragraph
(d) of this clause. In all respects, the requirements of this clause shall apply
to the assignee as if it were the Contractor. EFT information which shows the
ultimate recipient of the transfer to be-other than the Contractor, in the
absence of a proper assignment of claims acceptable to the Government, is
incorrect EFT information within the meaning of paragraph (e) of this clause.
(j) Payment office discretion. If the Contractor does not wish to receive
payment by EFT methods for one or more payments, the Contractor may submit a
request to the designated
<PAGE>
MDA904 97-C-0424
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payment office to refrain from requiring EFT information or using the EFT
payment method. The decision to grant the request is solely that of the
Government.
(k) Change of EFT information by financial agent. The Contractor agrees that the
Contractor's financial agent may notify the Government of a change to the
routing transit number. Contractor account number, or account type. The
Government shall use the changed data in accordance with paragraph (e)(2) of
this clause. The Contractor agrees that the information provided by the agent is
deemed to be correct information as if it were provided by the Contractor. The
Contractor agrees that the agent's notice of changed EFT data is deemed to bc a
request by the Contractor in accordance with paragraph (e)(2) that no further
payments be made until the changed EFT information is implemented by the payment
office.
(End of clause)
1.4 252.247-7023 TRANSPORTATION OF SUPPLIES BY SEA (DEC 1991)
(a) Definitions.
As used in this clause -(1) "Components" means articles materials, and supplies
incorporated directly into end products at any level of manufactures
fabrication, or assembly by the Contractor or any subcontractor.
(2) "Department of Defense" (DoD) means the Army, Navy, Air Force, Marine Corps,
and defense agencies.
(3) "Foreign flag vessel" means any vessel that is not a U.S. - flag vessel.
(4) "Ocean transportation" means any transportation aboard a ship, vessel, boat,
barge, or ferry through international waters.
(5) "Subcontractor" means a supplier, materialman, distributor, or vendor at any
Level below the prime contractor whose contractual obligation to perform results
from, or is conditioned upon, award of the prime contract and who is performing
any part of the work or other requirement of the prime contract.
(6) "Supplies" means all property, except land and interests in land, that is
clearly identifiable for eventual use by or owned by the DoD at the time of
transportation by sea.
(i) An item is clearly identifiable for eventual use by the DoD if, for example,
the contract documentation contains a reference to a DoD contract number or a
military destination.
(ii) "Supplies" includes (but is not limited to) public works; buildings and
facilities; ships; floating equipment and vessels of every character, type, and
description, with parts, subassemblies, accessories, and equipment; machine
tools; material; equipment; stores of all kinds; end items; construction
materials; and components of the-foregoing.
(7) "U.S.-flag vessel" means a vessel of the United States or belonging to the
United States, including any vessel registered or having national status under
the laws of the United States.
(b) The Contractor shall employ U.S.-flag vessels in the transportation by sea
of any supplies to bc furnished in the performance of this contract. The
Contractor and its
<PAGE>
M DA904-97-C-0494
27 of 34
subcontractors may request that the Contracting Officer authorize shipment in
foreign-flag vessels, or designate available U.S.-flag vessels, if the
Contractor or a subcontractor believes that
(1) U.S.-flag vessels are not available for timely shipment;
(2) The freight charges are inordinately excessive or unreasonable; or
(3) Freight charges are higher than charges to private persons for
transportation of like goods.
(c) The Contractor must submit any request for use of other than U.S.-flag
vessels in writing to the Contracting Officer at least 45 days prior to the
sailing date necessary to meet its delivery schedules. The Contracting Officer's
failure to grant approvals to meet the shipper's sailing date will not of itself
constitute a compensable delay under this or any other clause of this contract.
Requests shall contain at a minimum -
(1) Type, weight, and cube of cargo;
(2) Required shipping date;
(3) Special handling and discharge requirements;
(4) Loading and discharge points;
(5) Name of shipper and consignee;
(6) Prime contract number; and
(7) A documented description of efforts made to secure U.S.-flag vessels,
including points of contact (with names and telephone numbers) with at least two
U.S.-flag carriers contacted. Copies of telephone notes, telegraphic and
facsimile message or letters will bc sufficient for this purpose.
(d) The Contractor shall! within 30 days after each shipment covered by this
clause, provide the Contracting Officer and the Division of National Cargo,
Office of Market Development, Maritime Administration, U.S. Department of
Transportation, Washington, DC 20590, one copy of the rated on board vessel
operating carrier's ocean bill of lading, which shall contain the following
information -
(1) Prime contract number;
(2) Name of vessel;
(3) Vessel flag of registry;
(4) Date of loading;
(5) Port of loading;
(6) Port of final discharge;
(7) Description of commodity;
(8) Gross weight in pounds and cubic feet if available;
(9) Total ocean freight in U.S. dollars; and
(10) Name of the steamship company.
(c) The Contractor agrees to provide with its final invoice under this contract
a representation that to the best of its knowledge and belief -
(1) No ocean transportation was used in the performance of this contract;
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M DA904-97-C-0424
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(2) Ocean transportation was used and only U.S.-flag vessels were used for
all ocean shipments under the contract;
(3) Ocean transportation was used and the Contractor has the written
consent of the Contacting Officer for all non-U.S.-flag ocean transportation; or
(4) Ocean transportation was used and some or all of the shipments were
made on non-U.S.-flag vessels without the written consent of the Contracting
Officer. The Contractor shall describe these shipments in the following format:
ITEM CONTRACT QUANTITY
DESCRIPTION LINE ITEMS TOTAL
(f) If the final invoice does not include the required representation. the
Government will reject and return it to the Contractor as an improper invoice
for the purposes of the Prompt Payment clause of this contract. In the event
there has been unauthorized use of non-U.S.-flag vessels in the performance of
this contract~ the Contracting Officer is entitled to equitably adjust the
contract, based on the unauthorized use.
(g) The Contractor shall include this clause, including this paragraph (g) in
all subcontracts under this contract, which exceed the small purchase limitation
of section ] 3.000 of the Federal Acquisition Regulation.
(End of clause)
I 5 REFERENCED CLAUSES - when APPLICABLE The following clause(s) marked (X) when
applicable) pertinent to this section is/are hereby incorporated by reference
CLAUSE NO. TITLE
FAR CLAUSES
(X) 52 203-3 Gratuities (NOV 1990)
(X) 52 203-12 Limitation on Payments to Influence Certain
Federal Transactions (JAN 1990)
( ) 52 204-2 Security Requirements (AUG 1996)
( ) 52 207-5 Option to Purchase Equipment (FEB 1995)
( ) 52 208-8 Helium Requirement Forecast and Required Sources
for Helium (FEB 1995)
( ) 52 209-1 Qualification Requirements (FEB 1995)
(X) 52 210-7 Other Than New Material, Residual Inventory, and
Former Government Surplus Property (MAY 1995)
( ) 52 215-2 Audits and Records - Negotiations (AUG 1996)
( ) 52 215-2 Audits and Records - Negotiations (AUG 1996) -
Alternate II (JAN 1997)
( ) 52 215-2 Audits and Records - Negotiations (AUG 1996)
Alternate III (JAN 1997)
( ) 52 215-21 Changes or Additions to Make-Or Buy Program (APR
1984)
( ) 52 215-21 Changes or Additions to Make-Or-Buy Program (APR
1984) -Alternate I (APR 1984)
(X) 52 215-22 Price Reduction for Defective Cost or Pricing Data
(OCT 1995)
<PAGE>
( ) 52 215-23 Price Reduction for Defective Cost or Pricing
Data-Modifications (OCT 1995)
(X) 52 215-24 Subcontractor Cost or Pricing Data (OCT 1995)
( ) 52 215-25 Subcontractor Cost or Pricing Data - Modifications
(OCT 1995)
( ) 52 215-26 Integrity of Unit Prices (FEB 1997) Alternate 1
(APR 1991)
( ) 52 215 27 Termination of Defined Benefit Pension Plans (MAR
1996)
( ) 52 215-31 Waiver of Facilities Capital Cost of Money (SEP
1987)
( ) 52 215-39 Reversion or Adjustment of Plans for
Postretirement Benefits other Than Pensions (PRB)
(MAR 1996)
( ) 52 215-40 Notification of ownership Changes (FEB 1995)
( ) 52 215-42 Requirements for Cost or Pricing Data or
Information Other Than Cost or Pricing Data
Modifications (JAN 1997)
( ) 52 215-42 Requirements for Cost or Pricing Data or
Information Other Than Cost or Pricing Data
Modifications (JAN 1997) - Alienate II (OCT 1995)
( ) 52 217-2 Cancellation Under Multiyear Contracts (JUL 1996)
(X) 52 217-8 option to Extend Services (AUG 1989)
( ) 52 219-6 Notice of Total small Business Set-Aside (JUL
1996)
<PAGE>
M DA904-97-C-04'4
29 of 34
( ) 52 219-7 Notice of Partial Small Business Set Aside (JUL 1996)
( ) 52 219-9 Small, Small Disadvantaged and Women-Owned Small Business
Subcontracting Plan (AUG 1996)
( ) 52 219-9 Small, Small Disadvantaged and Women-Owned Small Business
subcontracting Plan (AUG 1996) - Alternate II (MAR 1996)
(X) 52 219-14 Limitations on Subcontracting (DEC 1996)
( ) 52 219-16 Liquidated Damages - subcontracting Plan (OCT 1995)
( ) 52 222-1 Notice to the Government of Labor Disputes Feb. 1997)
( ) 52 222-3 Convict Labor (AUG 1996)
( ) 52 222-20 Walsh-Healey Public Contracts Act (DEC 1996)
(X) 52 227-26 Equal Opportunity (APR 1984)
(X) 52 222-28 Equal opportunity Pre-Award Clearance of Subcontracts (APR
1984)
( ) 52 222-29 Notification of Visa Denial (APR 1984)
(X) 52 222-35 Affirmative Action for Special Disabled and Vietnam Era
Veterans (APR 1984)
(X) 52 222-36 Affirmative Action for Handicapped Workers (APR 1984)
(X) 52 222-37 Employment Reports on Special Disabled Veterans and Veterans
of the Vietnam Era (JAN 1988)
( ) 52 222-41 Service Contract Act of 1965, as Amended (MAY 1989)
( ) 52 222-43 Fair Labor Standards Act and Service Contract Act - Price
Adjustment (Multiple Year and Option Contracts) (MAY 1989)
( ) 52 222-44 Fair Labor Standards act and Service Contract Act - Price
Adjustment (MAY 1989)
( ) 52 222-48 Exemption from Application of Service Contract Act
provisions for Contracts for Maintenance, Calibration,
and/or Repair of Certain Information Technology, scientific
and Medical and/or Office and Business Equipment -
Contractor Certification (AUG 1996)
(X) 52.223-2 Clean Air and Water (JAN 1997)
( ) 52 223-3 Hazardous Material Identification and Material safety Data
(NOV 1991)
(X) 52 223-6 Drug-Free Workplace (JAN 1997)
( ) 52 223-9 Certification of Percentage of Recovered Material Consent
for EPA Designated Items Used in Performance of the Contract
(MAY 1995)
( ) 52 223-10 Waste Reduction Program (MAY 1995)
( ) 52 223-12 Refrigeration Equipment and Air Conditioners (MAY l995)
( ) 52 223-14 Toxic Chemical Release Reporting (OCT 1996)
( ) 52 224-1 Privacy Act Notification (APR 1984)
( ) 52 224-2 Privacy Act {APR 1984)
( ) 52 225-10 Duty-Free Entry (APR 1984)
<PAGE>
( ) 52 225-14 Inconsistency Between English Version and Translation of
Contract (AUG 1989)
( ) 52 225-17 Buy American Act - Supplies Under European Community
Agreement (MAY 1995)
( ) 52 226-1 Utilization of Indian Organizations and Indian-Owned
Economic Enterprises (SEP 1996)
(X) 52 227-1 Authorization and Consent (JUL 1995)
( ) 52 227-1 Authorization and Consent (JUL 1995) - Alternate II (APR
1984)
( ) 52 227-2 Notice and Assistance Regarding Patent and Copyright
Infringement (AUG 1996)
( ) 52 227 3 Patent Indemnity (APR l984)
( ) 52 227-9 Refund of Royalties (APR 1984)
( ) 52 227-10 Filing of Patent Applications - Classified Subject Matter
(APR 1984)
( ) 52 227-11 Patent Rights Retention by the Contractor (Short Form) (JUN
1989)
( ) 52 227-11 Patent Rights - Retention by the Contractor (Short Form)
(JUN 1989) - Alternate II (JUN 1989)
(X) 52 227-12 Patent Rights - Retention by the Contractor (Long Form) (JAN
1997)
( ) 52 227-12 Patent Rights - Retention by the Contractor (Long Form) (JAN
1997) - Alternate II (JUN 1989)
( ) 52 227-13 Patent Rights - Acquisition by the Government (JAN 1997)
( ) 52 227-13 Patent Rights - Acquisition by the Government (JAN 1997) -
Alienate II (JUN 1989)
( ) 52 228-3 Workers Compensation Insurance (Defense Base Act) (APR 1984)
( ) 52 228-4 Workers Compensation and War Hazard Insurance Overseas (APR
1984)
( ) 52 228-5 Insurance - Work on a Government Installation (JAN 1997)
( ) 52 228-14 Irrevocable Letter of Credit (JUN 1996)
( ) 52 228-16 Performance and Payment Bonds - Other Than Construction (SEP
1996)
( ) 52 228-16 Performance and Payment Bonds - Other Than Construction (SEP
1996) Alternate I (SEP 1996)
( ) 52 229-3 Federal, State and Local Taxes (JAN 1991)
(X) 52 229-4 Federal, State and Local Taxes (Noncompetitive Contract)
(JAN 1991)
(X) 52 229-5 Taxes - Contracts Performed in U S Possessions or Puerto
Rico (APR 1984)
( ) 52 229-6 Taxes - Foreign Fixed Price Contracts (JAN 1991)
( ) 52 230-2 Cost Accounting Standards (AUG 1992)
( ) 52 230-3 Disclosure and Consistency of Cost Accounting Practices (APR
1996)
( ) 52 230-4 Consistency in Cost Accounting Practices (AUG 1992)
( ) 52 230-5 Cost Accounting Standards - Educational Institution (APR
1996)
<PAGE>
( ) 52 230-6 Administration of Cost Accounting Standards (APR 1996)
( ) 52 232-4 Payments Under Transportation Contracts and Transportation
Related Service Contracts (APR 1984)
(X) 52 232-9 Limitation on Withholding of Payments {AFR 1984)
( ) 52 232-16 Progress Payments (JUL 1991)
( ) 52 232-16 Progress Payments (JUL 1991) Alternate I (AUG 1987)
( ) 52 232-18 Availability of Funds (APR 1984)
( ) 52 232 24 Prohibition of Assignment of Claims (JAN 1986)
(X) 52 232-25 Prompt Payment (MAR 1994)
( ) 52 232-33 Mandatory Information for Electronic Funds Transfer Payment
(AUG 1996)
( ) 52 232-34 Optional Information for Electronic Funds Transfer Payment
(AUG 1996)
(X) 52 233-1 Disputes (OCT 1995)
<PAGE>
M DA904-97-C-0424
30 of 34
( ) 52 233-1 Disputes (OCT 1995) - Alternate I (DEC 1991)
( ) 52 237-2 Protection of Government Buildings, Equipment and Vegetation
(APR 1984
( ) 52 237-3 Continuity of Services (JAN 1991)
( ) 52 237-9 Waiver of Limitation on Severance Payments to Foreign
Nationals (OCT l998)
( ) 52 239-1 Privacy or Security safeguards (AUG 1996)
( ) 52 242-1 Notice of Intent to Disallow Costs (APR 1984)
( ) 52 242-2 Production Progress Reports (APR 1991)
(X) 52 242-3 Penalties for Unallowable Costs (OCT 1995)
( ) 52 242-4 Certification of Final Indirect Costs (JAN 1997)
( ) 52 242-10 F. O. B. origin - Government Bills of Lading or Prepaid
Postage (APR 1984)
( ) 52 243-1 changes - Fixed Price (AUG 1987) Alternate I (APR 1984)
(X) 52 243-1 Changes - Fixed Price (AUG 1987) - Alternate II (APR 1984)
( ) 52 243-1 Changes - Fixed Price (AUG 1987) - Alternate III (APR 1984)
(X) 52 244-5 Competition in subcontractinq (DEC 1996)
( ) 52 244-6 subcontracts for Commercial Items and commercial Components
(OCT 1995)
( ) 52 245-1 Property Records (APR 1984)
( ) 52 245-2 Government Property (Fixed-Price Contracts) (DEC 1989)
( ) 52 245-2 Government Property (Fixed Price Contracts) (DEC 1989) -
Alternate I (APR 1984)
( ) 52 245-4 GovernmenL-Furnished Property (Short Form) (APR 1984)
( ) 52 245-18 Special Test Equipment (FEB 1993)
( ) 52 245-19 Government Property Furnished "As Is" (APR 1984)
( ) 52 246 23 Limitation of Liability (FEB 1997)
( ) 52 246 24 Limitation of Liability - High Value Items (FEB 1997)
( ) 52 246-24 Limitation of Liability - High Value Items (FEB 1997) -
Alternate I (APR 1984)
(X) 52 246-25 Limitation of Liability Services (FEB 1997)
( ) 52 247-1 Commercial Bill of Lading Notations (APR 1984)
( ) 52 247 64 Preference for Privately Owned U s Flag Commercial Vessels
(AUG 1996)
( ) 52 247-64 Preference for Privately owned U s Flag Commercial Vessels
(AUG 1996) - Alternate I (APR 1984)
( ) 52 248-1 Value Engineering (MAR 1989)
( ) 52 248-1 Value Engineering (MAR 1989) - Alternate I (APR 1984)
( ) 52 248-1 Value Engineering (MAR 1989) - Alternate II (APR 1984)
( ) 52 248-1 Value Engineering (MAR 1989) - Alternate III (APR 1984)
( ) 52 249-2 Termination for Convenience of the Government (Fixed Price)
(SEP 1996)
<PAGE>
( ) 52 249-2 Termination for Convenience of the Government (Fixed Price)
(SEP 1996) Alternate II (SEP 1996)
(X) 52 249-4 Termination for Convenience of the Government (Services)
(Short Form) (APR 1984)
(X) 52 251-1 Government Supply sources (APR 1984)
DFARS CLAUSES
(X) 252 201-7000 Contracting Officer's Representative (DEC 1991)
(X) 252 203-7000 Statutory Prohibitions on Compensation to Former Department
of Defense Employees (NOV 1995)
( ) 252 203-7002 Display of DoD Hotline Poster (DEC 1991)
(X) 252 204-7000 Disclosure of Information (DEC 1991)
( ) 252 204-7002 Payment for Subline Items Not Separately Priced (DEC 1991)
(X) 252 205-7000 Provision of Information to Cooperative Agreement Holders
(DEC 1991)
( ) 252 209-7004 Reporting of Commercial Transactions With The Government of
a Terrorist Country (SEP 1994)
( ) 252 209-7005 Military Recruiting on Campus (FEB 1996)
( ) 252 211-7000 Acquisition Streamlining (DEC 1991)
( ) 252 215-7000 Pricing Adjustments (DEC 1991)
( ) 252 215 7002 Cost Estimating System Requirements (DEC 1991)
( ) 252 219-7001 Notice of Partial Small Business Set-Aside with Preferential
consideration for Small Disadvantaged Business Concerns (MAY
1995)
( ) 252 219-7001 Notice of Partial Small Business Set-Aside with Preferential
Consideration for Small Disadvantaged Business Concerns (MAY
1995) - Alternate I (MAY 1994)
( ) 252 219-7003 Small Business and Small Disadvantaged Business
subcontracting Plan (DoD Contracts) (APR 1996)
( ) 252 219-7006 Notice of Evaluation Preference for Small Disadvantaged
Business Concerns (MAY 1995)
( ) 252 219-7006 Notice of Evaluation Preference for Small Disadvantaged
Business Concerns (MAY 1998) Alternate I (DEC 1991)
( ) 252 223-7001 Hazard Warning Labels (DEC 1991)
( ) 252 223-7005 Hazardous Waste Liability and Indemnification (OCT 1992)
( ) 252 223-7006 Prohibition on Storage and Disposal of Toxic and Hazardous
Materials (APR 1993)
( ) 252 223-7006 Prohibition on Storage and Disposal of Toxic and Hazardous
Waste (APR 93) Alternate I (NOV 1995)
( ) 252 225-7001 Buy American Act and Balance of Payments Program (JAN 1994)
( ) 252 225-7002 Qualifying Country Sources as Subcontractors (DEC 1991)
( ) 252 225-7005 Identification of Expenditures in the United States (DEC
1991)
(X) 252 225 7007 Trade Agreements Act (JUL 1996)
( ) 252 225 7008 Supplies to be Accorded Duty Free Entry (DEC 1991)
( ) 252 225-7009 Duty Free Entry - Qualifying Country End Products and
supplies (DEC 1991)
<PAGE>
( ) 252 225-7010 Duty-Free Entry - Additional Provisions (DEC 1991)
( ) 252 225-7011 Restriction on Acquisition of Supercomputers (JUL 1995)
( ) 252 225-7014 Preference for Domestic Specially Metals (NOV 1998)
( ) 252 225-7015 Preference for Domestic Hand or Measuring Tools (DEC 1991)
<PAGE>
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( ) 252 225 7022 Restriction on Acquisition of Polyacrylonitrile (PAN) Based
Carbon Fiber (DEC 1991)
( ) 252 225-7024 Restriction on Acquisition of Night Vision Image Intensifier
Tubes and Devices (DEC 1991)
( ) 252 225-7025 Foreign Source Restrictions (SEP 1996)
( ) 252 225-7026 Reporting of overseas Subcontracts (NOV 1995)
( ) 252 225 7028 Exclusionsay Policies and Practices of Foreign Governments
(DEC 1991)
( ) 252 225-7032 Waiver of United Kingdom Levies (OCT 1992)
( ) 252 225 7036 North American Free Trade Agreement Implementation Act (JAN
1994)
( ) 252 225-7036 North American Free Trade Agreement Implementation Act (JAN
1994) - Alternate 1 (MAY 1998)
( ) 252 225-7037 Duty-Free Entry - NAFTA Country End Products and Supplies
(JAN 1994)
( ) 252 226 7000 Notice of Historically Black Colleges or Universities and
Minority Institution Set asides (APR 1994)
(X) 252 227-7013 Rights in Technical Data - Noncommercial Items (NOV 1998)
(X) 252 227 7014 Rights in Noncommercial Computer Software and Noncommercial
Computer Software Documentation (JUN 1998)
( ) 252 227-7014 Rights in Noncommercial Computer Software and Noncommercial
Computer Software Documentation (JUN 1995) -Alternate I (JUN
1995)
( ) 252 227-7019 Validation of Asserted Restrictions - Computer Software (JUN
1995)
( ) 252 227-7020 Rights in Data- Special Works (JUN 1995)
( ) 252 227 7021 Rights in Data--Existing Work (MAR 1979)
( ) 252 227-7025 Limitation on the Use or Disclosure of Government-Furnished
Information Marked With Restrictive Legends (JUN 1998)
( ) 252 227-7026 Deferred Delivery of Technical Data or Computer Software
(APR 1988)
( ) 252 227-7027 Deferred ordering of Technical Data or Computer Software
(APR 1988)
(X) 252 227-7030 Technical Data Withholding of Payments (OCT 1988)
( ) 252 227 7032 Rights in Technical Data and Computer software (Foreign)
(JUN 1975)
(X) 252 227-7036 Certification of Technical Data Conformity (MAY 1987)
(X) 252 227-7037 Validation of Restrictive Markings Technical Data (NOV 1995)
( ) 252 227-7039 Patents - Reporting of Subject Inventions (APR 1990)
( ) 252 228-7000 Reimbursement for War-Hazard Losses (DEC 1991)
( ) 252 228-7003 Capture and Detention (DEC 1991)
( ) 252 232-7002 Progress Payments for Foreign Military Sales Acquisitions
(DEC 1991)
<PAGE>
( ) 252 232-7004 DoD Progress Payment Rates (FEB 1996)
( ) 252 232-7007 Limitation of Government's obligation (AUG 1993)
( ) 252 232-7007 Limitation of Government s Obligation (AUG 1993) - Alternate
I (AUG 1993)
(X) 252 233-7000 Certification of Claims and Requests for Adjustment or
Relief (MAY 1994)
( ) 252 234-7001 Cost/Schedule Control Systems (DEC 1991)
( ) 252 239-7000 Protection Against Compromising Emanations (DEC 1991)
( ) 252 239-7002 Access (DEC 1991)
( ) 252 242-7000 Postaward Conference (DEC 1991)
( ) 252 242-7003 Application for U S Government Shipping
Documentation/Instructions (DEC 1991)
( ) 252 242-7004 Material Management and Accounting System (SEP 1996)
( ) 252 245-7000 Government-Furnished Mapping, Charting and Geodesy Property
(DEC 1991)
( ) 252 245-7001 Reports of Government Property (MAY 1994)
(X) 252 246-7000 Material Inspection and Receiving Report (DEC 1991)
( ) 252 246-7001 Warranty of Data (DEC 1991)
( ) 252 246-7001 Warranty of Data (DEC 1991) Alternate I (DEC 1991)
( ) 252 246-7001 Warranty of Data (DEC 1991) - Alternate II (DEC 1991)
( ) 252 249-7001 Notification of substantial Impact on Employment (DEC 1991)
( ) 252 249-7002 Notification of Proposed Program Termination or Reduction
(MAY 1995)
(X) 252 251-7000 Ordering From Government Supply sources (MAY 1995)
FULL TEXT CLAUSES - WHEN APPLICABLE Pursuant to FAR 52 102-2, the following
clauses (marked (X) when applicable) shall be incorporated in this solicitation
and/or contract in full text Therefore, a copy of the applicable clause(s)
follows
CLAUSE NO. TITLE
FAR CLAUSES
( ) 52 209-1 Qualification Requirement (FEB 1995)
( ) 52 209-3 First Article Approval - Contractor Testing (SEP 1989)
( ) 52 209-3 First Article Approval - Contractor Testing (SEP
1989)Alternate I (JAN 1997)
( ) 52 209-3 First Article Approval Contractor Testing (SEP 1989) -
Alternate II (SEP 1989)
( ) 52 209-4 First Article Approval - Government Testing (SEP 1989)
( ) 52 209-4 First Article Approval - Government Testing (SEP 1989)--
Alternate I (JAN 1996)
( ) 52 209-4 First Article Approval - Government Testing (SEP 1989) -
Alternate II (SEP 1989)
(X) 52 215-42 Requirements for Cost or Pricing Data or Information other
Than Cost or Pricing Data Modifications (JAN 1997) -
Alternative 1 (OCT 1995)
<PAGE>
( ) 52 215 42 Requirements for Cost or Pricing Data or Information Other
Than Cost or Pricing Data Modifications (JAN 1997) Alternate
III (OCT 1995)
( ) 52 215-42 Requirements for Cost or Pricing Data or Information Other
Than Cost or Pricing Data Modifications (JAN 1997) -
Alternate IV (OCT 1995)
( ) 52 216-16 Incentive Price Revision Firm Target (FEB 1997)
( ) 52 216-16 Incentive Price Revision - Firm Target (FEB 1997) -Alternate
I (APR 1984)
( ) 52 216-17 Incentive Price Revision - Successive Targets (FEB 1997)
( ) 52 216-17 Incentive Price Revision Successive Targets (FEB 1997) -
Alternate I (APR 1984)
<PAGE>
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( ) 52 216-23 Execution and Commencement of Work (APR 1984)
( ) 52 216-24 Limitation of Government Liability (APR 1984)
( ) 52 216-25 Contract Definitization (APR 1984)
( ) 52 216 25 Contract Definitization (APR 1984) - Alternate I (APR 1984)
( ) 52 217-6 Option for Increased Quantity (APR 1984)
(X) 52 217-9 Option to Extend the Term of the Contract (MAR 1989)
( ) 52 222-26 Equal Opportunity (APR 1984) - Alternate (APR 1984)
( ) 52 222-42 Statement of Equivalent Rates for Federal Hires (MAY 1989)
( ) 52 222-47 SCA Minimum Wages and Fringe Benefits Applicable to
Successor Contract Pursuant to Predecessor Contractor
Collective Bargaining Agreements (CBA) (MAY 1989)
( ) 52 222-49 Service Contract Act - Place of Performance Unknown (MAY
1989)
( ) 52 227-3 Patent Indemnity (APR 1984) - Alternate I (APR 1984)
( ) 52 227-3 Patent Indemnity (APR 1984) Alternate II (APR 1984)
( ) 52 227-3 Patent Indemnity (APR 1984) - Alternate III {JUN 1995)
( ) 52 227-5 Waiver of Indemnity (APR 1984)
( ) 52 227-11 Patent Rights - Retention by the Contractor (Short Form)
(JUN 1989) - Alternate I (JUN 1989)
{ ) 52 227-12 Patent Rights - Retention by the Contractor (Long Form) (JAN
1997) Alternate I (JUN 1989)
( ) 52 227-13 Patent Rights - Acquisition by the Government (JAN 1997) -
Alternate I (JUN 1989)
( ) 52 229-7 Taxes--Fixed-Price Contracts with Foreign Governments (JAN
1991)
( ) 52 232-16 Progress Payments (JUL 1991) - Alternate II (AUG 1987)
( ) 52 243-7 Notification of Changes (APR 1984)
( ) 52 244 1 Subcontracts (Fixed Price Contracts) (FEB 1995)
( ) 52 244-1 Subcontracts (Fixed Price Contracts) (FEB 1995) Alternate I
(APR 1984)
( ) 52 244-2 Subcontracts Under Cost-Reimbursement and Letter Contracts
(FEB 1997) - Alternate I (AUG 1996)
( ) 52 246 20 Warranty of Services (APR 1984)
( ) 52 247-66 Returnable Cylinders (MAY 1994)
( ) 52 252-4 Alterations in Contract (APR 1984)
( ) 52 252-6 Authorized Deviations in Clauses (APR 1984)
DFARS CLAUSES
( ) 252 217-7027 Contract Definitization (FEB 1996)
( ) 252 219-7005 Incentive for Subcontracting with small Businesses, Small
Disadvantaged Businesses, Historically Black Colleges and
Universities and Minority Institutions (NOV 1995)
( ) 252 219-7005 Incentive for Subcontracting with Small Businesses, Small
Disadvantaged Businesses, Historically Black Colleges and
<PAGE>
Universities and Minority Institutions (NOV 1995) Alternate I
(DEC 1991)
( ) 252 219-7005 Incentive for Subcontracting with Small Businesses, Small
( ) 252 225-7027 Limitation on Sales Commissions and Fees (DEC 1991)
( ) 252 232-7003 Flexible Progress Payments {DEC 1991)
( ) 252 232-7007 Limitation of Government's Obligation (AUG 1993)
( ) 252 239-7016 Telecommunications Security Equipment, Devices, Techniques
and Services (DEC 1991)
( ) 252 243-7000 Engineering Change Proposals (MAY 1994)
( ) 252 243-7000 Engineering Change Proposals (MAY 1994) - Alternate I {MAY
1994)
( ) 252 247-7024 Notification of Transportation of Supplies by Sea (NOV 1995)
( ) 252 249-7000 Special Termination Costs (DEC 1991)
I.6 THE FOLLOWING 8(A) CLAUSES. PROVISIONS~ AND CERTIFICATIONS ARE
INCORPORATED:
PART 1 - CERTIFICATION OF SUBCONTRACTING
I certify that at least the percentage of work required by 13 CFR 124.314 shall
be performed by employees of my firm and the SBA approval will be obtained prior
to entering a subcontract with any other concern. Those percentages are:
[X] SERVICES (except construction) -- At least 50 percent of the-cost of
contract performance incurred for labor must be expended for employees of an
8(a) concern.
[_] SUPPLIES (other than from regular dealers) -- At Least 50 percent of the
cost of manufacturing that supplies, not including the cost of material.
<PAGE>
MDA904-97-C-0424
33 of 34
[_] G GENERAL CONSTRUCTION -- At least 15 percent of the cost of the contract
not including the cost of materials. must be expended or employees of the 8 (a)
concern.
[_] CONSTRUCTION BY SPECIAL TRADE CONTRACTORS -- At least 25 percent of the cost
of the contract, not including the cost of materials must be expended for
employees of the 8 (a) concern.
PART 2
I hereby request permission to subcontract with ___________________for the
amount specified in our Best and Final Offer.
PART 3 - COMPETITIVE BUSINESS MIX CERTIFICATION
(A) [X] FIRM NAME: LITRONICS INC ________________________is in the development
stage.
(B) [_] FIRM NAME: _________________________________acknowledges that it is
currently in the transition stage of the 8 (a) Program Participation and
certifies that it is in compliance with the non-8(a) business activity targets
established pursuant to 13 CFR 124.312(c) (4) and (5).
(C) [_] FIRM NAME: _________________________________certifies that it is in
compliance with the remedial measures imposed by SBA, if any, pursuant to 13 CFR
124.312(c) (12). Disrepresentation by falsely certifying to past compliance with
the non-8(a) business activity targets established in the business plan approved
by SBA shall subject that individual to:
(1) Punishment by a fine of not more than $500,000 or imprisonment for not
more than 10 years or both;
(2) The administrative remedies prescribed by the Program fraud Civil
Remedies Act of 1986 (31 USC 3801.3812);
(3) Suspension and debarment as specified in 13 CFR 145 of Subpart 9.4 of
Title 48 Code of Federal Regulations (or any successor regulation) on the basis
that such misrepresentation indicates a lack of business integrity that
seriously and directly affects the present responsibility of a person or entity
to transact business with the Federal Government; and
(4) Ineligibility for participation in any program or activity conducted
under the authority of the Small Business Act or the Small Business investment
Act for a period of not to exceed 3 years.
<PAGE>
MDA904-97-C-0424
34 of 34
FIRM NAME: ___________________________
ADDRESS: _____________________________
CITY, STATE, ZIP: _________________________
_______________________________________
Signature of President, Partner or Proprietor Date: _________________
ORIGINAL SIGNATURES ONLY, REPRODUCTIONS WILL NOT BE ACCEPTED.
PART 4 - ADDITIONAL CLAUSES AND PROVISIONS
52.219-11 Special 8(a) Contract Conditions (FEB 1990)
Name of Agency: Maryland Procurement Office
52.219- 12 Special 8(a) Subcontract Conditions (FEB 1990)
Prime Contract Number:
Name of Agency: Maryland Procurement Office
Name of Subcontractor:
52.219- 14 Limitations on Subcontracting (JAN 1991)
52.219- 17 Section 8(a) Award (DEC 1996)
Name of Agency: Maryland Procurement Office
52.203-11 Certification and Disclosure Regarding Payment s to
Influence Certain Federal
Transactions (APR 1991)
Certification of Subcontracting
Certification of Competitive Business Mix
SECTION J - LIST OF ATTACHMENTS
J.1 Statement of Work entitled, "Multi Level information System Security
Initiative, Crypto Card System Analysis and Library and Driver Architecture and
Development," dated 10 January 1997, 7 pages.
J.2 Contract Data Requirements List, DD Form 1423, dated 13 February 1997, 18
pages.
J.3 Award Fee Plan (Rev. 2), dated 10 June 1997, 5 pages.
<PAGE>
MDA904.97-C-0424
P00009
Page 2 of 7
SECTION B - SUPPLIES/SERVICES AND PRICES is revised to include:
<TABLE>
<CAPTION>
B.3 SUPPLIES/SERVICES (Date of Contract Modification P00009 - 30 September 1998)
CLIN ITEM DESCRIPTION UNIT QTY UNIT PRICE TOTAL
- ---- ---------------- ---- --- ---------- -----
<S> <C> <C> <C> <C> <C>
0001 The contractor shall furnish the HRS Gov't 6,400 XXX
necessary materials, facilities, Cont'r 5,237
equipments, supplies and services
of skilled professional, technical
and support personnel to fulfill
the requirements set forth in the
Statement of Work entitled
"Task Order for an Advanced
Fortczza and Commercial
Algorithm Smartcard, Version
2.0" dated 27 May 1998.
0001 AA Program Manager X XXX $118.06 XXXX
0001 AB Sr Electrical Engineer X XXX $ 75.41 XXXX
0001 AC Electronic Technician X XXX $ 69.32 XXXX
0001 AD Systems Analyst X XXX $575.38 XXXX
0001 AE Sr. Software Engineer X XXX $ 98.38 XXXX
0001 Af Software Engineer X XXX $ 62.60 XXXX
Total Amount CLIN 0001 Not-To-Exceed
ACR. AC Government's Share $519,434.00
Contractor's Share $424,991.00
0002 Award Fee Pool, to be determined For the Period $519,434.00
in accordance with the Award Fee
Determination Plan for Multi
Level Information System
Security Initiative Crypto Card
System Analysis and Library and
Driver Architecture and
Development, dated 10 June
1997 (Rev. 2). There shall be one
evaluation for the period, date of
contract modification - 30
September 1998, The contractor
is authorized to bill tor up to 50%
of the available award fee ($), on
a monthly basis in equal amounts.
ACR: AC
03 Travel For the Job Not-To-Exceed
(Inclusive of Burdens) Government's Share $8,37 l.00
ACR: AC Contractor's Share $6,849.00
</TABLE>
<PAGE>
MDA904-97-C-0424
P00009
Page 3 of 7
<TABLE>
<CAPTION>
CLIN ITEM DESCRIPTION UNIT QTY UNIT PRICE TOTAL
- ---- ---------------- ---- --- ---------- -----
<S> <C> <C> <C> <C>
0004 Other Direct Costs For the Job Not-To-Exceed
(Inclusive of Burdens) Government's Share $214,252.00
ACR: AC Contractor's Share $288,050.00
0005 Data, in accordance with the For the Lot Not-Separately-Priced
Contract Data Requirements
List (CDRL), DD Form 1423,
dated 13 February 1997
ACR: AC
TOTAL NOT TO-EXCEED GOVERNMENT'S SHARE $794,000.00
TOTAL CONTRACTOR'S SHARE $721,890,00
</TABLE>
SECTION C - DESCRIPTION/SPECIFICATION WORK STATEMENTS is revised to include:
C.4 Statement of Work entitled, Task Order for an Advanced Fortezza and
Commercial Algorithm Smartcard, dated May 7, 1998.
C.5 The Government shall submit individual task orders to The Contractor. Upon
review of The task, the contractor will review The task requirement and provide
the Government with an estimate of the required labor hours, by category,
material and travel for performance. If acceptable, the Government will
authorize the work to proceed by signing the task order and Returning it to the
Contractor The Contractor is not authorized to deviate from the specified labor
hours, per labor category by more than ten percent 10% without prior
authorization from the Contracting Officer. In the event the Contractor cannot
perform the effort within the authorized deviation, a revised estimate shall be
submitted to the Government for approval. If acceptable, the task order will be
amended accordingly. However, in no event shall the Contractor exceed the total
Not-to-Exceed portion of the contract regardless Of the authorized deviation
specified herein. Man Hours expended in preparing Task Order estimates shall not
be directly charged to this contract.
SECTION F - DELIVERIES OR PERFORMANCE
F.7 352.211-9004 PERIOD OF PERFORMANCE (APR 1989) is added:
Section R.3 of this contract shall extend from date of contract modification to
30 September 1998, unless performance is sooner terminated under the terms of
the contract
(End of Clause)
<PAGE>
MDA904-97-C 0424
P00009
Page 4 of 7
SECTION C - CONTRACT ADMINISTRATION DATA
G.1 ACCOUNTING~D APPROPRIATION DATA is revised w include ACR: AC:
<TABLE>
<CAPTION>
ACR: AA Obligate
- -------- --------
977/80400.4500 574E51 999-2520 S18119 03200106 IX 0000 X22 120B
<S> <C>
Previously Obligated for Section B.1 CLINs 000l, 0003 and 0004 $ 446,874.00
Previously Obligated for Provisional Award Fee Payments $ 0.00
Previously Obligated for Future Award Fee Payments $ 0.00
Previously Obligated for Award Fee Earned $ 36,433.00
Total Amount Previously Obligated ACR: AA $ 483,307.00
ACR: AB Obligate
- -------- --------
978190400.4500 584E51 999-2520 S18119 04700400 IX 0000 X22 I25D
Previously Obligated for section B.2 CLINs 0001, 0003 and 0004 $1,154,441.00
Previously Obligated for Provisional Award Fee Payments $ 42,279.50
Previously Obligated for Future Award Fee Payments $ 42,279.50
Total Amount Previously Obligated (PR: 16-97-9093-0003) $ 850,000.00
Total Amount Previously Obligated (PR: I6-97-2093-0004) $ 205,000.00
Total Amount Previously obligated (PR: l6-97-2093-0005) $ 184.000.00
Total Amount Previously Obligated ACR: AB $1,239,000.00
ACR: AC Obligate
- -------- --------
978/90400.4500 584E51 999-X550 S18119 04700100 IX 0000 X21 125D
Obligate This Action for section B.3 CLINs 0001, 0003 and 0004 $ 742,057.00
Obligate This Action for Provisional Award Fee Payments 25,971.50
Obligate This Action for Future Award Fee Payments 25,971.50
Total Obligated This Action (PR: I6-98-3701-0000) ACR: AC $ 794,000.00
</TABLE>
<PAGE>
MDA904-97-C-0424
P00009
Page 5 Of 7
G.2 352.216-9007 NOTICE: AWARD FEE FUNDING (JUL 1993) is restated as follows:
Funds in the amount of $42,279.50 Section B.2, and S25.971.50, SECTION B.3, have
been obligated under this contract towards future award fee determinations but
are not available for the Contractor to bill against or incur costs against.
obligated award fee funds identified above will be released to the Contractor
via subsequent modifications after the Government has rendered an award fee
determination in accordance with the Award Fee Plan currently in force under
this contract. Upon receipt of the aforementioned modifications, the Contractor
is authorized to bill for the earned fee.
G.14 METHOD OF INVESTMENT CALCULATION/INVOICING (applicable to Section B.2 only)
The Contractor agrees that it will make an investment of 45% of total costs
incurred up to a maximum investment contribution of 5721,890.00. In order to
implement this investment, The Contractor agrees that each of its invoices for
incurred costs on the effort contained in Section B.3 will include the following
information:
Total costs incurred
55% of those costs charged to the Government
45% of those costs charged to the Contractor
Total amount to be paid by the Government
Total investment to date by Contractor
It is further agreed by the parties that, once the maximum investment is
reached, any additional costs incurred above the estimated costs contained
herein that are otherwise allowable, allocable. and reasonable and in accordance
with the other provisions of the contract, will be invoiced up to a total of
$1,515,890.00, which total includes the contractor's maximum investment of
$721,890.00, and the government's investment of $794,000.00 for the current
period of performance. The contractor's maximum investment is $721,890.00. All
invoices will be paid in accordance with the payment provisions stated in this
contract. In no case will the contractor invoice the government for more than
the Not-To-Exceed amount listed in the contract. The Contractor shall notify the
Contracting Officer in writing whenever it has reason to believe that the costs
it expects to incur under this contract in the next 60 days, when added to all
costs previously incurred, will exceed 75 percent of the amount currently
obligated on the contract. The Contractor's notice shall include an estimate of
funds required to continue performance. If, after notification by the Contractor
pursuant to this clause, additional funds are required to be obligated for a
further period, the government will negotiate an appropriable resolution.
(end of Clause)
SECTION' H - SPECIAL CONTRACTOR REQUIREMENTS is revised to include:
H.19 552.227-9005 NOTIFICATION OF FOREIGN ORIGIN SOFTWARE AND/OR FIRMWARE. (OCT
1997)
Offerors/Contractor shall notify the Contracting Officer in writing if any
foreign manufactured, developed, maintained and/or modified software and/or
firmware will be used or included in the deliverables under this contract.
Foreign-origin software and/or firmware that is merely a possible candidate for
as under this contract shall also be identified. Notification pursuant to this
<PAGE>
clause must include the identity of the foreign source and the nature of the
software application, and is required as soon as there is a reason to know or
suspect foreign origin.
NSA reserves the right to exclude foreign-origin software and/or firmware from
use under contract on a case-by case basis.
(End of clause)
H.20 352.216-9012 TECHNICAL TASK ORDERS (OCT 1993)
(a) Technical Task Orders shall be issued by the Contracting Officer or his/her
duly authorized representative. The TTOs will include a ceiling price, beyond
which the Contractor shall not incur costs.
(b) The performance of the work under each TTO order shall be subject to the
technical direction and surveillance of the Contracting Officer's
Representatives (CORs) who are identified under separate letter. "Technical
Direction",
<PAGE>
MDA904-97-C 0424 POOOO9
Page 6 Of 7
as used herein, is direction to the Contractor which fills in details or
otherwise completes or explains the scope of the work and specific requirements
as set forth in the Statement of Work and in each TTO. Furthermore, the COR may
suggest to the Contractor lines of inquiry or methods of approach with respect
to work under this order. It is intended that the Technical Task Orders (TTOs)
or suggestions furnished shall be within the general scope of the work as set
forth in the Statement of Work: and shall not constitute changes as described
in the "Changes" clause.
(c) The following procedures shall be follows/ed in initiating tasks under this
order:
A TTO seeing forth the detailed requirements of a particular task, together with
any necessary attachments (drawings, schematics. ac.,) shall be furnished to the
Contractor in writing by a designated COR. The Contractor is obligated to
perform all TTOs issued pursuant to the technical specification cited in
paragraph (b), above. TTOs shall not constitute a basis for any increase in the
fee or extrusion to the period of performance. Nothing contained in this clause
authorizes the Contractor to incur costs in excess of the estimated cost or fund
limitation set forth in the order.
(d) All TTOs furnished to the Contractor shall be incorporated into this order
by reference.
(End of Clause)
H.21 MPO 232-9009 CEILING PRICE
The price negotiated for this contract and for any subsequent job orders
resulting hereunder shall be a ceiling once which the contractor exceeds at his
own risk without prior approval of the Contracting Officer.
SECTION I - CONTRACT CLAUSES
1.5 REFERENCED CLAUSES is revised to include:
52.215-2 Audits and Records - Negotiations (AUG 1996)
SECTION; J - LIST OF ATTACHMENTS IS REVISED to include:
J .4 Statement of Work entitled, "Task Order for an Advanced Fortezza and
Commercial Algorithm Smartcard, Version 2.0," dated 21 May 1998. 22 pages
(previously provided).
<PAGE>
MDA904-97-C-0424
P00009
Page 7 of 7
C. As a result of the foregoing, the total contract price is restated as
follows:
<TABLE>
<CAPTION>
Section B. 1 FROM BY TO
------------ ---- -- --
<S> <C> <C> <C>
Cost of CLINs 0001, 0003 and 0004 $446,874.00 $ 0.00 $ 446,874.00
Award Fee Pool $ 0.00 $ 0.00 $ 0.00
Earned Award Fee $ 36.433.00 $ 0.00 $ 36.433.00
------------- -------------
Total FPAF Amount $ 483,307.00 $ 0.00 $ 483,307.00
Section B.9 FROM BY TO
------------- ---- --- --
Cost of CLINs 0001, 0003 and 0004 $ l,154,441.00 $ 0.00 $1,154,441.00
Award Fee Pool $ 84,559.00 $ 0.00 $ 84,559.00
Earned Award Fee $ 0 00 $ 0.00 $ 0.00
-------------
Total FPAF Amount $1,,239,000.00 $ 0.00 $1,239,000.00
Section B.3 FROM BY TO
----------- ----- -- --
Cost of CLINs 0001, 0003 and 0004 $ 0.00 $ 742,057.00 $ 742,057.00
Award Fee Pool $ 0.00 $ 51,943.00 $ 51,943.00
Earned Award Fee $ 0 00 $ 0.00 $ 0 00
-------------- ------------- -------------
Total FPAF Amount $ 0.00 $ 794,000.00 $ 794,000.00
FROM BY TO
---- -- --
Total Contract Price $ 1,722,307.00 $ 794,000.00 $2,516,307.00
</TABLE>
D. Except as provided herein, all terms and conditions of this contract, as
previously modified, remain unchanged and in full force and effect.
<PAGE>
LITRONIC INDUSTRIES
PURCHASE ORDER WORKSHEET
PO Number:MDA904-97-C-W24, P00008 Customer Number:
Date: June 12, 1998 Customer: NSA
Maryland Procurement Office
Address: 9800 Savage Road
FANX III
Fort George G. Meade, MD 20755
6000
Buyer: M. Ouansy
REMARKS SECTION
1. ADDITIONAL FUNDING FOR FY98. TOTAL CONTRACT AMOUNT IS $1,239,000.00.
2. PROVIDE COPY TO BOB GRAY.
Item Part Number Quantity UNIT Price Due Date Total
0001 See Page 3 of Contract for 184,000.00 N/A $184,000.00
Appropriate Labor Categories
TOTAL PRICE $184,000.00
Taxable NO
Initiated by; Prohaska
Rep: Prohaska)
<PAGE>
P00006
Page 2 of 3
SECTION B - SUPPLIES OR SERVICES AND PRICES/COSTS
B.1 SUPPLIES/SERVICES (Basic period 27 June 1997 - 30 September 1997) is revised
to read:
CLIN ITEM DESCRIPTION UNIT QTY UNIT PRICE TOTAL
0001 The contractor shall furnish HRS 4,832 XXX $443,445.57
the necessary materials,
facilities, equipment,
supplies, and services of
skilled professional,
technical and support
personnel to fulfill the
requirements sel forth in the
Statement of' Work for Multi
NOTE:The above stated amounts reflect the following revisions:
<TABLE>
<CAPTION>
FROM BY TO
----
<S> <C> <C> <C>
Quantity in hours 4,582 250 4,832
Total Price $421,116.00 $421,116.00 $22,329.57 $443,445.57
0001AA Program Manager X XXX $118.06 XXXX
0001AB Sr. Electrical Engineer X XXX $ 75.41 XXXX
0001AC Electronic Technician X XXX $ 69.32 XXXX
000lAN Systems Analyst X XXX $ 75.38 XXXX
000AIS Sr. Software Engineer X XXX $ 98.38 XXXX
0001AF Software Engineer X XXX $ 62.60 XXXX
Total Amount CLIN 0001 Not-To-Exceed $443,445.57
0002Award Fee Earned For the Period $36,433.00
0003Travel For the Job Not-To-Exceed $ 0.00
(Inclusive of Burdens)
NOTE: The above stated amounts reflect the
following revisions:
FROM BY TO
---- -- --
$ 15,000.00 ($15,000.00) $ 0.00
0004 OTHER DIRECT COSTS For the Job Not-To-Exceed $ 3,428.43
(Inclusive of Burdens)
</TABLE>
<PAGE>
MDA9O4-97-C-0424|
P00005
Page 3 of 3
NOTE 2: TRAVEL shall be reimbursed at cost. Lodging shall be reimbursed at
actual costs meals and incidental expenses shall be reimbursed at the applicable
flat rate. The total of lodging, meals, and incidental expenses shall not exceed
the established rate for each location set forth in the "Federal Travel
Regulations (FTR);" the "Joint Travel Regulations," Volume 2 (JTR); and the
Standardized Regulation (Government Civilians Foreign Areas), Section 925," as
applicable. These costs shall be directly chargeable to this contract in
accordance with the contractor' s established method of distributing such costs.
First class travel shall not be reimbursed. Contractor shall be reimbursed for
coach rates only. Travel is non fee bearing. Invoices which request
reimbursement of travel expenses must be accompanied by airline ticket subs,
hotel/motel receipts, and rental car receipts.
SECTION G - CONTRACT ADMINISTRATION DATA
G.l ACCOUNTING AND APPROPRIATION DATA, ACR: AA only, is revised to read:
<TABLE>
<CAPTION>
ACR: AA Obligate
- -------- ---------
<S> <C>
977/80400.4500 574E51 999-2590 S18119 03200106 lX 0000 X22 120B
Previously Obligated for Section B. l CLINs 0001,, 0003 and 0004 $ 446,874.00
Previously Obligated for Provisional Award Fee Payments $ 21,431.00
DeObligate for Provisional Award Fee Payments This Action ($21,43l .00)
Total Amount Obligated for Provisional Award Fee Payments $ 0.00
Previously Obligated for Future Award Fee Payments $ 21,431.00
Deobligate for Future Award Fee Payments ($2l ,431.00)
Total Amount Obligated for Future Award Fee Payments $ 0.00
Previously Obligated for Award Fee Earned $ 0.00
Obligate for Award Fee Earned This Action $ 36,433.00
Total Amount Obligated for Award Fee Earned $ 36,433.00
Total Amount Previously Obligated for ACR: AA $ 489,736.00
DeObligate ACR: AA This Action ($6,429.00)
Total Amount Obligated ACR: AA $ 483,307.00
3. As a result of the foregoing, the total contract value is decreased as follows:
FROM By TO
---- -- --
Not-To-Exceed $1,339,736.00 ($6,429.00) $1,333,307.00
</TABLE>
4. Except as provided for herein, all terms and conditions and provisions remain
unchanged and in full force and effect.
<PAGE>
The Performance Evaluation Board discussed Litronic, Inc.'s performance during
the base year award fee period via informal meetings. The conclusions reached
are summarized as follows.
TECHNICAL
Staffing:
. Skilled personnel were assigned to the task, and all subcontracts appear to
have been well managed.
. There were no problems with personnel equipped with inadequate skills working
on the task.
Rating: EXCELLENT
PERFORMANCE:
. System Engineering produced a flexible architecture that was able to respond
to numerous problems.
. Few of the many bugs in the CI Library 1.52b were the result of any deficiency
in Litronic's test engineering process. While Litronic's Software Engineering
Process has some Way to go, it certainly was capable of responding to this
particular debugging exercise.
. Litronic is very responsive in addressing support concerns.
. Litronic communicates problems and concerns very well with the Program Office.
Rating: EXCELLENT
. Contractor had some difficulty in meeting schedule for Cl Library 1.52b. As a
result, library release was delayed for several months.
Rating: MARGINAL
COST
. Litronic effectively controlled program costs.
. No problems were evident in Litronic's billing procedures.
. Status reporting is deficient. It is often late, not available, or not useful.
If this problem is not corrected by the next evaluation period, cost will be
further affected.
Rating: GOOD
Base Year Award Period
PERB Recommendations: Litronic, Inc.
<PAGE>
AMENDMENT OF SOLICITATION/MODIFICATION OF CONTRACT
1/7
Amendment Modification No. P00004
Effective Date: 23 Oct, 1997
Requisition Purchase Req. No. :16-97-2093 /3
Issued by:
Maryland Procurement Office
9800 Savage Road
Ft. Meade, Md 20755-6000
Attn: N 141 (M . Lynn Miller) (410) 8594071
Name and Address of Contractor:
Litronic, Inc.
ATTN: James Prohaska (703-729-1700)
4308 8 Winter Grove Drive
Ashburn, VA 22011
Modification of Contract/Order No.: MDA###-##-####
X DATED (SEE ITEM 1.R)
11. THIS ITEM ONLY APPLIES TO AMENDMENTS OF SOLICITATIONS
Obligate $850,000.00
13. THIS ITEM APPLIES ONLY TO MODIFICATIONS OF CONTRACT/ORDERS, IT MODIFIES THE
CONTRACT/ORDER NO. AS DESCRIBED IN ITEM 14.
D. OTHER (Specify type of modification and authority)
FAR 43.103 (a) Bilateral Modification.
E. IMPORTANT: Contractor X is not required to sign this document and return 3
copies to the issuing office.
A. The purpose of this modification is to:
I .Reduce the quantity of hours in section H.13 paragraph (b) OPTION I,
2.Exercise a portion of the option under section H.13 paragraph (b) OPTION I, in
the FPAF amount of $850,000.00.
3.Add OPTION 3 for additional level of effort in Fiscal Year 1998 in the amount
of $391,112.00.
B. Accordingly, this contract is hereby modified as follows.
(Continued on following page)
NAME AND TITLE OF SIGNER (type or print)
James S. Prohaska
Director, Business Development
NAME AND TITLE OF CONTRACTING OFFICER (type or print)
Gregory A. Fream
Contracting Officer
[AUTHORIZED SIGNATORY]
- ----------------------
(Signature of personal authorized to sign this form)
15c. Date signed 03, Oct, 1997
16C. Date signed 03, Oct. 1997
<PAGE>
P00004
Page 2 of 7
PART I - REDUCE THE LEVEL OF EFFORT UNDER H.13 PARAGRAPH (B) OPTION I
- ---------------------------------------------------------------------
OPTION I - FISCAL YEAR 1998 (1 OCTOBER 1997 - 30 SEPTEMBER 1998) is hereby
- ----------------------------------------------------------------
restated as follows.
CLIN ITEM DESCRIPTION UNIT QTY UNIT PRICE
TOTAL
0001 The contractor shall furnish HRS 7864 XXX $738,500.00
the necessary materials,
facilities, equipment,
supplies, and services of
skilled professional,
technical and support
personnel to fulfill the
requirements set forth in the
Statement of Work for Multi
Level Information System
Security Initiative Crypto
NOTE: The above stated amounts reflect the following revisions:
<TABLE>
<CAPTION>
FROM BY TO
---- -- --
<S> <C> <C> <C> <C>
Quantity in hours 11,400 (3,536) 7864
Total Price $1,071,465.00 (5332,965.00) $738,500.00
0001AA Program Manager X XXX $ 118.06 XXXX
0001AB Sr Electrical Engineer X XXX $ 75.41 XXXX
0001 AC Electronic Technician X XXX $ 69.32 XXXX
0001AD Systems Analyst X XXX $ 75.38 XXXX
0001AE Sr. Software Engineer X XXX $ 98.38 XXXX
0001AF Software Engineer X XXX $ 62.60 XXXX
Total Amount CLIN 0001 Not-To-Exceed $738,500.00
</TABLE>
<PAGE>
P00004
Page 3 of 7
0002 Award Fee Pool, to be For the Period $73,850.00
determined in accordance
with the Award Fee
Determination Plan for Multi
Level Information System
Security Initiative Crypto
Card System Analysis and
Library and Driver
Architecture and
Development, dated 10 June
1997 (Rev.2)
NOTE: The above stated amounts reflect the following revisions:
<TABLE>
<CAPTION>
FROM BY TO
---- -- --
<S> <C> <C> <C> <C>
$107,147.00 ($33,297.00) $73,850.00
0003 Travel For the Job Not-To-Exceed $25,150.00
(Inclusive of Burdens)
</TABLE>
NOTE: The above stated amounts reflect the following revisions:
<TABLE>
<CAPTION>
FROM BY TO
---- -- --
<S> <C> <C> <C> <C>
$550,000.00 ($24,850.00) $25,150.00
0004 OTHER DIRECT COSTS For the Job Not-To-Exceed $12,500.00
(Inclusive of Burdens)
NOTE: The above staled amounts reflect the following revisions:
FROM BY TO
---- -- --
$12,500.00 ($0.00) $25,150.00
0005 Date, in accordance with the For the Job Not-Separately-Priced
Contract Data Requirements
List (CDRL), DD Form
1423, dated 13 February 1997
</TABLE>
<PAGE>
P00004
Page 4 of 7
PART II -EXERCISE THE OPTION UNDER H.13 PARAGRAPH (B) OPTION I
- --------------------------------------------------------------
SECTION B - SUPPLIES/SERVICES AND PRICES
OPTION I - FISCAL YEAR 1998 (1 OCTOBER 1997 - 30 SEPTEMBER 1998) is hereby
- ----------------------------------------------------------------
restated as follows.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
CLIN ITEM DESCRIPTION UNIT QTY UNIT PRICE TOTAL
0001 The contractor shall furnish HRS 7864 XXX $738,500.00
the necessary materials,
facilities, equipment,
supplies, and services of
skilled professional,
technical and support
personnel to fulfill the
requirements set forth in the
Statement of Work for Multi
Level Information System
Security Initiative Crypto
Card System Analysis and
Library and Driver
Architecture and
Development, dated 10
January 1997.
0001AA Program Manager X XX $118.06 XXXX
0001AB Sr Electrical Engineer X XXX $ 75.41 XXXX
0001AC Electronic Technician X XXX $ 69.32 XXXX
0001AD Systems Analyst X XXX $ 75.38 XXXX
0001AE Sr. Software Engineer X XXX $ 98.38 XXXX
0001AF Software Engineer X XXX $ 62.60 XXXX
Total Amount CLIN 0001 Not-To-Exceed $738,500.00
0002 Award Fee Pool, to be determined For the Period $ 73,850.00
in accordance with the Award Fee
Determination Plan for Multi
Level Information System
Security Initiative Crypto Card
System Analysis and Library and
Driver Architecture and
Development, dated 10 June
1997 (Rev. 2). There shall be one
evaluation for the period of I
October 1997 - 30 September
1998. The contractor is authorized
to bill for up to 50% of the
available award fee ($36,925.00),
on a monthly basis in equal
amounts of $3,077.08.
</TABLE>
<PAGE>
P00004
Page 5 of 7
<TABLE>
<CAPTION>
CLIN ITEM DESCRIPTION UNIT QTY UNIT PRICE TOTAL
<S> <C> <C> <C> <C> <C>
0003 Travel For the Job Not to Exceed $25,150.00
(Inclusive Of Burdens)
0004 Other Direct Costs For the Job Not to Exceed $12,500.00
(Inclusive of Burdens)
0005 Data, in accordance with the Con- For the Lot Not Separately-Priced
tract Data Requirements List
(CDRL), DD Form 1423, dated
13 February 1997
</TABLE>
SECTION F- DELIVERIES OR PERFORMANCE
F.3 352.211-900)4 PERIOD OF PERFORMANCE (OCT 1990) - ALTERNATE III (OCT 1990)
is hereby restated as follows.
The period of performance shall extend from the date of contract award to 30
September 1998, unless performance is sooner terminated under the terms of the
contract. However the Government reserves the right to exercise the option to
renew the contract for up to one (1) year, as set forth elsewhere in this
contract.
SECTION G - CONTRACT ADMINISTRATION DATA
G.1 ACCOUNTING AND APPROPRIATION DATA has the following fund cite added.
<TABLE>
<CAPTION>
ACR: AB Obligate
- -------- --------
<S> <C>
978/90400.4500 584E51 999-2520 S18119 04700400 IX 0000 X22 125D
PR 169720930003
Obligated for section B.2 CLINs 0001, 0003 and 0004 $776,150.00
Obligated for Provisional Award Fee Payments $ 36,925.00
Obligated for Future Award Fee Payments $ 36,925.00
Total Amount Obligated $850.000.00
</TABLE>
SECTION H- SPECIAL CONTRACT REQUIREMENTS
H.13 OPTION TO EXTEND THE TERM OF THE CONTRACT paragraph (b) OPTION I only, as
restated in PART I of this modification, is hereby deleted in its entirety.
PART III - ADD OPTION 3
H.13 OPTION TO EXTEND THE TERM OF THE CONTRACT paragraph (b) OPTION 3 is hereby
added to this contract as follows.
<PAGE>
P00004
Page 6 of 7
OPTION 3 - FISCAL YEAR 1998 ( 1 OCTOBER 1997 - 30 SEPTEMBER 1998).
<TABLE>
<CAPTION>
CLIN ITEM DESCRIPTION UNIT QTY UNIT PRICE TOTAL
<S> <C> <C> <C> <C>
0001 The contractor shall furnish HRS 3,536 XXX $332,965.00
the necessary materials,
facilities, equipment,
supplies, and services or
skilled professional,
technical and support
personnel to fulfill the
requirements set forth in the
Statement of Work for Multi
Level Information System
Security Initiative Crypto
Card System Analysis and
Library and Driver
Architecture and
Development, dated 10
January 1997.
0001AA Program Manager X XXX $118.06 XXXX
0001AB Sr Electrical Engineer X XXX $ 75.41 XXXX
0001AC Electronic Technician X XXX $ 69.32 XXXX
0001AD Systems Analyst X XXX $ 75.38 XXXX
001 AE Sr. Software Engineer X XXX $ 98.38 XXXX
0001AF Software Engineer X XXX $ 62.60 XXXX
Total Amount CLIN 0001 Not-To-Exceed $332,965.00
0002 Award Fee Pool, to be For the Period $ 33,297.00
determined in accordance
with the Award Fee
Determination Plan for Multi
Level Information System
Security Initiative Crypto
Card System Analysis and
Library and Driver
Architecture and
Development, dated 10 June
1997 (Rev. 2).
0003 Travel For the Job Not-To-Exceed $24,850.00
(Inclusive of Burdens)
0004 Other Direct Costs For the Job Not-To-Exceed $0.00
(Inclusive of Burdens)
0005 Date, in accordance with the For the Lot Not-Separately-Priced
Contract Data Requirements
List (CDRL), DD Form
1423, dated 13 February 1997
</TABLE>
<PAGE>
MDA904-97-C-0424
P00004
Page 7 of 7
C. As a result of the foregoing, the total contract price is restated as follows
<TABLE>
<CAPTION>
Section B.l FROM BY TO
- ----------- ---- -- --
<S> <C> <C> <C>
Cost of CLINs 0001 0003 and 0004 $338,465.00 $0.00 $338,465.00
Award Fee Pool $31,271.00 $0.00 $31,271.00
Earned Award Fee $0 00 $0.00 $0.00
----- -----
Total CPAF Amount $369,736.00 $0.00 $369,736.00
Section B.2 FROM BY TO
- ----------- ---- -- --
Cost of CLINs 0001, 0003 and 0004 $0.00 $776.150.00 $776.150.00
Award Fee Pool $0.00 $ 73,850.00 $73,850.00
Earned Award Fee $0.00 $0.00 $0.00
----- ----- -----
Total CPAF Amount $0.00 $850,000.00 $850.000.00
FROM BY TO
---- -- --
Total Contract Price $489,736.00 $850,000.00 $1,339.736.00
</TABLE>
D. Except as provided herein, all terms and conditions of this contract, as
previously modified, remain unchanged and in full force and effect.
<PAGE>
AMENDMENT OF SOLICITATION/MODIFICATION OF CONTRACT
1. CONTRACT ID CODE
PAGE 1 OF 3 PAGES
2. AMENDMENT MODIFICATION NO. P0003
3. EFFECTIVE DATE 15 SEP 1997
CODE H98230
7. ADMINISTERED BY (if other than Item 6)
Maryland Procurement Office
9800 Savage Rd., FANX III
Ft. George G. Meade, MD 20755-6000
ATTN: N 141 (MLM)
8. NAME AND ADDRESS OF CONTRACTOR (No, street, county, State and Z1P Cade
LITRONIC
ATTN: JAMES PROHASKA (703-729-1700)
43088 Winter Grove Drive
Ashburn. VA 22011
X 9A. AMENDMENT OF SOLICITATION NO.
- ---
9B. DATED (SEE ITEM 11)
10A. Modification of Contract/Order No.
MDA904-97-D-0424
10B. Dated (SEE ITEM 13)
27 June 1997
11. THIS ITEM ONLY APPLIES TO AMENDMENTS OF SOLICITATIONS
___ The above numbered solicitation is amended as set forth in Item 14. The
hour and date specified or receipt offers _____ is extended. _______is not
extended.
11. Offers's must acknowledge receipt of this amendment prior to the hour and
date specified in the solicitation or as amended. hy one of the following
methods:
(a) By completing Items 8 and 15, and returning copies~s of the amendment: (b}
By acknowledging receipt Of this amendment on each copy of the offer submitted:
or (c) By separate letter or telegram which includes a reference to the
solicitation and amendment numbers. FAILURE OF YOUR ACKNOWLEDGMENT TO BE
RECEIVED AT THE PLACE DESIGNATED FOR THE RECEIPT OF OFFERS PRIOR TO THE HOUR AND
DATE SPECIFIED MAY RESULT IN REJECTION OF YOUR OFFER. If by virtue of this
amendment you desire to change an offer already submitted, such change may be
made by telegram or letter, provided each telegram or letter makes reference to
the solicitation and this amendment, and is received prior to the opening hour
and date specified.
12. ACCOUNTING AND APPROPRIATION DATA (if required)
SEE PAGE 2 Obligate: $75,000.00
13. THIS ITEM APPLIES ONLY TO MODIFICATIONS OF CONTRACT ORDERS,
IT MODIFIES THE CONTRACT/ORDER NO. AS DESCRIBED IN ITEM 14.
X A. THIS CHANGE ORDER IS ISSUED PURSUANT TO: (Specify authority) THE
- ---
CHANGES SET FORTH IN ITEM 14 ARE MADE IN THE CONTRACT ORDER NO. IN ITEM 10A.
B. THE ABOVE NUMBERED CONTRACT/ORDER IS MODIFIED TO REFLECT THE ADMINISTRATIVE
CHANGES (such as changes in paying office, appropriation date, etc. SET FORTH IN
ITEM 14. PURSUANT TO THE AUTHORITY OF FAR 43.103(b).
<PAGE>
X C. THIS SUPPLEMENTAL AGREEMENT IS ENTERED INTO PURSUANT TO AUTHORITY OF
- ---
FAR 43.103(A)
D. OTHER (Specify type of modification and authority).
E. IMPORTANT: Contractor___ is not, X is required to sign this document
---
and return 3 copies of the issuing office.
14. DESCRIPTION OF AMENDMENT MODIFICATION (Organized by UCF section headings,
including solicitation /contract subject matter where feasible).
1. The purpose of this modification is to provide additional funds to increase
the level of effort and to change the subcontract number on page 2 of the basic
contract from SB0920-96-602356 to SB0920-97-706672.
2. Accordingly, the following sections are hereby modified: SEE PAGE 2
Except as provided herein, all terms and conditions of the document referenced
in Item 9A or 10A as heretofore changed, remains unchanged and in Full force and
effect.
15A NAME AND TITLE OF SIGNER (Type or Print)
James S. Prohaska
Director, Business Development
B. CONTRACTOR/OFFEROR
[AUTHORIZED SIGNATORY]
- ----------------------
(Signature of person authorized to sign)
15C. DATE SIGNED
12 SEP 1997
16A. NAME AND TITLE OF CONTRACTING OFFICER (Type or print)
GREGORY A. FREAM
CONTRACTING OFFICER
16B. UNITED STATES OF AMERICA
BY /S/ GREGORY A. FREAM
--------------------
(Signature of Contracting Officer)
16C. DATE SIGNED
15 SEPT. 199_
<PAGE>
page 2
MDA904-97-C-0424/ P00003
SECTION B - SUPPLIES OR SERVICES AND PRICES/COSTS
B.l SUPPLIES/SERVICES, CLINs 0001 and 0002 only, are revised as follows:
<TABLE>
<CAPTION>
UNIT
CLIN SUPPLIES/SERVICES UNIT QTY PRICE TOTAL
<S> <C> <C> <C>
0001 The Contractor shall furnish the HRS From 3873 XXX From $353,616.00
necessary materials, facilities, By 709 By $ 67,500.00
equipment, supplies and services To 4582 To $421,116.00
and services of skilled professional,
technical and support personnel to
fulfill the requirements set forth in
the Statement of Work entitled, "Multi
Level Information System Security
Initiative Crypto Card System Analysis
and Library and Driver Architecture
and Development," dated 10 January
1997 and the documents referenced in
Section C. The contractors's management
shall provide for the effective
timely and integrated implementation
of contract requirements.
0001AA Program Manager X XX $ 118.06 XXXX
0001 AB Sr. Electrical Eng. X XX $ 75.41 XXXX
0001 AC Electronic Technician X XX $ 69.32 XXXX
0001AD Systems Analyst X XX $ 75.38 XXXX
0001AE Sr. Software Engineer X XX $ 98.38 XXXX
0001AM Software Engineer X XX$ $ 62.60 XXXX
Total Amount CLIN 0001 Not-To-Exceed $421,116.00
0002 Award Fee Pool, to be determined in For the Period From $ 35,362.00
accordance with the Award Fee Plan By $ 7,500.00
for Multi-Level Information System To $ 42,862.00
Security Initiative Crypto Card
System Analysis and Library and Driver
Architecture and Development dated 10 June
1997 (Rev. 2). There shall be one
evaluation of performance at the end of the
period of performance (Dale of contract aware
through 30 September 1997.) If the
Government exercises the options to extend
the term of the contract, there shall be an
evaluation of performance at the conclusion
of each option year. The contractor is
authorized to bill for up to 50% of
the available award fee ($21,431.00), on a
monthly basis in equal amounts of $5,357.75.
</TABLE>
SECTION G - CONTRACT ADMINISTRATION DATA
<PAGE>
G1 ACCOUNTING AND APPROPRIATION DATA is revised as follows:
<TABLE>
<CAPTION>
ACR: AA Obligate
--------
977/780400.4500 574E5 l 999-2520 S18119 03200106 IX 0000
X22 120B
PR: 16-97-2093-0002 From By To
<S> <C> <C> <C>
Obligated for CLINs 0001, 0003 and 0004 $379,374.00 $67,500.00 $446,874.00
Obligated for Provisional Award Fee Payments $ 17,681.00 $ 3,750.00 $ 21,431.00
Obligated for Future Award Fee Payments $ 17,681.00 $ 3,750.00 $ 21,431.00
Total Amount Obligated $414,736.00 $75,000.00 $489,736.00
</TABLE>
<PAGE>
page 3
MDA904-97-C-0424/ P00003
G.2 352.216-9007 NOTICE: AWARD FEE FUNDING (JUL 1993) is restated as follows:
Funds in the amount of $21.431.00 have been obligated under this contract
----------
towards future award fee determinations but are not available for the Contractor
to bill against or incur costs against. Obligated award fee funds identified
above will be released to the Contractor via subsequent modifications after the
Government has rendered an award fee determination in accordance with the Award
Fee Plan currently in force under this contract. Upon receipt of the
aforementioned modifications, the Contractor is authorized to bill for the
earned fee.
3. As a result of this modification, total contract value is increased as
follows:
FROM BY TO
FFP (LOE) $414,736.00 $75,000.00 $489,736.00
4. Except as provided herein all other terms and conditions of the subject
contract remain unchanged and in full force.
<PAGE>
AMENDMENT OF SOLICITATION/MODIFICATION OF CONTRACT
1. CONTRACT ID CODE
PAGE 1 OF 3 PAGES
2. AMENDMENT MODIFICATION NO. P0002
3. EFFECTIVE DATE 04 SEP 1998
CODE H98230
7. ADMINISTERED BY (if other than Item 6)
Maryland Procurement Office
9800 Savage Rd., FANX III
Ft. George G. Meade, MD 20755-6000
ATTN: N 141 (MLM)
8. NAME AND ADDRESS OF CONTRACTOR (No, street, county, State and Z1P Cade
LITRONIC
ATTN: JAMES PROHASKA (703-729-1700)
43088 Winter Grove Drive
Ashburn. VA 22011
X 9A. AMENDMENT OF SOLICITATION NO.
- ---
9B. DATED (SEE ITEM 11)
10A. Modification of Contract/Order No.
MDA904-97-D-0424
10B. Dated (SEE ITEM 13)
27 June 1997
11. THIS ITEM ONLY APPLIES TO AMENDMENTS OF SOLICITATIONS
___ The above numbered solicitation is amended as set forth in Item 14. The
hour and date specified or receipt offers _____ is extended. _______is not
extended.
11. Offers's must acknowledge receipt of this amendment prior to the hour and
date specified in the solicitation or as amended. hy one of the following
methods:
(a) By completing Items 8 and 15, and returning copies of the amendment: (b} By
acknowledging receipt Of this amendment on each copy of the offer submitted: or
(c) By separate letter or telegram which includes a reference to the
solicitation and amendment numbers. FAILURE OF YOUR ACKNOWLEDGMENT TO BE
RECEIVED AT THE PLACE DESIGNATED FOR THE RECEIPT OF OFFERS PRIOR TO THE HOUR AND
DATE SPECIFIED MAY RESULT IN REJECTION OF YOUR OFFER. If by virtue of this
amendment you desire to change an offer already submitted, such change may be
made by telegram or letter, provided each telegram or letter makes reference to
the solicitation and this amendment, and is received prior to the opening hour
and date specified.
12. ACCOUNTING AND APPROPRIATION DATA (if required)
SEE PAGE 2 Obligate: $45,000.00
13. THIS ITEM APPLIES ONLY TO MODIFICATIONS OF CONTRACT ORDERS,
IT MODIFIES THE CONTRACT/ORDER NO. AS DESCRIBED IN ITEM 14.
X A. THIS CHANGE ORDER IS ISSUED PURSUANT TO: (Specify authority) THE
- ---
CHANGES SET FORTH IN ITEM 14 ARE MADE IN THE CONTRACT ORDER NO. IN ITEM 10A.
B. THE ABOVE NUMBERED CONTRACT/ORDER IS MODIFIED TO REFLECT THE ADMINISTRATIVE
CHANGES (such as changes in paying office, appropriation date, etc. SET FORTH IN
ITEM 14. PURSUANT TO THE AUTHORITY OF FAR 43.103(b).
<PAGE>
X C. THIS SUPPLEMENTAL AGREEMENT IS ENTERED INTO PURSUANT TO AUTHORITY OF
- ---
FAR 43.103(A)
D. OTHER (Specify type of modification and authority).
E. IMPORTANT: Contractor___ is not, X is required to sign this document
---
and return 3 copies of the issuing office.
14. DESCRIPTION OF AMENDMENT MODIFICATION (Organized by UCF section headings,
including solicitation /contract subject matter where feasible).
1. The purpose of this modification is to provide additional funds to increase
the level of effort.
2. Accordingly, the following sections are hereby modified: SEE PAGE 2
Except as provided herein, all terms and conditions of the document referenced
in Item 9A or 10A as heretofore changed, remains unchanged and in Full force and
effect.
15A NAME AND TITLE OF SIGNER (Type or Print)
James S. Prohaska
Director, Business Development
B. CONTRACTOR/OFFEROR
[AUTHORIZED SIGNATORY]
- ----------------------
(Signature of person authorized to sign)
15C. DATE SIGNED
03 SEP 1997
16A. NAME AND TITLE OF CONTRACTING OFFICER (Type or print)
JAMES M. RUSSELL
Contracting Officer
16B. UNITED STATES OF AMERICA
BY /S/ JAMES M. RUSSELL
--------------------
(Signature of Contracting Officer)
16C. DATE SIGNED
04 SEPT. 1997
<PAGE>
page 2
MDA904-97-C-0424/ P00003
SECTION B - SUPPLIES OR SERVICES AND PRICES/COSTS
B.1 SUPPLIES/SERVICES. CLINs 0001 and 0002 only arc revised as follows:
<TABLE>
<CAPTION>
UNIT
CLIN SUPPLIES/SERVICES UNIT QTY PRICE TOTAL
<S> <C> <C> <C>
0001 The contractor shall furnish the 11RS From 3425 XXX From $312,707.00
necessary materials, Facilities By 448 By $ 40,909.00
equipment, supplies and To 3873 To $353,616.00
services of skilled professional,
technical and support personnel to
fulfill the requirements set forth in
the Statement or work entitled, "Multi-
Level Information System Security Initiative
Crypto Card System /\analysis and
Library and Driver Architecture and
Development," dated 10 January
1997 and the documents referenced
in Section C. The contractor's management
shall provide for the effective timely and
integrated implementation of contract requirements
0001AA Program Manager X XX $ 118.06 XXXX
0001 AB Sr. Electrical Eng. X XX $ 75.41 XXXX
0001 AC Electronic Technician X XX $ 69.32 XXXX
0001AD Systems Analyst X XX $ 75.38 XXXX
0001AE Sr. Software Engineer X XX $ 98.38 XXXX
0001AM Software Engineer X XX$ $ 62.60 XXXX
Total Amount CLIN 0001 Not-To-Exceed $343,616.00
0002 Award Fee Pool, to be determined in For the Period From $31,271.00
accordance with the Award Fee Plan By $ 4,091.00
for Multi-Level Information System To $35,362.00
Security Initiative Crypto Card
System Analysis and Library and Driver
Architecture and Development dated 10 June
1997 (Rev. 2). There shall be one evaluation of
performance at the end of the period of performance
(Dale of contract aware through 30 September
1997.) If the Government exercises the
options to extend the term of the contract, there
shall be an evaluation of performance at the
conclusion of each option year. The contractor
is authorized to bill for up to 50% of
the available award fee ($17,681.00), on a
monthly basis in equal amounts of $4,420.25.
</TABLE>
SECTION G - CONTRACT ADMINISTRATION DATA G. I ACCOUNTING AND APPROPRIATION DATA
is revised as follows:
<PAGE>
ACR: AA Obligate
--------
977/780400.4500 574E5 1 999-2520 S I 8 I I 9 03200106 IX 0000
<TABLE>
<CAPTION>
X22 120B
PR: I6-97-2093-0001 From By To
<S> <C> <C> <C>
Obligated for CLINs 0001, 0003 and 0004 $338,465.00 $40,909.00 $379,374.00
Obligated for Provisional Award Fee Payments $ 15,635.50 $ 2,045.50 $ 17,681.00
Obligated for Future Award Fee Payments $ 15,635.50 $ 2,045.50 $ 17,681.00
Total Amount Obligated $369,736.00 $45,000.00 $414,736.00
</TABLE>
<PAGE>
page 3
G.2 352.216-9007 NOTICE: AWARD FEE FUNDING (JUL 1993) is restated as follows:
Funds in the amount of $ 17.681.00 have been obligated under this contract
-----------
towards future award fee determinations but are not available for the Contractor
to bill against or incur costs against. Obligated award fee funds identified
above will be released to the Contractor via subsequent modifications after the
Government has rendered an award fee determination in accordance with the Award
Fee Plan currently in force under this contract. Upon receipt of the
aforementioned modifications, the Contractor is authorized to bill for the
earned fee.
3. As a result of this modification, total contract value is increased as
follows:
FROM BY TO
FFP (LOE) $369,736.00 $45.000.00 $414,736.00
4. Except as provided herein all other terms and conditions of the subject
contract remain unchanged and in full force.
<PAGE>
AMENDMENT OF SOLICITATION/MODIFICATION OF CONTRACT
1. CONTRACT ID CODE
PAGE 1 OF 3 PAGES
2. AMENDMENT MODIFICATION NO. P0001
3. EFFECTIVE DATE 0_ JUL 1997
CODE H98230
7. ADMINISTERED BY (if other than Item 6)
Maryland Procurement Office
9800 Savage Rd., FANX III
Ft. George G. Meade, MD 20755-6000
ATTN: N 141 (MLM)
8. NAME AND ADDRESS OF CONTRACTOR (No, street, county, State and Z1P Cade
LITRONIC
ATTN: JAMES PROHASKA (703-729-1700)
43088 Winter Grove Drive
Ashburn VA 22011
X 9A. AMENDMENT OF SOLICITATION NO.
- ---
9B. DATED (SEE ITEM 11)
10A. Modification of Contract/Order No.
MDA904-97-D-0424
10B. Dated (SEE ITEM 13)
27 June 1997
11. THIS ITEM ONLY APPLIES TO AMENDMENTS OF SOLICITATIONS
___ The above numbered solicitation is amended as set forth in Item 14. The
hour and date specified or receipt offers _____ is extended. _______ is not
extended.
11. Offers's must acknowledge receipt of this amendment prior to the hour and
date specified in the solicitation or as amended by one of the following
methods:
(a) By completing Items 8 and 15, and returning copies of the amendment: (b) By
acknowledging receipt Of this amendment on each copy of the offer submitted: or
(c) By separate letter or telegram which includes a reference to the
solicitation and amendment numbers. FAILURE OF YOUR ACKNOWLEDGMENT TO BE
RECEIVED AT THE PLACE DESIGNATED FOR THE RECEIPT OF OFFERS PRIOR TO THE HOUR AND
DATE SPECIFIED MAY RESULT IN REJECTION OF YOUR OFFER. If by virtue of this
amendment you desire to change an offer already submitted, such change may be
made by telegram or letter, provided each telegram or letter makes reference to
the solicitation and this amendment, and is received prior to the opening hour
and date specified.
12. ACCOUNTING AND APPROPRIATION DATA (if required)
N/A Obligate: N/A
13. THIS ITEM APPLIES ONLY TO MODIFICATIONS OF CONTRACT ORDERS,
IT MODIFIES THE CONTRACT/ORDER NO. AS DESCRIBED IN ITEM 14.
X A. THIS CHANGE ORDER IS ISSUED PURSUANT TO: (Specify authority) THE
- ---
CHANGES SET FORTH IN ITEM 14 ARE MADE IN THE CONTRACT ORDER NO. IN ITEM 10A.
B. THE ABOVE NUMBERED CONTRACT/ORDER IS MODIFIED TO REFLECT THE ADMINISTRATIVE
CHANGES (such as changes in paying office, appropriation date, etc. SET FORTH IN
ITEM 14. PURSUANT TO THE AUTHORITY OF FAR 43.103(b).
<PAGE>
X C. THIS SUPPLEMENTAL AGREEMENT IS ENTERED INTO PURSUANT TO AUTHORITY OF
- ---
FAR 43.103(A)
D. OTHER (Specify type of modification and authority).
E. IMPORTANT: Contractor___ is not, X is required to sign this document
---
and return 3 copies of the issuing office.
14. DESCRIPTION OF AMENDMENT MODIFICATION (Organized by UCF section headings,
including solicitation/contract subject matter where feasible).
1. The purpose of this modification is to incorporate the requirements of the
attached Contract Security Classifications Specification DD Form 254, dated 23
June 1997..
2. Accordingly, the following sections are hereby modified: SEE PAGE 2
Except as provided herein, all terms and conditions of the document referenced
in Item 9A or 10A as heretofore changed, remains unchanged and in Full force and
effect.
15A NAME AND TITLE OF SIGNER (Type or Print)
James S. Prohaska
Director, Business Development
B. CONTRACTOR/OFFEROR
[AUTHORIZED SIGNATORY]
- ----------------------
(Signature of person authorized to sign)
15C. DATE SIGNED
7/3/97
16A. NAME AND TITLE OF CONTRACTING OFFICER (Type or print)
JAMES M. RUSSELL
Contracting Officer
16B. UNITED STATES OF AMERICA
BY /s/ JAMES M. RUSSELL
--------------------
(Signature of Contracting Officer)
16C. DATE SIGNED
03 JUL 1997
<PAGE>
page 2
SECTION C - DESCRIPTION/SPECIFICATION/WORK STATEMENTS is revised to add:
C.4 Contract Security Classification Specification, DD Form 254, dated 23 June
1997.
SECTION D - PACKAGING AND MARKING is revised to add:
D.3 352.247-9004 PACKING AND SHIPPING (OCT 1993)
(a) Packing
(I) Material shall be packed by personnel duly cleared for the level of
classification in question, to conceal it properly and to avoid suspicion as to
its contents, and to reach destination in satisfactory condition. Internal
markings or internal packaging will clearly indicate the classification. NO
NOTATION TO INDICATE THE CLASSIFICATION SHALL APPEAR ON EXTERNAL MARKING.
(2) Documents shall be enclosed in two sealed envelopes or covers. Typewritten
or printed matter in the contents shall be protected by a cover sheet or by
folding inward to avoid direct contact with the inner envelope or cover. The
inner cover shall be addressed, return addressed, sealed and marked with the
security classification on front and back so that the marking will be easily
seen when the outer cover is removed. Receipt for, if required, shall be
enclosed identifying the addressor, addressee, and listing the contents by short
title. The outer envelope or cover shall be of sufficient opaqueness and density
as to prevent the classification marking of the inner cover from being visible
and shall be addressed, return addressed, and carefully sealed with no markings
or notations.
(b) Shipping
(J) Classified material shall be shipped in accordance with the Industrial
Security Manual for Safeguarding Classified Material and Security Guidelines
contained in DD Form 254.
(2) Unclassified material shall be shipped in accordance with the Contractor's
best commercial practices to insure safe arrival at destination.
<PAGE>
page 3
SECTION H- SPECIAL CONTRACT REQUIREMENTS is revised to add:
H.16 352.290-9001 RETENTION OF INFORMATION (OCT 1993)
After completion of the contract, the Contractor shall not retain in his
possession (unless specific(l by the contract document) any drawings, sketches,
prints, reports, or other data developed under this contract without written
approval of the Contracting Officer, or his duly authorized representative.
SECTION I - CONTRACT CLAUSES
1.5 REFERENCED CLAUSES - WHEN APPLICABLE is revised to add:
52.204-2 Security Requirements (AUG 1996)
3. As a result of this modification, total contract value is unchanged.
4. Except as provided herein all other terms and conditions of the subject
contract remain unchanged and in full force.
<PAGE>
DEPARTMENT OF DEFENSE CONTRACT SECURITY CLASSIFICATION SPECIFICATION (The
requirements of the DoD industrial Security Manual apply to all security aspects
of this effort)
1. CLEARANCE AND SAFEGUARDING
a. FACILITY CLEARANCE REQUIRED: SECRET
b. LEVEL OF SAFEGUARDING REQUIRED: SECRET
2. USERS SPECIFICATION IS FOR: (X and complete as applicable)
X a. PRIME CONTRACT NUMBER: MDa904-97-C-0424
b. SUBCONTRACT NUMBER
c. SOLITATION OR OTHER NUMBER
DUE DATE (YYMMDD)
3. THIS SPECIFICATION IS: (X and complete as applicable)
X a. ORIGINAL (Complete date in all cases) DATE (YYMMDD): 970623
b. REVISED (Supercedes all previous specs) / Revision No. / DATE (YYMMDD)
c. FINAL (Complete Item 5 in all cases) / DATE
4. IS THIS A FOLLOW-ON CONTRACT? X YES; NO. IF YES, Complete the
Following:
Classified material received or generated under MDA904-95-C-4074. (Preceding
----------------
Contract Number) is transferred to this follow-on contract.
5. IS THIS A FINAL DD FORM 254: ______ YES; X NO.
-----
6. CONTRACTOR (Include Commercial and Government Entity (CAGE) Code)
a. Litronic Industries
2950 Redhill Avenue
Costa mesa CA 92626-7900
b. CAGE CODE: 4F972
c. COGNIZANT SECURITY OFFICE (Name, Address, and Zip Code)
Defensive Investigative Service
Industrial Security Field Office, San Digo
16855 W. Bernardo Drive, Suite 150
San Diego, CA 92127-1619
7. SUBCONTRACTOR
a. NAME, ADDRESS AND ZIP CODE:
b. CAGE CODE:
c. COGNIZANT SECURITY OFFICE (Name, Address, and Zip Code)
8. ACTUAL PERFORMANCE
a. Location:
b. CAGE CODE:
c. COGNIZANT SECURITY OFFICE (Name, Address, and Zip Code)
<PAGE>
9. GENERAL IDENTIFICATION OF THIS PROCUREMENT
Multi Level Information System Security Initiative Crypto Card System Analysis
and Library and Driver Architecture and Development.
10. THIS CONTRACT WILL REQUIRES ACCESS TO: YES NO
a. COMMUNICATIONS SECURITY (COMSEC) INFORMATION: X
b. RESTRICTED DATA X
c. CRITICAL NUCLEAR WEAPON DESIGN INFORMATION X
d. FORMERLY RESTRICTED DATA X
e. INTELLIGENCE INFORMATION:
(1) Sensitive Compartmented Information (SCI) X
(2) Non-SCI X
f. SPECIAL ACCESS INFORMATION X
g. NATO INFORMATION X
h. FOREIGN GOVERNMENT INFORMATION X
i. LIMITED DISSEMINATION INFORMATION X
j. FOR OFFICIAL USE ONLY INFORMATION X
k. OTHER (Specify
11. IN PERFORMING THIS CONTRACT, THE CONTRACTOR WILL:
YES NO
a. HAVE ACCESS TO CLASSIFIED INFORMATION ONLY AT
ANOTHER CONTRACTOR'S FACILITY OR A GOVERNMENT
ACTIVITY X
b. RECEIVE CLASSIFIED DOCUMENTS ONLY X
c. RECEIVE AND GENERATE CLASSIFIED MATERIAL X
d. FABRICATE MODIFY, OR STORE CLASSIFIED HARDWARE X
e. PERFORM SERVICES ONLY X
f. HAVE ACCESS TO U.S. CLASSIFIED INFORMATION
OUTSIDE THE U.S., PUERTO RICO, U.S. POSSESSIONS AND
TRUST TERRITORIES X
g. BE AUTHORIZED TO USE THE SERVICES OF DEFENSE
TECHNICAL INFORMATION CENTER (DTIC) OR OTHER
SECONDARY DISTRIBUTION CENTER X
h. REQUIRE A COMSEC ACCOUNT X
i. HAVE TEMPEST REQUIREMENTS
j. HAVE OPERATIONS SECURITY (OPSEC)
REQUIREMENTS X
k. BE AUTHORIZED TO USE THE DEFENSE COURIER
SERVICE X
l. OTHER (Specify)
12. PUBLIC RELEASE. Any information (classified or unclassified) pertaining to
this contract shall not be released for public dissemination except as provided
by the Industrial Security Manual or unless it has been approved for public
release by appropriate U.S. Government authority. Proposed public releases
shall be submitted for approval prior to release
<PAGE>
X DIRECT
Proposed public releases shall be submitted for approval prior to release
direct to the Contracting Officer.
to the Directorate for Freedom of Information and Security Review, Office
of the Assistant Secretary of Defense (Public Affairs)* for review.
* In the case of non-DoD User Agencies,
13. SECURITY GUIDANCE. The security classification guidance needed for this
classified effort is identified below. If any difficulty is encountered in
applying this guidance or if any other contributing factor indicates a need for
changes in this guidance, the contractor is authorized and encouraged to provide
recommended changes; to challenge the guidance or the classification assigned to
any information or material furnished or generated under this contract; and to
submit any questions for interpretation of this guidance to the official
identified below. Pending final decision, the information involved shall be
handled and protected at the highest level of classification assigned. (Fill in
appropriate for the classified effort. Attach, or forward under separate
correspondence, any documents/guides/extracts referenced herein. Add additional
pages as needed to provide complete guidance)
Additional security requirements begin on page 3.
Classified AIS Processing Will Be Involved? X YES
Annual reivew of This Form Required X YES One year ADAD
TYPED NAME, TITLE AND SIGNATURE OF
PROGRAM/PROJECT MANAGER/COR OR OTHER
DESIGNATED OFFICIAL
/S/ JOHN CENTAFONT
- --------------------
John Centafont
Program Manager
ACTIVITY NAME ADDRESS, ZIP CODE, TELEPHONE
NUMBER AND OFFICE SYMBOL
Director, National Security Agency
9800 Savage Road, Attn: X22
Fort George G. Meade, MD 20755-6733 (410) 859-4464
ONLY AUTHORIZED CONTRACTING OFFICERS MAY SERVE AS CERTIFYING OFFICIALS FOR NSA
SCI CONTRACTS AND SUBCONTRACTS.
<PAGE>
14. ADDITIONAL SECURITY REQUIREMENTS.
Requirements, in addition to ISM requirements, are established for this
contract. (If Yes, identify the pertinent contractual clauses in the contract
document itself, or provide an appropriate statement which identifies the
additional requirements. Provide a copy of the requirements to the cognizant
security office. Use Item 13 if additional space is needed.) X YES
15. INSPECTIONS. Elements of this contract are outside the inspection
responsibility of the cogizant security office. (If Yes, explain and identify
specific areas or elements carved out and the activity responsible for
inspections. Use item 13 if additional space is needed.) X NO
16. CERTIFICATION AND SIGNATURE. Security requirements stated herein are
complete and adequate for safeguarding the classified information to be released
or generated under this classified effort. All questions shall be referred to
the official named below.
a. TYPED NAME OF CERTIFYING OFFICIAL
James Russell
b. TITLE
Contracting Officer
c. TELEPHONE (Include Area Code)
(410) 684-7102
d. ADDRESS (Include Zip Code)
Maryland Procurement Office
9800 Savage Road
Fort George G. Meade, MD 20755-6000
e. SIGNATURE
/S/ JAMES M. RUSSELL
----------------------
17. REQUIRED FOR DISTRIBUTION
X a. Contractor
b. Subcontractor
X c. Cognizant Security Office for Prime and Subcontractor
d. U.S. Activity Responsible for Overseas Security Administration
X e. Administrative Contracting Officer
X f. Others As Necessary S412, DCS
<PAGE>
Attachment A
September 1996
SECURE TELECOMMUNICATION REQUIREMENTS
Secure telecommunications are required as this contract involves access to
classified information or sensitive unclassified, Government or Government-
derived information at the contractor facility. These requirements apply to the
use of Government contractor telecommunications equipment over which classified
information or sensitive unclassified Government or Government-derived
information is transmitted.
The following definitions apply:
Telecommunications: Preparation, transmission, communication, or related
processing of information (writing, images, sounds or other data) by electrical
electromagnetic, electromechanical, electro-optical or electronic means.
"Government Contractor" telecommunications: Voice and data telecommunications
between or among Federal Government Agencies and their
contractor/subcontractors. This includes management information processing
systems and local data networks.
"Secured" means the application of communications security (COMSEC) equipments,
devices or techniques to telecommunications or information processing systems
over which classified information is transmitted.
"Protected" means the application of National Security Agency (NSA) approved
protection equipment, devices or techniques to contractor telecommunications
over which sensitive unclassified, Government or Government-derived information
is transmitted.
"Sensitive unclassified, Government or Government derived information" is
defined as any information, the loss, misuse or unauthorized access to, or
modification of which might adversely affect the U.S. national interest, the
conduct of DoD programs or the privacy of DoD personnel.
A COMSEC account is required for this contract. The NSA Central Office of Record
has primary responsibility for auditing all COMSEC material held in this
account. NSA will ensure that all Government contractor secure
telecommunications facilities are operated in accordance with NSA requirements.
The contractor or subcontractor shall comply with DoD 5220.22-A, COMSEC Annex to
the National Industrial Security Program Operating Manual, dated June 1995.
Equipment, devices, techniques and services required for securing or protecting
contractor telecommunications will be acquired only from sources listed in the
NSA Information Systems Security Products and Services Catalog. Contractors
shall comply with the STU-III Doctrine or other appropriate doctrine.
Keying materials required for the operation of secured and protected
telecommunications systems will be furnished by the government. A Defense
Courier Service account may be required for shipment of this material.
The prime contractor shall include requirements that conform with this DD254 in
all subcontracts that require secured or protected equipment or services.
COMSEC incidents will be reported as follows: The contractor shall make an
immediate telephonic notification to NSA of any incident or violation of COMSEC
requirements. Notification will be made to the Office of COMSEC Insecurities on
(410) 859-6811. Violations or possible compromises of COMSEC information should
also be reported to S41 at (410) 859-6255 or the NSA Support Services Operations
Center, Security Duty Officer at (301) 688-6911. A follow-up written report is
required and shall be appropriately classified. Specific guidance as to proper
classification will be provided by NSA. The report shall be submitted to the
Contracting Officer, ATTN: V514 and the appropriate Defense Investigative
Service (DIS) Cognizant Security Office. If accountable COMSEC material is
involved, the Central Office of Record will also be provided a copy of the
report.
<PAGE>
Clarification and guidance for COMSEC requirements may be directed to the NSA
Procedural and Material Control Branch at (301) 688-8110.
<PAGE>
Page 2 of 2
Attachment C
September 1996
COLLATERAL (NON-SCI) CONTRACTS
Contractor employees may not carry any classified material on commercial
aircraft unless approved by the Contracting Officer (CO) or his designated
representative.
Classified material released under this contract does not become the property of
the contractor and can be withdrawn by the National Security Agency (NSA) at
anytime. Upon expiration of the contract, all classified materials released to
the contractor and all other materials of any kind incorporating data from such
classified materials will be returned to the NSA for final disposition. A
certificate of destruction in lieu of the material will suffice when the
material has been destroyed, either at the direction or under the supervision of
the CO or his designee.
The contractor will not release classified material to any activity or
individual of the contractor's organization not directly engaged in providing
services under the contract, or to another contractor (including a
subcontractor), government agency, private individual, or organization without
the written consent of the CO. In the event that consent for such release is
requested, the NSA will verify that the proposed recipient is appropriately
cleared and has need-to-know.
Contractor and subcontractor personnel, as well as individuals who are
consultants to the contractor or subcontractor, who have access to certain
specified classified cryptographic information or materials, or to spaces where
such classified cryptographic information or materials are produced, processed
or stored are subject to requirements set forth in NSA/CSS Regulation 90-15. The
Contractor Security Officer shall notify such personnel that they are subject to
this requirement and shall provide the CO written confirmation that this notice
was provided within 90 days of the effective date of this DD254.
Non-US citizens, to include immigrant aliens, are not authorized access to
classified or to unclassified portions of this contract, proposal or study
without the express written approval of NSA, Facilities Security Services (S41).
Contractors will maintain such records as will permit them to furnish on demand
the names of individuals who have or have had access to classified material in
the custody of the contractor.
- --Reproduction of any material released to the contractor must be approved by
the Contracting Officer's Representative (COR).
The following marking applies to all classified elements of information
generated under this contract:
DERIVED FROM: (Insert source document) DECLASSIFY ON: (Insert date)
These documents apply to this contract:
Form G9006, "Classification Guidelines"
Director of Central Intelligence Directive 1/7, Security Controls on the
Dissemination of Intelligence Information, effective 15 June 1996
Executive Order 12958, Classified National Security Information, dated October
1995
32 Code of Federal Regulations Part 2001, Implementation of Executive Order
12958, dated October 1995
DoD 5220.22-M, National Industrial Security Program Operating Manual, dated
January 1995
<PAGE>
DoD 5220.22-M-Sup 1, National Industrial Security Program Operating Manual
Supplement, dated February 1995
Handling, Control and Accountability Requirements for NSA Sensitive
Compartmented Information Contracts, dated 8 August 1994
NSA/CSS Classification Manual 123-2, dated 3 September 1991
These additional documents and paragraphs will be included on DD254 attachments
for COMSEC collateral efforts:
DoD 5220.22-A, COMSEC Annex to the National Industrial Security Program
Operating Manual, dated June 1995
NSA/CSS Regulation 90-15, Access to Classified Cryptographic Information, dated
16 March 1992
NCSC-6, National Policy Governing the Disclosure or Release of COMSEC to Foreign
Governments or International Organizations, dated 16 January 1981
The contractor/subcontractor shall not divulge to any individual, company,
organization, or other U.S. Government Department or Agency any information,
either classified or unclassified, pertaining to the design or capabilities of
COMSEC or communications protection systems or equipment being developed,
produced, purchased, or provided as Government furnished equipment under this
and/or previous NSA contracts without the prior approval of the NSA.
Classified and COMSEC waste paper products should be destroyed daily.
Classified and Controlled Cryptographic Item (CCI) hardware production scrap
resulting from this contract shall be disposed of at intervals not to exceed six
months.
Any external view or photographs of the end item hardware, provided all covers
are in place, shall be unclassified, but the information shall be marked FOR
OFFICIAL USE ONLY and released based on need-to-know. This information will not
be published in periodicals or trade publications without prior approval of the
CO.
Contractor/subcontractor-generated documents, both classified and unclassified,
shall not be released to the Defense Technical Information Center (DTIC). They
shall bear the statement "Not Releasable to the Defense Technical Information
Center per DoD Directive 3200.12."
All material created from the pattern generation tape, whether intermediate or
end product, shall be afforded the same protection as the pattern generation
tape. The contractor or subcontractor shall ensure that an appropriate
classification marking is affixed to each item in a manner that affords the item
sufficient protection. Reticles, masters and submasters, working plates,
blowbacks, and any other material created from the pattern generation tape or
its derivative shall be marked with the appropriate classification and shall be
controlled within the "in-process" accounting system as required by DoD 5220.22-
A. Depending upon the process used for the fabrication or CCI products, reticles
and other materials produced from the pattern generation tape or its derivatives
shall be marked to reflect either a classification or a CCI designation, as
appropriate. Such material shall also be controlled within the "in-process"
accounting system.
All classified COMSEC documents (drawings, reports, test date, correspondence,
etc.) originated by the contractor or subcontractor shall not be disclosed to
foreign nationals and must be marked "US ONLY." The release of those documents
that need to be shared with foreign governments must be approved by Director,
NSA as specified in NCSC-6. Documents approved for release to a foreign
government shall be marked "REL to US and (insert name of specified country)
ONLY".
In addition to other applicable caveats, contractor or subcontractor-generated
classified COMSEC documents, photographs, reports, etc., shall be marked with
the following caveat: "COMSEC MATERIAL -- Access by Contractor Personnel Is
Restricted to U.S. Citizens Holding Final Government Clearance."
Requirements for contractor handling of classified operational keying material
marked CRYPTO are provided in DoD 5220.22-A.
<PAGE>
AMENDMENT OF SOLICITATION/MODIFICATION OF CONTRACT
1. Contract ID Code:
Page of Pages:
2. Amendment/Modification No.: 01
3. Effective Date: 26 Aug, 97
4. Requisition/Purchase Req. No.:
5. Project No. (If applicable)
6. Issued by:
U.S. SMALL BUSINESS ADMINISTRATION
ATTN: MED
200 W. SANTA ANA BLVD., STE. #700
SANTA ANA, CA 92701
ATTN: JOE DWORNICZAK
(714) 550-7420
7. Administered by (If other than Item 6)
8. Name and address of Contractor
LITRONIC INDUSTRIES
ATTN: JAMES PROHASKA
43088 WINTER GROVE DRIVE
ASHBURN, VA 22011
9. Amendment of Solicitation No.
10. Modification of contract/Order No.: SB0920-96-602356
10b. Dated (See Item 13): 27 Jun 97
11. THIS ITEM ONLY APPLIES TO AMENDMENTS OF SOLICITATIONS
12. Accounting and Appropriation Data (If required): N/A
13. THIS ITEM ONLY APPLIES TO MODIFICATIONS OF CONTRACTS/ORDERS. IT MODIFIES
THE CONTRACT/ORDER NO. AS DESCRIBED IN ITEM 14.
b. X The Above Numbered Contract Order is Modified to reflect the
administrative changes (such as changes in paying office, appropriation date,
etc.) Set Forth in Item 14, pursuant to the authority of Far 43.103 (b).
e. IMPORTANT: Contractor X is not required to sign this document and return
_______copies to the issuing office.
14. Description of Amendment/Modification (Organized by UCF section headings,
including solicitation/contract subject matter where possible.)
1. Reference contract MDA904-97-C-0424, with NSA.
2. Effective immediate, the subcontract #SB0920-96-602356 is changed to the new
number SBO920-97-706672.
3. The SBA office which issues/administrates the subcontract is as in block 6
above.
15A. Name and Title of Signer (Type of Print)
15B. Contractor/Offeror
16A. Name and Title of Contracting Officer (Type of Print)
JOSEPH DWORNICZAK
CONTRACTING OFFICER
16B. United States of America
BY /S/ JOSEPH DWORNICZAK
---------------------
16C. Date Signed: 26 Aug 97
<PAGE>
PART I-REDUCE THE LEVEL OF EFFORT UNDER H.13 PARAGRAPH(B) OPTION I
- ------------------------------------------------------------------
OPTION I-FISCAL YEAR 1988 (1 OCTOBER 1997 - 30 SEPTEMBER 1998) is hereby
- --------------------------------------------------------------
restated as follows.
CLIN ITEM DESCRIPTION UNIT QTY UNIT PRICE TOTAL
0001 The contractor shall furnish HRS 7864 XXX $738,500.00
the necessary materials,
facilities, equipment,
supplies, and services of
skilled professional,
technical and support
personnel to fulfill the
requirements set forth in the
Statement of Work for Multi
Level Information System
Security Initiative Crypto
Card System Analysis and
Library and Driver
Architecture and
Development, dated 10
January 1997
NOTE: The above stated amounts reflect the following revisions:
<TABLE>
<CAPTION>
FROM BY TO
---- -- --
Quantity in hours 11,400 (3,536) 7,864
Total Price $1,071,465.00 (5332,965.00) $ 738,500.00
<S> <C> <C> <C>
0001AA Program Manager X XXX $ 118.06 XXXX
0001AB Sr. Electrical Engineer X XXX $ 75.41 XXXX
0001AC Electronic Technician X XXX $ 69.32 XXXX
0001AD Systems Analyst X XXX $ 75.38 XXXX
0001AE Sr. Software Engineer X XXX $ 98.38 XXXX
0001AF Software Engineer X XXX $ 62.60 XXXX
Total Amount CLIN 0001 Not-to-Exceed $738,500.00
</TABLE>
<PAGE>
0002 Award Fee Pool, to be For the Period $10.709.00
determined in accordance
with the Award Fee
Determination Plan for Multi
Level Information System
Security Initiative Crypto
Card System Analysis and
NOTE: The above stated amounts reflect the following revisions:
<TABLE>
<CAPTION>
FROM BY TO
---- -- --
<S> <C> <C> <C> <C>
$ 33,297.00 ($22,588.00) $ 10.709.00
0003 Travel For the Job Not-to-Exceed $ 2,600.00
(Inclusive of Burdens)
</TABLE>
NOTE: The above stated amounts reflect the following revisions:
<TABLE>
<CAPTION>
FROM BY TO
---- -- --
<S> <C> <C> <C>
$ 24,850.00 ($22,250.00) $ 2,600.00
0004 OTHER DIRECT COSTS For the Job Not-to-Exceed $ 84,600.00
(Inclusive of Burdens)
</TABLE>
NOTE: The above stated amounts reflect the following revisions:
<TABLE>
<CAPTION>
FROM BY TO
---- -- --
<S> <C> <C> <C>
0.00 $ 84,600.00 $ 84,600.00
0005 Data, in accordance with the For the Lot Not-Separately-Priced
Contract Data Requirements
List(CDRL), DD Form
1423, dated 13 February 1997
</TABLE>
<TABLE>
<CAPTION>
FROM BY TO
---- -- --
<S> <C> <C> <C>
TOTAL NOT-TO-EXCEED $391,112.00 (186,112.00) $205,000.00
</TABLE>
<PAGE>
AMENDMENT OF SOLICITATION/MODIFICATION OF CONTRACT
1. CONTRACT ID CODE
PAGE 1 OF 11 PAGES
2. AMENDMENT MODIFICATION NO. P00007
3. EFFECTIVE DATE 28 MAY 1998
CODE H98230
4. REQUISITION/PURCHASE REQ. NO. 16-97-2093 A/4
5. PROJECT NO. (if applicable)
6. ISSUED BY:
Maryland Procurement Office
9800 Savage Rd., FANX III
Ft. George G. Meade, MD 20755-6000
ATTN: N 141 (M. Lynne Miller) (410) 859-4071
7. ADMINISTERED BY (if other than Item 6)
8. NAME AND ADDRESS OF CONTRACTOR (No, street, county, State and Z1P Cade
Litronic Inc.
ATTN: James Prohaska (703-729-1700)
43088 Winter Grove Drive
Ashburn. VA 22011
X 9A. AMENDMENT OF SOLICITATION NO.
- ---
9B. DATED (SEE ITEM 11)
10A. Modification of Contract/Order No.
MDA904-97-C-0424
10B. Dated (SEE ITEM 13)
27 June 1997
11. THIS ITEM ONLY APPLIES TO AMENDMENTS OF SOLICITATIONS
___ The above numbered solicitation is amended as set forth in Item 14. The
hour and date specified or receipt offers _____ is extended. _______is not
extended.
11. Offers's must acknowledge receipt of this amendment prior to the hour and
date specified in the solicitation or as amended by one of the following
methods:
(a) By completing Items 8 and 15, and returning copies of the amendment: (b}
By acknowledging receipt Of this amendment on each copy of the offer submitted:
or (c) By separate letter or telegram which includes a reference to the
solicitation and amendment numbers. FAILURE OF YOUR ACKNOWLEDGMENT TO BE
RECEIVED AT THE PLACE DESIGNATED FOR THE RECEIPT OF OFFERS PRIOR TO THE HOUR AND
DATE SPECIFIED MAY RESULT IN REJECTION OF YOUR OFFER. If by virtue of this
amendment you desire to change an offer already submitted, such change may be
made by telegram or letter, provided each telegram or letter makes reference to
the solicitation and this amendment, and is received prior to the opening hour
and date specified.
12. ACCOUNTING AND APPROPRIATION DATA (if required) Obligate: $205,000.00
13. THIS ITEM APPLIES ONLY TO MODIFICATIONS OF CONTRACT ORDERS,
IT MODIFIES THE CONTRACT/ORDER NO. AS DESCRIBED IN ITEM 14.
X A. THIS CHANGE ORDER IS ISSUED PURSUANT TO: (Specify authority) THE
- ---
CHANGES SET FORTH IN ITEM 14 ARE MADE IN THE CONTRACT ORDER NO. IN ITEM 10A.
<PAGE>
B. THE ABOVE NUMBERED CONTRACT/ORDER IS MODIFIED TO REFLECT THE ADMINISTRATIVE
CHANGES (such as changes in paying office, appropriation date, etc. SET FORTH IN
ITEM 14. PURSUANT TO THE AUTHORITY OF FAR 43.103(b).
X C. THIS SUPPLEMENTAL AGREEMENT IS ENTERED INTO PURSUANT TO AUTHORITY OF:
- ---
D. OTHER (Specify type of modification and authority). FAR 43.103(a) Bilateral
Modification
E. IMPORTANT: Contractor___ is not, X is required to sign this document
and return 3 copies of the issuing office.
14. DESCRIPTION OF AMENDMENT MODIFICATION (Organized by UCF section headings,
including solicitation /contract subject matter where feasible).
A. The purpose of this modification is to:
1. Part I-Revise section H.13 paragraph (b) OPTION 3;
2. Part II-Exercise the revised OPTION 3 in the FPAF amount of
$205,000.00, which is hereby added to Section B.2; and
3. Part II-Incorporate government furnished property.
B. Accordingly, this contract is hereby modified as follows (continued on
following page)
Except as provided herein, all terms and conditions of the document referenced
in Item 9A or 10A as heretofore changed, remains unchanged and in Full force and
effect.
15A NAME AND TITLE OF SIGNER (Type or Print)
James S. Prohaska
Director, Business Development
B. CONTRACTOR/OFFEROR
/S/ JAMES S. PROHASKA
- ----------------------
(Signature of person authorized to sign)
15C. DATE SIGNED
05 MAY 1998
16A. NAME AND TITLE OF CONTRACTING OFFICER (Type or print)
MARGARET M. QUASNY
CONTRACTING OFFICER
16B. UNITED STATES OF AMERICA
By /S/ MARGARET M. QUASNY
--------------------------
(Signature of Contracting Officer)
16C. DATE SIGNED
05 27-98
<PAGE>
SECTION B - SUPPLIES/SERVICES AND PRICES
B.2 SUPPLIES/SERVICES (Fiscal Year 1998 - 1 October 1997 - 30 September 1998) is
restated as follows:
<TABLE>
<CAPTION>
UNIT
----
CLIN ITEM DESCRIPTION UNIT QTY PRICE TOTAL
- ---- ---------------- ---- --- ----- -----
<S> <C> <C> <C> <C> <C>
0001 The Contractor shall furnish the HRS 9,004 XXX $845,591.00
necessary materials, facilities,
equipment, supplies and services
and services of skilled professional,
technical and support personnel to
fulfill the requirements set forth in
the Statement of Work for "Multi
Level Information System Security
Initiative Crypto Card System
Analysis and Library and Driver
Architecture and Development,"
dated 10 January 1997.
0001AA Program Manager X XXX $ 118.06 XXXX
0001AB Sr. Electrical Eng. X XXX $ 75.41 XXXX
0001AC Electronic Technician X XXX $ 69.32 XXXX
0001AD Systems Analyst X XXX $ 75.38 XXXX
0001AE Sr. Software Engineer X XXX $ 98.38 XXXX
0001AF Software Engineer X XXX$ $ 62.60 XXXX
Total Amount CLIN 0001 Not-To-Exceed $845,591.00
0002 Award Fee Pool, to be determined For the Period $ 84,559.00
in accordance with the Award
Fee Determination Plan for
Multi Level Information System
Security Initiative Crypto Card
System Analysis and Library and Driver
Architecture and Development dated 10 June
1997 (Rev. 2). There shall be one
evaluation for the period of 1
October 1997 - 30 September
1998. The contractor is
authorized to bill for up to 50% of
the available award fee ($42,279.50), on a
monthly basis in equal amounts.
ACR: AB
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CLIN ITEM DESCRIPTION UNIT QTY UNIT PRICE TOTAL
- ---- ---------------- ---- --- ----------- -----------
<S> <C> <C> <C> <C> <C>
0003 Travel For the Job Not-to-Exceed $ 27,750.00
(Inclusive of Burdens)
ACR: AB
0004 Other Direct Costs For the Job Not-to-Exceed From: $ 97,100.00
(Inclusive of Burdens) By: $ 184,000.00
To: $ 281,100.00
0005 Data, in accordance with For the Lot Not-Separately-Priced
the Contract Data
Requirements List
(CDRL), DD Form 1423,
dated 13 February 1997
ACR: AB
TOTAL NOT-TO-EXCEED From: $1,055,000.00
By: $ 184,000.00
To: $1,239,000.00
SECTION G - CONTRACT ADMINISTRATION DATA
G1 ACCOUNTING AND APPROPRIATION DATA is revised as follows:
ACR: AB Obligate
- ------ -- --------
978/90400.4500 584E5l 999-2520 S18119 04700400 IX 0000 X22 125D
Previously Obligated for section B.2 CLINs 0001, 0003 and 0004 $ 970,441.00
OBLIGATE THIS ACTION FOR SECTION B.2 CLIN 004 184,000.00
Total Obligated for section B.2 CLINs 0001, 0003 and 0004 $ 1,154,441.00
Total Previously Obligated for Provisional Award Fee Payments 42,279.50
Total Previously Obligated for Future Award Fee Payments 42,279.50
Total Amount Previously Obligated (PR: I6-97-2093-0003) $ 850,000.00
Total Amount Previously Obligated (PR: I6-97-2093-0004) $ 205,000.00
TOTAL AMOUNT OBLIGATED THIS ACTION (PR: I6-97-2093-0005) $ 184,000.00
TOTAL AMOUNT OBLIGATED ACR: AB $ 1,239,000.00
C. As a result of the foregoing, the total contract price is restated as follows:
Section B.1 FROM BY TO
----------- ----- -- --
Cost of CLINs 0001, 0003 and 0004 $ 446,874.00 $ 0.00 $ 446,874.00
Award Fee Pool $ 0.00 $ 0.00 $ 0.00
Earned Award Fee $ 36,433.00 $ 0.00 $ 36,433.00
------------ ------ -------------
Total FPAF Amount $ 483,307.00 $ 0.00 $ 483,307.00
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Section B.2 FROM BY TO
- ----------- ---- -- --
<S> <C> <C> <C>
Cost of CLINs 0001, 0003 and 0004 $ 970,441.00 $ 184,000.00 $ 1,154,441.00
Award Fee Pool $ 84,559.00 $ 0.00 $ 84,559.00
Earned Award Fee $ 0.00 $ 0.00 $ 0.00
------------- ------------ --------------
Total FPAF Amount $1,055,000.00 $ 184,000.00 $ 1,239,000.00
FROM BY TO
----- -- --
Total Contract Price $ 1,538,307.00 $ 184,000.00 $ 1,722,307.00
</TABLE>
D. Except as provided herein, all terms and conditions of this contract, as
previously modified, remain unchanged and in full force and effect.
<PAGE>
LITRONIC INDUSTRIES
PURCHASE ORDER WORKSHEET
PO NUMBER: MDA904-97-C-0424, P00007 CUSTOMER NUMBER:
DATE: May 28, 1998 CUSTOMER: NSA
Maryland Procurement Office
ADDRESS: 9800 Savage Road
FANX III
Fort George G. Meade, MD 20755-
6000
BUYER M. Quansy
REMARKS SECTION
1. ADDITIONAL FUNDING FOR FY98. TOTAL CONTRACT AMOUNT IS $1,055.000.00
2. PROVIDE COPY TO BOB GRAY.
ITEM PART NUMBER QUANTITY UNIT PRICE DUE DATE TOTAL
0001 See Page 4 of Contract for 205,000.00 N/A $205,000.0-0
Appropriate Labor Categories
TOTAL PRICE: $205,000.00
TAXABLE: No
INITIATED BY: Prohaska
REP: Prohaska
<PAGE>
AMENDMENT OF SOLICITATION/MODIFICATION OF CONTRACT
1. CONTRACT ID CODE
PAGE 1 OF 3 PAGES
2. AMENDMENT MODIFICATION NO. P00006
3. EFFECTIVE DATE 07 NOV 1997
CODE H98230
4. REQUISITION/PURCHASE REQ. NO. N/A
5. PROJECT NO. (if applicable)
6. ISSUED BY:
Maryland Procurement Office
9800 Savage Rd., FANX III
Ft. George G. Meade, MD 20755-6000
ATTN: N 141 (M. Lynne Miller) (410) 859-4071
7. ADMINISTERED BY (if other than Item 6)
8. NAME AND ADDRESS OF CONTRACTOR (No, street, county, State and Z1P Cade
Litronic Inc.
ATTN: James Prohaska (703-729-1700)
43088 Winter Grove Drive
Ashburn. VA 22011
X 9A. AMENDMENT OF SOLICITATION NO.
- ---
9B. DATED (SEE ITEM 11)
10A. Modification of Contract/Order No.
MDA904-97-C-0424
10B. Dated (SEE ITEM 13)
27 June 1997
11. THIS ITEM ONLY APPLIES TO AMENDMENTS OF SOLICITATIONS
___ The above numbered solicitation is amended as set forth in Item 14. The
hour and date specified or receipt offers _____ is extended. _______is not
extended.
11. Offers's must acknowledge receipt of this amendment prior to the hour and
date specified in the solicitation or as amended. hy one of the following
methods:
(a) By completing Items 8 and 15, and returning copies~s of the amendment: (b}
By acknowledging receipt Of this amendment on each copy of the offer submitted:
or (c) By separate letter or telegram which includes a reference to the
solicitation and amendment numbers. FAILURE OF YOUR ACKNOWLEDGMENT TO BE
RECEIVED AT THE PLACE DESIGNATED FOR THE RECEIPT OF OFFERS PRIOR TO THE HOUR AND
DATE SPECIFIED MAY RESULT IN REJECTION OF YOUR OFFER. If by virtue of this
amendment you desire to change an offer already submitted, such change may be
made by telegram or letter, provided each telegram or letter makes reference to
the solicitation and this amendment, and is received prior to the opening hour
and date specified.
12. ACCOUNTING AND APPROPRIATION DATA (if required) N/A
13. THIS ITEM APPLIES ONLY TO MODIFICATIONS OF CONTRACT ORDERS,
IT MODIFIES THE CONTRACT/ORDER NO. AS DESCRIBED IN ITEM 14.
X A. THIS CHANGE ORDER IS ISSUED PURSUANT TO: (Specify authority) THE
- ---
CHANGES SET FORTH IN ITEM 14 ARE MADE IN THE CONTRACT ORDER NO. IN ITEM 10A.
<PAGE>
B. THE ABOVE NUMBERED CONTRACT/ORDER IS MODIFIED TO REFLECT THE ADMINISTRATIVE
CHANGES (such as changes in paying office, appropriation date, etc. SET FORTH IN
ITEM 14. PURSUANT TO THE AUTHORITY OF FAR 43.103(b).
X C. THIS SUPPLEMENTAL AGREEMENT IS ENTERED INTO PURSUANT TO AUTHORITY OF:
- ---
43.103(a) Bilateral Modification
D. OTHER (Specify type of modification and authority). FAR 43.103(a) Bilateral
Modification
E. IMPORTANT: Contractor___ is not, X is required to sign this document
---
and return 3 copies of the issuing office.
14. DESCRIPTION OF AMENDMENT MODIFICATION (Organized by UCF section headings,
including solicitation/contract subject matter where feasible).
1. The purpose of this modification is to decrease the Not-to-Exceed amounts
for CLIN 0003, Travel and CLIN 0004, Other Direct Costs, and increase the number
of labor hours for CLIN 0001 in Section B.1 of this contract.
2. Accordingly, this contract is hereby modified as follows. (Continued on
following page)
Except as provided herein, all terms and conditions of the document referenced
in Item 9A or 10A as heretofore changed, remains unchanged and in Full force and
effect.
15A NAME AND TITLE OF SIGNER (Type or Print)
James S. Prohaska
Director, Business Development
B. CONTRACTOR/OFFEROR
/S/ JAMES S. PROHASKA
------------------------
(Signature of person authorized to sign)
15C. DATE SIGNED
07 NOV 1997
16A. NAME AND TITLE OF CONTRACTING OFFICER (Type or print)
MARGARET M. QUASNY
CONTRACTING OFFICER
16B. UNITED STATES OF AMERICA
By /S/ MARGARET M. QUASNY
-----------------------
(Signature of Contracting Officer)
16C. DATE SIGNED
11 07-97
<PAGE>
AMENDMENT OF SOLICITATION/MODIFICATION OF CONTRACT
1. CONTRACT ID CODE
PAGE 1 OF PAGES
2. AMENDMENT MODIFICATION NO. P0008
3. EFFECTIVE DATE 08 JUN 1998
CODE H98230
4. REQUISITION/PURCHASE REQ. NO
16-97-2093-0005
5. PROJECT NUMBER (if applicable)
6. AMENDED BY
Maryland Procurement Office
9800 Savage Rd.,
Ft. Meade, MD 20755-6000
ATTN: N 141 (M. Lynn Miller) (410) 859-4071
7. ADMINISTERED BY (if other than Item 6)
8. NAME AND ADDRESS OF CONTRACTOR (No, street, county, state and Z1P Code
Litronic, Inc.
ATTN: James Prohaska (703-729-1700)
2950 Redhill Avenue
Costa Mesa, CA 92626
X 9A. AMENDMENT OF SOLICITATION NO.
- ---
9B. DATED (SEE ITEM 11)
X 10A. Modification of Contract/Order No.
- ---
MDA904-97-C-0424
X 10B. Dated (SEE ITEM 13)
- ---
27 June 1997
11. THIS ITEM ONLY APPLIES TO AMENDMENTS OF SOLICITATIONS
___ The above numbered solicitation is amended as set forth in Item 14. The
hour and date specified or receipt offers _____ is extended. _______ is not
extended.
11. Offers's must acknowledge receipt of this amendment prior to the hour and
date specified in the solicitation or as amended by one of the following
methods:
(a) By completing Items 8 and 15, and returning copies of the amendment: (b)
By acknowledging receipt Of this amendment on each copy of the offer submitted:
or (c) By separate letter or telegram which includes a reference to the
solicitation and amendment numbers. FAILURE OF YOUR ACKNOWLEDGMENT TO BE
RECEIVED AT THE PLACE DESIGNATED FOR THE RECEIPT OF OFFERS PRIOR TO THE HOUR AND
DATE SPECIFIED MAY RESULT IN REJECTION OF YOUR OFFER. If by virtue of this
amendment you desire to change an offer already submitted, such change may be
made by telegram or letter, provided each telegram or letter makes reference to
the solicitation and this amendment, and is received prior to the opening hour
and date specified.
12. ACCOUNTING AND APPROPRIATION DATA (if required)
SEE SECTION GI Obligate: $184,000.00
13. THIS ITEM APPLIES ONLY TO MODIFICATIONS OF CONTRACT ORDERS,
IT MODIFIES THE CONTRACT/ORDER NO. AS DESCRIBED IN ITEM 14.
<PAGE>
X A. THIS CHANGE ORDER IS ISSUED PURSUANT TO: (Specify authority) THE
- ---
CHANGES SET FORTH IN ITEM 14 ARE MADE IN THE CONTRACT ORDER NO. IN ITEM 10A.
B. THE ABOVE NUMBERED CONTRACT/ORDER IS MODIFIED TO REFLECT THE
ADMINISTRATIVE CHANGES (such as changes in paying office, appropriation date,
etc. SET FORTH IN ITEM 14. PURSUANT TO THE AUTHORITY OF FAR 43.103(b).
C. THIS SUPPLEMENTAL AGREEMENT IS ENTERED INTO PURSUANT TO AUTHORITY OF
X D. OTHER (Specify type of modification and authority).
- ---
FAR 43.103 (a) Bilateral Modification
E. IMPORTANT: Contractor___ is not, X is required to sign this document
---
and return 3 copies of the issuing office.
14. DESCRIPTION OF AMENDMENT MODIFICATION (Organized by UCF section headings,
including solicitation/contract subject matter where feasible).
A. The purpose of this modification is to increase CLIN 0004, Other Direct
Costs/Materials, in Section B.2.
B. Accordingly, this contract is hereby modified as follows. (Continued on
following page)
Except as provided herein, all terms and conditions of the document referenced
in Item 9A or 10A as heretofore changed, remains unchanged and in Full force and
effect.
15A NAME AND TITLE OF SIGNER (Type or Print)
James S. Prohaska
Director, Business Development
B. CONTRACTOR/OFFEROR
/s/ JAMES S. PROHASKA
- ---------------------
(Signature of person authorized to sign)
15C. DATE SIGNED
08 JUN 1998
16A. NAME AND TITLE OF CONTRACTING OFFICER (Type or print)
MARGARET M. QUASNY
Contracting Officer
16B. UNITED STATES OF AMERICA
BY /s/ MARGARET M. QUASNY
------------------------
(Signature of Contracting Officer)
16C. DATE SIGNED
08 JUN 1998
<PAGE>
page 2
PART 1 - REDUCE THE LEVEL OF EFFORT UNDER H.13 PARAGRAPH (B) OPTION 3
- ---------------------------------------------------------------------
OPTION 3 - FISCAL YEAR 1998 (1 OCTOBER 1997-SEPTEMBER 1998) is hereby restated
as follows:
CLIN ITEM DESCRIPTION UNIT QTY UNIT PRICE TOTAL
- --------------------------------------------------------------------------------
0001 The Contractor shall furnish the HRS 1,140 XXX $107,091.00
necessary materials, facilities,
equipment, supplies and services
and services of skilled professional,
technical and support personnel to
fulfill the requirements set forth in
the Statement of Work for Multi
Level Information System Security
Initiative Crypto Card System Analysis
and Library and Driver Architecture
and Development, dated 10 January
1997.
- --------------------------------------------------------------------------------
NOTE: The above stated amounts reflect the following revisions:
<TABLE>
<CAPTION>
FROM BY TO
---- -- --
<S> <C> <C> <C> <C> <C>
Quantity in hours 3,536 (2,396) 1,140
Total Price $332,965.00 ($225,874.00) $107,091.00
0001AA Program Manager X XXX $ 118.06 XXXX
0001AB Sr. Electrical Engineer X XXX $ 75.41 XXXX
0001AC Electronic Technician X XXX $ 69.32 XXXX
0001AD Systems Analyst X XXX $ 75.38 XXXX
0001AE Sr. Software Engineer X XXX $ 98.38 XXXX
0001AF Software Engineer X XXX $ 62.60 XXXX
Total Amount CLIN 0001 Not-To-Exceed $107,091.00
</TABLE>
<PAGE>
page 4
PART II - EXERCISE THE OPTION UNDER H.13 PARAGRAPH (B) OPTION 3
- ---------------------------------------------------------------
SECTION B - SUPPLIES/SERVICES AND PRICES
B.2 SUPPLIES/SERVICES (Fiscal Year 1998 - 1 October 1997 - 30 September 1998)
------------------------------------------------------------------------
Option 3 is hereby added to this section as follows:
<TABLE>
<CAPTION>
UNIT
-----
CLIN ITEM DESCRIPTION UNIT QTY PRICE TOTAL
- ---- ---------------- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C>
0001 The Contractor shall furnish the HRS From: 7,864 XXX From: $353,616.00
necessary materials, facilities, By: 1,140 By: $ 67,500.00
equipment, supplies and services To: 9,004 To: $421,116.00
of skilled professional, technical
and support personnel to fulfill
the requirements set forth in
the Statement of Work for Multi
Level Information System Security
Initiative Crypto Card System
Analysis and Library and Driver
Architecture and Development,
dated 10 January 1997.
0001AA Program Manager X XXX $118.06 XXXX
0001AB Sr. Electrical Engineer X XXX $ 75.41 XXXX
0001AC Electronic Technician X XXX $ 69.32 XXXX
0001AD Systems Analyst X XXX $ 75.38 XXXX
0001AE Sr. Software Engineer X XXX $ 98.38 XXXX
0001AF Software Engineer X XXX $ 62.60 XXXX
Total Amount CLIN 0001 Not-To-Exceed $845,591.00
ACR: AB
0002 Award Fee Pool, to be determined For the Period From: $ 73,850.00
in accordance with the Award Fee By: $ 10,709.00
Determination Plan for Multi To: $ 84,559.00
Level Information System
Security Initiative Crypto Card
System Analysis and Library and
Driver Architecture and
Development, dated 10 June
1997 (Rev. 2). There shall be one
evaluation for the period of 1
October 1997-30 September
1998. The contractor is authorized
to bill for up to 50% of the
available award fee ($42,279.50),
on a monthly basis in equal
amounts.
ACR: AB
</TABLE>
page 5
<PAGE>
<TABLE>
<CAPTION>
UNIT
----
CLIN ITEM DESCRIPTION UNIT QTY PRICE TOTAL
- ---- ---------------- ---- ---- ----- ------
<S> <C> <C> <C> <C> <C>
0003 Travel For the Job Not-To-Exceed From: $ 25,150.00
(Inclusive of Burdens) BY: $ 2,600.00
ACR: AB To: $ 27,750.00
0004 Other direct Costs For the Job Not-To-Exceed From: $ 12,500.00
(Inclusive of Burdens) BY: $ 84,600.00
ACR: AB To: $ 97,100.00
0005 Data, in accordance with the Con- For the Lot Not-Separately-Priced
tract Data Requirements List
(CDRL), DD Form 1423, dated
13 February 1997
ACR: AB
TOTAL NOT-TO-EXCEED FROM: $ 850,000.00
BY: $ 205,000.00
TO: $1,055,000.00
</TABLE>
SECTION G - CONTRACT ADMINISTRATION DATA
G.1 ACCOUNTING AND APPROPRIATION DATA is revised to include the following:
---------------------------------
<PAGE>
ACR: AB
978/90400.4500 584E51 999-2520 S18119 04700400 IX 0000 X22 I125D
Previously obligated for section B.2 CLINs 0001, 0003 and 0004 $776,150.00
Obligate this action for section B.2 CLINs 0001,0003 and 0004 194,291.00
Total Obligated for section B.2 CLINs 0001, 0003 and 0004 970,441.00
Previously Obligated for Provisional Award Fee Payments 36,925.00
Obligate this action for Provisional Award Fee Payments 5,354.50
Total Obligated for Provisional Award Fee Payments 42,279.50
Previously Obligated for Provisional Award Fee Payments 36,925.00
Obligate this action for Future Award Fee Payments 5,354.50
Total Obligated for Future Award Fee Payments 42,279.50
Total Amount Previously Obligated (PR: 16-97-2093-0003) 850,000.00
Total Amount Obligated This Action (PR: 16-97-2093-0004) 205,000.00
Total Amount Obligated ACR: AB 1,055,000.00
G.2 352.216-9007 NOTICE: AWARD FEE FUNDING (JUL 1993) is restated as follows
Funds in the amount of $42,279.50 have been obligated under this contract
towards future award fee determinations but are not available for the Contractor
to bill against or incur costs against. Obligated award fee funds identified
above will be released the Contractor via subsequent modifications after the
Government has rendered an award fee determination in accordance with the Award
Fee Plan currently in force under this contract. Upon receipt of the
aforementioned modifications, the Contractor is authorized to bill for the
earned fee.
G.13 NOTICE - CONTRACT ADMINISTRATION FUNCTION (OCT 1993) is added:
(a) The Procuring Contracting Officer (PCO) will retain all administrative
functions under this contract except for those assigned to the cognizant Defense
Contract Management Command (DCMC) component, in accordance with Plan 42 of the
FAR, Part 242 of the DoD FAR Supplement and the PCO's letter dated 27 May 1998.
(b) The Contractor's 5-position CAGE Code is 4F972.
(c) The following administration functions are hereby delegated to the
cognizant DCMC component (see FAR/DFARS references below):
(1) 42.302(a)(1). Review the Contractor's compensation structure.
(2) 42.302(a)(2). Review the Contractor's insurance plans.
(3) 42.302(a)(5). Negotiate forward pricing rate agreements (see FAR 15.809).
<PAGE>
(4) 42.302(a)(9). Establish final indirect cost rates and billing rates for
those contractors meeting the criteria for contracting officer determination in
FAR Subpart 42.7.
(5) 42.302(a)(11). In connection with Cost Accounting Standards (see FAR Part
30).
(i) Determine the accuracy of the Contractor's disclosure statements;
(ii) Determine whether disclosure statements are in compliance with Cost
accounting Standards and FAR Part 31;
(iii) Determine the Contractor's compliance with Cost Accounting Standards and
disclosure statements, if applicable; and
(iv) Negotiate price adjustments and execute supplemental agreements under the
Cost Accounting Standards clause at FAR 52.230-3, 52.230-4, and 52.230-5. Note:
the ACO will negotiate the amount of the adjustment, but the MPO CO will issue
the modification to the contract.
(6) 42.302(a)(16). Monitor the Contractor's financial condition and advise the
contracting officer when it jeopardizes contract performance.
(7) 42.302(a)(19). Ensure processing and execution of duty-free certificates.
(8) 42.302(a)(25). Process and execute of novation and change of name
agreements under FAR Subpart 42.12.
(9) 42.302(a)(26). Perform property administration and plant clearance (see
FAR Part 45).
(10) 42.302(a)(33). Advise and assist contractors regarding their priorities and
allocations responsibilities and assist contracting offices in processing for
special assistance and for priority ratings for privately owned capital
equipment.
(11) 42.302(a)(34). Monitor Contractor industrial relations matters under the
contract; apprise the contracting officer of actual or potential labor disputes;
and coordinate the removal of urgently required material from the strikebound
contractor's plant upon instruction from, and authorization of, the contracting
officer.
(12) 42.302(a)(36). Review the adequacy of the Contractor's traffic operations.
(13) 42.302(a)(37). Review and evaluate preservation, packaging, and packing.
(14) 42.302(a)(42). Review and evaluate for technical adequacy the Contractor's
logistics support, maintenance, and modification programs.
(15) 42.302(a)(48). Evaluate and monitor the Contractor's procedures for
complying with procedures regarding restrictive markings on data.
<PAGE>
(16) 42.302(a)(49). Monitor the Contractor's value engineering program.
(17) 42.302(a)(50). Review, approve or disapprove, and maintain surveillance of
the Contractor's purchasing system (see FAR Part 44).
(18) 42.302(a)(52). Review, evaluate, and approve plant or division-wide small
and small disadvantaged business master subcontracting plans.
(19) 42.302(a)(53). Obtain the Contractor's currently approved company or
division-wide plans for small business and small disadvantaged business
subcontracting for its commercial products or, if there is no currently approved
plan, assist the contracting officer in evaluating the plans for those products.
(20) 42.302(a)(54). Assist the contracting officer, upon request, in evaluating
an offeror's proposed small business and small disadvantaged business
subcontracting plans, including documentation of compliance with similar plans
under prior contracts.
(21) 42.302(a)(55). By periodic surveillance, ensure the Contractor's compliance
with small business and small disadvantaged business subcontracting plans and
any labor surplus area contractual requirements; maintain documentation of the
Contractor's performance under and compliance with these plans and requirements;
and provide advice and assistance to the firms involved, as appropriate.
(22) 42.302(a)(58). Ensure timely submission of required reports.
(23) 42.302(a)(66). Determine that the Contractor has a drug-free workplace
program and drug-free awareness program (see FAR Subpart 23.5).
(24) 242.302(a)(4). Also, review and evaluate.
(A) Contractor estimating system (see FAR 15.811); and
(B) Contractor material management and accounting system under DFARS Subpart
242.72.
(25) 242.302(a)(8). Monitor the Contractor's costs under DFARS Subpart 242.70.
(26) 242.302(a)(9). For additional contract administration functions related to
IR&D/B&P projects performed by major contractors, see 242.771-3(a).
(c) The following contract administration functions (marked (X) when
applicable) are hereby delegated to the cognizant DCMC component (see FAR/DFARS
references below):
( ) (1) 42.302(a)(3). Conduct post-award orientation conferences.
( ) (2) 42.302(a)(4). Review and evaluate contractor's proposals under FAR
Subpart 25.8 and, when negotiation will be accomplished by the contracting
officer, furnish comments and recommendations to that officer.
<PAGE>
( ) (3) 42.302(a)(6). Negotiate advance agreements applicable to treatment of
costs under contracts currently assigned for administration (see FAR Subpart
31.109).
( ) (4) 32.302(a)(12). Review and approve for disapprove the Contractor's
requests for payments under the progress payments clause.
( ) (5) 42.302(a)(13). Make payments on assigned contracts when prescribed in
agency acquisition regulations (see FAR Subpart 2.205).
( ) (6) 42.302(a)(15). Ensure timely notification by the Contractor of any
anticipated overrun or underrun of the estimated cost under cost-reimbursement
contracts.
( ) (7) 42.302(a)(17). Analyze quarterly limitation on payments statements
and recover overpayments from the Contractor. Note: use with 42.302(a)(12)
above.
( ) (8) 42.302(a)(20). For classified contracts, administer those portions of
the applicable industrial security program designated as ACO responsibilities
(see FAR Subpart 4.4).
( ) (9) 42.302(a)(28). Perform necessary screening, redistribution, and
disposal of contractor inventory.
( ) (10) 42.302(a)(29). Issue contract modifications requiring the Contractor
to provide packing, crating, and handling services on excess Government
property. When the ACO determines it to be in the Government's interests, the
services may be secured from a contractor other than the contractor in
possession of the property.
( ) (11) 42.302(a)(31). Perform production support, surveillance, and status
reporting, including timely reporting of potential and actual slippages in
contract delivery schedules.
( ) (12) 42.302(a)(32). Perform pre-award surveys (se FAR Subpart 9.1).
( ) (13) 42.302(a)(38). Ensure Contractor compliance with contractual quality
assurance requirements (see FAR Part 46).
( ) (14) 42.302(a)(39). Ensure Contractor compliance with contractual safety
requirements. Note: see DFARS 223.370 for safety requirements on contracts for
ammunition and explosives.
( ) (15) 42.302(a)(40). Perform engineering surveillance to assess compliance
with contractual terms for schedule, cost, and technical performance in the
areas of design, development, and production.
( ) (16) 42.302(a)(41). Evaluate for adequacy and perform surveillance of
Contractor efforts and management systems that relate to design, development,
production, engineering changes, subcontractors, tests, management of
engineering resources, reliability and maintainability, data control systems,
configuration management, and independent research and development.
<PAGE>
( ) (17) 42.302(a)(43). Report to the contracting office any inadequacies
noted in specifications.
( ) (18) 42.302(a)(44). Perform engineering analyses of Contractor cost
proposals.
( ) (19) 42.302(a)(45). Review and analyze Contractor proposed engineering and
design studies and submit comments and recommendations to the contracting
office, as required.
( ) (20) 42.302(a)(46). Review engineering change proposals for proper
classification and, when required, for need, technical adequacy of design,
productibility, and impact on quality, reliability, schedule, and cost; submit
comments to the contracting office.
( ) (21) 42.302(a)(47). Assist in evaluating and make recommendations for
acceptance or rejection of waivers and deviations.
( ) (22) 42.302(a)(51). Consent to the placement of subcontracts.
( ) (23) 42.302(a)(57). Assign and perform supporting contract administration.
( ) (24) 42.302(a)(59). Issue administrative changes, correcting errors or
omissions in typing, Contractor address, facility or activity code, remittance
address, computations which do not require additional contract funds, and other
such changes (see FAR Subpart 43.101).
( ) (25) 42.302(a)(60). Cause release of shipments from Contractor's plants
according to the shipping instructions. When applicable, the order of assigned
priority shall be followed; shipments within the same priority shall be
determined by date of the instructions.
( ) (26) 42.302(a)(61). Obtain contractor proposals for any contract price
adjustments resulting from amended shipping instructions. ACO's shall review
all amended shipping instructions on a periodic, consolidated basis to assure
that adjustments are timely made. Except when the ACO has settlement authority,
the ACO shall forward the proposal to the contracting officer for contract
modification. The ACO shall not delay shipments pending completion and
formalization of negotiations of revised shipping instructions.
( ) (27) 42.302(a)(65). Accomplish administrative closeout procedures (see FAR
Subpart 4.0804-5).
( ) (28) 242.302(a)(19). Also negotiate and issue contract modifications
reducing contract prices in connection with the provisions of paragraph (b) of
the clause at FAR 42.224-10, Duty-Free Entry, and paragraph (c) of the clause at
252.225-7009, Duty-Free Entry--Qualifying Country End Products and Supplies.
( ) (29) 242.302(a)(33). Also perform industrial readiness and mobilization
productions planning field surveys and negotiate schedules.
( ) (30) 242.302(a)(41). In contract with cost schedule control systems
requirements (see DFARS Subpart 234.005-70;
(A) Perform postaward surveillance of contractor progress in demonstrating that
its cost schedule control systems meet the cost schedule control systems
criteria;
(B) Provide assistance in the review and acceptance of the Contractor's cost
schedule control systems; and
(C) After acceptance of the systems, perform surveillance to monitor their
continuing acceptable operation.
<PAGE>
H.17 352.245-9001 GOVERNMENT FURNISHED PROPERTY (APR 1989) is added:
(a) The Government shall deliver to the Contractor, F.O.B. carrier's equipment,
wharf, or freight station Ashburn, VA, where the work will be performed, the
following property to be used for this requirement:
Description Qty. Value To be delivered to Contractor
GTC FORTEZZA Crypto Card 2 $140.00 In Place
(b) The Contractor shall inspect the property within thirty (30) days of its
receipt. Damaged or defective property will be promptly reported to the
Contracting Officer after having a confirming inspection thereof made by the
Government Representative. The Contractor will also request a confirming
inspection by the carrier's representative where he considers the damage to be
attributable in some degree to the carrier.
(c) A representative of the Contracting Officer may be present to inspect the
condition of the property prior to packaging thereof for return to the
Government. The Contractor will notify the designated property administrator
prior to the packaging of the property for return so that personnel may be
assigned for these examinations.
(d) In fulfillment of the requirements of the contract clause entitled
"Government Property," reporting of Government Property inventory shall be
submitted in accordance with FAR 45.508.
(e) Under no circumstances shall government property be accepted by the
contractor without a contracting officer's signature on the shipping document.
(f) All inquiries with regard to the above property should be directed to the
designated property administrator.
H.18. DESIGNATION OF PROPERTY ADMINISTRATOR - RECORDS OF GOVERNMENT PROPERTY
(OCT 1993) is added:
Ia) The cognizant Defense Contract Management Command (DCMC) component is
designated to administer the maintenance by the Contractor of the official
Government Property Records for all Government property.
Ib) The Contractor will sign one (1) copy of the shipping or inspection document
acknowledging receipt of property and forward same to the designated property
administrator.
(End of Clause)
SECTION I - CONTRACT CLAUSES
1.1 REFERENCED CLAUSES. The following contract clause (s) pertinent to this
section are hereby incorporated by reference:
CLAUSE NO TITLE
FAR CLAUSES
52.245-4 Government-Furnished Property (Short Form) (APR 1984)
C. As a result of the foregoing, the total contract price is restated as
follows.
<TABLE>
<CAPTION>
Section B.1 FROM BY TO
----------- ---- -- --
<S> <C> <C> <C>
Cost of CLINs 0001, 0003 and 0004 $ 446,874.00 $ 0.00 $ 446,874.00
Award Fee Pool $ 0.00 $ 0.00 $ 0.00
Earned Award Fee $ 36,433.00 $ 0.00 $ 36,433.00
Total PFAF Amount $ 483,307.00 $ 0.00 $ 483,307.00
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Section B.2 FROM BY TO
----------- ---- -- --
<S> <C> <C> <C>
Cost of CLINs 0001, 0003 and 0004 $ 776,150.00 $194,291.00 $ 970,441.00
Award Fee Pool $ 73,850.00 $ 10,709.00 $ 84,559.00
Earned Award Fee $ 0.00 $ 0.00 $ 0.00
Total PFAF Amount $ 850,000.00 $205,000.00 $1,055,000.00
FROM BY TO
---- -- --
Total Contract Price $1,333,307.00 $205,000.00 $1,538,307.00
</TABLE>
D. Except as provided herein, all terms and conditions of this contract, as
previously modified, remain unchanged and in full force and effect.
<PAGE>
Exhibit 10.12
FORBEARANCE AGREEMENT
August 8, 1997
Mr. William W. Davis, Sr.
Pulsar Data Systems, Inc.
4500 Forbes Boulevard
Lanham, MD 20706
Dear Mr. Davis:
This letter is in reference to the Agreement for Wholesale Financing and dated
August 9, 1989 and the FPP Addendum dated June 5, 1992 by and between Pulsar
Data Systems, Inc. ("the Company") and IBM Credit Corporation ("IBM Credit"),
and as amended, supplemented or otherwise modified on or prior to the date
hereof, and together with any FPP or other addendum or other documents executed
in connection therewith, the "AWF".
WITNESSETH:
WHEREAS, the Company and IBM Credit entered into the AWF, and all loans made by
IBM Credit to the Company, and all other liabilities and obligations at any time
owing by the Company to IBM Credit are secured by security interests granted by
the Company to IBM Credit pursuant to the terms of the AWF in all of the
Company's then existing and thereafter acquired inventory, accounts receivables,
chattel paper, contract rights, documents, instruments, general intangibles and
other items of personal property; and
WHEREAS, by Guaranty Agreement (by Individual) dated July 31, 1990, Mr. William
W. Davis, Sr. and Mrs. William W. Davis, Sr. (Each as "Guarantor" and together
the "Guarantors") unconditionally guaranteed payment to IBM Credit of all
liabilities at any time owing by the Company to IBM Credit under the AWF or
otherwise (the "Guaranty"); an d
WHEREAS, the Company is in default under the AWF; and
WHEREAS, the Company and IBM Credit desire that IBM Credit forbear from
exercising certain remedies available to IBM Credit under the AWF as a
consequence of the Company's default in order to afford the Company an
opportunity to recognize its affairs and to pay the indebtedness owing to IBM
Credit in accordance with the terms of the AWF; and
WHEREAS, IBM Credit is willing to forbear, in accordance with the terms of this
Agreement and as long as all the Forbearance Conditions set forth in paragraph 7
and Attachment A are met, from exercising remedies available to it as a result
of the Company's default against the AWF.
<PAGE>
NOW THEREFORE, in consideration of the foregoing and the promises hereinafter
set forth and other good and valuable consideration, the receipt and sufficiency
of which is hereby acknowledged, the Company and IBM Credit agree as follows:
1. The Company acknowledges that it is currently in default of its obligations
to IBM Credit under the AWF. The Company acknowledges that as of June 23,
1997 a collateral shortfall of $7,528,766.05 (the "Shortfall Obligation")
is due and payable by the Company to IBM Credit pursuant to the terms of
the AWF. The Company acknowledges that any of the unpaid Shortfall
Obligation continues to accrue interest at a fluctuating rate per annum
equal to the Prime Rate plus 6.5% (as such term is defined below). [The
definition of Shortfall Obligation shall include unpaid interest on the
unpaid principal amount form time to time outstanding, payable monthly in
arrears on the first day of each calendar month for the previous month
beginning June 30, 1997, at a fluctuating rate per annum equal to the Prime
Rate plus 6.5%.] Interest shall accrue on all principal (to the extent
permitted by applicable law) not paid when due (both before and after
judgment) from the due date until paid in full, at a fluctuating rate per
annum equal to the Prime Rate plus 6.5%. The Company acknowledges that it
has no defenses to payment of the Shortfall Obligation or any part thereof
and has no other claim against IBM Credit as of the date hereof.
The Shortfall Obligation shall not exceed the following limits:
Date: Shortfall Limits:
---- -----------------
06/30/97 $2,350,000.00
07/01/97-07/30/97 $3,000,000.00
07/31/97 $1,500,000.00
08/01/97-08/30/97 $2,000,000.00
08/31/97 $1,250,000.00
09/01/97-09/29/97 $1,750,000.00
09/30/97 0
"Prime Rate" as used herein shall mean the average of the rates of interest
announced by Citibank N.A., the Chase Manhattan Bank, N.A. and Bank of
America National Trust and Savings Association as their prime or base rate,
as of the last business day of the calendar month immediately preceding the
date of determination, whether or not such announced rates are the actual
rates charged by such banking institutions to their most credit-worthy
borrowers. In the event that one or more of the above mentioned financial
institutions cease to do business, "Prime Rate" shall be determined using
the rates of interest of the other aforementioned bank or banks. Changes
to the Prime Rate shall be effective as of the first calendar day of each
month.
-2-
<PAGE>
The base rate for financing, excluding the Shortfall Obligation, going
forward is Prime+1.75% until the Shortfall Obligation is paid in full, then
the going forward 1.25% through the remainder of 1997. The parties agree
to renegotiate the going-forward interest rate at that time.
2. The Guarantors acknowledge that the Company is currently in default of its
obligations to IBM Credit under the AWF including the Shortfall Obligation
in Paragraph 1 above. Guarantors hereby acknowledge the Company's Shortfall
Obligation, and hereby rectifies and reaffirms the validity, legality and
enforceability of such Guarantee and restates his/her agreement to
personally unconditionally guarantee payment of such Shortfall Obligation
as set forth in the Guaranty (by Individual) and as modified by this
Forbearance Agreement.
3. From the date hereof, Company agrees and covenants that it shall not,
without IBM Credits prior written consent, pledge, encumber, grant a lien
on any of its assets, make any distributions, (except to the extent set
forth in paragraph 4 below) permit any unreasonable salary increases or
consent to any loans in excess of $25,000 until the Shortfall Obligation
has been paid in full.
4. The Company shall make the distributions necessary to pay the estimated
personal income tax liability for Mr .William Davis, Sr., in addition to
the distribution of $15,000.00 per month to Mr. William Davis, Sr.
5. The Company agrees to adhere to limits of the Shortfall Obligation limits
as set forth in paragraph 1 above.
6. The Company shall reimburse IBM Credit for all collection costs and
expenses including attorney's fees, arising out of a default of this
Forbearance Agreement.
7. Conditions to Forbearance. The following conditions shall constitute
Forbearance Conditions, the satisfaction of each and every one of which
during the Forbearance Period shall be a condition to the agreement of IBM
Credit to forbear as set forth in Paragraph 3 of this Agreement and the
Attachments hereto.
(a) The Company and the Guarantors each duly and punctually observe,
perform and discharge each and every obligation and covenant on its or
his/her part to be performed under this Agreement and the Attachments
hereto.
(b) IBM Credit completes a satisfactory audit of the business records of
the Company. "Satisfactory" shall mean that (i) the Company's
representation of its financial condition is materially correct and
(ii) the Company's business records do not indicate any diversion of
corporate assets other than in the ordinary course of business of the
Company.
-3-
<PAGE>
(c) No additional default occurs other than the Shortfall Obligation
referenced in Paragraph 1 of this Agreement or the financial covenant
defaults that are in existence on the date hereof.
(d) The Guarantors shall not revoke or attempt to revoke or terminate
his/her Guaranty.
(e) No representation or warranty made by the Company or the Guarantors in
this Agreement proves to have been intentionally or knowingly false or
misleading in any material respect.
8. Termination of Forbearance. In the event that any one or more of the
Forbearance Conditions is not satisfied, IBM Credit's agreement to forbear
as set forth in this Agreement shall, at IBM Credit's election but without
further notice to or demand upon the Company, terminate, and IBM Credit
shall thereupon have any may exercise from time to time all of the remedies
available to it under the AWF, this Agreement and applicable law as a
consequence of an Event or Default except that in the event that Company
defaults under paragraph 7(b) or 7(c) then IBM Credit shall give company
five (5) days notice before exercising its remedies.
9. Representations and Warranties of the Company and Guarantors. The Company
and the Guarantors each represent and warrant that:
(a) No default exists under the AWF, except for financial covenant
defaults and the Shortfall Obligation identified in Paragraph 1 of
this Agreement that are in existence on the date hereof.
(b) Subject to the existence of Shortfall Obligation specified in
Paragraph 1 of this Agreement, the representations and warranties of
Borrower contained in the AWF were true and correct to the best of the
Company and Guarantor's knowledge in all material respects when made
and continue to be true and correct in all material respects on the
date hereof.
(c) The execution, delivery and performance by the Company of this
Agreement and the consummation of the transactions contemplated hereby
are within the corporate power of the Company, have been duly
authorized by all necessary corporate action on the part of the
Company and do not result in a breach of or constitute a default under
any agreement or instrument to which the Company is a party or by
which it or any of its properties are bound.
(d) This Agreement constitutes a legal, valid and binding obligation to
the Company enforceable against the Company in accordance with its
terms.
-4-
<PAGE>
(e) Each party is entering into this Agreement freely and voluntarily with
the advice of legal counsel of his or its own choosing.
(f) Each party has freely and voluntarily agreed to the releases, waivers
and undertakings set forth in this Agreement.
10. Waiver of Limitations Period. The Company and Guarantors hereby severally
waive the benefit of any statute of limitations that might otherwise bar
the recovery of any of the Shortfall Obligations from any one or more of
them.
11. Relationship of Parties; No Third Party Beneficiaries. Nothing in this
Agreement shall be construed to alter the existing debtor-creditor
relationship between the Company and IBM Credit. Nor is this Agreement
intended to change or affect in any way the relationship between IBM Credit
and the Guarantors to one other than a debtor-creditor relationship. This
Agreement is not intended, nor shall it be construed to create, a
partnership or joint venture relationship between or among any of the
parties hereto. No Person other than a party hereto is intended to be a
beneficiary hereof, and no Person other than a party hereto shall be
authorized to rely upon the contents of this Agreement.
12. Entire Agreement; Modification of Agreement. This Agreement and the AWF
constitute the entire understanding of the parties with respect to the
subject made hereof and thereof. This Agreement may not be modified,
altered or amended except by agreement in writing signed by all the parties
hereto.
13. Governing Law. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of New York. The parties
agree that venue for any lawsuit will be in the state or federal court
within the county parish, or district where the Company is located. D The
Company hereby waives any right to change the venue of any action brought
by IBM Credit.
14. Nonwaiver of Default. Neither this Agreement nor IBM Credit's forbearance
hereunder shall be deemed a waiver of or consent to the default referenced
din Paragraph 1 of this Agreement. The Company and the Guarantors agree
that such default and the Shortfall Obligation shall not be deemed to have
been waived, released or cured by virtue of such loans or IBM Credit's
agreement to forbear pursuant to the terms of this Agreement or the
execution of this Agreement.
15. No Novation, etc. This Agreement is not intended to be, nor shall it be
construed to create, a novation or accord and satisfaction, and except as
otherwise expressly stated herein, the AWF remains in full force and
effect. Notwithstanding any prior mutual temporary disregard of any of the
terms of any of the AWF, the parties agree that the terms of the AWF shall
be strictly adhered to on and after the date hereof except as expressly
modified by this Agreement.
-5-
<PAGE>
16. Counterparts; Waivers of Notice of Acceptance. This Agreement may be
executed in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed shall constitute an
original, but all of which taken together shall be one and the same
instrument. In providing this Agreement or any of the Loan Documents, it
shall not be necessary to produce or account for more than one such
counterpart signed by the party against whom enforcement is sought. Notice
of IBM Credit's acceptance hereof is hereby waived.
17. JURY TRAIL WAIVER. EACH OF IBM CREDIT, THE COMPANY AND EACH GUARANTOR
HEREBY IRREVOCABLY WAIVE THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR
PROCEEDING (INCLUDING ANY COUNTERCLAIM) OF ANY TYPE IN WHICH IBM CREDIT AND
THE COMPANY ARE PARTIES AS TO ALL MATTERS ARISING DIRECTLY OR INDIRECTLY
OUT OF THIS AGREEMENT THE GUARANTY OR ANY DOCUMENT, INSTRUMENT OR AGREEMENT
EXECUTED IN CONNECTION HEREWITH.
18. RELEASE OF CLAIMS. TO INDUCE IBM CREDIT TO ENTER INTO THIS AGREEMENT, THE
COMPANY AND EACH GUARANTOR EACH HEREBY RELEASES, ACQUITS AND FOREVER
DISCHARGES IBM CREDIT AND IBM CREDIT'S OFFICERS, DIRECTORS; AGENTS,
EMPLOYEES, SUCCESSORS AND ASSIGNS FROM ALL LIABILITIES, CLAIMS, DEMANDS,
ACTIONS OR CAUSES OF ACTIONS OF ANY KIND (IF THERE BE ANY), WHETHER
ABSOLUTE OR CONTINGENT, DUE OR TO BECOME DUE, EQUITY, THAT ANY ONE OR MORE
OF THEM NOW HAVE OR EVER HAVE HAD AGAINST IBM CREDIT, WHETHER ARISING UNDER
OR IN CONNECTION WITH THE AWF, THIS AGREEMENT, THE GUARANTY OR OTHERWISE.
IN WITNESS WHEREOF, the parties hereto have read this entire Agreement and have
caused this Agreement to be duly executed and delivery on the date first written
above.
-6-
<PAGE>
ATTACHMENT A
(a) The Company shall assign, and shall give IBM Credit possession of the
Original copy of each of the following Notes:
(i) A demand Note, dated 10/20/95, in the amount of $173,000 from
Davis Holding Co.
(ii) A demand Note, dated 11/1/95, in the amount of $439,500 from
Davis Holding Co.
(iii) A demand Note, dated 7/1/95, in the amount of $600,000 from
Davis Holding Co.
(iv) A demand Note, dated 8/1/95, in the amount of $355,000 from
Davis Holding Co.
(v) A demand Note, dated 6/15/95, in the amount of $350,000 from
Davis Holding Co.
(vi) A demand Note, dated 5/15/96, in the amount of $300,000 from
Davis Holding Co.
(vii) A demand Note, dated 2/1/96, in the amount of $150,000 from
Davis Holding Co.
(viii) A demand Note, dated 5/9/97, in the amount of $1,250,000 from
Teleconsult Corp.
(ix) A demand Note, dated 12/31/96, in the amount of $1,175,000
from William Davis.
(x) A demand Note, dated 3/28/95, in the amount of $300,000 from
M. Cubed Information Systems, Inc.
(xi) An executed and notarized Note Power in the form of Attachment
B for each of the demand Noes set forth in (i) - (xi) above.
(b) William W. Davis, Sr., shall execute and deliver, contemporaneously with
the execution of this agreement, a written assignment o the Cash value for
the following policies individual insurance as well as a copy of each such
policy:
Sun Life Insurance of Canada Policy #92767680
National Life of Vermont Policy #2203010
New York Life Insurance Company Policy #44711634
IBM Credit shall not enforce any such assignment unless Pulsar defaults
under this Forbearance Agreement.
(c) William W. Davis, Sr., and Lillian Davis, shall execute and deliver,
contemporaneously with the execution of this Agreement, a written
assignment of the cash value for the tax return for the tax year 1996.
-7-
<PAGE>
(d) Mr. William Davis, Sr. agrees to provide to IBM Credit copies of
preliminary personal income tax returns within 5 days of receipt of such
returns, and in no event later than August 15, 1997.
2) A daily system-generated sales journal.
3) A daily system-generated cash receipts journal.
4) A listing of any Accounts receivable adjustments.
5) A copy of any credit memos or adjustments over $25,000.00.
6) A copy of the last page of the current Accounts Receivable aging.
7) A daily cleared funds report from the blocked account.
8) A daily bank statement reflecting operating account activity.
9) A copy of the detailed in-transit calculation.
10) A copy of the back-up to support price protection and return claims
with RMA numbers and a contact and phone number for IBM Credit
verifications.
11) A copy of the last page of all current eligible inventory reports.
(f) Pulsar shall continue to provide a fully reconciled, month end collateral
reconciliation that ties into the month end financial statements by the 5th
business day of each month.
(g) Pulsar shall provide accurate, monthly financial statements within 35 days
of each month end. These financial statements shall reflect the correct
inventory, accounts receivable and account payable balances that track to
the month end collateral report. Any discrepancies that exist must be
explained to IBM Credit.
(h) Pulsar shall provide copies of bank statements of all of its bank accounts
to IB Credit within three (3) days of receipt on a monthly basis.
(i) Pulsar shall report blocked account and operations bank account collections
to IBM Credit on a daily basis. Pulsar understands that IBM Credit
requires 100% of any collections to be deposited in to the blocked account
and to flow to IBM Credit. In the event that some of Pulsar's customers
continue to wire payments directly to Pulsar's operating account, Pulsar
agrees that once the aggregate amount of such funds equals $25,000 it will
transfer such amounts to IBM Credit.
(j) Company shall provide copies of bank statements for all of its accounts as
of the date hereof.
(k) Company shall use its best efforts to provide financial information on
Teleconsult, Inc. to IBM Credit by August 15, 1997.
(l) Company shall amend its UCC-1 financing statements to reflect IBM Credit's
security interest in the furniture and fixtures.
-8-
<PAGE>
(m) Pulsar shall provide no later than August 15,1997 an executed Inventory and
Working Capital Financing Agreement completed to the satisfaction of IBM
Credit.
(n) Company shall take whatever steps are necessary to return it to a good
standing status in the State of Delaware.
(o) Company shall provide IBM Credit with UC-1 in form and substance
satisfactory to IBM Credit which, when properly filed, will provide IBM
Credit with a security interest in Company's inventory at any additional
locations.
(p) Company shall consolidate all its inventory into the Lanham, MD warehouse
by August 31, 1997.
(q) Company shall provide 1996 year end financial statements and t ax returns
for Davis Holdings, Inc. by July 15, 1997.
(r) Company shall cease using the Income Tax refund in paragraph (c) of this
Attachment A and the cash value of life insurance referenced in paragraph
(b) of this Attachment A as collateral by October 31, 1997. When Company
ceases to use the cash value of life insurance referenced in paragraph (b)
of this Attachment A as collateral, IBM Credit shall not enforce the
assignment of such life insurance, unless Company defaults under this
forbearance Agreement.
(s) Company shall comply with the following financial covenants:
<TABLE>
<CAPTION>
Required Required Required
by 09/97 by 12/97 by 03/98
-------- -------- --------
<S> <C> <C> <C>
Revenue on an annual basis to 30.0 28.0 27.0
Working Capital greater than
zero and equal to or less than
Net profit after tax to revenue -1.0 0.0 0.5
equal to or greater than
Total liabilities to tangible net 17.0 15.0 14.0
worth greater than zero and
equal to or less than
</TABLE>
-9-
<PAGE>
ATTEST: PULSAR DATA SYSTEMS INC.
(COMPANY)
[AUTHORIZED SIGNATORY] By: /s/ William W. Davis, Sr.
- --------------------- --------------------------
Secretary Name: Mr. William W. Davis, Sr.
[Corporate Seal] Title: President
GUARANTOR ("GUARANTOR")
By: /s/ Lillian Davis By: /s/ William W. Davis, Sr.
------------------------ --------------------------
Name: Lillian Davis Name: Mr. William W. Davis, Sr.
Title: Executive Vice President Title: President
IBM CREDIT CORPORATION
By:___________________________
Name:_________________________
Title:________________________
-10-
<PAGE>
Exhibit 10.13
October 10,1997
Mr. William W. Davis, Sr.
President/CEO
Pulsar Data Systems, Inc.
4500 Forbes Boulevard
Lanham, MD 20706
Dear Mr. Davis:
The purpose of this letter is to memorialize the agreement reached at the
October 9 meeting between representatives of Pulsar Data Systems, Inc.
("Pulsar") and IBM Credit Corporation, ("IBM Credit").
Pulsar has immediately cash requirements of $2.1 million and has requested that
IBM Credit wire funds to cover such requirements. IBM Credit has agreed to
provide such funding in light of the agreement reached at the above referenced
meeting summarized herein. Pulsar agrees to use its best efforts to pursue
potential sources for a cash equity infusion. It is Pulsar's intent to obtain a
cash equity infusion in an amount sufficient to resolve the Shortfall Amount and
sufficient enough so that all collateral except A/R and inventory at the Advance
Rates set by IBM Credit (the "Equity Infusion") shall be excluded when
calculating Eligible Collateral. It is the intent of Pulsar and IBM Credit that
such Equity Infusion shall occur before January 31, 1998 and shall be in amount
of no less than $2 million.
Additionally, IBM Credit understands that due to the nature of Pulsar's business
and billing cycle, Pulsar's Shortfall Amount (as such term is defined in the
Forbearance Agreement) may fluctuate during each month. IBM Credit and Pulsar
agree that:
(a) during the month of October the Shortfall Amount shall fluctuate and
shall not exceed $3.5 million, and shall be $1.2 million on October
30, 1997 during the week ending October 17, 1997 the Shortfall Amount
not exceed 42.5 million;
(b) during the month of November the Shortfall Amount shall not exceed
$3.0 million and shall be $375,000 on November 30, 1997;
(c) during the month of December the Shortfall Amount shall not exceed
$2.5 million and shall be $0 on December 30, 1997; and
<PAGE>
(d) during the month of January the Shortfall Amount shall not exceed $1.5
million and shall be $0 on January 31, 1997.
IBM Credit shall provide Pulsar with a formula to determine the permissible
spread of the Shortfall Amount fluctuation by October 17, 1997, (for example -
in November the formula should be first week 25% of the difference between $3
million and $375,000 plus $1.2 million). Such formula shall be calculated using
the above amounts.
Mr. William Davis agrees to make available certain personal assets available to
IBM Credit. Mr. Davis shall:
1. Grant to IBM Credit a second mortgage for and a security interest in, and a
lien on, his personal residence. Mr. Davis that Mrs. Lillian Davis agrees
to execute and deliver whatever documents are required to formalize her
commitment to grant such mortgage. Mr. Davis has further represented that
the present value of equity in his residence is $1 million and IBM Credit
is willing to give collateral value 80% of that amount.
2. Obtain a loan on the $1.5 million cash value of certain Life Insurance
Policies #2203010 and 9267680, and 44711634 and pay the proceeds of such
loan directly to the Pulsar Lockbox.
3. Grant to IBM Credit a security interest in and an assignment of brokerage
account #723-27W37 at Merrill Lynch, with an estimated present value at
$544,000.
4. Deposit any and all amounts received as a personal Federal Income Tax
Refund into the Pulsar Lockbox (currently represented to be $1.573
million).
Pulsar agrees to:
1. Provide IBM Credit with weekly itemized cash flow projections beginning
October 17, 1997.
2. Sign and execute and deliver to IBM Credit that certain IWCF on or before
October 17, 1997.
3. For $1.00, Issue Warrants to IBM Credit evidencing 4% ownership interest
(fully diluted) of Pulsar stock on the occurrence of (i) Pulsar's default
of its commitments set forth herein, (ii) any additional default or (iii)
Pulsar does not get the equity infusion referenced in paragraph 2 above by
January 31, 1998. In the event that Pulsar does not obtain an Equity
Infusion by January 31, 1998, then Pulsar shall issue to IBM Credit
additional Warrants for stock representing 5% ownership interest, on a
fully diluted basis, at the end of each month such Equity Infusion has not
been obtained beginning February 1998 until April 30, 1998.
<PAGE>
IBM Credit Agrees:
1. To extend the term of the Forbearance Agreement until January 31, 1998,
provided that Pulsar meets all its obligations as set forth herein and
provided that no further defaults occurs and further provided that all
documents necessary to finalize these terms are executed by October 31,
1997.
2. Release the Assignment by William Davis of the cash value of the Life
Insurance Policies referenced herein, so that Mr. Davis may obtain the loan
referenced above.
3. IBM Credit Corporate hereby agrees to extend the terms of the Forbearance
Agreement based on the shortfall amount for January 1998 up until the
period ending April 30, 1998.
4. In the event that the Cash Infusion identified in paragraph two is not
obtained by January 31, 1998, and provided there are no additional events
of default, IBM Credit agrees to extend the terms of the forbearance until
April 30, 1998, provided that Pulsar meets the following Shortfall limits,
collateralized only by accounts receivable and inventory at the Advance
Rates Set by IBM Credit:
January 31, 1998 $0
February 28, 1998 $825k
March 31, 1998 $1,630K
IBM Credit and Pulsar intend to execute whatever documentation is necessary to
formalize and finalize their agreement herein. By way of example and not
limitation, this shall include mortgage documentation, assignment of a brokerage
account, stock certificates, and executed IWCF and the modified Forbearance
Agreement. IBM Credit, in good faith, is providing funding to Pulsar based in
part on the representation set forth herein, and on Pulsar's request for
immediate working capital requirements and on Pulsar's agreement to execute the
required documentation. Pulsar and IBM Credit agree that time is of the essence
in this Agreement.
Nothing in this letter, the Forbearance Agreement of any of the other
negotiations or other action undertaken pursuant to this letter shall constitute
a waiver or modification of any of IBM Credit's rights and remedies against
Pulsar or Mr. and Mrs. Davis.
<PAGE>
Please sign below to acknowledge the terms set forth herein, and your acceptance
and agreement to such terms.
Sincerely,
/s/ Mitch Faile
-----------------------
Mitch Faile
Account Executive
Acknowledged and agreed to:
By: /s/ William W. Davis, Sr.
-----------------------------------
Name: Mr. William Davis, as Guarantor
and as President and CEO of Pulsar Data
Systems, Inc.
<PAGE>
Exhibit 10.14
SUBLEASE
NOTE: This Sublease document is being used as a Sub-sublease document.
Therefore, the terms "sublease", "sublessor" and "sublessee" will often be used
as "sub-sublease", "sub-sublessor" and sub-sublessee", respectively.
1. PARTIES.
This Sublease, dated October 20, 1997, is made between E.I. du Pont de Nemours
and Company, a Delaware corporation (Sublessor"), and Lintronic Industries, a
California corporation ("Sublessee").
2. MASTER LEASE.
Sublessor is the Sub-lessee under a written lease dated February 21, 1991,
wherein Koll Tower Four Associates, a California limited partnership ("Lessor")
leased to Lessee Hadson Power Systems, a Delaware corporation, the real property
located in the City of Irvine, County of Orange, State of California, described
as portions of that certain 16-story office building located at 2030 Main
Street, Irvine, California, as identified in the Master Lease as the "Premises"
("Master Premises"). Said lease has been amended by the following amendments
that certain Sublease dated April 7, 1995 by and between Hadson Power Systems
("Hadson")*, a Delaware corporation and E.I. du Pont de Nemours and Company (as
existing "Sublessor"); said lease and amendments are herein collectively
referred to as the "Master Lease" and are attached hereto as Exhibit "A".
*Hadson Systems is now LG & E Energy Systems, Inc., a Kentucky Corporation
3. PREMISES.
Sublessor hereby subleases to Sublessee that the Master Lease has not been
amended or modified except as expressly set forth herein, that Sublessor is not
now, and as of the commencement of the Term hereof will not be, in default or
breach of any of the provisions of the Master Lease, and that Sublessor has no
knowledge of any claim by Lessor that Sublessor is in default or breach of any
of the provisions of the Master Lease.
5. TERM.
The Term of this Sublease shall commence on November 1, 1997 ("Commencement
Date"), or when Lessor consents to this Sublease (if such consent is required
under the Master Lease), whichever shall last occur, and end on September 17,
2001 ("Termination Date"), unless otherwise sooner terminated in accordance with
the provisions of this Sublease. In the event the Term commences on a date
other than the Commencement Date, Sublessor and Sublessee shall execute a
memorandum setting forth the actual date of the commencement of the Term.
Possession of the Premises ("Possession") shall be delivered to Sublessee on the
commencement of the Term. If for any reason Sublessor does not deliver
Possession to Sublessee on the commencement of the Term, Sublessor shall not be
subject to any liability for such failure, the Termination Date shall not be
extended by the delay, and the validity of this Sublease shall not be impaired,
but rent shall abate until delivery of Possession. Notwithstanding the
foregoing, if Sublessor has not delivered Possession to Sublessee within thirty
(30) days after the Commencement Date, then at any time thereafter and before
delivery of Possession, sublessee
<PAGE>
may given written notice to Sublessor of Sublessee's intention to cancel this
Sublease. Said notice shall set forth an effective date for such cancellation
which shall be at least ten (10) days after delivery of said notice to
Sublessor. If Sublessor delivers Possession to Sublessee on or befre such
effective date, this Sublease shall remain in full force and effect. If
Sublessor fails to deliver Possession to Sublessee on or before such effective
date, this Sublease shall be cancelled, in which case all consideration
previously paid by Sublessee on or before such effective date, this Sublease
shall be cancelled, in which case all consideration previously paid by Sublessee
to Sublessor on account of this Sublease shall be returned to Sublessee, this
Sublease shall thereafter be of no further force and effect, and Sublessor shall
have no further liability to Sublessee on account of such delay or cancellation.
If Sublessor permits Sublessee to take Possession prior to the commencement of
the Term, such early Possession shall not advance the Termination Date and shall
be subject to the provisions of this Sublease, including without limitation the
payment of rent.
6. RENT.
6.1. Minimum Rent. Sublessee shall pay to Sublessor as minimum rent, without
deduction, setoff, notice, or demand, at E.I. du Pont de Nemours, Attn:
Corporate Real Estate, 1007 Market Street, D12048A, Wilmington, DE 19898, or at
such other place as Sublessor shall designate from time to time by notice to
Sublessee, the sum of See Addendum One Dollars ($_________) per month, in
advance on the first day of each month of the Term. Sublesse shall pay to
Sublessor upon execution of this Sublease the sum of Twenty Thousand Two Hundred
Fifty and 40/100ths Dollars ($20,250.40) as rent for the first month. If the
Term begins or ends on a day other than the first or last day of a month, the
rent for the partial months shall be prorated on a per diem basis. Additional
provisions: See attached Addendum One
6.2. Operating Costs. If the Master Lease requires Sublessor to pay to Lessor
all or portion of the expenses of operating the building and/or project of which
the Premises are a part ("Operating Costs"), including but not limited to taxes,
utilities, or insurance, then Sublessee shall pay to Sublessor as additional
rent seventy and 24/100ths percent (70.24%) of the amounts payable by Sublessor
for Operating Costs incurred during the Term. Such ________ shall be payable as
and ______ Operating Costs are payable by Sublessor to Lessor if the Master
Lease provides for the payment by Sublessor of Operating Costs on the basis of
an estimate thereof, then as and when adjustments when estimated and actual
Operating Costs are made under the Master Lease, the obligations of Sublessor
and Sublessee hereunder shall be adjusted in a like manner, and if any such
adjustment shall occur after the expiration of earlier termination of the term,
then the obligations of Sublessor and Sublessee under this Section 6.2 shall
survive such expiration or termination. Sublessor shall, upon request by
Sublessee, furnish Sublessee with copies of all statements submitted by Lessor
of actual or estimated Operating Costs during the Term.
7. SECURITY DEPOSIT.
2
<PAGE>
Sublessee shall deposit with Sublessor upon execution of this Sublease the sum
of Twenty Thousand Two Hundred Fifty and 40/100ths Dollars ($20,350.40) as
security for Sublessee's faithful performance of Sublessee's obligations
hereunder ("Security Deposit"). If Sublessee fails to pay rent or other charges
when due under this Sublease, or fails to perform any of its other obligations
hereunder, Sublessor may use or apply all or any portion of the Security Deposit
for the payment of any rent or other amount then due hereunder and unpaid, for
the payment of any other sum for which Sublessor may become obligated by reason
of Sublessee's default or breach, or for any loss or damage sustained by
Sublessor as a result of Sublessee's default or breach. If Sublessor so uses
any portion of the Security Deposit, Sublessee shall, within ten (10) days after
written demand by Sublessor, restore the Security Deposit to the full amount
originally deposited, and Sublessee's failure to do so shall constitute a
default under this Sublease. Sublessor shall not be required to keep the
security Deposit separate from its general accounts, and shall have no
obligation or liability for payment of interest on the Security Deposit. In the
event Sublessor assigns its interest in this Sublease, Sublessor shall deliver
to its assignee so much of the Security Deposit as is then held by Sublessor.
Within ten (10) days after the Term has expired, or Sublessee has vacated the
Premises, or any final adjustment pursuant to Subsection 6.2 hereof has been
made, whichever shall last occur, and provided Sublessee is not then in default
of any of its obligations hereunder, the Security Deposit, or so much thereof as
had no theretofore been applied by Sublessor, shall be returned to Sublessee or
to the last assignee, if any, of Sublessee's interest hereunder.
8 USE OF PREMISES.
The Premises shall be used and occupied only for sales, consulting and related
general office functions, and for no other use or purpose.
9. ASSIGNMENT AND SUBLETTING.
Sublessee shall not assign this Sublease or further sublet all or any part of
the Premises without the prior written consent of Sublessor (and the consent of
Lessor, if such is required under the terms of the Master Lease).
10. OTHER PROVISIONS OF SUBLEASE.
All applicable terms and conditions of the Master Lease are incorporated into
and made a part of this Sublease as if Sublessor were the lessor thereunder,
Sublessee the lessee thereunder, and the Premises the Master Premises, except
for the following:
See attached Addendum One to the Sublease
Sublessee assumes and agrees to perform the lessee's obligations under the
Master Lease during the Term to the extent that such obligations are applicable
to the Premises, except that the obligation to pay rent to Lessor under the
Master Lease shall be considered performed by Sublessee to the extent and in the
amount rent is paid to Sublessor in accordance with Section 6 of this Sublease.
Sublessee shall not commit or suffer any act or omission that will violate any
of the provisions of the Master Lease. Sublessor shall exercise due diligence
in attempting to cause Lessor to perform its obligations under the Master Lease
for the benefit of Sublessee. If the Master Lease terminates, this Sublease
shall terminate and the parties shall be relieved of any
3
<PAGE>
further liability or obligation under this Sublease, provided however, that if
the Master Lease terminates as a result of a default or breach by Sublessor or
Sublessee under this Sublease and/or the Master Lease, then the defaulting party
shall be liable to the nondefaulting party for the damage suffered as a result
of such termination. Notwithstanding the foregoing, if the Master Lease gives
Sublessor any right to terminate the Master Lease in the event of the partial or
total damage, destruction, or condemnation of the Master Premises or the
building or project of which the Master Premises are a part, the execise of such
right by Sublessor shall not constitute a default or breach hereunder.
11. ATTORNEYS' FEES
If Sublessor, Sublessee, or Broker shall commence an action against the other
arising out of or in connection with this Sublease, the prevailing party shall
be entitled to recover its costs of suti and reasonable attorney's fees.
12. AGENCY DISCLOSURE.
Sublessor and Sublessee each warrant that they have dealt with no other real
estate broker in connection with this transaction except: CB COMMERCIAL REAL
ESTATE GROUP, INC., who represents Sublessor and Sublessee. In the event that
CB COMMERCIAL REAL ESTATE GROUP, INC. represents both Sublessor and Sublessee,
Sublessor and Sublessee hereby confirm that they were timely advised of the dual
representation and they consent to the same, and that they do not expect said
broker to disclose to either of them the confidential information of the other
party.
13. COMMISSION.
Upon execution of this Sublease, and consent thereto by Lessor (if such consent
is required under the terms of the Master Lease), Sublessor shall pay Broker a
real estate brokerage commission in accordance with Sublessor's contract with
Broker for the subleasing of the Premises, if any, and otherwise in the amount
of (Per separate agreement) Dollars ($_________) for services rendered in
effecting this Sublease. Broker is hereby made a third party beneficiary of
this Sublease for the purpose of enforcing its right to said commission.
14. NOTICES.
All notices and demands which may or are to be required or permitted to be given
by either party on the other hereunder shall be in writing. All notices and
demands by the Sublessor shall be sent by United States Mail, postage prepaid,
addressed to the Sublessee at the Premises, and to the address hereinbelow, or
to such other place as Sublessee may from time to time designate in a notice to
the Sublessor. All notices and demands by the Sublessee to Sublessor shall be
sent by United States Mail, postage prepaid, addressed to the Sublessor at the
address set forth herein, and to such other person or place as the Sublessor may
from time to time designate in a notice to the Sublessee.
To Sublessor: E.I. du Pont de Nemours and Company, Corporate Real Estate,
D12048A, 1007 Market Street, Wilmington, Delaware 19898.
4
<PAGE>
To Sublesse: Lintronic Industries, 2030 SE Main Street, Suite 1250, Irvine, CA
92714.
15. CONSENT BY LESSOR.
THIS SUBLEASE SHALL BE OF NO FORCE OR EFFECT UNLESS CONSENTED TO BY LESSOR
WITHIN 10 DAYS AFTER EXECUTION HEREOF, IF SUCH CONSENT IS REQUIRED UNDER THE
TERMS OF THE MASTER LEASE.
16. COMPLIANCE.
The parties hereto agree to comply with all applicable federal, state and local
laws, regulations, codes, ordinances and administrative orders having
jurisdiction over the parties, property or the subject matter of this Agreement,
including, but not limited to, the 1964 Civil Rights Act and all amendments
thereto, the Foreign Investment in Real Property Tax Act, the Comprehensive
Environmental Response Compensation and Liability Act, and The Americans With
Disabilities Act.
Sublessor: E.I. du Pont de Nemours and Sublessee: Lintronic Industres, a
Company, a Delaware California corporation
corporation
By:_________________________________ By: /s/ KRIS SHAH
--------------------------------
Title:______________________________ Title: President
----------------------------
Date:_______________________________ Date: Oct. 24, 1997
-------------
LESSOR'S AND LESSEE'S CONSENT TO SUBLEASE
The undersigned ("Lessor"), lessor under the Master Lease and the undersigned
Lessee hereby consents to the foregoing Sublease without waiver of any
restriction in the Master Lease concerning further assignment or subletting.
Lessor certifies that, as of the date of Lessor's execution hereof, Sublessor is
not in default or breach of any of the provisions of the Master Lease, and that
the Master Lease has not been amended or modified except as expressly set rorth
in the foregoing Sublease.
Lessor: Koll Tower Four Associates, Lessee: LG & E Energy Systems, Inc.
a California limited partnership a Kentucky corporation
By: __________________________ By: _______________________________
Title: __________________________ Title: ____________________________
5
<PAGE>
- --------------------------------------------------------------------------------
CONSULT YOUR ADVISORS - This document has been prepared for approval by your
attorney. No representation or recommendation is made by Broker as to the legal
sufficiency or tax consequences of this document or the transaction to which it
relates. These are questions for your attorney.
In any real estate transaction, it is recommended that you consult with a
professional, such as a civil engineer, industrial hygienist or other person,
with experience in evaluating the condition of the property, including the
possible presence of asbestos, hazardous materials and underground storage
tanks.
- --------------------------------------------------------------------------------
6
<PAGE>
EXHIBIT ONE
[Floorplan]
7
<PAGE>
ADDENDUM ONE TO THAT CERTAIN SUBLEASE DATED OCTOBER 20, 1997
BY AND BETWEEN E.I. DU PONT DE NEMOURS AND COMPANY ("DU PONT")
AND LINTRONIC INDUSTRIES ("LINTRONIC")
FOR THE PREMISES LOCATED AT
2030 MAIN STREET, SUITE 1250, IRVINE, CALIFORNIA
BASE RENT: Months Rate/Rentable S.F. Monthly Total
1-46 $1.70 Fully Serviced $20,250.40
TCNANT IMPROVEMCNTS: Landlord shall clean the premises and shampoo the carpet.
Otherwise, Tenant must accept the premises in its "as is"
condition. Any proposed modifications to the suite must
have the written approval of Sublessor and Lessor, and
shall be at Sublessee's expense.
PARKING: Du Pont shall make available a maximum of forty-eight (48)
in-common unreserved parking spaces to Lintronic at a
monthly charge of $30.00 per space per month. Lintronic
shall lease a minimum of thirty (30) of these parking
spaces for the sublease tern. Lintronic shall pay a one-
time charge of $ 10.00 for each parking card issued.
HAZARDOUS MATERIALS: Du Pont has no knowledge of any toxic or hazardous
materials within the proposed sublease premises. Du Pont
will not provide any warranties or guarantees or be
responsible for any remedies as a result of the presence
of any toxic or hazardous materials.
INDEMNITY: Lintronic shall indemnify and hold Du Pont safe and
harmless from and against any and all loss, costs,
damages, claims, actions or liability on account of the
death of or injury to any person or persons, or the damage
to or destruction of any property or pollution arising
from or growing out of Lintronic's use and occupancy of
the subleased premises, unless caused in whole or in part
by the willful misconduct or sole negligence of Du Pont
or Lessor.
OPERATING EXPENSES: Lintronic shall have a 1998 base year. Lintronic shall pay
for increases in operating expenses in excess of the 1998
base year, which shall be calculated to reflect 95%
occupancy and in accordance with Section 6.2 of the
Sublease document.
8
<PAGE>
EARLY OCCUPANCY: Lintrol1ic shall not commence to pay base rent or
operating expenses other than after-hours heating,
ventilation and air conditioning until November 18, 1997
regardless of Lintromic's actual occupancy date. Lintronic
will be responsible for parking charges during its early
occupancy. In the event Lintronic cannot occupy the
Premises prior to November 17, 1997, and the delay in
occupancy is through no fault of Lintronic, then rent
shall commence one (1) business day after all approvals
have been obtained from all parties to this Sublease.
FURNITURE: Du Pont shall allow Tenant to utilize the private office,
conference room, reception area and modular furniture
systems in place within the premises as of October 20,
1997 hereinafter referred to as Furniture. By signing
below, Lintronic acknowledges that it has inspected and
accepts the Furniture with respect to quantity and
quality. As a condition of utilizing said Furniture,
Lintronic and Du Pont shall comply with the following:
a. Lintronic shall deposit $30,000 as a non-refundable
deposit towards the purchase of the Furniture.
b. Lintronic's deposit will be retained by Du Pont until
the expiration of the sublease term and then applied
together with a rental credit of $595.60 per month ($.05
per rentable square foot per month) towards the purchase
price for a total rental credit of $27,397.60.
c. Du Pont will convey title to the Furniture to
Lintronic for $1.00 at the end of the sublease term. Title
shall be conveyed by a bill of sale prepared by Du Pont.
d. Any default of the sublease terms or conditions will
result in Lintronic's forfeiture of both the deposit and
rental credit paid by Lintronic.
RIGHT TO ASSIGN
SUBLEASE: Lintronic's rights to sublease or assign all or any
portion of the Premises to any other entity or person per
the terms of the Master Lease and subject to the approval
of Lessor, Lessee and Sublessor.
SIGNAGE: No exterior signage is available from Lessor. All directly
and suite signage shall be obtained through the Master
Lessor and shall be at Lintronic's cost.
9
<PAGE>
Sublessor: E.I. du Pont de Nemours and Sublessee: Lintronic Industries, a
Company, a Delaware California corporation
corporation
By:______________________________ By: /s/ KRIS SHAH
-------------------------------
Title: __________________________ Title: President
----------------------------
Date: __________________________ Date: Oct. 24, 1997
-------------
Lessor: Koll Tower Four Associates, Lessee: LG & E Energy Systems, Inc.
a California limited partnership a Kentucky corporation
By: _____________________________ By: _______________________________
Title: __________________________ Title: ____________________________
10
<PAGE>
Exhibit 10.15
INVENTORY AND WORKING CAPITAL
FINANCING AGREEMENT
This INVENTORY AND WORKING CAPITAL FINANCING AGREEMENT (as amended, supplemented
or otherwise modified from time to time, this "Agreement") amends and restates
that Agreement for Wholesale Financing dated August 9, 1989 (as amended from
time to time, the "Financing Agreement") and is hereby made this 30th day of
----
October, 1997, by and between IBM CREDIT CORPORATION with a place of business at
- -------
1500 RiverEdge Parkway, Atlanta, GA 30328, a Delaware corporation, ("IBM
Credit"), and PULSAR DATA SYSTEMS, INCORPORTATED, with a place of business at
4500 Forbes Boulevard, Lanham, MD 20706, a Delaware corporation, ("Customer").
WITNESSETH
WHEREAS, IBM Credit and Customer are parties to that certain Financing
Agreement pursuant to which IBM Credit finances Customer's acquisition of
inventory and equipment;
WHEREAS, in the course of Customer's operations, Customer intends to
purchase from Persons approved in writing by IBM Credit for the purposes of this
Agreement (the "Authorized Suppliers") computer hardware and software products
manufactured or distributed by or bearing any trademark or trade name of such
Authorized Suppliers (the "Products") (as of the date hereof the Authorized
Suppliers are as set forth on Attachment E hereto);
WHEREAS, Customer has requested that IBM Credit finance its purchase of
Products from such Authorized Suppliers and its working capital requirements,
and IBM Credit is willing to provide such financing to Customer subject to the
terms and conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereby agree that the Financing Agreement is hereby
amended and restated in its entirety as follows:
Section 1. DEFINITIONS; ATTACHMENTS
1.1 Special Definitions. The following terms shall have the following
respective meaning in this Agreement:
"A/R Advance": any loan or advance of funds made by IBM Credit to or on behalf
of Customer pursuant to Section 2.3 of this Agreement, including, as the context
may require, a WCO Advance, a PRO Advance and a Takeout Advance.
"A/R Advance Date": the Business Day on which IBM Credit makes an A/R Advance
under this Agreement.
"A/R Advance Term": shall be the collective or individual reference, as the
context may require, to a PRO Advance Term and a WCO Advance Term.
Page 3 of 45
<PAGE>
"A/R Finance Charges": as defined on Attachment A.
"Accounts": as defined in the U.C. C.
"Advance": any loan or other extension of credit by IBM Credit to or on behalf
of Customer pursuant to this Agreement including, without limitation, (i)
Product Advances and (ii) A/R Advances.
"Affiliate": with respect to the Customer, any Person meeting one of the
following: (i) at least 10% of such Person's equity is owned, directly or
indirectly, by Customer; (ii) at least 10% of Customer's equity is owned,
directly or indirectly, by such Person; or (iii) at least 10% of Customer's
equity and at least 10% of such Person's equity is owned, directly or
indirectly, by the same Person or Persons. All of Customer's officers,
directors, joint venturers, and partners shall also be deemed to be Affiliates
of Customer for purposes of this Agreement.
"Agreement": as defined in the caption.
"Auditors": a nationally recognized firm of independent certified public
accountants selected by Customer and satisfactory to IBM Credit.
"Available Credit": at any time, (1) the Maximum Advance Amount less (2) the
Outstanding Advances at such time.
"Average Daily Balance": the sum of the unpaid principal of Outstanding Product
Advances or Outstanding A/R Advances, as the case may be, as of each day during
a calendar month, divided by the number of days in the calendar month.
"Borrowing Base": as defined in Attachment A.
"Business Day": any day other than a Saturday, Sunday or other day on which
commercial banks in New York, New York are generally closed or on which IBM
Credit is closed.
"Closing Date": the date on which the conditions precedent to the effectiveness
of this Agreement set forth in Section 5.1 hereof are satisfied or waived in
writing by IBM Credit.
"Code": the Internal Revenue Code of 1986, as amended or any successor statute.
"Collateral": as defined in Section 4.1.
"Collateral Management Report": a report to be delivered by Customer to IBM
Credit from time to time, as provided herein, signed by the chief executive
officer or chief financial officer of Customer, substantially in the form and
detail of Attachment F hereto, detailing and certifying, among other items: a
summary of Customer's inventory on hand financed by IBM Credit and Customer's
Eligible Accounts, the amounts and aging of all of Customer's Accounts,
Customer's inventory on hand financed by IBM Credit by quantity, type, model,
Authorized Supplier's invoice price to Customer and the total of the line item
values for all inventory listed on the report, the amounts and aging of
Customer's accounts payable as
Page 4 of 45
<PAGE>
of a specified date, all of Customer's IBM Credit borrowing activity during a
specified period and the total amount of Customer's Borrowing Base as well as
Customer's Outstanding A/R Advances, Outstanding Product Advances, Available
Credit and any Shortfall Amount as of a specified date.
"Common Due Date": (1) the fifth day of a calendar month if the Product
Financing Period or A/R Advance Term, whichever is applicable, expires on the
first through tenth of such calendar month; (2) the fifteenth day of a calendar
month if the Product Financing Period or A/R Advance Term, whichever is
applicable, expires on the eleventh through twentieth of such calendar month;
and (3) the twenty-fifth day of a calendar month if the Product Financing Period
or A/R Advance Term, whichever is applicable, expires on the twenty-first
through the last day of such calendar month.
"Compliance Certificate": a certificate substantially in the form of
Attachment C.
"Credit Line": as defined in Section 2.1.
"Customer": as defined in the caption.
"Default": either (1) an Event of Default or (2) any event or condition which,
but for the requirement that notice be given or time lapse or both, would be an
Event of Default.
"Delinquency Fee Rate": as defined on Attachment A.
"Eligible Accounts": as defined in Section 3.1.
"Environmental Laws": all statutes, laws, judicial decisions, regulations,
ordinances, and other governmental restrictions relating to pollution, the
protection of the environment, occupational health and safety, or to emissions,
discharges or release of pollutants, contaminants, hazardous substances or
wastes into the environment.
"Environmental Liability": any claim, demand, obligation, cause of action,
allegation, order, violation, injury, judgment, penalty or fine, cost or
expense, resulting from the violation or alleged violation of any Environmental
Laws or the imposition of any Lien pursuant to any Environmental Laws.
"ERISA": the Employee Retirement Income Security Act of 1974, as amended, or any
successor statutes.
"Event of Default": as defined in Section 9.1.
"Financial Statements": the consolidated and consolidating balance sheets
(including, without limitation, securities such as stocks and investment bonds),
statements of operations, statements of cash flows and statements of changes in
shareholder's equity of Customer and its Subsidiaries for the period specified,
prepared in accordance with GAAP and Consistent with prior practices.
Page 5 of 45
<PAGE>
"Floor Plan Lender": any Person who now or hereinafter provides inventory
financing to Customer, provided that such Person executes an Intercreditor
Agreement (as defined in Section 5.1 of this Agreement) or a subordination
agreement with IBM Credit in form and substance satisfactory to IBM Credit.
"Free Financing Period": for each Product Advance, the period, if any, in which
IBM Credit does not charge Customer a financing charge. IBM Credit shall
calculate the Customer's Free Financing Period utilizing a methodology that is
consistent with the methodologies used for similarly situated customers of IBM
Credit. The Customer understands that IBM Credit may not offer or may cease to
offer a Free Financing Period for the Customer's purchases of Products. IBM
Credit will use its best efforts to timely inform Customer of a change in a Free
Financing Period made available by an Authorized Supplier, however IBM Credit
assumes no liability of any kind for any delay or failure on its part to provide
such information.
"Free Financing Period Exclusion Fee": as defined in Attachment A.
"GAAP": generally accepted accounting principles in the United States as in
effect from time to time.
"Governmental Authority": any nation or government, any state or other political
subdivision thereof, and any entity exercising executive, legislative, judicial,
regulatory or administrative functions of or pertaining to government, and any
corporation or other entity owned or controlled (through stock or capital
ownership or otherwise) by any of the foregoing.
"Hazardous Substances": all substances, wastes or materials, to the extent
subject to regulation as "hazardous substances" or "hazardous waste" under any
Environmental Laws.
"IBM Credit": as defined in the caption.
Indebtedness": with respect to any Person, (1) all obligations of such Person
for borrowed money or for the deferred purchase price of property or services
(other than trade liabilities incurred in the ordinary course of business and
payable in accordance with customary practices) or which is evidenced by a note,
bond, debenture or similar instrument, (2) all obligations of such Person under
capital leases (including obligations under any leases Customer may enter into,
now or in the future with IBM Credit), (3) all obligations of such Person in
respect of letters of credit, banker's acceptances or similar obligations issued
or created for the account of such Person, (4) liabilities arising under any
interest rate protection, future, option swap, cap or hedge agreement or
arrangement under which such Person is a party or beneficiary, (5) all
obligations under guaranties of such Person and (6) all liabilities secured by
any Lien on any property owned by such Person even though such Person has not
assumed or otherwise become liable for the payment thereof.
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"Investment": with respect to any Person (the "Investor"), (1) any investment by
the Investor in any other Person, whether by means of share purchase, capital
contribution, purchase or other acquisition of a partnership or joint venture
interest, loan, time deposit, demand deposit or otherwise, and (2) any guaranty
by the Investor of any Indebtedness or other obligation of any other Person.
"Lien(s)": any lien, claim, charge, pledge, security interest, deed of trust,
mortgage, other encumbrance or other arrangement having the practical effect of
the foregoing, including the interest of a vendor or lessor under any
conditional sale agreement, capital lease or other title retention agreement.
"Material Adverse Effect": a material adverse effect (1) on the business,
operations, results of operations, assets, or financial condition of the
Customer, (2) on the aggregate value of the Collateral or the aggregate amount
which IBM Credit would be likely to receive (after giving consideration to
reasonably likely delays in payment and reasonable costs of enforcement) in the
liquidation of such Collateral to recover the Obligations in full, or (3) on the
rights and remedies of IBM Credit under this Agreement.
"Maximum Advance Amount": at any time, the lesser of (1) the Credit Line and (2)
the Borrowing Base at such time.
"Obligations": all covenants, agreements, warranties, duties, representations,
loans, advances, interest (including interest accruing on or after the filing of
any petition in bankruptcy, or the commencement of any insolvency,
reorganization or like proceeding, relating to Customer, whether or not a claim
for post-filing or post-petition interest is allowed in such proceeding), fees,
reasonable expenses, indemnities, liabilities and Indebtedness of any kind and
nature whatsoever now or hereafter arising, owing, due or payable from Customer
to IBM Credit.
"Other Documents": all security agreements, mortgages, leases, instruments,
documents, guarantees, schedules of assignment, contracts and similar agreements
executed by Customer and delivered to IBM Credit, pursuant to this Agreement or
otherwise, and all amendments, supplements and other modifications to the
foregoing from time to time.
"Other Charges": as set forth in Attachment A.
"Outstanding Advances": at any time of determination, the sum of (1) the unpaid
principal amount of all Advances made by IBM Credit under this Agreement, and
(2) any finance charge, fee, expense or other amount related to Advances charged
to Customer's account with IBM Credit.
"Outstanding A/R Advances": at any time of determination, the sum of (1) the
unpaid principal amount of all A/R advances made by IBM Credit under this
Agreement; and (2) any finance charge, fee, expense or other amount related to
A/R Advances charged to Customer's account with IBM Credit.
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"Outstanding Product Advances": at any time of determination, the sum of (1) the
unpaid principal amount of all Product Advances made by IBM Credit under this
Agreement; and (2) any finance charge, fee, expense or other amount related to
Product Advances charged to Customer's account with IBM Credit.
"Permitted Indebtedness": any of the following:
(1) Indebtedness to IBM Credit;
(2) Indebtedness described in Section VII of Attachment B;
(3) Indebtedness to any Floor Plan Lender;
(4) Purchase Money Indebtedness;
(5) guaranties in favor of IBM Credit; and
(6) other Indebtedness consented to by IBM Credit in writing prior to incurring
such Indebtedness.
"Permitted Liens": any of the following:
(1) Liens which are the subject of an Intercreditor Agreement, in effect from
time to time between IBM Credit and any other secured creditor;
(2) Purchase Money Security Interests;
(3) Liens described in Section I of Attachment B;
(4) Liens of warehousemen, mechanics, materialmen, workers, repairmen, common
carriers, landlords and other similar Liens arising by operation of law or
otherwise, not waived in connection herewith, for amounts that are not yet due
and payable or being contested in good faith by appropriate proceedings promptly
instituted and diligently conducted if an adequate reserve or other appropriate
provisions shall have been made therefor as required to be in conformity with
GAAP and an adverse determination in such proceedings could not reasonably be
expected to have a Material Adverse Effect;
(5) attachment or judgement Liens individually or in the aggregate not in
excess of $250,000 (exclusive of (A) any amounts that are duly bonded to the
satisfaction of IBM Credit or (B) any amount fully covered by insurance as to
which the insurance company has acknowledged its obligation to pay such
judgement in full);
(6) easements, rights-of-way, restrictions and other similar encumbrances
incurred in the ordinary course of business which, in the aggregate, are not
substantial in amount and which do not materially detract from the value of the
property subject thereto or materially interfere with the ordinary conduct of
the business of Customer;
(7) extensions of renewals of the foregoing permitted Liens; provided that (A)
the aggregate amount of such extended or renewed Liens do not
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exceed the original principal amount of the Indebtedness for which it secures,
(B) such Liens do not extend to any property other than property already
previously subject to the Lien and (C) such extended or renewed Liens are on
terms and conditions no more restrictive than the terms and conditions of the
Liens being extended or renewed;
(8) Liens arising from deposits or pledges to secure bids, tenders, contracts,
leases, surety and appeal bonds and other obligations of like nature arising in
the ordinary course of the Customer's business;
(9) Liens for taxes, assessments or governmental charges not delinquent or
being contested, in good faith, by appropriate proceedings promptly instituted
and diligently conducted if an adequate reserve or other appropriate provisions
shall have been made therefor as required in order to be in conformity with GAAP
and an adverse determination in such proceedings could not reasonably be
expected to have a Material Adverse Effect;
(10) Liens arising out of deposits in connection with workers' compensation,
unemployment insurance or other social security or similar legislation;
(11) Liens arising pursuant to this Agreement; and
(12) other Liens consented to by IBM Credit in writing prior to incurring such
Lien.
"Person": any individual, association, firm, corporation partnership, trust,
unincorporated organization or other entity whatsoever.
"Policies": all policies of insurance required to be maintained by Customer
under this Agreement or any of the Other Documents.
"Prime Rate": as of the date of determination, the average of the rates of
interest announced by Citibank, N.A., Chase Manhattan Bank and Bank of America
National Trust & Savings Association (or any other bank which IBM Credit uses in
its normal course of business of determining Prime Rate) as their prime or base
rate, as of the last Business Day of the calendar month immediately preceding
the date of determination, whether or not such announced rates are the actual
rates charged by such banking institutions to their most creditworthy borrowers.
"PRO Advance": an A/R Advance, with a PRO Advance Term, made by IBM Credit to
itself on behalf of Customer to repay all or a portion of a Product Advance that
is due and payable.
"PRO Advance Term": for each PRO Advance, a period, in increments of ten days as
specified by Customer in the Request for A/R Advance with respect to such PRO
Advance, but in no event in excess of thirty days, commencing on the A/R Advance
Date for such PRO Advance.
"Product Advance": any advance of funds made or committed to be made by IBM
Credit for the account of Customer to an Authorized Supplier in respect of an
invoice delivered by such Authorized Supplier to IBM Credit describing Products
purchased by Customer, including any such
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advance made or committed to be made as of the date hereof pursuant to the
Financing Agreement.
"Product Financing Charge": as defined in Attachment A.
"Product Financing Period": for each Product Advance, a period of days equal to
that set forth in Attachment A from time to time, commencing on the invoice date
of such Product Advance.
"Purchase Money Indebtedness": any Indebtedness (including capital leases)
incurred to finance the acquisition of assets (other than assets manufactured or
distributed by or bearing any trademark or trade name of any Authorized
Supplier) to be used in the Customer's business not to exceed the lesser of (1)
the purchase price or acquisition cost of such asset and (2) the fair market
value of such asset.
"Purchase Money Security Interest": any security interest securing Purchase
Money Indebtedness, which security interest applies solely to the particular
asset acquired with the Purchase Money Indebtedness.
"Request for A/R Advance": as defined in Section 2.3.
"Requirement of Law": as to any Person, the articles of incorporation and by-
laws of such Person, and any law, treaty, rule or regulation or determination of
an arbitrator or a court or other governmental authority, in each case
applicable to or binding upon such Person or any of its property or to which
such Person or any of its property is subject.
"Shortfall Amount": as defined in Section 2.6.
"Shortfall Transaction Fee": as defined in Attachment A.
"Subsidiary": with respect to any Person, any corporation or other entity of
which securities or other ownership interests having ordinary voting power to
elect a majority of the board of directors or other Person performing similar
functions are at the time directly or indirectly owned by such Person.
"Takeout Advance": an A/R Advance made to existing creditors of Customer on
behalf of Customer, in an amount sufficient to discharge Customer's indebtedness
to such creditor.
"Termination Date": shall mean the first anniversary of the date of this
Agreement or such other date as IBM Credit and Customer may agree to from time
to time.
"Voting Stock": securities, the holders of which are ordinarily, in the absence
of contingencies, entitled to elect the corporate directors (or persons
performing similar functions).
"WCO Advance": an A/R Advance, with a WCO Advance Term.
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"WCO Advance Term": for each WCO Advance, a period of one hundred eighty (180)
days commencing on the A/R Advance Date for such WCO Advance.
1.2. Other Defined Terms. Terms not otherwise defined in this Agreement which
are defined in the Uniform Commercial Code as in effect in the State of New York
(the "U.C.C.") shall have the meanings assigned to them therein.
1.3. Attachments. All attachments, exhibits, schedules and other addenda
hereto, including, without limitation, Attachment A and Attachment B, are
specifically incorporated herein and made a part of this Agreement.
Section 2. CREDIT LINE/ FINANCE CHARGES/ OTHER CHARGES
2.1. Credit Line. Subject to the terms and conditions set forth in this
Agreement, on and after the Closing Date to but not including the date that is
the earlier of (x) the date on which this Agreement is terminated pursuant to
Section 10. and (y) the date on which IBM Credit terminates the Credit Line
pursuant to Section 9., IBM Credit agrees to extend to the Customer a credit
line ("Credit Line") in the amount set forth the Attachment A pursuant to which
IBM Credit will make to the Customer, from time to time, Advances in an
aggregate amount at any one time outstanding not to exceed the Maximum Advance
Amount. Notwithstanding any other term or provision of this Agreement, IBM
Credit may, at any time and from time to time, in its sole discretion (x)
temporarily increase the amount of the Credit Line above the amount set forth in
Attachment A and decrease the amount of the Credit Line back to the amount of
the Credit Line set forth in Attachment A, in each case upon written notice to
the Customer and (y) make Advances pursuant to this Agreement upon the request
of Customer in an aggregate amount at any one time outstanding in excess of the
Credit Line.
2.2. Product Advances. (A) Subject to the terms and conditions of this
Agreement, IBM Credit shall make Product Advances in connection with Customer's
purchase of Products from Authorized Suppliers (as defined under WITNESSETH).
Customer hereby authorizes and directs IBM Credit to pay the proceeds of Product
Advances directly to the applicable Authorized Supplier in respect of invoices
delivered to IBM Credit for such Products by such Authorized Supplier and
acknowledges that each such Product Advance constitutes a loan by IBM Credit to
Customer pursuant to this Agreement as if the Customer received the proceeds of
the Product Advance directly from IBM Credit.
(B) No finance charge shall accrue on any Product Advance during the Free
Financing Period, if any, applicable to such Product Advance. Customer shall
repay each Product Advance no later than the Common Due Date for such Product
Advance. Customer may, at its option, repay each Product Advance by requesting
IBM Credit to apply all or any part of the principal amount of an A/R Advance to
the Outstanding Product Advances. Customer's request for such application shall
be made in accordance with Section 2. When so requested and subject to the
terms and conditions of this Agreement, IBM Credit shall apply the amount so
requested to the amounts due in respect of the Outstanding Product Advances.
Nothing
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contained herein shall relieve Customer of its obligation to repay Product
Advances when due. Each Product Advance shall accrue a finance charge on the
Average Daily Balance thereof from and including the first (1st) day following
the end of the Free Financing Period, if any, for such Product Advance, or if no
such Free Financing Period shall be in effect, from and including the date of
invoice for such Product Advance, in each case, to and including the date such
Product Advance shall become due and payable in accordance with the terms of
this Agreement, at a per annum rate equal to the lesser of (a) the finance
charge set forth in Attachment A to this Agreement as the "Product Financing
Charge" and (b) the highest rate from time to time permitted by applicable law.
In addition, for any Product Advance with respect to which a Free Financing
Period shall not be in effect, Customer shall pay a Free Financing Period
Exclusion Fee. Such fee shall be due and payable on the Common Due Date for
such Product Advance. If it is determined that amounts received from Customer
were in excess of the highest rate permitted by law, then the amount
representing such excess shall be considered reductions to principal of
Advances.
(C) Customer acknowledges that IBM Credit does not warrant the Collateral.
Customer shall be obligated to pay IBM Credit in full even if the Collateral is
defective or fails to conform to the warranties extended by the Authorized
Supplier. The Obligations of Customer shall not be affected by any dispute
Customer may have with any manufacturer, distributor or Authorized Supplier.
Customer will not assert any claim or defense which it may have against any
manufacturer, distributor or Authorized Supplier against IBM Credit.
(D) Customer hereby authorizes IBM Credit to collect directly from any
Authorized Supplier any credits, rebates, bonuses or discounts owed by such
Authorized Supplier to Customer ("Supplier Credits"). Any Supplier Credits
received by IBM Credit may be applied by IBM Credit to the Outstanding Advances.
IBM Credit will use its best efforts to provide a schedule of Supplier Credits
to Customer weekly or upon Customer's reasonable demand. Any Supplier Credits
collected by IBM Credit shall in no way reduce Customer's debt to IBM Credit in
respect of the Outstanding Advances until such Supplier Credits are applied by
IBM Credit.
(E) IBM Credit may apply any payments and Supplier Credits received by
IBM Credit to reduce finance charges first and then to principal amounts of
Advances owed by Customer. IBM Credit may apply principal payments to the
oldest (earliest) invoices (and related Product Advances) first, but, in any
case, all principal payments will be applied in respect of the Outstanding
Product Advances made for Products which have been sold, lost, stolen,
destroyed, damaged or otherwise disposed of prior to any other application
thereof.
(F) Customer will indemnify and hold IBM Credit harmless from and against
any claims or demands asserted by any Person relating to or arising from the
Collateral for any reason whatsoever, including, without limitation, the
condition of the Collateral, any misrepresentation made about the Collateral by
any representative of
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Customer, or any act or failure to act by Customer except to the extent such
claims or demands are directly attributable to IBM Credit's gross negligence or
willful misconduct. Nothing contained in the foregoing shall impair any rights
or claims which the Customer may have against any manufacturer, distributor or
Authorized Supplier.
2.3. A/R Advances. (A) Whenever Customer shall desire IBM Credit to provide an
A/R Advance, Customer shall deliver to IBM Credit written notice of Customer's
request for such an Advance ("Request for A/R Advance"). For any requested A/R
Advance pursuant to which monies will be disbursed to Customer or any Person
other than IBM Credit, a Request for A/R Advance shall be delivered to IBM
Credit on or prior to 1:00 p.m. (eastern time) one Business Day prior to the
requested A/R Advance Date. The Request for A/R Advance shall specify (i) the
requested A/R Advance Date; (ii) the amount of the requested A/R Advance; (iii)
whether such A/R Advance is a WCO Advance or a PRO Advance; (iv) if applicable,
the PRO Advance Term for such A/R Advance; (v) for each PRO Advance, the month,
day and year of the Common Due Date, as set forth in Customer's applicable
billing statement from IBM Credit, for the Product Advance to which the PRO
Advance is to be applied; and (vi) if applicable, the amount of the requested
A/R Advance that should be applied to the Outstanding Product Advances (provided
that all PRO Advances shall be applied to the Outstanding Product Advances).
Customer may deliver a Request for A/R Advance via facsimile. Any Request for
A/R Advance delivered to IBM Credit shall be irrevocable. Notwithstanding any
other provision of this Agreement, Customer shall not (i) request more than one
PRO Advance in respect of any Product Advance; and (ii) request a PRO Advance
for any Common Due Date on which Customer will take a discount offered by IBM
Credit for invoice amounts paid in full within fifteen days of the invoice date
under IBM Credit's High Turnover Option ("HTO") Program.
(B) Subject to the terms and conditions of this Agreement, on the A/R
Advance Date specified in a Request for A/R Advance, IBM Credit shall make the
principal amount of each A/R Advance available to the Customer in immediately
available funds to an account maintained by Customer (or in the case of a
Takeout Advance, as directed by Customer). If IBM Credit is making an A/R
Advance hereunder on a day on which Customer is to repay all or any part of and
Outstanding Advance (or any other amount owing hereunder), IBM Credit shall
apply the proceeds of the A/R Advance to such repayment and only an amount equal
to the difference, if any, between the amount of the A/R Advance and the amount
being repaid shall be made available to Customer as provided in the immediately
preceding sentence.
(C) Each A/R Advance shall accrue a finance charge on the unpaid principal
amount thereof, from and including the date of each A/R Advance to and including
the date such A/R Advance is due and payable in accordance with the terms of
this Agreement at a per annum rate equal to the lesser of (a) the finance charge
set forth in Attachment A to this Agreement under the caption "A/R Finance
Charge" for such type of A/R Advance, or (b) the highest rate from time to time
permitted by applicable law. If it is determined that amounts received from the
Customer were in excess of such highest rate, then the amount
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representing such excess shall be considered reductions to principal of
Advances.
(D) Unless otherwise due and payable at an earlier date, the unpaid
principal amount of each A/R Advance, other than a Takeout Advance, shall be due
and payable on the applicable Common Due Date. Unless otherwise notified by
Customer in writing prior to the day the principal amount of any WCO Advance
becomes due and payable, the customer shall be deemed to have provided IBM
Credit with a Request for A/R Advance requesting a WCO Advance on the day such
principal amount is due and payable in an amount equal to the unpaid principal
amount of the WCO Advance so due. Subject to the terms and conditions of this
Agreement, the principal amount of such WCO Advance shall automatically renew
for an additional WCO Advance Term. Notwithstanding any other provision of this
Agreement, a Takeout Advance may only be requested on the Closing Date and such
Takeout Advance shall be limited to an amount sufficient to discharge the
indebtedness that is the subject of a Takeout Advance.
Unless otherwise agreed in writing, a Takeout Advance shall be due pursuant to
the Schedule of Repayments in Attachment D to this Agreement.
2.4. Finance and Other Charges. (A) Finance charges shall be calculated by
multiplying the applicable Delinquency Fee Rate, Product Financing Charge or A/R
Finance Charge provided for in this Agreement by Customer's applicable Average
Daily Balance. The Delinquency Fee Rate, the Product Financing Charge and the
various A/R Finance Charges provided for in this Agreement are each computed on
the basis of an actual day, 360 day year.
(B) The Customer hereby agrees to pay to IBM Credit the charges set forth
as "Other Charges" in Attachment A. The Customer also agrees to pay IBM Credit
additional charges for any returned items of payment received by IBM Credit.
The Customer hereby acknowledges that any such charges are not interest but that
such charges, if unpaid, will constitute part of the Outstanding Advances.
(C) The finance charges and Other Charges owed under this Agreement, and
any charges hereafter agreed to in writing by the parties, are payable monthly
on receipt of IBM Credit's bill or statement therefor or IBM Credit may, in its
sole discretion, add unpaid finance charges and Other Charges to the Customer's
outstanding Advances.
(D) If any amount owned under this Agreement, including, without
limitation, any Advance, is not paid when due (whether at maturity, by
acceleration or otherwise), the unpaid amount thereof will bear a late charge
from and including the day after such Advance was due and payable to and
including the date IBM Credit receives payment thereof, at a per annum rate
equal to the lesser of (a) the amount set forth in Attachment A to this
Agreement as the "Delinquency Fee Rate" and (b) the highest rate from time to
time permitted by applicable law. In addition, if any Shortfall Amount shall
not be paid when due pursuant to Section 2.6 hereof, Customer shall pay IBM
Credit a Shortfall Transaction Fee. If
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it is determined that amounts received from customer were in excess of such
highest rate, then the amount representing such excess shall be considered
reductions to principal of Advances.
2.5 Statements Regarding Customer's Account. IBM Credit will send statements of
each transaction hereunder as well as monthly billing statements to Customer
with respect to Advances and other charges due on Customer's account with IBM
Credit. Each statement of transaction and monthly billing statement shall be
deemed, absent manifest error, to be correct and shall constitute an account
stated with respect to each transaction or amount described therein unless
within seven (7) Business Days after such statement of transaction or billing
statement is received by Customer, Customer provides IBM Credit written notice
objecting that such amount or transaction is incorrectly described therein and
specifying the error(s), if any, contained therein. IBM Credit may at any time
adjust such statements of transaction or billing statements to comply with
applicable law and this Agreement.
2.6. Shortfall. If, on any date, the Outstanding Advances shall exceed the
Maximum Advance Amount (such excess, the "Shortfall Amount"), then the Customer
shall on such date prepay the Outstanding Advances in an amount equal to such
Shortfall amount.
2.7. Application of Payments. The Customer hereby agrees that all checks and
other instruments delivered to IBM Credit on account of Customer's Obligations
shall constitute conditional payment until such items are actually collected by
IBM Credit. The Customer waives the right to direct the application of any and
all payments at any time or times hereafter received by IBM Credit on account of
the Customer's Obligations. Customer agrees that IBM Credit shall have the
continuing exclusive right to apply and reapply any and all such payments to
Customer's Obligations in such manner as IBM Credit may deem advisable
notwithstanding any entry by IBM Credit upon any of its books and records.
2.8. Prepayment and Reborrowing By Customer. (A) Customer may at any time
prepay, without notice or penalty, in whole or in part amounts owed under this
Agreement. IBM Credit may apply payments made to it (whether by the Customer or
otherwise) to pay finance charges and other amounts owing under this Agreement
first and then to the principal amount owed by the Customer.
(B) Subject to the terms and conditions of this Agreement, any amount
prepaid or repaid to IBM Credit in respect to the Outstanding Advances may be
reborrowed by Customer in accordance with the provisions of this Agreement.
Section 3. CREDIT LINE ADDITIONAL PROVISIONS
3.1. Ineligible Accounts. IBM Credit and Customer agree that IBM Credit shall
have the sole right to determine eligibility of Accounts from an Account debtor
for purposes of determining the Borrowing Base; however, without limiting such
right, the following Accounts will be deemed to be ineligible for purposes of
determining the Borrowing Base;
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(A) Accounts created from the sale of goods and/or performance of services
(i) on non-standard terms or (ii) that allow for payment to be made more than
thirty (30) days from the date of such sale or performance or services or (iii)
to Nexus Unlimited, Inc.
(B) Accounts unpaid more than: (i) one hundred twenty (120) days from date
of invoice if the Account debtor is a United States government institution; or
(ii) ninety (90) days from date of invoice for all other Account debtors;
(C) Accounts payable by an Account debtor if fifty percent (50%) or more of
the aggregate outstanding balance of all such Accounts remain unpaid for more
than: (i) one hundred twenty (120) days from date of invoice if the Account
debtor is a United States government institution; or (ii) ninety (90) days from
date of invoice for all other Account debtors;
(D) Accounts payable by an Account debtor that is an Affiliate of Customer,
or an officer, employee, agent, guarantor, stockholder of Customer or an
Affiliate of Customer, or is related to or has common shareholders, officers or
directors with Customer;
(E) Accounts arising from consignment sales;
(F) Except for state, local and United States government institutions and
public educational institutions, Accounts with respect to which the payment by
the Account debtor is or may be conditional;
(G) Except for state, local and United States government institutions and
public educational institutions, Accounts with respect to which : (i) the
Account debtor is not a commercial entity, or (ii) the Account debtor is not a
resident of the United States;
(H) Accounts payable by any Account debtor to which Customer is or may
become liable for goods sold or services rendered by such Account debtor to
Customer;
(I) Accounts arising from the sale or lease of goods purchased for a
personal, family or household purpose;
(J) Accounts arising from the sale or other disposition of goods that have
been used for demonstration purposes or loaned or leased by the Customer to
another party;
(K) Accounts which are progress payment accounts or contra accounts;
(L) Accounts upon which IBM Credit does not have a valid, perfected, first
priority security interest;
(M) Accounts payable by an Account debtor that is or Customer knows will
become, subject to proceedings under United States Bankruptcy Law or other law
for the relief of debtors;
(N) Accounts that are not payable in US dollars;
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(O) Accounts payable by any Account debtor that is a remarketer of computer
hardware and software products and whose purchases of such products from
Customer have been financed by another person, other than IBM credit, who pays
the proceeds of such financing directly to Customer on behalf of such debtor
("Third Party Financer") unless (i) such Third Party Financer does not have a
separate financing relationship with Customer or (ii) such Third Party Financer
has a separate financing relationship with Customer and has waived its right to
set off its obligations to Customer;
(P) Accounts arising from the sale or lease of goods which are billed to
any Account debtor but have not yet been shipped by Customer;
(Q) Accounts with respect to which Customer has permitted or agreed to any
extension, compromise or settlement, or made any change or modification of any
kind or nature, including, but not limited to, any change or modification to the
terms relating thereto;
(R) Accounts that do not arise from undisputed bona fide transactions
completed in accordance with the terms and conditions contained in the invoices,
purchase orders and contracts relating thereto;
(S) Accounts that are discounted for the full payment term specified in
Customer's terms and conditions with its Account debtors, or for any longer
period of time.
(T) Accounts on cash on delivery (C.O.D.) Terms;
(U) Accounts arising from maintenance or service contracts that are billed
in advance of full performance of service;
(V) Accounts arising from bartered transactions;
(W) Accounts arising from incentive payments, rebates, discounts, credits,
and refunds from a supplier; and
(X) Upon thirty (30) days prior notice, any and all other Accounts that IBM
Credit deems, in its sole and absolute discretion, to be ineligible, provided
however, that no direct obligation of the government of the United States of
America shall be deemed ineligible pursuant to this subsection (X).
The aggregate of all Accounts that are not ineligible Accounts shall hereinafter
be referred to as "Eligible Accounts".
3.2 Reimbursement for Charges. Customer agrees to pay for all costs and
expenses of Customer's bank in respect to collection of checks and other items
of payment, all fees relating to the use and maintenance of the Lockbox and the
Special Account (each as defined in Section 3.3) and with respect to remittances
of proceeds of the Advances hereunder.
3.3 Lockbox and Special Account. Customer shall establish and maintain a
lockbox ("Lockbox") at the address set forth in Attachment A
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with the financial institution listed in Attachment A ("Bank") pursuant to an
agreement between the Customer and Bank in form and substance satisfactory to
IBM Credit. Customer shall also establish and maintain a deposit account which
shall contain only proceeds of Customer's Accounts ("Special Account") with such
Bank. Customer shall enter into and maintain a contingent blocked account
agreement with such Bank for the benefit of IBM Credit in form and substance
satisfactory to IBM Credit pursuant to which, among other things, such Bank
shall agree that, upon notice from IBM Credit, disbursements from the Special
Account shall be made only as IBM Credit shall direct.
3.4. Collections. Customer shall instruct all Account debtors to remit
payments directly to a Lockbox. In addition, Customer shall have such
instruction printed in conspicuous type on all invoices. Customer shall
instruct such Bank to deposit all remittances to such Bank's Lockbox into its
Special Account. Customer further agrees that it shall not deposit or permit
any deposits of funds other than remittances paid in respect of the Accounts
into the Special Account(s) or permit any commingling of funds with such
remittances in any Lockbox or Special Account. Without limiting the Customer's
foregoing obligations, if, at any time, Customer receives a remittance directly
from an Account debtor, then Customer shall make entries on its books and
records in a manner that shall reasonably identify such remittances and shall
keep a separate account on its record books of all remittances so received and
deposit the same into a Special Account. Until so deposited into the Special
Account, Customer shall keep all remittances received in respect of Accounts
separate and apart from Customer's other property so that they are capable of
identification as the proceeds of Accounts in which IBM Credit has a security
interest.
3.5. Application of Remittances and Credits. Customer shall apply all
remittances against the aggregate of Customer's outstanding Accounts no later
than the end of the Business Day on which such remittances are deposited into
the Special Account. Customer also agrees to apply each remittance against its
respective Account no later than three (3) Business Days from the date such
remittance is deposited into the Special Account. In addition, Customer shall
promptly apply any credits owing in respect to any Account when due.
3.6. Power of Attorney. Customer hereby irrevocably appoints IBM Credit, with
full power of substitution, as its true and lawful attorney-in-fact with full
power, in good faith and in compliance with commercially reasonable standards,
in the discretion of IBM Credit, to:
(A) sign the name of Customer on any document or instrument that IBM Credit
shall deem necessary or appropriate to perfect and maintain perfected the
security interest in the Collateral contemplated under this Agreement and the
Other Documents;
(B) endorse the name of Customer upon any of the items of payment of
proceeds and deposit the same in the account of IBM Credit for application to
the Obligation; and
upon the occurrence and during the continuance of an Event of Default, as
defined in Section 9.1 hereof, which is not waived by the IBM Credit;
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(C) demand payment, enforce payment and otherwise exercise all Customer's
rights and remedies with respect to the collection of any Accounts;
(D) settle, adjust, compromise, extend or renew any Accounts;
(E) settle, adjust or compromise any legal proceedings brought to collect
any Accounts;
(F) sell or assign any Accounts upon such terms, for such amounts and at
such time or times as IBM Credit may deem advisable;
(G) discharge and release any Accounts;
(H) prepare, file and sign Customer's name on any Proof of Claim in
Bankruptcy or similar document against any Account debtor;
(I) prepare, file and sign Customer's name on any notice of lien, claim of
mechanic's lien, assignment or satisfaction of lien or mechanic's lien, or
similar document in connection with any Accounts;
(J) endorse the name of Customer upon any chattel paper, document,
instrument, invoice, freight bill, bill of lading or similar document or
agreement relating to any Account or goods pertaining thereto;
(K) endorse the name of Customer upon any of the items of payment of
proceeds and deposit the same in the account of IBM Credit for application to
the Obligation;
(L) sign the name of Customer to requests for verification of Accounts
and notices thereof to Account debtors;
(M) sign the name of Customer on any document or instrument that IBM
Credit shall deem necessary or appropriate to enforce any and all remedies it
may have under this Agreement, at law or otherwise; and
(N) make, settle and adjust claims under the Policies with respect to
the Collateral and endorse Customer's name on any check, draft, instrument or
other item of payment of the proceeds of the Policies with respect to the
Collateral; and
(O) take control in any manner of any term of payment or proceeds and
for such purpose to notify the postal authorities to change the address for
delivery of mail addressed to Customer to such address as IBM Credit may
designate.
The power of attorney granted by this Section is for value and coupled with an
interest and is irrevocable so long as this Agreement is in effect or any
Obligations remain outstanding. Nothing done by IBM Credit pursuant to such
power of attorney will reduce any of Customer's Obligations other than
Customer's payment Obligations to the extent IBM Credit has received monies.
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Section 4. SECURITY -- COLLATERAL
4.1 Grant. To secure Customer's full and punctual payment and performance of
the Obligations (including obligations under leases Customer may enter into, now
or in the future, with IBM Credit) when due (whether at the stated maturity, by
acceleration or otherwise), Customer hereby grants IBM Credit a security
interest in all of Customer's right, title and interest in and to the following
property, whether now owned or hereafter acquired or existing and wherever
located:
(A) all inventory and equipment, and all parts thereof, attachments,
accessories and accessions thereto, products thereof and documents therefor;
(B) all accounts, contract rights, chattel paper, instruments, deposit
accounts, obligations of any kind owning to Customer, whether or not arising out
of or in connection with the sale or lease of goods or the rendering of services
an all books, invoices, documents and other records in any form evidencing or
relating to any of the foregoing;
(C) general intangibles;
(D) all rights now or hereafter existing in and to all mortgages, security
agreements, leases or other contracts securing or otherwise relating to any of
the foregoing; and
(E) all substitutions and replacements for all of the foregoing, all
proceeds of the foregoing and, to the extent not otherwise included, all
payments under insurance or any indemnity, warranty or guaranty, payable by
reason of loss or damage to or otherwise with respect to any of the foregoing.
All of the above assets shall be collectively defined herein as the
"Collateral."
Customer covenants and agrees with IBM Credit that: (a) the security constituted
to by this Agreement is in addition to any other security from time to time held
by IBM Credit and (b) the security hereby created is a continuing security
interest and will cover and secure the payment of all Obligations both present
and future of Customer to IBM Credit.
4.2 Further Assurances. Customer shall, from time to time upon the request of
IBM Credit, execute and deliver to IBM Credit, or cause to be executed and
delivered, at such time or times as IBM Credit may request such other and
further documents, certificates and instruments that IBM Credit may deem
necessary to perfect and maintain perfected IBM Credit's security interests in
the Collateral and in order to fully consummate all of the transactions
contemplated under this Agreement and the Other Documents. Customer shall make
appropriate entries on its books and records disclosing IBM Credit's security
interests in the Collateral.
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Section 5. CONDITIONS PRECEDENT
5.1. Conditions Precedent to the Effectiveness of this Agreement. The
effectiveness of this Agreement is subject to the receipt by IBM Credit of, or
waiver in writing by IBM Credit of compliance with, the following conditions
precedent:
(A) this Agreement executed and delivered by Customer and IBM Credit;
(B) (i) copies of the resolutions of the Board of Directors of Customer
certified by the secretary or assistant secretary of Customer authorizing the
execution, delivery and performance of this Agreement and each Other Document
executed and delivered in connection herewith, (ii) a certificate of the
secretary or an assistant secretary of Customer, in form and substance
satisfactory to IBM Credit, certifying the names and true signatures of the
officers of Customer authorized to sign this Agreement and the Other Documents
and (iii) copies of the articles of incorporation and by-laws of Customer
certified by the secretary or assistant secretary of Customer;
(C) certificates dated as of a recent date from the Secretary of State or
other appropriate authority evidencing the good standing of Customer in the
jurisdiction of its organization and in each other jurisdiction where the
ownership or lease of its property or the conduct of its business requires it to
qualify to do business;
(D) copies of all approvals and consents from any Person, in each case in
form and substance satisfactory to IBM Credit, which are required to enable
Customer to authorize, or required in connection with, (a) the execution,
delivery or performance of this Agreement and each of the Other Documents, and
(b) the legality, validity, binding effect or enforceability of this Agreement
and each of the Other Documents;
(E) a lockbox agreement executed by Customer and each Bank, in form and
substance satisfactory to IBM Credit;
(F) a contingent blocked account agreement executed by Customer and each
Bank in form and substances satisfactory to IBM Credit;
(G) intercreditor agreements ("Intercreditor Agreement"), in form and
substance satisfactory to IBM Credit, executed by each other secured creditor of
Customer as set forth in Attachment A;
(H) a favorable opinion of counsel for Customer in substantially the form
of Attachment H;
(I) CCC-1 financing statements for each jurisdiction reasonably requested
by IBM Credit executed by Customer and each guarantor whose guaranty to IBM
Credit is intended to be secured by a pledge of its assets;
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(J) the statements, certificates, documents, instruments, financing
statements, agreements and information set forth in Attachment A and Attachment
B; and
(K) all such other statements, certificates, documents, instruments,
financing statements, agreements and other information with respect to the
matters contemplated by this Agreement as IBM Credit shall have reasonably
requested.
5.2. Conditions Precedent to Each Advance. No Advance will be required to be
made or renewed by IBM Credit under this Agreement unless, on and as of the date
of such Advance, the following statements shall be true to the satisfaction of
IBM Credit;
(A) The representations and warranties contained in this Agreement or
in any document, instrument or agreement executed in connection herewith, are
true and correct in all material respects on and as of the date of such Advance
as though made on and as of such date;
(B) No event has occurred and is continuing or after giving effect
to such Advance or the application of the proceeds thereof would result in or
would constitute a Default;
(C) No event has occurred and is continuing which could reasonably be
expected to have a Material Adverse Effect;
(D) Both before and after giving effect to the making of such Advance,
no Shortfall Amount exists.
Except as Customer has otherwise disclosed to IBM Credit in writing prior to
each request, each request (or deemed request pursuant to Section 2.3 (D)) for
an Advance hereunder and the receipt (or deemed receipt) by the Customer of the
proceeds of any Advance hereunder shall be deemed to be a representation and
warranty by Customer that, as of and on the date of such Advance, the statements
set forth in (A) through (D) above are true statements. No such disclosures by
Customer to IBM Credit shall in any manner be deemed to satisfy the conditions
precedent to each Advance that are set forth in this Section 5.2.
Section 6. REPRESENTATIVES AND WARRANTIES
To induce IBM Credit to enter into this Agreement, Customer represents and
warrants to IBM Credit as follows;
6.1. Organization and Qualifications. Customer and each of its Subsidiaries
(i) is a corporation duly organized, validly existing and in good standing under
the laws of the jurisdiction of its incorporation, (ii) has the power and
authority to own its properties and assets and to transact the businesses in
which it presently is engaged and (iii) is duly qualified and is authorized to
do business and is in good standing in each jurisdiction where it presently is
engaged in business and is required to be so qualified.
6.2. Rights in Collateral; Priority of Liens. Customer and each of its
Subsidiaries owns the property granted by it respectively as Collateral
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to IBM Credit, free and clear of any and all Liens in favor of third parties
except for the Liens otherwise permitted pursuant to Section 8.1. The Liens
granted by the Customer and each of its Subsidiaries pursuant to this Agreement,
the Guaranties and the Other Documents in the Collateral constitute the valid
and enforceable first, prior and perfected Liens on the Collateral, except to
the extent any Liens that are prior to IBM Credit's Liens are (i) the subject of
an Intercreditor Agreement or (ii) Purchase Money Security Interests in product
of a brand that is not financed by IBM Credit.
6.3. No Conflicts. The execution, delivery and performance by Customer of this
Agreement and each of the Other Documents (i) are within its corporate power;
(ii) are duly authorized by all necessary corporate action; (iii) are not in
contravention in any respect of any Requirement of Law or any indenture,
contract, lease, agreement, instrument or other commitment to which it is a
party or by which it or any of its properties are bound; (iv) do not require the
consent, registration or approval of any Governmental Authority or any other
Person (except such as have been duly obtained, made or given, and are in full
force and effect); and (v) will not, except as contemplated herein, result in
the imposition of any Liens upon any of its properties.
6.4. Enforceability. This Agreement and all of the other documents executed and
delivered by the Customer in connection herewith are the legal, valid and
binding obligations of Customer,and are enforceable in accordance with their
terms, except as such enforceability may be limited by the effect of any
applicable bankruptcy, insolvency, reorganization, fraudulent conveyance,
moratorium or similar laws affecting creditors' rights generally or the general
equitable principles relating thereto.
6.5. Locations of Offices, Records and Inventory. The address of the principal
place of business and chief executive office of Customer is as set forth on
Attachment B or on any notice provided by Customer to IBM Credit pursuant to
Section 7.7(C) of this Agreement. The books and records of Customer, and all of
its chattel paper (other than the chattel paper delivered to IBM Credit pursuant
to Section 7.14(E)) and records of Accounts, are maintained exclusively at such
locations.
There is no jurisdiction in which Customer has any assets, equipment or
inventory (except for vehicles and inventory in transit for processing) other
than those jurisdictions identified on Attachment B or on any notice provided by
Customer to IBM Credit pursuant to Section 7.7(C) of this Agreement. Attachment
B, as amended from time to time by any notice provided by Customer to IBM Credit
in accordance with Section 7.7(C) of this Agreement, also contains a complete
list of the legal names and addresses of each warehouse at which the Customer's
inventory is stored. None of the receipts received by Customer from any
warehouseman states that the goods covered thereby are to be delivered to bearer
or to the order of a named person or to a named person and such named person's
assigns.
6.6. Fictitious Business Names. Customer has not used any corporate or
fictitious name during the five (5) years preceding the date of this Agreement,
other than those listed on Attachment B.
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6.7. Organization. All of the outstanding capital stock of Customer has been
validly issued, is fully paid and nonassessable.
6.8. No Judgments or Litigation. Except as set forth on Attachment B, no
judgments, orders, writs or decrees are outstanding against Customer nor is
there now pending or, to the best of Customer's knowledge after due inquiry,
threatened, any litigation, contested claim, investigation, arbitration, or
governmental proceeding by or against Customer.
6.9. No Defaults. The Customer is not in default under any term of any
indenture, contract, lease, agreement, instrument or other commitment to which
it is a party or by which it, or any of its properties are bound. Customer has
no knowledge of any dispute regarding any such indenture, contract, lease,
agreement, instrument or other commitment. No Default or Event of Default has
occurred and is continuing.
6.10. Labor Matters. Except as set forth on any notice provided by Customer to
IBM Credit pursuant to Section 7.1(G) of this Agreement, the Customer is not a
party to any labor dispute. There are no strikes or walkouts or labor
controversies pending or threatened against the Customer which could reasonably
be expected to have a Material Adverse Effect.
6.11. Compliance with Law. Customer has not violated or failed to comply with
any Requirement of Law or any requirement of any self regulatory organization.
6.12. ERISA. Each "employee benefit plan", "employee pension benefit plan",
"defined benefit plan", or "multi-employer benefit plan", which Customer has
established, maintained, or to which it is required to contribute (collectively,
the "Plans") is in compliance with all applicable provisions of ERISA and the
Code and the rules and regulations thereunder as well as the Plan's terms and
conditions. There have been no "prohibited transactions" and no "reportable
event" has occurred within the last 60 months with respect to any Plan. Customer
has no "multi-employer benefit plan".
As used in this Agreement the terms "employee benefit plan", "employee pension
benefit plan", "defined benefit plan", and "multi-employer benefit plan" have
the respective meanings assigned to them in Section 3 of ERISA and any
applicable rules and regulations thereunder. The Customer has not incurred any
"accumulated funding deficiency" within the meaning of ERISA or incurred any
liability to the Pension Benefit Guaranty Corporation (the "PBGC") in connection
with a Plan (other than for premiums due in the ordinary course).
6.13. Compliance with Environmental Laws. Except as otherwise disclosed in
Attachment B:
(A) The Customer has obtained all government approvals required with
respect to the operation of their businesses under any Environmental Law.
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(B) (i) the Customer has not generated, transported or disposed of any
Hazardous Substances; (ii) the Customer is not currently generating,
transporting or disposing of any Hazardous Substances; (iii) the Customer has no
knowledge that (a) any of its real property (whether owned, leased, or otherwise
directly or indirectly controlled) has been used for the disposal of or has been
contaminated by any Hazardous Substances, or (b) any of its business operations
have contaminated lands or waters of others with any Hazardous Substances; (iv)
the Customer and its respective assets are not subject to any Environmental
Liability and, to the best of the Customer's knowledge, any threatened
Environmental Liability; (v) the Customer has not received any notice of or
otherwise learned of any governmental investigation evaluating whether any
remedial action is necessary to respond to a release or threatened release of
any Hazardous Substances for which the Customer may be liable; (vi) the Customer
is not in violation of any Environmental Law; (vii) there are no proceedings or
investigations pending against Customer with respect to any violation or alleged
violation of any Environmental Law; provided however, that the parties
acknowledge that any generation, transportation, use, storage and disposal of
certain such Hazardous Substances in Customer's or its Subsidiaries' business
shall be excluded from representations (i) and (ii) above, provided, further,
that Customer is at all times generating, transporting, utilizing, storing and
disposing such Hazardous Substances in accordance with all applicable
Environmental Laws and in a manner designed to minimize the risk of any spill,
contamination, release or discharge of Hazardous Substances other than as
authorized by Environmental Laws.
6.14. Intellectual Property. Customer possesses such assets, licenses, patents,
patent applications, copyrights, service marks, trademarks, trade names and
trade secrets and all rights and other property relating thereto or arising
therefrom ("Intellectual Property") as are necessary or advisable to continue to
conduct its present and proposed business activities.
6.15. Licenses and Permits. Customer has obtained and holds in full force and
effect all franchises, licenses, leases, permits, certificates, authorizations,
qualifications, easements, rights of way and other rights and approvals which
are necessary for the operation of its businesses as presently conducted.
Customer is not in violation of the terms of any such franchise, license, lease,
permit, certificate, authorization, qualification, easement, right of way, right
or approval.
6.16. Investment Company. The Customer is not (i) an investment company or a
company controlled by an investment company within the meaning of the Investment
Company Act of 1940, as amended, (ii) a holding company or a subsidiary of a
holding company, or an Affiliate of a holding company or of a subsidiary of a
holding company, within the meaning of the Public Utility Holding Company Act of
1935, as amended, or (iii) subject to any other law which purports to regulate
or restrict its ability to borrow money or to consummate the transactions
contemplated by this Agreement or the Other Documents or to perform its
obligations hereunder or thereunder.
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6.17. Taxes and Tax Returns. Customer has timely filed all federal, state,
and local tax returns and other reports which it is required by law to file, and
has either duly paid all taxes, fees and other governmental charges indicated to
be due on the basis of such reports and returns or pursuant to any assessment
received by the Customer, or made provision for the payment thereof in
accordance with GAAP. The charges and reserves on the books of the Customer in
respect of taxes or other governmental charges are in accordance with GAAP. No
tax liens have been filed against Customer or any of its property.
6.18. Status of Accounts. Each Account is based on an actual and bona fide
sale and delivery of goods or rendition of services to customers, made by
Customer, in the ordinary course of its business; the goods and inventory being
sold and the Accounts created are its exclusive property and are not and shall
not be subject to any Lien, consignment arrangement, encumbrance, security
interest or financing statement whatsoever (other than Permitted Liens). The
Customer's customers have accepted goods or services and owe and are obligated
to pay the full amounts stated in the invoices according to their terms. There
are no proceedings or actions known to Customer which are pending or threatened
against any Material Account Debtor (as defined in Section 7.14(B) of this
Agreement) of any of the Accounts which could reasonably be expected to result
in a Material Adverse Effect on the debtor's ability to pay the full amounts due
to Customer.
6.19. Affiliate/Subsidiary Transactions. Customer is not a party to or bound
by any agreement or arrangement (whether oral or written) to which any Affiliate
or Subsidiary of the Customer is a party except (i) in the ordinary course of
and pursuant to the reasonable requirements of Customer's business and (ii) upon
fair and reasonable terms no less favorable to Customer than it could obtain in
a comparable arm's-length transaction with an unaffiliated Person.
6.20. Accuracy and Completeness of Information. All factual information
furnished by or on behalf of the Customer to IBM Credit or the Auditors for
purposes of or in connection with this Agreement or any Other Document, or any
transaction contemplated hereby or thereby is or will be true and accurate in
all material respects on the date as of which such information is dated or
certified and not incomplete by omitting to state any material fact necessary to
make such information not misleading at such time.
6.21. Recording Taxes. All recording taxes, recording fees, filing fees and
other charges payable in connection with the filing and recording of this
Agreement have either been paid in full by Customer or arrangements for the
payment of such amounts by Customer have been made to the satisfaction of IBM
Credit.
6.22. Indebtedness. Customer (i) has no Indebtedness, other than Permitted
Indebtedness; and (ii) has not guaranteed the obligations of any other Person
(except as permitted by Section 8.4).
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Section 7. AFFIRMATIVE COVENANTS
Until termination of this Agreement and the indefeasible payment and
satisfaction of all Obligations:
7.1. Financial and Other Information. Customer shall cause to be furnished to
IBM Credit the following information within the following time periods:
(A) as soon as available and in any event within ninety (90) days after the
end of each fiscal year of Customer (i) audited Financial Statements (provided
that, to the extent not otherwise audited by the Auditors, the consolidating
Financial Statements may be unaudited) as of the close of the fiscal year and
for the fiscal year, together with a comparison to the Financial Statements for
the prior year, in each case accompanied by (a) either an opinion of the
Auditors without a "going concern" or like qualification or exception, or
qualification arising out of the scope of the audit or, if so qualified, an
opinion which shall be in scope and substance reasonably satisfactory to the IBM
Credit, (b) such Auditors' "Management Letter" to Customer, if any, (c) a
written statement signed by the Auditors stating that in the course of the
regular audit of the business of Customer and its consolidated Subsidiaries,
which audit was conducted by the Auditors in accordance with generally accepted
auditing standards, the Auditors have not obtained any knowledge of the
existence of any Default under any provision of this Agreement, or, if such
Auditors shall have obtained from such examination any such knowledge, they
shall disclose in such written statement the existence of the Default and the
nature thereof, it being understood that such Auditors shall have no liability,
directly or indirectly, to anyone for failure to obtain knowledge of any such
Default; (ii) if composed, a narrative discussion of the consolidated financial
condition and results of operations and the consolidated liquidity and capital
resources of Customer and its Subsidiaries for such fiscal year prepared by the
chief executive officer or chief financial officer of Customer; and (iii) a
Compliance Certificate along with a schedule, in substantially the form of
Attachment C hereto, of the calculations used in determining, as of the end of
such fiscal year, whether Customer is in compliance with the financial covenants
set forth in Attachment A;
(B) as soon as available and in any event within forty-five (45) days after
the end of each fiscal quarter of Customer (i) Financial Statements as of the
end of such period and for the fiscal year to date, together with a comparison
to the Financial Statements for the same periods in the prior year, all in
reasonable detail and duly certified (subject to normal year-end audit
adjustments and except for the absence of footnotes) by the chief executive
officer or chief financial officer of Customer as having been prepared in
accordance dance with GAAP; (ii) if composed, a narrative discussion of the
consolidated financial condition and results of operations and the consolidated
liquidity and capital resources of Customer and its Subsidiaries
for such period and for the fiscal year to date prepared by the chief executive
officer or chief financial officer of Customer; and (iii) a Compliance
Certificate along with a schedule, in substantially the form of Attachment C
hereto, of the calculations used in determining, as of the end of such fiscal
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quarter, whether Customer is in compliance with the financial covenants set
forth in Attachment A;
(C) as soon as available and in any event within thirty (30) days after the
end of each fiscal month of Customer (i) Financial Statements as of the end of
such period and for the fiscal year to date, together with a comparison to the
Financial Statements for the same periods in the prior year, all in reasonable
detail and duly certified (subject to normal year-end audit adjustments and
except for the absence of footnotes) by the chief executive officer or chief
financial officer of Customer as having been prepared in accordance with GAAP;
(ii) if composed, a narrative discussion of the consolidated financial condition
and results of operations and the consolidated liquidity and capital resources
of Customer and its Subsidiaries for such period and for the fiscal year to date
prepared by the chief executive officer or chief financial officer of Customer;
and (iii) a Compliance Certificate along with a schedule, in substantially the
form of Attachment C hereto, of the calculations used in determining, as of the
end of such fiscal month, whether Customer is in compliance with the financial
covenants set forth in Attachment A;
(D) as soon as available and in any event within forty-five (45) days after
the end of each fiscal year of Customer (i) projected Financial Statements,
broken down by quarter, for the current and following fiscal year; and (ii) if
composed, a narrative discussion relating to such projected Financial
Statements;
(E) as soon as available and in any event within thirty (30) days after the
end of each fiscal quarter of Customer, revised projected Financial Statements,
broken down by quarter, for (i) the current fiscal year from the beginning of
such fiscal quarter to the fiscal year end and (ii) the following fiscal year;
(F) promptly after Customer obtains knowledge of (i) the occurrence of a
Default or Event of Default, or (ii) the existence of any condition or event
which would result in the Customer's failure to satisfy the conditions precedent
to Advances set forth in Section 5, a certificate of the chief executive officer
or chief financial officer of Customer specifying the nature thereof and the
Customer's proposed response thereto, each in reasonable detail;
(G) promptly after Customer obtains knowledge of (i) any proceeding(s) being
instituted or threatened to be instituted by or against Customer in any federal,
state, local or foreign court or before any commission or other regulatory body
(federal, state, local or foreign), or (ii) any actual or prospective change,
development or event which, in any such case, has had or could reasonably be
expected to have a Material Adverse Effect, a certificate of the chief executive
officer or chief financial officer of Customer specifying the nature thereof and
the Customer's proposed response thereto, each in reasonable detail;
(H) promptly after Customer obtains knowledge that (i) any orders, judgments
or decrees which in the aggregate exceed Fifty Thousand Dollars ($50,000.00)
shall have been entered against Customer or any of its properties or assets, or
(ii) it has received any notification of a
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material violation of any Requirement of Law from any Governmental Authority, a
certificate of the chief executive officer or chief financial officer of
Customer specifying the nature thereof and the Customer's proposed response
thereto, each in reasonable detail;
(I) promptly after Customer learns of any material labor dispute to which
Customer may become a party, any strikes or walkouts relating to any of its
plants or other facilities, and the expiration of any labor contract to which
Customer is a party or by which it is bound, a certificate of the chief
executive officer or chief financial officer of Customer specifying the nature
thereof and the Customer's proposed response thereto, each in reasonable detail;
(J) within five (5) Business Days after request by IBM Credit, any
written certificates, schedules and reports together with all supporting
documents as IBM Credit may reasonably request relating to the Collateral or
the Customer's or any guarantor's business affairs and financial condition;
(K) by the fifth (5th) Business Day of each month, or as otherwise agreed
in writing, a Collateral Management Report as of a date no earlier than the
last day of the immediately preceding month;
(L) along with the Financial Statements set forth in Section 7.1(A) and
(B); the name, address and phone number of each of its Account debtors' primary
contacts for each Account on the Accounts aging report contained in its most
recent Collateral Management Report; and
(M) within five (5) days after the same are sent, copies of all financial
statements and reports which Customer sends to its stockholders, and within five
(5) days after the same are filed, copies of all financial statements and
reports which Customer may make to, or file with, the Securities and Exchange
Commission or any successor or analogous governmental authority.
Each certificate, schedule and report provided by Customer to IBM Credit shall
be signed by an authorized officer of Customer, and which signature shall be
deemed a representation and warranty that the information contained in such
certificate, schedule or report is true and accurate in all material respects on
the date as of which such certificate, schedule or report is made and does not
omit to state a material fact necessary in order to make the statements
contained therein not misleading at such time. Each financial statement
delivered pursuant to this Section 7.1 shall be prepared in accordance with GAAP
applied consistently throughout the periods reflected therein and with prior
periods.
7.2 Location of Collateral. The inventory, equipment and other tangible
Collateral shall be kept or sold at the addresses as set forth on Attachment B
or on any notice provided by Customer to IBM Credit in accordance with Section
7.7(C). Such locations shall be certified quarterly to IBM Credit substantially
in the form of Attachment G.
7.3 Changes in Customer. Customer shall provide thirty (30) days prior
written notice to IBM Credit of any change in Customer's name,
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chief executive office and principal place of business, organization, form of
ownership or corporate structure; provided, however, that Customer's compliance
with this covenant shall not relieve it of any of its other obligations or any
other provisions under this Agreement or any Other Document limiting actions of
the type described in this Section.
7.4. Corporate Existence. Customer shall (A) maintain its corporate existence,
maintain in full force and effect all licenses, bonds, franchises, leases and
qualifications to do business, and all contracts and other rights necessary to
the profitable conduct of its business, (B) continue in, and limit its
operations to, the same general lines of business as presently conducted by it
unless otherwise permitted in writing by IBM Credit and (C) comply with all
Requirements of Law.
7.5. ERISA. Customer shall promptly notify IBM Credit in writing after it
learns of the occurrence of any event which would constitute a "reportable
event" under ERISA or any regulations thereunder with respect to any Plan, or
that the PBGC (as defined in Section 6.12 of this Agreement) has instituted or
will institute proceedings to terminate any Plan. Notwithstanding the foregoing,
the Customer shall have no obligation to notify IBM Credit as to any "reportable
event" as to which the 30-day notice requirement of Section 4043(b) has been
waived by the PBGC, until such time as such Customer is required to notify the
PBGC of such reportable event.
Such notification shall include a certificate of the chief financial officer of
Customer setting forth details as to such "reportable event" and the action
which Customer proposes to take with respect thereto, together with a copy of
any notice of such "reportable event" which may be required to be filed with the
PBGC, or any notice delivered by the PBGC evidencing its intent to institute
such proceedings. Upon request of IBM Credit, Customer shall furnish, or cause
the plan administrator to furnish, to IBM Credit the most recently filed annual
report for each Plan.
7.6. Environmental Matters. (A) Customer and any other Person under Customer's
control (including, without limitation, agents and Affiliates under such
control) shall (i) comply with all Environmental Laws in all material respects,
and (ii) undertake to use commercially reasonable efforts to prevent any
unlawful release of any Hazardous Substance by Customer or such Person into,
upon, over or under any property now or hereinafter owned, leased or otherwise
controlled (directly or indirectly) by Customer.
(B) Customer shall notify IBM Credit, promptly upon its obtaining knowledge
of (i) any non-routine proceeding or investigation by any Governmental Authority
with respect to the presence of any Hazardous Substances on or in any property
now or hereinafter owned, leased or otherwise controlled (directly or
indirectly) by Customer, (ii) all claims made or threatened by any Person or
Governmental Authority against Customer or any of Customer's assets relating to
any loss or injury resulting from any Hazardous Substance, (iii) Customer's
discovery of evidence of unlawful disposal of or environmental contamination by
any Hazardous Substance on any property now or
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hereinafter owned, leased or otherwise controlled (directly or indirectly) by
Customer, and (iv) any occurrence or condition which could constitute a
violation of any Environmental Law.
7.7. Collateral Books and Records/Collateral Audit. (A) Customer agrees to
maintain books and records pertaining to the Collateral in such detail, form and
scope as is consistent with good business practice, and agrees that such books
and records will reflect IBM Credit's interest in the Accounts.
(B) Customer agrees that IBM Credit or its agents may enter upon the
premises of Customer at any time and from time to time, during normal business
hours and upon reasonable notice under the circumstances, and at any time at all
on and after the occurrence and during the continuance of an Event of Default
for the purposes of (i) inspecting the Collateral, (ii) inspecting and/or
copying (at Customer's expense) any and all records pertaining thereto, (iii)
discussing the affairs, finances and business of Customer with any officers,
employees and directors of Customer or with the Auditors and (iv) verifying
Eligible Accounts and other Collateral. Customer also agrees to provide IBM
Credit with such reasonable information and documentation that IBM Credit deems
necessary to conduct the foregoing activities, including, without limitation,
reasonably requested samplings of purchase orders, invoices and evidences of
delivery or other performance.
Upon the occurrence and during the continuance of an Event of Default which has
not been waived by IBM Credit in writing, IBM Credit may conduct any of the
foregoing activities in any manner that IBM Credit deems reasonably necessary.
(C) Customer shall give IBM Credit thirty (30) days prior written notice of
any change in the location of any Collateral, the location of its books and
records or in the location of its chief executive office or place of business
from the locations specified in Attachment B, and will execute in advance of
such change and cause to be filed and/or delivered to IBM Credit any financing
statements, landlord or other lien waivers, or other documents reasonably
required by IBM Credit, all in form and substance reasonably satisfactory to IBM
Credit.
(D) Customer agrees to advise IBM Credit promptly, in reasonably sufficient
detail, of any substantial change relating to the type, quantity or quality of
the Collateral, or any event which could reasonably be expected to have a
Material Adverse Effect on the value of the Collateral or on the security
interests granted to IBM Credit therein.
7.8. Insurance Casualty Loss. (A) Customer agrees to maintain with financially
sound and reputable insurance companies: (i) insurance on its properties, (ii)
public liability insurance against claims for personal injury or death as a
result of the use of any products sold by it and (iii) insurance coverage
against other business risks, in each case, in at least such amounts and against
at least such risks as are usually and prudently insured against in the same
general geographical area by companies of established repute engaged in the same
or a similar business. Customer will furnish to IBM Credit, upon its written
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request, the insurance certificates with respect to such insurance. In addition,
all Policies so maintained are to name IBM Credit as an additional insured as
its interest may appear.
(B) Without limiting the generality of the foregoing, Customer
shall keep and maintain, at its sole expense, the Collateral insured for an
amount not less than the amount set forth on Attachment A from time to time
opposite the caption "Collateral Insurance Amount" against all loss or damage
under an "all risk" Policy with companies mutually acceptable to IBM Credit and
Customer, with a lender's loss payable endorsement or mortgagee clause in form
and substance reasonably satisfactory to IBM Credit designating that any loss
payable thereunder with respect to such Collateral shall be payable to IBM
Credit. Upon receipt of proceeds by IBM Credit the same shall be applied on
account of the Customer's Outstanding Product Advances first, then to the
Outstanding A/R Advances. Customer agrees to instruct each insurer to give IBM
Credit, by endorsement upon the Policy issued by it or by independent
instruments furnished to IBM Credit at least ten (10) days written notice before
any Policy shall be altered or cancelled and that no act or default of Customer
or any other person shall affect the right of IBM Credit to recover under the
Policies. Customer hereby agrees to direct all insurers under the Policies to
pay all proceeds with respect to the Collateral directly to IBM Credit.
If Customer fails to pay any cost, charges or premiums, or if Customer fails
to insure the Collateral, IBM Credit may pay such costs, charges or premiums.
Any amounts paid by IBM Credit hereunder shall be considered an additional debt
owed by Customer to IBM Credit and are due and payable immediately upon receipt
of an invoice by IBM Credit.
7.9. Taxes. Customer agrees to pay, when due, all taxes lawfully levied
or assessed against Customer or any of the Collateral before any penalty or
interest accrues thereon unless such taxes are being contested, in good faith,
by appropriate proceedings promptly instituted and diligently conducted and an
adequate reserve or other appropriate provisions have been made therefore as
required in order to be in conformity with GAAP and an adverse determination in
such proceedings could not reasonably be expected to have a Material Adverse
Effect.
7.10. Compliance With Laws. Customer agrees to comply with all Requirements of
Law applicable to the Collateral or any part thereof, or to the operation of its
business.
7.11. Fiscal Year. Customer agrees to maintain its fiscal year as a year
ending December 31 unless Customer provides IBM Credit at least thirty (30)
days prior written notice of any change thereof.
7.12. Intellectual Property. Customer shall do and cause to be done all things
necessary to preserve and keep in full force and effect all registrations of
Intellectual Property which the failure to do or cause to be done could
reasonably be expected to have a Material Adverse Effect.
7.13. Maintenance of Property. Customer shall maintain all of its material
properties (business and otherwise) in good condition and
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repair (ordinary wear and tear excepted) and pay and discharge all costs of
repair and maintenance thereof and all rental and mortgage payments and related
charges pertaining thereto and not commit or permit any waste with respect to
any of its material properties.
7.14. Collateral. Customer shall:
(A) from time to time upon request of IBM Credit, provide IBM Credit with
access to copies of all invoices, delivery evidences and other such documents
relating to each Account;
(B) promptly upon Customer's obtaining knowledge thereof, furnish to and
inform IBM Credit of all material adverse information relating to the financial
condition of any Account debtor, other than the government of the United States
of America, whose outstanding obligations to Customer constitute five percent
(5%) or more of the Accounts at such time (a "Material Account Debtor");
(C) promptly upon Customer's learning thereof, notify IBM Credit in
writing of any event which would cause any obligation of a Material Account
Debtor to become an Ineligible Account;
(D) keep all goods rejected or returned by any Account debtor and all
goods repossessed or stopped in transit by Customer from any Account debtor
segregated from other property of Customer, holding the same in trust for IBM
Credit until Customer applies a credit against such Account debtor's outstanding
obligations to Customer or sells such goods in the ordinary course of business,
whichever occurs earlier;
(E) stamp or otherwise mark chattel paper and instruments now owned or
hereafter acquired by it in conspicuous type to show that the same are subject
to IBM Credit's security interest and immediately thereafter deliver or cause
such chattel paper and instruments to be delivered to IBM Credit or any agent
designated by IBM Credit with appropriate endorsements and assignments to vest
title and possession in IBM Credit;
(F) use commercially reasonable efforts to collect all Accounts owed;
(G) promptly notify IBM Credit of any loss, theft or destruction of or
damage to any of the Collateral. Customer shall diligently file and prosecute
its claim for any award or payment in connection with any such loss, theft,
destruction of or damage to Collateral. Customer shall, upon demand of IBM
Credit, make, execute and deliver any assignments and other instruments
sufficient for the purpose of assigning any such award or payment to IBM Credit,
free of any encumbrances of any kind whatsoever;
(H) consistent with reasonable commercial practice, observe and perform
all matters and things necessary or expedient to be observed or performed under
or by virtue of any lease, license, concession or franchise forming part of the
Collateral in order to preserve, protect and maintain all the rights of IBM
Credit thereunder;
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(I) consistent with reasonable commercial practice, maintain, use and
operate the Collateral and carry on and conduct its business in a proper and
efficient manner so as to preserve and protect the Collateral and the earnings,
incomes, rents, issues and profits thereof; and
(J) at any time and from time to time, upon the request of IBM Credit, and
at the sole expense of Customer, Customer will promptly and duly execute and
deliver such further instruments and documents and take such further action as
IBM Credit may reasonably request for the purpose of obtaining or preserving the
full benefits of this Agreement and of the rights and powers herein granted,
including, without limitation, the filing of any financing or continuation
statements under the Uniform Commercial Code in effect in any jurisdiction with
respect to the security interests granted herein and the payment of any and all
recording taxes and filing fees in connection therewith. IBM Credit shall use
its best efforts to provide prior written notice to Customer if the filing of
any such instrument, document or financing statement is expected to result in
any expense to Customer.
7.15. Subsidiaries. IBM Credit may require that any Subsidiaries of Customer
become parties to this Agreement or any other agreement executed in connection
with this Agreement as guarantors or sureties. Customer will comply, and cause
all Subsidiaries of Customer to comply with Sections 7 and 8 of this Agreement,
as if such sections applied directly to such Subsidiaries.
7.16. Financial Covenants; Additional Covenants. Customer acknowledges and
agrees that Customer shall at all times maintain the financial covenants and
other covenants set forth in the attachments, exhibits and other addenda
incorporated in this Agreement.
Section 8. NEGATIVE COVENANTS
Until termination of this Agreement and the indefeasible payment and
satisfaction of all Obligations due hereunder:
8.1. Liens. The Customer will not, directly or indirectly mortgage, assign,
pledge, transfer, create, incur, assume, permit to exist or otherwise permit any
Lien or judgment to exist on any of its property, assets, revenues or goods,
whether real, personal or mixed, whether now owned or hereafter acquired, except
for Permitted Liens.
8.2. Disposition of Assets. The Customer will not, directly or indirectly, sell,
lease, assign, transfer or otherwise dispose of any assets other than (i) sales
of inventory in the ordinary course of business and short term rental of
inventory as demonstrations in amounts not material to Customer, and (ii)
voluntary dispositions of individual assets and obsolete or worn out property in
the ordinary course of business, provided, that the aggregate book value of all
such assets and property so sold or disposed of under this section 8.2 (ii) in
any fiscal year shall not exceed 5% of the consolidated assets of the Customer
as of the beginning of such fiscal year.
8.3. Corporate Changes. The Customer will not, without the prior written consent
of IBM Credit, directly or indirectly, merge,
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consolidate, liquidate, dissolve or enter into or engage in any operation or
activity materially different from that presently being conducted by Customer.
8.4. Guaranties. The Customer will not, without the prior written consent of IBM
Credit, directly or indirectly, assume, guaranty, endorse, or otherwise become
liable upon the obligations of any other Person, except (i) by the endorsement
of negotiable instruments for deposit or collection or similar transactions in
the ordinary course of business, (ii) by the giving of indemnities in connection
with the sale of inventory or other asset dispositions permitted hereunder, and
(iii) for guaranties in favor of IBM Credit.
8.5. Restricted Payments. The Customer will not, directly or indirectly: (i)
declare or pay any dividend (other than dividends payable solely in common stock
of Customer) on, or make any payment on account of, or set apart assets for a
sinking or other analogous fund for, the purchase, redemption, defeasance,
retirement or other acquisition of, any shares of any class of capital stock of
Customer or any warrants, options or rights to purchase any such capital stock,
whether now or hereafter outstanding, or make any other distribution in respect
thereof, either directly or indirectly, whether in cash or property or in
obligations of Customer; or (ii) make any optional payment or prepayment on or
redemption (including, without limitation, by making payments to a sinking or
analogous fund) or repurchase of any Indebtedness (other than the Obligations).
8.6. Investments. The Customer will not, directly or indirectly, make, maintain
or acquire any Investment in any Person other than:
(A) interest bearing deposit accounts (including certificates of deposit)
which are insured by the Federal Deposit Insurance Corporation ("FDIC") or a
similar federal insurance program;
(B) direct obligations of the government of the United States of America or
any agency or instrumentality thereof or obligations guaranteed as to principal
and interest by the United States of America or any agency thereof;
(C) stock or obligations issued to Customer in settlement of claims against
others by reason of an event of bankruptcy or a composition or the readjustment
of debt or a reorganization of any debtor of Customer; and
(D) commercial paper of any corporation organized under the laws of any
State of the United States or any bank organized or licensed to conduct a
banking business under the laws of the United States or any State thereof having
the short-term highest rating then given by Moody's Investor's Services, Inc. or
Standard & Poor's Corporation.
8.7. Affiliate/Subsidiary Transactions. The Customer will not, directly or
indirectly, enter into any transaction with any Affiliate or Subsidiary,
including, without limitation, the purchase, sale or exchange of property or the
rendering of any service to any Affiliate or Subsidiary of Customer except in
the ordinary course of business and
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pursuant to the reasonable requirements of Customer's business upon fair and
reasonable terms no less favorable to customer than could be obtained in a
comparable arm's-length transaction with an unaffiliated Person.
8.8. ERISA. The Customer will not (A) terminate any Plan so as to incur a
material liability to the PBGC (as defined in Section 6.12 of this Agreement),
(B) permit any "prohibited transaction" involving any Plan (other than a "multi-
employer benefit plan") which would subject the Customer to a material tax or
penalty on "prohibited transactions" under the Code or ERISA, (C) fail to pay to
any Plan any contribution which they are obligated to pay under the terms of
such Plan, if such failure would result in a material "accumulated funding
deficiency", whether or not waived, (D) allow or suffer to exist any occurrence
and during the continuance of a "reportable event" or any other event or
condition, which presents a material risk of termination by the PBGC (as defined
in Section 6.12 of this Agreement) of any Plan (other than a "multi-employer
benefit plan"), or (E) fail to notify IBM Credit as required in Section 7.5. As
used in this Agreement, the terms "accumulated funding deficiency" and
"reportable event" shall have the respective meanings assigned to them in ERISA,
and the term "prohibited transaction" shall have the meaning assigned to it in
the Code and ERISA. For purposes of this Section 8.8, the terms material
liability, tax, penalty, accumulated funding deficiency and risk of termination
shall mean a liability, tax, penalty, accumulated funding deficiency or risk of
termination which could reasonably be expected to have a Material Adverse
Effect.
8.9. Additional Negative Pledges. Customer will not, directly or indirectly,
create or otherwise cause or permit to exist or become effective any contractual
obligation which may restrict or inhibit IBM Credit's rights or ability to sell
or otherwise dispose of the Collateral or any part thereof after the occurrence
and during the continuance of an Event of Default.
8.10. Storage of Collateral with Bailees and Warehousemen. Collateral shall not
be stored with a bailee, warehouseman or similar party without the prior written
consent of IBM Credit unless Customer will, concurrently with the delivery of
such Collateral to such party, cause such party to issue and deliver to IBM
Credit, warehouse receipts in the name of IBM Credit evidencing the storage of
such Collateral.
8.11. Use of Proceeds. The Customer shall not use any portion of the proceeds
of any Advances other than to acquire Products from Authorized Suppliers and for
its general working capital requirements.
8.12. Accounts. The Customer shall not permit or agree to any extension,
compromise or settlement or make any change or modification of any kind or
nature with respect to any Account, including any of the terms relating
thereto, which would affect IBM Credit's ability to collect payment on any
Account in whole or in part, except for such extensions, compromises or
settlements made by Customer in the ordinary course of its business, provided,
however, that the aggregate amount of such extensions, compromises or
settlements does not exceed five percent (5%) of the Customer's Accounts at any
time.
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8.13. Indebtedness. The Customer will not create, incur, assume or permit to
exist any Indebtedness, except for Permitted Indebtedness.
8.14. Loans. The Customer will not make any loans, advances, contributions or
payments of money or goods to any Subsidiary, Affiliate or parent corporation or
to any officer, director or stockholder of Customer or of any such corporation
(except for compensation for personal services actually rendered), except for
transactions expressly authorized in this Agreement.
Section 9. DEFAULT
9.1. Event of Default. Any one or more of the following events shall
constitute an Event of Default by the Customer under this Agreement and the
Other Documents:
(A) The failure to make timely payment of the Obligations or any part
thereof when due and payable;
(B) Customer fails to comply with or observe any term, covenant or
agreement contained in this Agreement or any Other Documents;
(C) Any representation, warranty, statement, report or certificate made or
delivered by or on behalf of Customer or any of its officers, employees or
agents or by or on behalf of any guarantor to IBM Credit was false in any
material respect at the time when made or deemed made;
(D) The occurrence of any event or circumstance which could reasonably be
expected to have a Material Adverse Effect;
(E) Customer, any Subsidiary or any guarantor shall generally not pay its
debts as such debts become due, become or otherwise declare itself insolvent,
file a voluntary petition for bankruptcy protection, have filed against it any
involuntary bankruptcy petition, cease to do business as a going concern, make
any assignment for the benefit of creditors, or a custodian, receiver, trustee,
liquidator, administrator or person with similar powers shall be appointed for
Customer, any Subsidiary or any guarantor or any of its respective properties or
have any of respective properties seized or attached, or take any action to
authorize, or for the purpose of effectuating, the foregoing, provided, however,
that Customer, any Subsidiary or any guarantor shall have a period of forty-five
(45) days within which to discharge any involuntary petition for bankruptcy or
similar proceeding;
(F) The use of any funds borrowed from IBM Credit under this Agreement for
any purpose other than as provided in this Agreement;
(G) The entry of any judgment against Customer or any guarantor in an
amount in excess of $250,000 and such judgment is not satisfied, dismissed,
stayed or superseded by bond within thirty (30) days after the day of entry
thereof (and in the event of a stay or supersedeas bond, such judgment is not
discharged within thirty (30) days after termination of any such stay or bond)
or such judgment is not fully
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covered by insurance as to which the insurance company has acknowledged its
obligation to pay such judgment in full;
(H) The dissolution of liquidation of Customer or any guarantor, or
Customer or any guarantor or its directors or stockholders shall take any action
to dissolve or liquidate Customer or any guarantor;
(I) Any "going concern" or like qualification or exception, or
qualification arising out of the scope of an audit by an Auditor of his opinion
relative to any Financial Statement delivered to IBM Credit under this
Agreement;
(J) There issues a warrant of distress for any rent or taxes with respect
to any premises occupied by Customer in or upon which the Collateral, or any
part thereof, may at any time be situated and such warrant shall continue for a
period of ten (10) Business Days from the date such warrant is issued;
(K) Customer suspends business;
(L) The occurrence of any event or condition which enables the holder of
any Indebtedness arising in one or more related or unrelated transactions to
accelerate the maturity thereof or the failure of Customer to pay when due any
such Indebtedness;
(M) Any guaranty of any or all of the Customer's Obligations executed by
any guarantor in favor of IBM Credit, shall at any time for any reason cease to
be in full force and effect or shall be declared to be null and void by a court
of competent jurisdiction or the validity or enforceability thereof shall be
contested or denied by any such guarantor, or any such guarantor shall deny that
it has any further liability or obligation thereunder or any such guarantor
shall fail to comply with or observe any of the terms, provisions or conditions
contained in any such guaranty;
(N) Customer is in default under the material terms of any of the Other
Documents after the expiration of any applicable cure periods;
(O) There shall occur a "reportable event" with respect to any Plan, or
any Plan shall be subject to termination proceedings (whether voluntary or
involuntary) and there shall result from such "reportable event" or termination
proceedings a liability of Customer to the PBGC which in the reasonable opinion
of IBM Credit will have a Material Adverse Effect;
(P) Any "person" (as defined in Section 13(d)(3) of the Securities
Exchange Act of 1924, as amended) acquires a beneficial interest in 50% or more
of the Voting Stock of Customer.
9.2. Acceleration. Upon the occurrence and during the continuance of an Event
of Default which has not been waived in writing by IBM Credit, IBM Credit may,
in it sole discretion, take any or all of the following actions, without
prejudice to any other rights it may have at law or under this Agreement to
enforce its claims against the Customer: (a) declare its Obligations to be
immediately due and payable (except with
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respect to any Event of Default set forth in Section 9.1(E) hereof, in which
case all Obligations shall automatically become immediately due and payable
without the necessity of any notice or other demand) without presentment,
demand, protest or any other action or obligation of IBM Credit; and
(b) immediately terminate the Credit Line hereunder.
9.3. Remedies. (A) Upon the occurrence and during the continuance of any
Event of Default which has not been waived in writing by IBM Credit, IBM Credit
may exercise all rights and remedies of a secured party under the U.C.C. Without
limiting the generality of the foregoing, IBM Credit may: (i) remove from any
premises where same may be located any and all documents, instruments, files and
records (including the copying of any computer records), and any receptacles or
cabinets containing same, relating to the Accounts, or IBM Credit may use (at
the expense of the Customer) such of the supplies or space of the Customer at
Customer's place of business or otherwise, as may be necessary to properly
administer and control the Accounts or the handling of collections and
realizations thereon; (ii) bring suit, in the name of the Customer or IBM Credit
and generally shall have all other rights respecting said Accounts, including
without limitation the right to accelerate or extend the time of payment,
settle, compromise, release in whole or in part any amounts owing on any
Accounts and issue credit in the name of the Customer or IBM Credit;
(iii) sell, assign and deliver the Accounts and any returned, reclaimed or
repossessed merchandise, with or without advertisement, at public or private
sale, for cash, on credit or otherwise, at IBM Credit's sole option and
discretion, and IBM Credit may bid or become a purchaser at any such sale; and
(iv) foreclose the security interests created pursuant to this Agreement by any
available judicial procedure, or to take possession of any or all of the
Collateral without judicial process and to enter any premises where any
Collateral may be located for the purpose of taking possession of or removing
the same.
(B) Upon the occurrence and during the continuance of any Event of Default
which has not been waived in writing by IBM Credit, IBM Credit shall have the
right to sell, lease, or otherwise dispose of all or any part of the Collateral,
whether in its then condition or after further preparation or processing, in the
name of Customer or IBM Credit, or in the name of such other party as IBM Credit
may designate, either at public or private sale or at any broker's board, in
lots or in bulk, for cash or for credit, with or without warranties or
representations, and upon such other terms and conditions as IBM Credit in its
sole discretion may deem advisable, and IBM Credit shall have the right to
purchase at any such sale. If IBM Credit, in its sole discretion determines that
any of the Collateral requires rebuilding, repairing, maintenance or
preparation, IBM Credit shall have the right, at its option, to do such of the
aforesaid as it deems necessary for the purpose of putting such Collateral in
such salable form as IBM Credit shall deem appropriate. The Customer hereby
agrees that any disposition by IBM Credit of any Collateral pursuant to and in
accordance with the terms of a repurchase agreement between IBM Credit and the
manufacturer or any supplier (including any Authorized Supplier) of such
Collateral
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constitutes a commercially reasonable sale. The Customer agrees, at the request
of IBM Credit, to assemble the Collateral and to make it available to IBM Credit
at places which IBM Credit shall select, whether at the premises of the Customer
or elsewhere, and to make available to IBM Credit the premises and facilities of
the Customer for the purpose of IBM Credit's taking possession of, removing or
putting such Collateral in salable form. If notice of intended disposition of
any Collateral is required by law, it is agreed that ten (10) Business Days
notice shall constitute reasonable notification.
(C) Unless expressly prohibited by the licensor thereof, if any, IBM
Credit is hereby granted, upon the occurrence and during the continuance of any
Event of Default which has not been waived in writing by IBM Credit, an
irrevocable, non-exclusive license to use, assign, license or sublicense all
computer software programs, data bases, processes and materials used by the
Customer in its businesses or in connection with any of the Collateral.
(D) The net cash proceeds resulting from IBM Credit's exercise of any
of the foregoing rights (after deducting all charges, costs and expenses,
including reasonable attorneys' fees) shall be applied by IBM Credit to the
payment of Customer's Obligations, whether due or to become due, in such order
as IBM Credit may in it sole discretion elect. Customer shall remain liable to
IBM Credit for any deficiencies, and IBM Credit in turn agrees to remit to
Customer or its successors or assigns, any surplus resulting therefrom.
(E) The enumeration of the foregoing rights is not intended to be
exhaustive and the exercise of any right shall not preclude the exercise of any
other rights, all of which shall be cumulative.
9.4. Waiver. If IBM Credit seeks to take possession of any of the Collateral
by any court process Customer hereby irrevocably waives to the extent permitted
by applicable law any bonds, surety and security relating thereto required by
any statute, court rule or otherwise as an incident to such possession and any
demand for possession of the Collateral prior to the commencement of any suit or
action to recover possession thereof. In addition, Customer waives to the
extent permitted by applicable law all rights of set-off it may have against IBM
Credit. Customer further waives to the extent permitted by applicable law
presentment, demand and protest, and notices of non-payment, non-performance,
any right of contribution, dishonor, and any other demands, and notices required
by law.
Section 10. MISCELLANEOUS
10.1. Term; Termination. (A) This Agreement shall remain in force until the
earlier of (i) the Termination Date, (ii) the date specified in a written notice
by the Customer that they intend to terminate this Agreement which date shall be
no less than ninety (90) days following the receipt by IBM Credit of such
written notice, and (iii) termination by IBM Credit after the occurrence and
during the continuance of any Event of Default. Upon the date that this
Agreement is terminated, all of Customer's Obligations shall be immediately due
and payable in their entirety, even if they are not yet due under their terms.
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(B) Until the indefeasible payment in full of all of Customer's
Obligations, no termination of this Agreement or any of the Other Documents
shall in any way affect or impair (i) Customer's Obligations to IBM Credit
including, without limitation, any transaction or event occurring prior to and
after such termination, or (ii) IBM Credit's rights hereunder, including,
without limitation IBM Credit's security interest in the Collateral. On and
after a Termination Date, IBM Credit may, but shall not be obligated to, upon
request of Customer, continue to provide Advances hereunder.
10.2. Indemnification. The Customer hereby agrees to indemnify and hold
harmless IBM Credit and each of its officers, directors, agents and assigns
(collectively, the "Indemnified Persons") against all losses, claims, damages,
liabilities or other expenses (including reasonable attorneys' fees and court
costs now or hereinafter arising from the enforcement of this Agreement, the
"Losses") to which any of them may become subject insofar as such Losses arise
out of or are based upon any event, circumstance or condition (a) occurring or
existing on or before the date of this Agreement relating to any financing
arrangements IBM Credit may from time to time have with (i) Customer, (ii) any
Person that shall be acquired by Customer or (iii) any Person that Customer may
acquire all or substantially all of the assets of, or (b) directly or
indirectly, relating to the execution, delivery or performance of this Agreement
or the consummation of the transactions contemplated hereby or thereby or to any
of the Collateral or to any act or omission of the Customer in connection
therewith. Notwithstanding the foregoing, the Customer shall not be obligated to
indemnify IBM Credit for any Losses incurred by IBM Credit which are a result of
IBM Credit's gross negligence or willful misconduct. The indemnity provided
herein shall survive the termination of this Agreement.
10.3. Additional Obligations. IBM Credit, without waiving or releasing any
Obligation or Default of the Customer, may perform any Obligations of the
Customer that the Customer shall fail or refuse to perform and IBM Credit may,
at any time or times hereafter, but shall be under no obligation so to do, pay,
acquire or accept any assignment of any security interest, lien, encumbrance or
claim against the Collateral asserted by any person. All sums paid by IBM
Credit in performing in satisfaction or on account of the foregoing and any
expenses, including reasonable attorney's fees, court costs, and other charges
relating thereto, shall be a part of the Obligations, payable on demand and
secured by the Collateral.
10.4. LIMITATION OF LIABILITY. NEITHER IBM CREDIT NOR ANY OTHER INDEMNIFIED
PERSON SHALL HAVE ANY LIABILITY WITH RESPECT TO ANY SPECIAL, INDIRECT OR
CONSEQUENTIAL DAMAGES SUFFERED BY CUSTOMER IN CONNECTION WITH THIS AGREEMENT,
ANY OTHER AGREEMENT OR ANY CLAIMS IN ANY MANNER RELATED THERETO. NOR SHALL IBM
CREDIT OR ANY OTHER INDEMNIFIED PERSON HAVE ANY LIABILITY TO CUSTOMER OR ANY
OTHER PERSON FOR ANY ACTION TAKEN OR OMITTED TO BE TAKEN BY IT OR THEM
HEREUNDER, EXCEPT FOR ITS OR THEIR OWN GROSS NEGLIGENCE OR WILLFUL MISCONDUCT.
10.5 Alteration Waiver. This Agreement and the Other Documents may not be
altered or amended except by an agreement in writing signed by
Page 41 of 45
<PAGE>
the Customer and by IBM Credit. No delay or omission of IBM Credit to exercise
any right or remedy hereunder, whether before or after the occurrence of any
Event of Default, shall impair any such right or remedy or shall operate as a
wavier thereof or as a waiver of any such Event of Default. In the event that
IBM Credit at any time or from time to time dispenses with any one or more of
the requirements specified in this Agreement or any of the Other Documents, such
dispensation may be revoked by IBM Credit at any time and shall not be deemed to
constitute a waiver of any such requirement subsequent thereto. IBM Credit's
failure at any time or times to require strict compliance and performance by the
Customer of any undertakings, agreements, covenants, warranties and
representations of this Agreement or any Other Document shall not waive, affect
or diminish any right of IBM Credit thereafter to demand strict compliance and
performance thereof. Any waiver by IBM Credit of any Default by the Customer
under this Agreement or any of the Other Documents shall not waive or affect any
other Default by the Customer under this Agreement or any of the Other
Documents, whether such Default is prior or subsequent to such other Default and
whether of the same or a different type. None of the undertakings, agreements,
warranties, covenants, and representations of the Customer contained in this
Agreement or the Other Documents and no Default by the Customer shall be deemed
waived by IBM Credit unless such waiver is in writing signed by an authorized
representative of IBM Credit.
10.6. Severability. If any provision of this Agreement or the Other Documents
or the application thereof to any Person or circumstance is held invalid or
unenforceable, the remainder of this Agreement and the Other Documents and the
application of such provision to other Persons or circumstances will not be
affected thereby, the provisions of this Agreement and the Other Documents being
severable in any such instance.
10.7. One Loan. All Advances heretofore, now or at any time or times hereafter
made by IBM Credit to the Customer under this Agreement or the Other Documents
shall constitute one loan secured by IBM Credit's security interests in the
Collateral and by all other security interests, liens and encumbrances
heretofore, now or from time to time hereafter granted by the Customer to IBM
Credit or any assignor of IBM Credit.
10.8. Additional Collateral. All monies, reserves and proceeds received or
collected by IBM Credit with respect to Accounts and other property of the
Customer in possession of IBM Credit at any time or times hereafter are hereby
pledged by Customer to IBM Credit as security for the payment of Customer's
Obligations and shall be applied promptly by IBM Credit on account of the
Customer's Obligations; provided, however, IBM Credit may release to the
Customer such portions of such monies, reserves and proceeds as IBM Credit may
from time to time determine, in its sole discretion.
10.9. No Merger or Novations. A) Notwithstanding anything contained in any
document to the contrary, it is understood and agreed by the Customer and IBM
Credit that the claims of IBM Credit arising hereunder and existing as of the
date hereof constitute continuing claims arising out of the Obligations of
Customer under the Financing Agreement and any Other Document. Customer
acknowledges and agrees that such Obligations
Page 42 of 45
<PAGE>
outstanding as of the date hereof have not been satisfied or discharged and
that this Agreement is not intended to effect a novation of the Customer's
Obligations under the Financing Agreement or any Other Document.
(B) Neither the obtaining of any judgment nor the exercise of any power
of seizure or sale shall operate to extinguish the Obligations of the Customer
to IBM Credit secured by this Agreement and shall not operate as a merger of any
covenant in this Agreement, and the acceptance of any payment or alternate
security shall not constitute or create a novation and the obtaining of a
judgment or judgments under a covenant herein contained shall not operate as a
merger of that covenant or affect IBM Credit's rights under this Agreement.
10.10. Paragraph Titles. The Section titles used in this Agreement and the
Other Documents are for convenience only and do not define or limit the contents
of any Section.
10.11. Binding Effect; Assignment. This Agreement and the Other Documents shall
be binding upon and inure to the benefit of IBM Credit and the Customer and
their respective successors and assigns; provided, that the Customer shall have
no right to assign this Agreement or any of the Other Documents without the
prior written consent of IBM Credit.
10.12. Notices. Except as otherwise expressly provided in this Agreement, any
notice required or desired to be served, given or delivered hereunder shall be
in writing, and shall be deemed to have been validly served, given or delivered
(A) upon receipt if deposited in the United States mails, first class mail, with
proper postage prepaid, (B) upon receipt of confirmation or answerback if sent
by telecopy, or other similar facsimile transmission, (C) one Business Day after
deposit with a reputable overnight courier with all charges prepaid, or (D) when
delivered, if hand-delivered by messenger, all of which shall be properly
addressed to the party to be notified and sent to the address or number
indicated as follows:
(i) If to IBM Credit at:
IBM Credit Corporation
1500 RiverEdge Parkway
Atlanta, GA 30328
Attention: Remarketer Finance Center Manager
Telecopy: (770) 644-4826
(ii) If to Customer at:
Pulsar Data Systems, Incorporated
4500 Forbes Boulevard
Lanham, MD 20706
Attention: Mr. John Shutz
Telecopy: (301) 459-9353
or to such other address or number as each party designates to the other in the
manner prescribed herein.
Page 43 of 45
<PAGE>
10.13. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto were upon the same instrument.
10.14. ATTACHMENT A MODIFICATIONS. IBM Credit may modify the Product Financing
Period set forth in Attachment A from time to time if on at least two occasions
during any three-month period a Shortfall Amount has become due and payable and
may modify the Collateral Insurance Amount set forth in Attachment A from time
to time, in each case, by providing Customer with a new Attachment A. Any such
new Attachment A shall be effective as of the date specified in the new
Attachment A.
10.15. SUBMISSION AND CONSENT TO JURISDICTION AND CHOICE OF LAW. TO INDUCE IBM
CREDIT TO ACCEPT THIS AGREEMENT AND THE OTHER DOCUMENTS, THE CUSTOMER HEREBY
IRREVOCABLY AND UNCONDITIONALLY:
(A) SUBMITS ITSELF AND ITS PROPERTY IN ANY LEGAL ACTION OR PROCEEDING
RELATING TO THIS AGREEMENT AND ANY OTHER DOCUMENT, OR FOR THE RECOGNITION AND
ENFORCEMENT OF ANY JUDGMENT IN RESPECT THEREOF, TO THE NON-EXCLUSIVE GENERAL
JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK AND ANY FEDERAL DISTRICT
COURT IN NEW YORK.
(B) CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY BE BROUGHT IN SUCH
COURTS AND WAIVES ANY OBJECTION THAT IT MAY NOW OR HEREINAFTER HAVE TO THE VENUE
OF ANY SUCH ACTION OR PROCEEDING IN ANY SUCH COURT OR THAT SUCH ACTION OR
PROCEEDING WAS BROUGHT IN AN INCONVENIENT COURT AND AGREES NOT TO PLEAD OR CLAIM
THE SAME.
(C) AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR PROCEEDING MAY BE
EFFECTED BY MAILING A COPY THEREOF BY REGISTERED OR CERTIFIED MAIL (OR ANY
SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE PREPAID, TO CUSTOMER AT ITS ADDRESS
SET FORTH IN SECTION 10.12 OR AT SUCH OTHER ADDRESS OF WHICH IBM CREDIT SHALL
HAVE BEEN NOTIFIED PURSUANT THERETO;
(D) AGREES THAT NOTHING HEREIN SHALL AFFECT THE RIGHT TO EFFECT SERVICE OF
PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT TO SUE IN
ANY OTHER JURISDICTION.
(E) AGREES THAT THE VALIDITY, INTERPRETATION AND ENFORCEMENT OF THIS
AGREEMENT SHALL BE GOVERNED BY THE LAWS (WITHOUT GIVING EFFECT TO CONFLICT OF
LAW PROVISIONS) OF THE STATE OF NEW YORK.
10.16. JURY TRIAL WAIVER. EACH OF IBM CREDIT AND THE CUSTOMER HEREBY
IRREVOCABLY WAIVES THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING
(INCLUDING ANY COUNTERCLAIM) OF ANY TYPE IN WHICH IBM CREDIT AND THE CUSTOMER
ARE PARTIES AS TO ALL MATTERS ARISING DIRECTLY OR INDIRECTLY OUT OF THIS
AGREEMENT OR ANY DOCUMENT, INSTRUMENT OR AGREEMENT EXECUTED IN CONNECTION
HEREWITH.
10.17. Additional Provision. In the event that any conflict arises between
this Agreement and that certain Forbearance Agreement dated August 8, 1997 by
and among Customer, IBM Credit, Lillian Davis and William W. Davis, Sr. (the
"Forbearance Agreement"), the Forbearance Agreement, while it remains in effect,
shall govern provided however,
Page 44 of 45
<PAGE>
that the occurance of any event that causes a termination of the Forbearance
Agreement shall create an Event of Default under this Agreement.
IN WITNESS WHEREOF, the Customer has read this entire Agreement, and has caused
its authorized representatives to execute this Agreement and has caused its
corporate seal to be affixed hereto as of the date first written above.
PULSAR DATA SYSTEMS, INCORPORATED
By: /s/ William W. Davis, Sr.
------------------------------
Print Name: William W. Davis, Sr.
----------------------
PRESIDENT/CEO
Title:
---------------------------
ACCEPTED this ______________ day of ________________, 1997:
IBM CREDIT CORPORATION
By:
------------------------------
Print Name:
----------------------
Title:
---------------------------
Page 45 of 45
<PAGE>
Exhibit 10.16
LEASE AND SERVICE AGREEMENT
THIS AGREEMENT IS MADE THIS 30TH DAY OF JANUARY, 1998, BY AND BETWEEN ALLIANCE
----
8150 LEESBURG, INC., D/B/A ALLIANCE BUSINESS CENTERS ("LESSOR") HAVING OFFICES
KNOWN AND NUMBERED AS SUITE 600/700 (THE "FACILITY") IN THE BUILDING LOCATED AT
8150 LEESBURG PIKE, VIENNA, VIRGINIA 22182 (THE "BUILDING") AND LITRONIC, INC.
("LESSEE") A(N) CALIFORNIA CORPORATION, WITH AN ADDRESS OF 2905 RED HILL DRIVE,
COSTRA MESA CA 92626
The parties for themselves, their heirs, legal representatives, successors and
assigns. agree as follows:
1. Demise and Description of Property.
----------------------------------
a. Lessor leases to Lessee and Lessee leases from Lessor, the 'Premises'
(defined below), being a subpart of Lessor's total leased Facility space, for
the term and subject to the conditions and covenants hereinafter set forth and
to all encumbrances, restrictions, zoning laws, regulations or statutes
affecting the Building, Facility or Premises.
b. The Premises consists of Facility office space number(s) 713 as shown
---
in the floor plan annexed hereto. Lessor hereby grants Lessee the privilege to
use in common with other lessees and parties that Lessor may designate certain
office amenities located in the Facility; the use of all of which are subject to
such reasonable rules and regulations as Lessor currently has in place and may
adopt from time to time. The amenities are more particularly described in
attached Exhibit 'A.' The "Operating Standards" as presently in place and
governing the use of the Premises and the Facility are attached in Exhibit "B".
2. Use.
----
a. The Premises shall be used by Lessee solely for general office
activity and such other normally incident uses and for no other purpose, in
strict accordance with the Operation Standards. Additionally, Lessee shall not
offer g the Premises any services which Lessor provides to its lessees,
including, but not limited to those amenities or services described in attached
Exhibit 'A'. In the event Lessee breaches any provision of this paragraph,
Lessor shall be entitled to exercise any rights or remedies available to the
Lessor pursuant to this Agreement together with such other rights and remedies
as the Lessor may otherwise have and choose to exercise.
b. Lessee shall not make nor permit to be made any use of the Premises
which would violate any of the terms of this Agreement or which, directly or
indirectly, is forbidden by statute, ordinance or government regulations, which
may be dangerous to life, limb or property, which may invalidate or increase the
premium of any policy of insurance carried on the Building or on the Facility,
which will suffer or permit the Premises to be used in any manner or anything to
be brought into or kept there which, in the sole judgment of Lessor, shall in
any way impair or tend to impart
<PAGE>
the high quality character, reputation or appearance of the Building or the
Facility, or which may or tend to impair or interfere with any services
performed by Lessor for Lessee or for others.
3. Term.
-----
a. The term of this Agreement shall be for a period of 12 months,
commencing 9:00 am. on the 1st day of February 1998, and ending 5:00 p.m. on the
31st day of January, 1999, unless renewed as provided in paragraph "3(b)"
- ----
herein. Tenant may, at any time during this agreement provide sixty (60) days
written notice to terminate.
b. Upon the ending term date set forth herein or any extension thereof,
the Agreement shall be extended for the same period of time as the initial term
and upon the same terms and conditions as herein contained except for the amount
of base rental charges, which shall each be renegotiated, unless either party
notifies the other in writing by certified or registered mail. return receipt
requested, or delivered by hand that the Agreement shall not be extended within
the period hereinafter specified or automatically renewed. If Lessee has less
than three offices, such notice shall be given at least 60 days prior to the
expiration date of this Agreement. If Lessee has three or more offices, such
notice shall be given g least 90 days prior to the expiration date of this
Agreement.
c. In the event the entire Premises or the Facility are damaged,
destroyed or taken by eminent domain or acquired by private purchase in lieu of
eminent domain so as to render the Premises fully untenantable and unrestorable
in Lessor's sole judgment, then within 90 days thereafter by written notice to
the other party, either party shall be able to terminate this Agreement, which
will terminate as of the date thereof.
4. Rent.
-----
a. For and during the term of this Agreement, Lessee shall pay Lessor as
rent for the Premises a total rental of $ 63240, payable in 12 equal monthly
-----
installments of $ 5270 each payable in advance of the first day of each calendar
----
month after the commencement of the term, or a daily prorated amount for any
partial calendar month during the term. If any payment of rent or other charge-
off due under this Agreement is not received within five (5) calendar days after
its due date, the Lessee will also pay, as additional rent, a late payment
charge which shall be an amount equal to 10% of any amount owed to Lessor or $50
whichever is greater. See attached Lease and Services Rebate Rider for base
monthly rental for this term which dictates a base monthly rent of $4,100.
b. It is additionally specifically covenanted and agreed that the
financial terms of this Agreement are strictly confidential and Lessee agrees
not to knowingly or willfully divulge this information to or any other Lessee or
potential Lessee of Lessor. Any such disclosure by the Lessee of the financial
terms of this Agreement as set forth herein above, shall constitute a material
breach of this Lease.
2
<PAGE>
c. The first such payment of rental as well as the payment of the Deposit
as set forth in below shall be billed by Lessor simultaneously with execution of
this Agreement. Should the Lessee fail to make such payment prior to the
commencement of the term of this Agreement, then, at Lessor's sole option, the
Agreement shall be null and void and of no further effect. Tenants existing
security deposit will be applied to the security deposit required for this
Agreement.
d. Rent charges are based on the value of the rental Premises and
services to be used by five (5) person(s) only. If more than said number of
person(s) habitually use the Premises or services, the Fixed Monthly Rental
Charges will be increased by a factor of $100 for each additional person who
habitually uses the Premises.
e. If a Lessee check is returned for any reason, Lessee will pay an
additional charge of $100.00 per returned check and, for the purpose of
considering default and/or late charges, it will be as if the payment
represented by the returned check had never been made.
5. Security Deposit.
-----------------
a. Lessee has deposited with Lessor $2900, as a non-interest bearing
security deposit. Lessor may use the security deposit to cure any default of
Lessee under this Agreement, restore the Premises including any and all
furniture, fixtures and equipment provided by Lessor and vendors a the Premises
to their original condition and configuration, reasonable wear and tear
excepted, to pay for repairs to any damage to the Premises. Executive Suite or
Building, caused by Lessee or Lessee's guests, to pay any rent or other charges
which Lessee owes Lessor at or prior to the expiration of this Agreement, and to
reimburse Lessor for costs or expenses arising from any other obligation of
Lessee which Lessee has failed to perform, If Lessor transfers control or
ownership of the Premises and Lessor transfers the security deposit to such
purchaser, Lessee will look solely to the new Lessor for the return of the
security deposit, and the Lessor named in this Agreement shall be released from
all liability for the return of the security deposit.
b. The security deposit (less any sums used by Lessor in accordance with
the terms and conditions of this Agreement) will be returned within sixty (60)
days after the termination of any services rendered or expiration of the term
hereof. The security deposit shall not under any circumstance be applied in lieu
of be the final payment(s) of Fixed Monthly Rental charges or service charges
under this Agreement.
c. In the event that, by reason of the Lessee's default in its
obligations pursuant to this Agreement or otherwise, including but not limited
to the payment of the Fixed Monthly Rental Charge, any amounts due by reason of
the Lessee's use of additional services hereto and/or by reason of the Lessee's
use of telephone services as supplied pursuant to this Agreement, Lessor shall
be entitled to apply any of the security deposited pursuant to this Agreement to
any outstanding sums due or owing to the Lessor, and Lessor shall have the right
to charge the Lessee, as additional rent, such sums as are necessary to
replenish any and all amounts applied so as to cause the security to be returned
to its entire amount. The failure to pay such amounts as are necessary to
replenish the
3
<PAGE>
security shall be considered a breach of this Agreement and shall entitle the
Lessor to exercise any of its rights pursuant to this Agreement or otherwise.
6. Delivery of Possession.
-----------------------
If, for any reason whatsoever, Lessor cannot deliver possession of the
Premises to Lessee at the commencement of the term, this Agreement shall not be
will nor voidable nor shall Lessor be liable to Lessee for any loss or damage
resulting therefrom; but there shall be an abatement of rent for the period
between the stated term commencement and the time when Lessor does deliver
possession of the Premises.
7. Services.
---------
a. So long as Lessee is not in default hereunder, Lessor shall make
available certain amenities to Lessee as more particularly described in Exhibit
A. Such services shall be offered to Lessee, in conjunction with such services
being offered by Lessor to its other lessees, without charge for the reasonable
use of the same.
b. In addition, provided Lessee is not in default hereunder and provided
the cost thereof does not exceed the Security Deposit, Lessor shall make
available to Lessee certain other services the cost of which shall be billed to
the Lessee as additional rent and the payment of which shall be subject to the
same terms and conditions as those governing the payment of the Fixed Monthly
Rental Charge herein regardless of when such charges are billed to the Lessee.
8. Telephone Services.
-------------------
a. Provided Lessee is not in default of any of the terms, covenants,
conditions or provisions of this Agreement, Lessor will make available to
Lessee, a telecommunications package which will consist of some combination of
telephone equipment, numbers, lines, conference calling, voice mail, local, long
distance and international service, and directory listing. All components of the
telecommunications package including any telephone numbers used by Lessee will
remain g all times the property of Lessor and Lessee will acquire no rights in
the components beyond the term specified by Lessor.
b. Upon Lessee'S written request. Lessee shall be entitled to appoint
Lessor as its exclusive agent for the sole purpose of procuring and arranging
Lessee's local 'white pages' listings. Lessor shall have no involvement nor
responsibility for any 'yellow pages' listings desired by Lessee.
c. Lessor shall not be liable for any interruption or error in the
performance of its services to Lessee under this Section. Lessee waives any
recourse as against the Lessor for any claimed liability arising from the
provision of telecommunication services including, but not limited to; injuries
to persons or property arising out of mistakes, omissions, interruptions,
delays, errors or
4
<PAGE>
defects in transmissions occurring in the course of furnishing
telecommunications services provided same are not caused by the willful acts of
the Lessor, as well any claim for business interruption and for consequential
damages. Lessor will use best efforts to maintain consistent telecommunications
services.
d. Lessor shall use reasonable efforts to provide Telephone Services to
Lessee in a first-class, professional manner. Telephone service charges shall be
as per Lessor's then scheduled rates for the same, or as the same may be amended
by Lessor from time to time.
e. In the event that any toll fraud is traceable to telecommunications
services employed by Lessee, such toll fraud shall be deemed to be a material
default in the Lessee's obligations hereunder. Lessee further hereby agrees to
indemnify, hold harmless and to reimburse Lessor for all charges associated with
any such toll fraud including, but not limited to, unauthorized use of calling
cards or telephone lines.
f. It is expressly acknowledged and agreed that Lessor shall be the sole
and exclusive provider of telecommunication services to Lessee for Local, Long
Distance and Fax services. It is understood that Lessee will continue to
maintain their own ISDN account. Lessee hereby agrees and covenants that it will
not use any other telephone service or telephone carrier to provide it service
in the Premises. In the event that Lessee uses or acquires any other telephone
service a the Premises, such use and/or installation shall constitute a material
default in the Lessee's obligations hereunder.
9. Furniture and Fixtures.
-----------------------
At its own cost and expense, Lessor shall furnish and install furniture,
fixtures and equipment as are in Lessor's sole opinion necessary to provide
suitable office accommodations for Lessee, upon such terms and conditions
routinely applicable to the Facility. All such furniture, fixtures and equipment
shall remain Lessor's property.
10. Insurance: Waiver of Claims.
-----------------------------
a. Lessor has no obligation to and will not carry insurance for Lessee's
benefit. Lessor will not be liable to Lessee or to any other person for damages
on account of loss, damage or theft, to any business or personal property of
Lessee. Lessee hereby waives any claims against Lessor from any loss, cost,
liability or expense (including reasonable attorneys' fees) arising from
Lessee's use of the Premises or any common areas made available to Lessee by
Lessor or from the conduct of Lessee's business, or from any activity, work, or
thing done in the Premises or common areas by Lessee or Lessee's agents,
contractors, visitors or employees. To the extent that Lessor has any liability
for any of the forgoing pursuant to any law. ordinance or statute, Lessee shall
seek recovery for such loss(es)/or damage(s) from its own insurance company as
provided for in subparagraph (c) herein prior to making any claims against
Lessor.
5
<PAGE>
b. The Lessor shall not be liable or responsible to the Lessee for any
injury or damage resulting from the acts or omissions of Lessor, its employees,
persons leasing office space or obtaining services from the Lessor, or other
persons occupying any part of the Premises or Building, or for any failure of
services provided such as water, gas or electricity, HVAC or for any injury or
damage to person or property caused by any person except for such loss or damage
arising from the willful or grossly negligent misconduct of the Lessor. its
agents, servants, or employees or from the Lessor's failure to make repairs
which it is obligated to make hereunder. Neither Lessor or any of its agents,
employees, officers or directors shall be responsible for damages resulting from
any error, omission or defect in any work performed or provided as part of the
services rendered, whether uncompensated services or compensated services.
c. Lessee shall provide Lessor with a certificate of insurance evidencing
General/Public Liability coverage with liability limits of not less than One
Million Dollars ($1,000,000) per occurrence for Bodily injury and/or Property
Damage Liability and One Hundred Thousand Dollars ($100,000) per occurrence for
Fire/Legal Liability. Said insurance coverage shall remain in force during the
term of this Agreement and renewals thereof. Lessee's failure to provide or
maintain such insurance shall not reduce or otherwise alter Lessee's liability
or responsibility to pay any judgment rendered against Lessee for such Liability
and Damages Failure to maintain such insurance and/or to name the Lessor and its
designees, as set forth above, shall constitute a material breach of this
Agreement,
d. Both parties hereby agree to defend. indemnify and hold the other
harmless from and against any and all claims, damages. injury, loss and expenses
to or of any person or property resulting from the acts or negligence of their
agents, employees, invitees and/or licensees while in the Building, Executive
Suite and/or Premises.
e. Any fire and attended risk casualty insurance that Lessee maintains
all include a waiver of subrogation in favor of Lessor and Building Landlord,
and any fire and extended risk insurance carried on the Facility by Lessor shall
likewise contain a waiver of subrogation in favor of Lessee.
11. Waiver of Breach.
-----------------
Should Lessor not insist upon the strict performance of any term or
condition of this Agreement or to exercise any right or remedy available for a
breach thereof, and no acceptance of full or partial payment during the
continuance of any such breach shall constitute a waiver of any such breach or
any such term or condition. No term or condition of this Agreement required to
be performed by Lessee and no breach thereof, shall be waived, altered or
modified, except by a written instrument executed by Lessor. No waiver of any
breach shall affect or alter any term or condition in this Agreement, and each
term or condition shall continue in full force and effect with respect to any
other then existing or subsequent breach thereof.
12. Operating Standards.
--------------------
6
<PAGE>
The Operating Standards attached to this Agreement as Exhibit "B" are
hereby made an integral part of this Agreement. Lessee, its employees, agents,
guests, invitees, visitors and/or any other persons caused to be present in and
around the Premises by the Lessee shall perform and abide by the rules and
regulations and any amendments or additions to said rules and regulations as
Lessor may make. In addition, Lessee, its employees and agents shall abide by
all applicable governmental rules, regulations, statutes and ordinances relating
in any way to the Premises or the Facility or Lessee's use or occupancy of the
Premises or the Facility; failing which Lessee shall be in default hereunder and
shall pay any fines or penalties imposed for such violation(s) directly to the
appropriate governmental authority or to Lessor, if Lessor has paid such amount
on behalf of Lessee. Such remedy shall not be exclusive. It is hereby further
explicitly agreed and understood that full compliance with the Operating
Standards as set forth constitutes a material obligation of this Agreement, and
that the failure to so comply shall constitute a violation of this Agreement
entitling the Lessor to exercise any of its remedies pursuant to this Agreement
or otherwise.
13. Employment of Lessor's Employees.
--------------------------------
a. Lessee agrees that it will not, during the term of this Agreement and
any renewals thereof, or for a period of one year after the expiration or sooner
termination of this Agreement, hire or issue an offer to employ any person who
is an employee of Lessor or Lessor's agent without prior consent from Lessor. If
Lessee either hires an employee of Lessor or Lessor's agent; or hires any person
who has been an employee of Lessor or its agent within six months prior to the
time they are hired by Lessee, Lessee will, at Lessors sole option, be liable to
Lessor for liquidated damages equal to six months wages of the employee, a the
rate last paid that employee by Lessor.
b. If Lessor assists in hiring an employee for Lessee. Lessee shall pay
to the Lessor a commission equal to 20% of that employee's annual salary. The
provisions hereof shall survive the expiration or sooner termination of the term
thereof.
14. Alteration.
-----------
If Lessee requires any special wiring or office alterations for
extraordinary business machines or other purposes not consistent with the
current wiring, extraordinary telephone equipment or computer equipment. Such
alteration shall be done (i) only with the express written permission of the
Lessor, and if said permission is granted, then (ii) by an agent designated by
Lessor at Lessee's cost. The electrical current shall be used for ordinary
lighting purposes only, unless written permission to do otherwise shall first
have been obtained from Lessor a an agreed cost to Lessee. Lessor further
reserves the sole and exclusive right to limit the number and type of lines and
telephone equipment Lessee can install in the leased Premises.
15. Re-Entry.
---------
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Lessor and its agents shall have the right to enter the Premises at any
time for the purpose of making any repairs, alterations, inspections which it
shall deem necessary for the preservation, safety or improvements of said
Premises, without in any way being deemed or held to have committed an eviction
(constructive or otherwise) of or trespass against Lessee.
16. Relocation.
-----------
Lessee agrees that the Lessor may, in its sole discretion, relocate the
lessee from its present Premises to a like or similar office space within the
same facility upon thirty (30) days notice to the Lessee with right of refusal.
In the event that the Lessor requires the Lessee to relocate, the Lessor hereby
agrees to bear the reasonable cost of any such relocation, which cost shall be
limited to the cost associated with the physical transfer of the Lessee's
property to any different office, which the Lessor may designate.
b. In the event that any such relocation is effected, the Lessee hereby
acknowledges that, unless otherwise agreed in writing, that all of the terms and
conditions of this Agreement shall remain in full force and effect.
17. Assignment and Subletting.
--------------------------
No assignment or subletting of the Premises, this Agreement or any part
thereof shall be made by Lessee without Lessor's prior written consent, which
consent may be withheld for any or no reason in Lessor's sole discretion.
Neither all nor any part of Lessee's interest in the Premises or this Agreement
shall be encumbered, assigned or transferred, in whole or in part, either by act
of the Lessee or by operation of law.
18. Surrender.
----------
a. On expiration of the term, any extended term, or sooner termination of
this Agreement, Lessee shall promptly surrender and deliver the Premises to
Lessor, without demand. and in as good condition as when let, ordinary wear and
tear excepted.
b. Upon Lessee serving a notice of cancellation as provided in 3b herein
Lessor shall have the right to show Lessee's Premises during the 60 day period
(for one or two offices) or 90 day period (for three or more offices) as the
case may be.
c. Without prior written approval of Lessor, Lessee shall not remove any
of Lessors property from the Premises upon termination of this Agreement or at
any other time, except during Lessor's normal business hours. In the event
Lessor consents to Lessee's removing property before or other normal business
hours, any expenses incurred by Lessor as a result, including but not limited to
expenses for personnel, security, elevator, utilities and the like shall be paid
by Lessee in advance, to the extent determinable by Lessor, by certified and/or
bank check.
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d. If Lessee vacates the Premises and leaves behind any property,
whatsoever, same will be deemed abandoned by Lessee and may be disposed of by
Lessor a Lessee's expense. Lessor will provide fifteen (15) days notice of
intent to dispose. If Lessee defaults in the payment of sums due to Lessor, and
Lessor changes the locks, removes Lessee's property, or otherwise denies access
to Lessee, Lessor shall not be liable for conversion or partial, actual and/or
constructive eviction.
19. Holding Over.
-------------
a. In the event that Lessee, should not renew this Agreement in
accordance with the terms and conditions hereof, and/or fail to surrender the
Premises upon the expiration of the term of the Agreement as provided herein,
Lessee agrees to pay Lessor, as liquidated damages, a sum equal to twice the
monthly rent and all additional charges for services provided hy Lessor to
Lessee, for each month that Lessee retains possession of the Premises or any
part thereof: provided, however, that the acceptance of such sums, representing
liquidated damages shall not be deemed to be permission to Lessee to continue in
possession of the Premises.
20. Default and Remedies.
---------------------
a. If the Lessee shall default in fulfilling any of its terms,
conditions, covenants or provisions of this Agreement, including but not limited
to:
1. Payment of fixed Monthly Rental Charges and/or any other charges
hereunder within ten days of the date such charges become due,
2. Becomes comes insolvent, makes an assignment for benefit of creditors,
or files a voluntary petition under any bankruptcy or insolvency law. or has
filed against it an involuntary petition under any such law;
3. Defaults in fulfilling any of the terms. conditions. covenants or
provisions of this Agreement including but not limited to the breach of any of
the terms and conditions set forth in the exhibits attached hereto;
4. The abandonment and/or vacatur of the Premises by the Lessee; then,
after thirty days notice of any such default(s), the Lessor may, at its sole
discretion, terminate this Agreement upon thirty days notice to the Lessee, and
upon the expiration of such notice period, the Lessee shall quit and surrender
the Premises to the Lessor. In the event that the Lessee fails to quit and
surrender the Premises, the Lessor may re-enter and take possession of the
Premises and remove al persons and property therefrom, as well as disconnect any
telephone lines installed for the benefit of Lessee, without any liability
whatsoever to Lessee. In addition, Lessor may elect concurrently or alternately
to accelerate al of Lessee's obligations hereunder including without limitation
the rental, direct expenses, Schedule B Costs, and Telephone Services costs,
and/or the re-letting of the Premises or any part thereof, for all or any part
of the remainder of sad term, to a party satisfactory to Lessor, at any monthly
rental rate. Lessor, in its sole discretion, may accept notwithstanding the
foregoing,
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Lessor shall have no obligation, implied or otherwise, to mitigate its damage(s)
under such circumstances.
b. Should Lessor be unable to re-let the Premises, or should each monthly
re-rental be less than the rental, Lessee is obligated to pay under this
Agreement or any renewal thereof, at Lessor's option Lessee shall pay the amount
of such deficiency, plus the expenses of reletting, immediately in one lump sum
(if allowable under law) to Lessor upon demand and/or as such obligations
accrue.
c. If Lessee shall default in the observance or performance of any term
or covenant on Lessee's part to be observed or performed under or by virtue of
any of the terms or provisions in any article of this lease, then. Unless
otherwise provided elsewhere in this lease, Lessor may immediately or at any
time thereafter and with notice perform the obligation of Lessee thereunder, and
if Lessor, in connection therewith or in connection with any default by Lessee
in the covenant to pay rent hereunder, makes any expenditures or incurs any
obligations for the payment of money, including but not limited to attorney's
fees, in instituting, prosecuting or defending any actions or proceeding, such
sums so paid or obligations incurred with interest and costs shall be deemed to
be additional rent hereunder and shall be pad by Lessee to Lessor rendition of
any bill or statement to Lessee therefor. and if Lessee's lease term shall have
expired at the time of making of such expenditures or incurring of such
obligations, such sums shall be recoverable by Lessor as damages.
21. Mail & Telephone Forwarding.
---------------------------
a. After termination or expiration of the term of this Agreement, Lessee
hereby agrees that it will take all reasonable steps to notify all parties of
Lessee's new address and phone numbers. Lessor shall have no obligation, to
notify any person or entity of Lessee's new address and/or phone numbers, except
as expressly provided herein. Lessor will provide a forwarding message and hold
mail for Lessee for thirty (30) days at no charge.
b. Lessor will, unless otherwise instructed by Lessee in writing, forward
mail to Lessee a its new address and give out new telephone number via a voice
mal message for a period of three (3) months at the rate of $150.00 per month,
which sums shall be deducted from any amounts deposited with the Lessor as
security hereunder and paid to the Lessor in advance. In the event that there is
not sufficient security remaining on deposit to pay for the charges set forth
herein, unless the Lessee shall pay the charges set forth herein to the Lessor
in advance, Lessor shall have no obligation to provide the services set forth
herein.
22. Notices.
--------
Any notice under this Agreement shall be in writing and shall be either
delivered by hand or by first class mail to the party at the address set forth
below. Lessor hereby designates its address as:
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ALLIANCE Business Centers
8150 Leesburg Pike, Suite 600/700
Vienna, Virginia 22182
Attn: Sales Management
with a copy by regular first class mail to:
ALLLIANCE National, Inc.
122 East 42nd Street. Suite 2707
New York, NY 10168
Attn: Legal Department
Lessee hereby designates its address (which address must be an address within
the United States), as
Litronic, Inc.
Attn: James Prohaska
8150 Leesburg Pike, Suite 700
Vienna,VA 22182
Litronic, Inc.
Attn: Tom Seykora
2030 Man Street Suite 1250
Irvine, CA 92614
If such mail is properly addressed and mailed, as above, it shall be deemed
notice for al purposes, given when sent or delivered, even if returned as
undelivered.
23. Landlord's Election Under This Agreement.
----------------------------------------
Upon early termination of the main Building lease, this Agreement shall
terminate unless the Building Landlord under the main lease elects to have this
Agreement assigned to the Building Landlord or another entity as provided in the
main lease. Upon notice to Lessor of the termination of the main lease and such
election, (i) the Agreement shall be deemed to have been assigned by Lessor to
the Building Landlord or to such other entity as is designated in such notice by
the Building Landlord, (ii) the Building Landlord shall be deemed to be the
Lessor under this Agreement and shall assume al rights and responsibilities of
Lessor under this Agreement, and (iii) Lessee shall be deemed to have attorned
to the Building Landlord as Lessor under this Agreement.
24. Time of Essence.
----------------
Time is of the essence as to the performance by Lessee of al covenants,
terms and provisions of this Agreement.
25. Severability.
------------
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The invalidity of any one or more of the sections, subsections, sentences,
clauses or words contained in this Agreement or the application thereof to any
particular set of circumstances, shall not affect the validity of the remaining
portions of this Agreement or of their valid application to any other set of
circumstances. All of said sections, subsections, sentences, clauses and words
are inserted conditionally on being valid in law; and in the event that one or
more of the sections, subsections, sentences, clauses or words contained herein
shall be deemed invalid, this Agreement shall be construed as if such invalid
sections, subsections, sentences, clauses or words had not been inserted. In the
event that any part of this Agreement shall be held to be unenforceable or
invalid, the remaining pans of this Agreement shall nevertheless continue to be
valid and enforceable as though the invalid portions had not been a part hereof.
In addition, the parties acknowledge (i) that this Agreement has been fully
negotiated by and between the parties in good faith and is the result of the
joint efforts of both parties, (ii) that both parties have been provided with
the opportunity to consult with legal counsel regarding its terms, conditions
and provisions and (iii) that regardless of whether or not either party has
elected to consult with legal counsel, it is the intent of the parties that in
no event shall the terms, conditions or provisions of this Agreement be
construed against either party as the drafter of this Agreement.
26. Execution by Lessee.
--------------------
The party or parties executing this Agreement on behalf of the Lessee
warrant(s) and represent(s): (i) that such executing party (or parties) has (or
have) complete and full authority to execute this Agreement on behalf of Lessee;
(ii) that Lessee shall fully perform its obligations hereunder.
27. Assumption Agreements and Covenants.
-----------------------------------
This Agreement is subject and subordinate to the main Building lease
governing the Facility, under which Lessor is bound as tenant: and the
provisions of the main lease, other than as to the payment of rent or other
monies, are incorporated into this Agreement as if completely herein rewritten.
Lessee shall comply with and be bound by all provisions of the main lease except
that the payment of rent shall be governed by the provisions of this Agreement,
and Lessee shall indemnify and hold Lessor harmless from and against any clam or
liability under the man lease of Lessor arising from Lessee's breach of the Man
Lease or this Agreement. Lessor covenants and warrants that the use of the
Premises as a business office is consistent with and does not violate the terms
of the main lease.
28. Covenant and Conditions.
------------------------
Each term, provision and obligation of this Agreement to be performed by
Lessee shall be construed as both a covenant and condition.
29. Entire Agreement.
-----------------
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This Agreement embodies the entire understandings between the parties
relative to its subject mater, and shall not be modified, changed or altered in
any respect except in writing signed by all parties.
30. Counterparts.
-------------
This Agreement may be executed in two or more counterparts, each of which
shall be deemed to be an original, but all of which together shall constitute
one and the same instrument.
IN WITNESS WHEREOF, Lessor and Lessee have executed this Agreement as of
the date first above written.
ALLIANCE Business Centers
ALLIANCE 8150 Leesburg, Inc.
By: /S/ A.F. COHEN
-----------------------------------
Anna F. Cohen - Area Sales Manager
Cheri Reid - Area Genera Manager
LESSEE: Litronic, Inc.
(If a corporation)
By: /S/ J.S. PROHASKA
-----------------------------------
Print Name: James S. Prohaska
Title: Director, Business Development
[Corporate Seal]
LESSEE:
(If an individual or partnership)
By: _____________________________________
By: _____________________________________
EXHIBIT "A"
. Furnished Private Office
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. Furnished, Decorated Reception Room with Professional Receptionist
. Personalized Telephone Answering During Office Hours
. 24 hour Voicemail
. 12 hours of Conference Room or private furnished offices, subject to prior
scheduling and use by other lessees
. Corporate Identity on Lobby Directory where Available
. Complete Mail Room Facility
. Receipt of Mail and Packages
. Complete Kitchen Facilities with Coffee Machine
. Utilities and Maintenance
. HVAC During Hours as controlled by Building Management
. Janitorial Services
. Tenant will have ample electric to run PC's and other normal and standard
business equipment.
. 8 hours per month courtesy use of other ALLIANCE Business Centers
affiliated facilities. Locations subject to current affiliation and
availability.
14
<PAGE>
EXHIBIT 10.17
AIRPORT BUS. CENTER
Dated: December 4, 1997
1. BASIC LEASE TERMS. For purposes of this Lease, the following terms have the
following definitions and meanings:
(a) LANDLORD: Airport Industrial Complex, a California Limited Partnership
Landlord's Address (For Notices): 17755 Sky Park East, Ste 100,
Irvine, CA 92614
or such other place as Landlord may from time to time designate by notice
to Tenant with a copy to Koll Management Services, P.O. Box 1980, Newport
Beach, California 92660.
(b) Tenant: Litronic Industries, Inc., a California Corporation
TENANT'S TRADE NAME: Litronic
TENANT'S ADDRESS FOR NOTICES (PREMISES):
17895 Sky Park Circle, Suite A
Irvine. CA 92614 Attention: Kris Shah
(c) PREMISES: Suite(s) A of building 2401 (the "Building") of AIRPORT BUS.
CENTER (the "Project"), located in the City of Irvine ("City"), County of
Orange ("County"), State of California ("State") as shown on Exhibit "A-I".
The Premises are depicted on Exhibit "A-II" and contain approximately 1,800
Rentable Square Feet (subject to adjustment as provided in this Lease).
(d) TENANT'S SHARE: 0.2%
(e) TERM: 18 Lease Months and 0 Days.
(f) COMMENCEMENT DATE: January 1, 1998.
(g) EXPIRATION DATE: June 30. 1999.
(h) INITIAL MONTHLY BASE RENT: $1,476.00, subject to adjustment as
provided in Exhibit "B" and as otherwise provided in this Lease.
(i) MONTHLY OPERATING EXPENSE CHARGE: $54.00, subject to adjustment as
provided in Exhibit "B" and as set forth in Paragraph 6.
(j) SECURITY DEPOSIT: $1,655.00.
(k) NON-REFUNDABLE CLEANING FEE PORTION OF SECURITY DEPOSIT: $125.00
<PAGE>
(l) PERMITTED USE: General office for computer programming and
installation of computer chips and no other use without the express written
consent of Landlord, which consent Landlord may withhold in its sole and
absolute discretion.
(m) BROKER(S): Dave Desner, CB Commercial.
(n) GUARANTOR(S): None
(o) INTEREST RATE: The greater of ten percent (10%) per annum or two percent
(2%) in excess of the prime lending or reference rale of Wells Fargo Bank
N.A. or any successor bank in effect on the twenty-fifth (25th) day of the
calendar month immediately prior to the event giving rise to the Interest
Rate imposition; provided, however, the Interest Rate will in no event
exceed the maximum interest rale permitted to be charged by applicable law.
(p) EXHIBITS: A-l through H, inclusive, which Exhibits are attached to this
Lease and incorporated herein by this reference.
This Paragraph 1 represents a summary of the basic terms and definitions of this
Lease. In the event of any inconsistency between the terms contained in this
Paragraph 1 and any specific provision of this Lease, the terms of the more
specific provision shall prevail.
2. PREMISES AND COMMON AREAS.
(a) PREMISES. Landlord hereby leases lo Tenant and Tenant hereby leases from
Landlord the Premises upon and subject to the terms, covenants and
conditions contained in this Lease to be performed by each party.
(b) TENANT'S USE OF COMMON AREAS. During the Term of this Lease, Tenant shall
have the nonexclusive right to use in common with all other occupants of
the Project, the following common areas of the Project (collectively, the
"Common Areas"): the parking facilities of the Project which serve the
Building, loading and unloading areas, trash areas, roadways, sidewalks,
walkways, parkways, driveways, landscaped areas, and similar areas and
facilities situated within the Project and appurtenant to the Building
which are not reserved for the exclusive use of any Project occupants.
(c) LANDLORD'S RESERVATION OF RIGHTS. Provided Tenant's use of and access to
the Premises is not interfered with in an unreasonable manner, Landlord
reserves for itself and for all other owner(s) and operator(s) of the
Common Areas and the balance of the Project, the right from time to time
to: (i) install, use, maintain, repair, replace and relocate pipes, ducts,
conduits, wires and appurtenant meters and equipment above the ceiling
surfaces, below the floor surfaces and within the walls of the Building;
(ii) make changes to the design and layout of the Project, including,
without limitation, changes to buildings, driveways, entrances, loading and
unloading areas, direction of traffic, landscaped areas and walkways,
parking spaces and parking areas; and
2
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(iii) use or close temporarily the Common Areas, and/or other portions of
the Project while engaged In making improvements, repairs or alterations to
the Building, the Project, or any portion thereof
3. TERM. The term of this Lease ("Term") will be for the period designated in
Subparagraph 1(e), commencing on the Commencement Date, and ending on the
Expiration Date. Each consecutive twelve (12) month period of the Term of
this Lease, commencing on the Commencement Date, will be referred to herein
as a "Lease Year".
4. POSSESSION.
(a) DELIVERY OF POSSESSION. Landlord will deliver possession of the Premises to
Tenant in its current "as-is" condition with the addition of only those
items of work described on Exhibit "C" which are to be completed by
Landlord on or before the Commencement Date. If, for any reason not caused
by Tenant, Landlord cannot deliver possession of the Premises to Tenant on
the Commencement Date, this Lease will not be void or voidable, nor will
Landlord be liable to Tenant for any loss or damage resulting from such
delay, but in such event, the Commencement Date and Tenant's obligation to
pay rent will not commence until Landlord delivers possession to Tenant. If
the delay in possession is caused by Tenant, then the Term and Tenant's
obligation to pay rent will commence as of the Commencement Date even
though Tenant does not yet have possession. Notwithstanding the foregoing,
Landlord will not be obligated to deliver possession of the Premises to
Tenant (but Tenant will be liable for rent if Landlord can otherwise
deliver the Premises to Tenant) until Landlord has received from Tenant all
of the following: (i) a copy of this Lease fully executed by Tenant and
the guaranty of Tenant's obligations under this Lease, if any, executed by
the Guarantor(s), (ii) the Security Deposit and the first installment of
Monthly Rase Rent; and (iii) copies of policies of insurance or
certificates thereof as required under Paragraph 19 of this Lease.
(b) CONDITION OF PREMISES. By taking possession of the Premises, Tenant will be
deemed to have accepted the Premises in its "as-is" condition on the date
of delivery of possession and to have acknowledged that all work to be
completed by Landlord as described on Exhibit "C" has been completed and
there are no additional items needing work or repair by Landlord. Tenant
acknowledges that neither Landlord nor any agent of Landlord has made any
representation or warranty with respect to the Premises, the Building, the
Project or any portions thereof or with respect to the suitability of same
for the a conduct of Tenant's business and Tenant further acknowledges that
Landlord will have no obligation to construct or complete any additional
buildings or improvements within the Project. Landlord shall deliver the
premises in a good working condition, including but not limited to the
HVAC, electrical, plumbing and mechanical systems, etc. Tenant shall have
(30) days after possession to notify Landlord.
3
<PAGE>
5. RENT
(a) MONTHLY BASE RENT. Tenant agrees to pay Landlord the Monthly Base Rent for
the Premises (subject to adjustment as hereinafter provided) in advance on
the first day of each calendar month during the Term without prior notice
or demand, except that Tenant agrees to pay the Monthly Base Rent for the
first month of the Term directly to Landlord concurrently with Tenant's
delivery of the executed Lease to Landlord. All rent must be paid to
Landlord, without any deduction or outset, in lawful money of the United
States of America, at the address designated by Landlord or to such other
person or at such other place as Landlord may from time to time designate
in writing. Monthly Base Rent will be adjusted during the Term of this
Lease as provided in Exhibit "B".
(b) ADDITIONAL RENT. All amounts and charges to be paid by Tenant hereunder,
including, without limitation, payments for Operating Expenses, insurance
and repairs, will be considered additional rent for purposes of this Lease,
and the word "rent" as used in this Lease will include all such additional
rent unless the context specifically or clearly implies that only Monthly
Base Rent is intended.
(c) LATE PAYMENTS. Late payments of Monthly Base Rent and/or any item of
additional rent will be subject to interest and a late charge as provided
in Subparagraph 22(t) below.
6. OPERATING EXPENSES.
(a) OPERATING EXPENSES. Throughout the Term of this Lease, commencing on the
Commencement Date, Tenant agrees to pay Landlord as additional rent in
accordance with the terms of this Paragraph 6, Tenant's Share of Operating
Expenses /or the taxes and insurance for the Project and all costs and
expenses of the operation, maintenance, repair, and replacement o/ the
Project including, without limitation: (i) any form of real property tax
assessment, license tee, license tax, business license fee, commercial
rental tax, levy, charge, improvement bond or similar imposition of any
kind or nature imposed by any authority having the direct power to tax,
including any city, county, state or federal government, or any school,
agricultural lighting, drainage or other improvement or special assessment
district thereof; (ii) any and all assessments under any covenants,
conditions and restrictions affecting the Project; (iii) water, sewer and
other utility charges; (iv) costs of insurance obtained by Landlord
pursuant to Paragraph 19 of the Lease; (v) waste disposal and janitorial
services; (vi) security; (vii) labor; (viii) management costs including,
without limitation: (A) wages and salaries (and payroll taxes and similar
charges) of property management employees, and (B) management office
rental, supplies, equipment and related operating expenses and management
tees; (ix) supplies, materials, equipment and tools including rental o/
personal property; (x) repair and maintenance o/ the structural portions o/
the buildings with the Project, including the plumbing, heating,
ventilating, air-conditioning and electrical systems installed or furnished
by Landlord; (xi) maintenance, costs and upkeep of ail parking and other
Common Areas; (xii) depreciation on a straight line basis and rental of
personal property used in maintenance; (xiii) amortization on a straight
line basis over the useful life [together with interest at the Interest
Rate on the unamortized balance] of all capitalized expenditures which are:
(A) reasonably intended to produce a reduction in
4
<PAGE>
operating charges or energy consumption; or (B) required under any
governmental law or regulation that was not applicable to the Project at
the time it was originally constructed; or (C) for replacement of any
Project equipment needed to operate the Project at the same quality levels
as prior to the replacement; (xiv) gardening and landscaping; (xv)
maintenance of signs (other than signs of tenant's of the Project); (xvi)
personal property taxes levied on or attributable lo personal property used
in connection with the Common Areas; (xvii) reasonable accounting, audit,
verification, legal and other consulting fees; and (xviii) costs and
expenses of repairs, resurfacing, repairing, maintenance, painting,
lighting, cleaning, refuse removal, security and similar items, including
appropriate reserves
(b) Determination of Tenant's Monthly Operating Expense Charge. Tenant's
Monthly Operating Expense Charge shall be determined as provided in
Subparagraph 1(i) of this Lease. If Tenant's Monthly Operating Expense
Charge is scheduled for each year of the Lease Term as shown on Exhibit
"B", then Subparagraphs (c) and (d) below will not apply.
(c) Estimate Statement. Prior to the Commencement Date and on or about March
1st of each subsequent calendar year during the Term o/ this Lease,
Landlord will endeavor to deliver to Tenant a statement ("Estimate
Statement") wherein Landlord will estimate both the Operating Expenses and
Tenant's Monthly Operating Expense Charge for the then current calendar
year. Tenant agrees to pay Landlord, as additional rent, Tenant's estimated
Monthly Operating Expense Charge each month thereafter, beginning with the
next installment of rent due, until such time as Landlord issues a revised
Estimate Statement or the Estimate Statement /or the succeeding calendar
year; except that, concurrently with the regular monthly rent payment next
due following the receipt of each such Estimate Statement, Tenant agrees to
pay Landlord an amount equal to one monthly installment of Tenant's
estimated Monthly Operating Expense Charge (less any applicable Operating
Expenses already paid) multiplied by the number of months from January, in
the current calendar year, to the month of such rent payment next due, all
months inclusive. If at any time during the Term of this Lease, but not
more often than quarterly, Landlord reasonably determines that Tenant's's
share of Operating Expenses for the current calendar year will be greater
than the amount set forth in the then current Estimate Statement, Landlord
may issue a revised Estimate Statement and Tenant agrees to pay Landlord,
within ten (10) days of receipt of the revised Estimate Statement, the
difference between the amount owed by Tenant under such revised Estimate
Statement and the amount owed by Tenant under the original Estimate
Statement for the portion o/ the then current calendar year which has
expired. Thereafter Tenant agrees to pay Tenant's Monthly Operating Expense
Charge based on such revised Estimate Statement until Tenant receives the
next calendar year's Estimate Statement or a new revised Estimate Statement
for the current calendar year.
(d) Actual Statement. By March 1st of each calendar year during the Term of
this Lease, Landlord will also endeavor to deliver to Tenant a statement
("Actual Statement") which states Tenant's Share of the actual Operating
Expenses [or the preceding calendar year. If the Actual Statement reveals
that Tenant's Share of the actual Operating Expenses is more than the total
Additional Rent paid by Tenant for Operating Expenses on account of the
preceding calendar
5
<PAGE>
year, Tenant agrees to pay Landlord the difference in a lump sum within ten
(10) days of receipt of the Actual Statement. If the Actual Statement
reveals that Tenant's Share of the actual Operating Expenses is less than
the Additional Rent paid by Tenant for Operating Expenses on account of the
preceding calendar year, Landlord will credit any overpayment toward the
next monthly installment(s) of Tenant's Share of the Operating Expenses due
under this Lease.
(e) Miscellaneous. Any delay or failure by Landlord in delivering any Estimate
Statement or Actual Statement pursuant to this Paragraph 6 will not
constitute a waiver of its right to require an increase in rent nor will it
relieve Tenant of its obligations pursuant to this Paragraph 6, except that
Tenant will not be obligated to make any payments based on such Estimate
Statement or Actual Statement unless ten (10) days after receipt of such
Estimate Statement or Actual Statement it Tenant does not object to any
Estimate Statement or Actual Statement within thirty (30) days after Tenant
receives any such statement, such statement will be deemed final and
binding on Tenant. Even though the Term has expired and Tenant has vacated
the Premises, when the final determination is made of Tenant's Share of the
actual Operating Expenses for the year in which this Lease terminates,
Tenant agrees to promptly pay any increase due over the estimated expenses
paid and, conversely, any overpayment made in the event said expenses
decrease shall promptly be rebated by Landlord to Tenant. Such obligation
will be a continuing one which will survive The expiration or termination
of This Lease. Prior to the expiration or sooner termination of the Lease
Term and Landlord's acceptance of Tenant's surrender of the Premises,
Landlord will have the right to estimate the actual Operating Expenses for
the then current Lease Year and to collect from Tenant prior to Tenant's
surrender of the Premises, Tenant's Share of any excess of such actual
Operating Expenses over the estimated Operating Expenses paid by Tenant in
such Lease Year.
7. SECURITY DEPOSIT AND CLEANING FEE. Upon Tenant's execution of This Lease,
Tenant will deposit with Landlord the Security Deposit designated in
Subparagraph 1(j). The Security Deposit will be held by Landlord as
security for the full and faithful performance by Tenant of all of the
terms, covenants, and conditions of this Lease to be kept and performed by
Tenant during the Term hereof. The Security Deposit is not, and may not be
construed by Tenant to constitute, rent for the last month or any portion
thereof. If Tenant defaults with respect to any provisions of this Lease
including, but not limited to, the provisions relating to the payment of
rent or additional rent, Landlord may (but will not be required to) use,
apply or retain all or any part of the Security Deposit for the payment of
any rent or any other sum in default, or for the payment of any other
amount which Landlord may spend by reason of Tenant's default or to
compensate Landlord for any loss or damage which Landlord may suffer by
reason of Tenant's default. If any portion to the Security Deposit is so
used or applied, Tenant agrees, within ten (10) days after Landlord's
written demand therefor, to Deposit cash with Landlord in an amount
sufficient to restore The Security Deposit to its original amount and
Tenant's failure to do so shall constitute a default under this Lease.
Landlord is not required to keep Tenant's Security Deposit separate from
its general funds, and Tenant is not entitled to interest on such Security
Deposit. If Tenant is not in default at the expiration or termination of
this Lease, Landlord will return the Security Deposit to Tenant, less the
non-refundable Cleaning Fee
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portion designated in Subparagraph 1(k). Landlord's obligations with
respect to the Security Deposit are those of a debtor and not of a Trustee.
8. USE.
(a) TENANT'S USE OF THE PREMISES. The Premises may be used for the use or uses
set forth in Subparagraph 1(1) only, and Tenant will not use or permit the
Premises to be used for any other purpose without the prior written consent
of Landlord, which consent Landlord may not unreasonably withhold. Nothing
in this Lease will be deemed to give Tenant any exclusive right to such use
in the Project.
(b) COMPLIANCE. Al Tenant's sole cost and expense, Tenant agrees to procure,
maintain and hold available for Landlord's inspection, all governmental
licenses and permits required for the proper and lawful conduct of Tenant's
business from the Premises, it any. Tenant agrees not to use, alter or
occupy the Premises or allow the Premises to be used, altered and occupied
in violation of, and Tenant, at its sole cost and expense, agrees to use
and occupy the Premises, and cause the Premises to be used and occupied, in
compliance with: (i) any and all laws, statutes, zoning restrictions,
ordinances, rules, regulations, orders and rulings now or hereafter in
force and any requirements of any insurer, insurance authority or duly
constituted public authority having jurisdiction over the Premises, the
Building or the Project now or hereafter in force, (ii) the requirements of
the Board of Fire Underwriters and any other similar body, (iii) the
Certificate of Occupancy issued for the Building, and (iv) any recorded
covenants, conditions and restrictions and similar regulatory agreements,
if any, which affect the use, occupation or alteration of the Premises, the
Building and/or the Project. Tenant agrees to comply with the Rules and
Regulations referenced in Paragraph 28 below. Tenant agrees not to do or
permit anything to be done in or about the Premises which will in any
manner obstruct or interfere with the rights of other tenants or occupants
of the Project, or injure or unreasonably annoy them, or use or allow the
Premises to be used for any unlawful or unreasonably objectionable purpose.
Tenant agrees not to place or store any articles or materials outside of
the Premises or to cause, maintain or permit any nuisance or waste in, on,
under or about the Premises or elsewhere within the Project. Tenant shall
not use or allow The Premises to be used for lodging, bathing or the
washing of clothes.
(c) HAZARDOUS MATERIALS. Except for ordinary and general office supplies, such
as copier toner, liquid paper, glue, ink and common household cleaning
materials (some or all of which may constitute "Hazardous Materials" as
defined in this Lease), Tenant agrees not to cause or permit any Hazardous
Materials to be brought upon, stored, used, handled, generated, released or
disposed of on, in, under or about the Premises, the Building, the Common
Areas or any other portion of The Project by Tenant, its agents, employees,
subtenants, assignees, licensees, contractors or invitees (collectively,
"Tenant's Parties"), without the prior written consent of Landlord, which
consent Landlord may withhold in its sole and absolute discretion.
Concurrently with the execution of this Lease, Tenant agrees to complete
and deliver to Landlord an Environmental Questionnaire in the form of
Exhibit "G" attached hereto. Upon the expiration or
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earlier termination of this Lease, Tenant agrees to promptly remove from
the Premises, the Building and the Project, at its sole cost and expense,
any and all Hazardous Materials, including any equipment or systems
containing Hazardous Materials which are installed, brought upon, stored,
used, generated or released upon, in, under or about The Premises, the
Building and/or the Project or any portion thereof by Tenant or any of
Tenant's Parties. To the fullest extent permitted by law, Tenant agrees to
promptly indemnity, protect, defend and hold harmless Landlord and
Landlord's partners, officers, directors, employees, agents, successors and
assigns (collectively, "Landlord indemnified Parties") from and against any
and all claims, damages, judgments, suits, causes of action, losses,
liabilities, penalties, fines, expenses and costs (including, without
limitation, clean-up, removal, remediation and restoration costs, sums paid
in settlement of claims, attorneys' fees, consultant lees and expert lees
and court costs) which arise or result from the presence of Hazardous
Materials on, in, under or about the Premises, the Building or any other
portion of the Project and which are caused or permitted by Tenant or any
of Tenant's Parties. Tenant agrees to promptly notify Landlord of any
release of Hazardous Materials in the Premises, the Building or any other
portion of the Project which Tenant becomes aware o/ during the Term of
this Lease, whether caused by Tenant or any other persons or entities. In
the event of any release of Hazardous Materials caused or permitted by
Tenant or any of Tenant's Parties, Landlord shall have The right, but not
the obligation, to cause Tenant to immediately take all steps Landlord
deems necessary or appropriate to remediate such release and prevent any
similar future release to the satisfaction of Landlord and Landlord's
mortgagee(s). At all times during the Term of this Lease, Landlord will
have the right, but not the obligation, to enter upon the Premises to
inspect, investigate, sample and/or monitor the Premises to determine if
Tenant is in compliance with the terms of this Lease regarding Hazardous
Materials. As used in this Lease, the term "Hazardous Materials" shall mean
and include any hazardous or toxic materials, substances or wastes as now
or hereafter designated under any law, statute, ordinance, rule,
regulation, order or ruling of any agency of the State, the United States
Government or any local governmental authority, including, without
limitation, asbestos, petroleum, petroleum hydrocarbons and petroleum based
products, urea formaldehyde foam insulation, polychlorinated biphenyls
("PCBs"), and freon and other chlorofluorocarbons. The provisions of this
Subparagraph 8(c) will survive the expiration or earlier termination o/
this Lease.
(d) Refuse and Sewage. Tenant agrees not to keep any trash, garbage, waste or
other refuse on the Premises except in sanitary containers and agrees to
regularly and frequently remove same from the Premises. Tenant shall keep
all containers or other equipment used for storage of such materials in a
clean and sanitary condition. Tenant shall properly dispose of all sanitary
sewage and shall not use the sewage disposal system for the disposal of
anything except sanitary sewage. Tenant shall keep the sewage disposal
system tree of all obstructions and in good operating condition. If the
volume of Tenant's trash becomes excessive in Landlord's judgment, Landlord
shall have the right to charge Tenant for additional trash disposal
services and/or to require that Tenant contract directly for additional
trash disposal services at Tenant's sole cost and expense.
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9. NOTICES. Any notice required or permitted to be given hereunder must be in
writing and may be given by personal delivery (including delivery by
overnight courier or an express mailing service) or by mail, if sent by
registered or certified mail. Notices to Tenant shall be sufficient if
delivered to Tenant at the Premises and notices to Landlord shall be
sufficient if delivered to Landlord at the address designated in
Subparagraph 1(a). Either party may specify a different address /or notice
purposes by written notice to the other, except that the Landlord may in
any event use the Premises as Tenant's address for notice purposes.
10. BROKERS. The parties acknowledge that the broker(s) who negotiated this
Lease are stated in Subparagraph 1(m) Landlord and Tenant each agree to
promptly indemnify, protect, defend and hold harmless the other from and
against any and all claims, damages, judgments, suits, causes of action,
losses, liabilities, penalties, fines, expenses and costs (including
attorneys' tees and court costs) resulting from any breach by the
indemnifying party of the foregoing representation, including, without
limitation, any claims that may be asserted by any broker, agent or finder
undisclosed by the indemnifying party. The foregoing mutual indemnity shall
survive The expiration or earlier termination of this Lease. Tenant agrees
that Landlord will not recognize or compensate any third party broker with
regards to any renewals and/or expansions unless such renewal or expansion
rights are included within this Lease at the time of execution by the
parties and in Landlord's commission agreement with the broker(s) specified
in Subparagraph 1(m).
11. SURRENDER; HOLDING OVER.
(a) Surrender. The voluntary or other surrender of this Lease by Tenant, or a
mutual cancellation thereof, shall not constitute a merger, and shall, at
the option of Landlord, operate as an assignment to Landlord of any or all
subleases or subtenancies. Upon The expiration or earlier termination of
this Lease, Tenant agrees to peaceably surrender the Premises to Landlord
broom clean and in a state of good order, repair and condition, ordinary
wear and tear and casually damage excepted, with all of Tenant's personal
property and alterations removed from The Premises to The extent required
under Paragraph 13 and all damage caused by such removal repaired as
required by Paragraph 13. The delivery of keys to any employee of Landlord
or to Landlord's agent or any employee thereof alone will not be sufficient
to constitute a termination of This Lease or a surrender of The Premises.
(b) Holding Over. If Tenant holds over after The expiration or earlier
termination of the Term, Landlord may, at its option, treat Tenant as a
tenant at sufferance only, and evict Tenant immediately, or consent in
writing to the continued occupancy by Tenant which shall be subject to all
of the terms, covenants and conditions of this Lease, so far as applicable,
including the payment of Operating Expenses, except that the Monthly Rase
Rent for any month or partial month during which Tenant holds over shall be
equal to one hundred fifty percent (150%) of the Monthly Base Rent in
effect under this Lease immediately prior to such holdover. Acceptance by
Landlord of rent alter such expiration or earlier termination will not
result in a renewal o/ this Lease. If Tenant fails to surrender the
Premises upon the expiration of this Lease in accordance
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with the terms of this Paragraph 11 despite demand to do so by Landlord,
Tenant agrees to promptly indemnify, protect, defend and hold Landlord
harmless from all claims, damages, judgments, suits, causes of action,
losses, liabilities, penalties, tines, expenses and costs (including
attorneys' lees and costs), including, without limitation, costs and
expenses incurred by Landlord in returning the Premises to the condition in
which Tenant was to surrender it and claims made by any succeeding tenant
founded on or resulting from Tenant's failure to surrender the Premises.
The provisions of this Subparagraph 11(b) will survive the expiration or
earlier termination of this Lease.
12. TAXES ON TENANT'S PROPERTY. Tenant agrees to pay before delinquency, all
taxes and assessments (real and personal) levied against Tenant's business
operations or any personal property, improvements, alterations, trade
fixtures or merchandise placed by Tenant in or about the Premises.
13. ALTERATIONS. Tenant shall not make any alterations to the Premises or any
other aspect of the Project, without Landlord's prior written consent,
which consent Landlord may withhold in its reasonable but subjective
discretion. All permitted alterations must be performed in compliance with
Landlord's standard rules and regulations regarding alterations. All
alterations will become the property of Landlord and will remain upon and
be surrendered with the Premises at the end of the Term o/ this Lease;
provided, however, Landlord may require Tenant to remove any or all
alterations at the end of the Term of this Lease. If Tenant fails to remove
by the expiration or earlier termination of this Lease all of its personal
property, or any alterations identified by Landlord for removal, Landlord
may, at its option, treat such failure as a hold-over pursuant to
Subparagraph 11(b) above, and/or Landlord may (without liability to Tenant
for loss thereof) treat such personal property and/or alterations as
abandoned and, at Tenant's sole cost and expense and in addition to
Landlord's other rights and remedies under this Lease, at law or in equity:
(a) remove and store such items; and/or (b) upon ten (10) days' prior
notice to Tenant, sell, discard or otherwise dispose of all or any such
items at private or public sale for such price as Landlord may obtain or by
other commercially reasonable means. Tenant shall be liable for all costs
of disposition of Tenant's abandoned property and Landlord shall have no
liability to Tenant with respect to any such abandoned property. Landlord
agrees to apply the proceeds of any sale of any such property to any
amounts due to Landlord under this Lease from Tenant (including Landlord's
attorneys' fees and other costs incurred in the removal, storage and/or
sale of such items), with any remainder to be paid to Tenant.
14. REPAIRS.
(a) LANDLORD'S OBLIGATIONS. Landlord agrees to repair and maintain the
structural portions of the Building, including the foundations, bearing and
exterior walls (excluding glass), subflooring and roof (excluding
skylights), and the unexposed electrical, plumbing and sewer systems,
including those portions of such systems which are outside the Premises,
gutters and downspouts on the Building and the heating, ventilating and air
conditioning systems which serve the Premises, unless such maintenance and
repairs are caused in part or in whole by the act,
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neglect or omission of any duty by Tenant, its agents, servants, employees
or invitees, in which case Tenant will pay to Landlord, as additional rent,
the reasonable cost of such maintenance and repairs. The costs of
maintenance and repairs performed by Landlord will be included in Operating
Expenses. Except as provided in this Subparagraph 14(a), Landlord has no
obligation to alter, remodel, improve, repair, decorate or paint the
Premises or any part thereof. Landlord will not be liable for any failure
to make any such repairs or to perform any maintenance unless such failure
shall persist for an unreasonable time after written notice of the need of
such repairs or maintenance is given to Landlord by Tenant. Tenant will not
be entitled to any abatement of rent and Landlord will not have any
liability by reason of any injury to or interference with Tenant's business
arising from the making of any repairs, alterations or improvements in or
to any portion o/ the Building or the Premises or in or to fixtures,
appurtenances and equipment therein. Tenant waives the right to make
repairs al Landlord's expense under any law, statute, ordinance, rule,
regulation, order or ruling (including, without limitation, to the extent
the Premises are located in California, the provisions of California Civil
Code Sections 1941 and 1942 and any successor statutes or laws of a similar
nature).
(b) Tenant's Obligations. Tenant agrees to keep, maintain and preserve the
Premises in a state of condition and repair consistent with the Building
and, when and if needed, at Tenant's sole cost and expense, to make all
repairs to the Premises and every part thereof including, without
limitation, all walls, storefronts, floors, ceilings, interior and exterior
doors and windows and fixtures and interior plumbing. Any such maintenance
and repairs will be performed by Landlord's contractor, or at Landlord's
option, by such contractor or contractors as Tenant may choose from an
approved list to be submitted by Landlord. Tenant agrees to pay all costs
and expenses incurred in such maintenance and repair within seven (7) days
after billing by such contractor or contractors. It Tenant refuses or
neglects to repair and maintain the Premises property as required hereunder
to the reasonable satisfaction of Landlord, Landlord, at any time following
ten (10) days from the date on which Landlord makes a written demand on
Tenant to effect such repair and maintenance, may enter upon the Premises
and make such repairs and/or maintenance, and upon completion thereof,
Tenant agrees to pay to Landlord as additional rent, Landlord's costs for
making such repairs plus an amount not to exceed ten percent (10%) of such
costs for overhead, within ten (10) days of receipt from Landlord of a
written itemized bill therefor. Any amounts not reimbursed by Tenant within
such ten (10) day period will bear interest at the interest Rate until paid
by Tenant.
15. LIENS. Tenant agrees not to permit any mechanic's, materialmen's or other
liens to be filed against all or any part of the Project, the Building or
the Premises, nor against Tenant's leasehold interest in the Premises, by
reason of or in connection with any repairs, alterations, improvements or
other work contracted for or undertaken by Tenant or any other act or
omission o/ Tenant or Tenant's agents, employees, contractors, licensees or
invitees. Al Landlord's request, Tenant agrees to provide Landlord with
enforceable, conditional and final lien releases (or other evidence
reasonably requested by Landlord to demonstrate protection from liens) from
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all persons furnishing labor and/or materials at the Premises. Landlord
will have the right at all reasonable times to post on the Premises and
record any notices o/ non-responsibility which it deems necessary for
protection from such liens. If any such liens are filed, Tenant will, at
its sole cost and expense, promptly cause such liens to be released of
record or bonded so that it no longer affects title to the Project, the
Building or the Premises. If Tenant fails to cause any such liens to be so
released or bonded within ten (10) days after filing thereof, such failure
will be deemed a material breach by Tenant under this Lease without the
benefit of any additional notice or cure period described in Paragraph 22
below, and Landlord may, without waiving its rights and remedies based on
such breach, and without releasing Tenant from any o/ its obligations,
cause such liens to be released by any means it shall deem proper,
including payment in satisfaction of the claims giving rise to such liens.
Tenant agrees to pay to Landlord within ten (10) days after receipt of
invoice from Landlord, any sum paid by Landlord to remove such liens,
together with interest at the Interest Rate from the dale of such payment
by Landlord.
16. ENTRY BY LANDLORD. Landlord and its employees and agents will at all
reasonable times have the right to enter the Premises to inspect the same,
to show the Premises to prospective purchasers or tenants, to post notices
of nonresponsibility, and/or to repair the Premises as permitted or
required by this Lease. In exercising such entry rights, Landlord will
endeavor to minimize as reasonably practicable, the interference with
Tenant's business, and will provide Tenant with reasonable advance notice
of any such entry (except in emergency situations). Landlord will at all
times have and retain a key with which to unlock all doors in the Premises,
excluding Tenant's vaults and safes. Tenant shall not alter any lock or
install any new or additional locks or bolts on any door of the Premises
without Landlord's prior written consent and without providing Landlord
with a key to all such locks. Except in the case of the gross negligence or
willful misconduct of Landlord, any entry to the Premises obtained by
Landlord will not be construed or deemed to be a forcible or unlawful entry
into the Premises, or an eviction of Tenant from the Premises and Landlord
will not be unable to Tenant for any damages or losses resulting from any
such entry.
17. UTILITIES AND SERVICES. Throughout the Term of this Lease, Tenant shall pay
directly to the utility company providing such service all costs for water,
gas, heat, light, power, sewer, electricity, telephone and other services
metered, chargeable or provided to the Premises. Landlord will not be
liable to Tenant for any failure to furnish any of the foregoing utilities
and services if such failure is caused by all or any of the following: (i)
accident, breakage or repairs' (ii) strikes, lockouts or other labor
disturbance or labor dispute of any character; (iii) governmental
regulation, moratorium or other governmental action or inaction; (iv)
inability despite the exercise of reasonable diligence to obtain
electricity, water or fuel, or (v) any other cause beyond Landlord's
reasonable control. In addition, in the event of any stoppage or
interruption of services or utilities, Tenant shall not be entitled to any
abatement or reduction of rent (except as expressly provided in
Subparagraphs 20(t) or 21(b) if such failure results from a damage or
taking described therein), no eviction of Tenant will result from such
failure and Tenant will not be relieved from the performance of any
covenant or agreement in this Lease
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because of such failure. In the event of any failure, stoppage or
interruption thereof, Landlord agrees to diligently attempt to resume
service promptly.
18. ASSUMPTION OF RISK AND INDEMNIFICATION.
(a) Assumption of Risk. Tenant, as a material part other consideration to
Landlord, agrees that neither Landlord nor any Landlord indemnified Parties
(as defined in Subparagraph 8(c) above) will be liable to Tenant for, and
Tenant expressly assumes the risk o/ and waives any and all claims it may
have against Landlord or any Landlord Indemnified Parties with respect to,
(i) any and all damage to property or injury to persons in, upon or about
the Premises, the Building or the Project resulting /rom the act or
omission (except for the grossly negligent or intentionally wrongful act or
omission) of Landlord, (ii) any such damage caused by other tenants or
persons in or about the Building or the Project, or caused by quasi-public
work, (iii) any damage to property entrusted to employees of The Building,
(iv) any loss of or damage to property by them or otherwise, or (v) any
injury or damage to persons or property resulting from any casualty,
explosion, falling plaster or other masonry or glass, steam, gas,
electricity, water or rain which may leak /rom any part o/ the Building or
any other portion of the Project or from the pipes, appliances or plumbing
works therein or from the root, street or subsurface or from any other
place, or resulting from dampness. Neither Landlord nor any Landlord
Indemnified Parties will be liable for consequential damages arising out of
any loss of the use of the Premises or any equipment or facilities therein
by Tenant or any Tenant Parties (as defined in Subparagraph 8(c) above) or
for interference with light. Tenant agrees to give prompt notice to
Landlord in case of fire or accidents in the Premises or the Building, or
of detects therein or in the fixtures or equipment.
(b) Indemnification. Tenant will be liable for, and agrees, to the maximum
extent permissible under applicable law, to promptly indemnify, protect,
defend and hold harmless Landlord and all Landlord Indemnified Parties,
from and against, any and all claims, damages, judgments, suits, causes of
action, losses, liabilities, penalties, fines, expenses and costs,
including attorneys' tees and court costs (collectively, "Indemnified
Claims"), arising or resulting from (i) any act or omission of Tenant or
any Tenant Parties; (ii) the use of the Premises and Common Areas and
conduct of Tenant's business by Tenant or any Tenant Parties, or any other
activity, work or thing done, permitted or suffered by Tenant or any Tenant
Parties, in or about the Premises, the Building or elsewhere within the
Project and/or (iii) any default by Tenant o/ any obligations on Tenant's
part to be performed under the terms of this Lease. In case any action or
proceeding is brought against Landlord or any Landlord indemnified Parties
by reason of any such indemnified Claims, Tenant, upon notice from
Landlord, agrees to promptly defend the same at Tenant's sole cost and
expense by counsel approved in writing by Landlord, which approval Landlord
will not unreasonably withhold.
(c) Survival; No Release of Insurers. Tenant's indemnification obligations
under Subparagraph 18(b) will survive the expiration or earlier termination
of this Lease Tenant's covenants, agreements and indemnification obligation
in Subparagraphs 18(a) and 18(b) above,
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are not intended to and will not relieve any insurance carrier of its
obligations under policies required to be carried by Tenant pursuant to the
provisions of This Lease.
19. INSURANCE.
(a) Tenant's Insurance. On or before the earlier to occur of (i) the
Commencement Date, or (ii) the date Tenant commences any work of any type
in the Premises pursuant to this Lease (which may be prior to the
Commencement Date), and continuing throughout the entire Term hereof and
any other period of occupancy, Tenant agrees to keep in full force and
effect, at its sole cost and expense, the insurance specified on Exhibit
"F" attached hereto. Landlord reserves the right to require any other form
or forms of insurance as Tenant or Landlord or any mortgagees of Landlord
may reasonably require from time to time in form, in amounts, and for
insurance risks against which, a prudent tenant would protect itself, but
only to the extent coverage for such risks and amounts are available in The
insurance market at commercially acceptable rates Landlord makes no
representation that the limits of liability required to be carried by
Tenant under the terms of this Lease are adequate to protect Tenant's
interests and Tenant should obtain such additional insurance or increased
liability limits as Tenant deems appropriate.
(b) Supplemental Tenant Insurance Requirements. All policies must be in a form
reasonably satisfactory to Landlord and issued by an insurer admitted to do
business in the State. All policies must be issued by insurers with a
policyholder rating of"A" and a financial rating of "X" in the most recent
version of Best's Key Rating Guide. AU policies must contain a requirement
to notify Landlord (and Landlord's property manager and any mortgagees or
ground lessors of Landlord who are named as additional insureds, if any) in
writing not less than thirty (30) days prior to any material change,
reduction in coverage, cancellation or other termination thereof. Tenant
agrees to deliver to Landlord, as soon as practicable after placing the
required insurance, but in any event within the time frame specified in
Subparagraph 19(a) above, certificate(s) of insurance and/or H required by
Landlord, certified copies of each policy evidencing the existence of such
insurance and Tenant's compliance with The provisions of This Paragraph 19.
Tenant agrees to cause replacement policies or certificates to be delivered
to Landlord not less than thirty (30) days prior to the expiration of any
such policy or policies. If any such initial or replacement policies or
certificates are not furnished within the time(s) specified herein,
Landlord will have the right, bul not the obligation, to obtain such
insurance as Landlord deems necessary to protect Landlord's interests at
Tenant's expense. Tenant's insurance under Subparagraphs 19(a)(iii) and
(iv) must name Landlord and Landlord's property manager (and at Landlord's
request, Landlord's mortgagees and ground lessors of which Tenant has been
informed in writing) as additional insureds and must also contain a
provision that the insurance afforded by such policy is primary insurance
and any insurance carried by Landlord and Landlord's property manager or
Landlord's mortgagees or ground lessors, if any, will be excess over and
non-contributing with Tenant's insurance.
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(c) Waiver of Subrogation. Tenant's property insurance shall contain a clause
whereby the insurer waives all rights of recovery by way of subrogation
against Landlord. Tenant shall also obtain and furnish evidence to Landlord
of the waiver by Tenant's worker's compensation insurance carrier of all
rights of recovery by way of subrogation against Landlord.
20. DAMAGE OR DESTRUCTION.
(a) Partial Destruction. If The Premises or the Building are damaged by lire or
other casualty to an extent not exceeding twenty-five percent (25%) of the
full replacement cost thereof and Landlord's contractor reasonably
estimates in a writing delivered to Landlord and Tenant that the damage
thereto may be repaired reconstructed or restored to substantially its
condition immediately prior to such damage within one hundred eighty (180)
days from the date of such casualty and Landlord will receive insurance
proceeds sufficient to cover the costs of such repairs reconstruction and
restoration (including proceeds from Tenant and/or Tenants insurance which
Tenant is required to deliver to Landlord pursuant to Subparagraph 20(d)
below to cover Tenant s obligation for the costs of repair reconstruction
and restoration of any portion of the tenant improvements and any
alterations for which Tenant is responsible under this Lease) then Landlord
agrees to commence and proceed diligently with the work of repair
reconstruction and restoration and this Lease will continue in full force
and effect.
(b) Substantial Destruction. Any damage or destruction to the Premises or the
Building which Landlord is not obligated to repair pursuant to Subparagraph
20(a) above will be deemed a substantial destruction. In the event of a
substantial destruction Landlord may elect to either: (i) repair
reconstruct and restore the portion of the Building or the Premises damaged
by such casualty in which case this Lease will continue in full force and
effect subject to Tenant s termination right contained in Subparagraph
20(c) below; or (ii) terminate this Lease effective as of the date of
Tenant's receipt of Landlord s election to so terminate.
(c) Termination Rights. It Landlord elects to repair reconstruct and restore
pursuant to Subparagraph 20(b)(i) hereinabove and if Landlord's contractor
estimates that as a result of such damage Tenant cannot be given reasonable
use of and access to the Premises within two hundred forty (240) days after
the dale of such damage then either Landlord or Tenant may terminate this
Lease effective upon delivery of written notice to the other within ten
(10) days after Landlord delivers notice to Tenant of its election to so
repair reconstruct or restore; provided however Tenant shall have no right
to terminate this Lease it Landlord can relocate Tenant to other comparable
Premises in the Building or the Project within one hundred eighty (180)
days after the date of such damage.
(d) Tenants Costs and Insurance Proceeds. In the event of any damage or
destruction of all or any part of the Premises Tenant agrees to immediately
(i) notify Landlord thereof and (ii) deliver to Landlord all property
insurance proceeds received by Tenant with respect to any tenant
improvements installed by or at the cost of Tenant and any alterations bul
excluding proceeds for Tenant s furniture, fixtures, equipment and other
personal property whether or not this Lease is
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terminated as permitted in this Paragraph 20 and Tenant hereby assigns to
Landlord all rights to receive such insurance proceeds. If for any reason
(including Tenants failure to obtain required insurance) Tenant fails to
receive insurance proceeds covering the full replacement cost of any tenant
improvements and any alterations which are damaged Tenant will be deemed to
have self-insured the replacement cost oi such items and upon any damage or
destruction thereto Tenant agrees to immediately pay to Landlord the full
replacement cost of such items less any insurance proceeds actually
received by Landlord from Landlord's or Tenant's insurance with respect to
such items.
(e) Abatement of Rent. In the event of any damage repair reconstruction and/or
restoration described in this Paragraph 20 rent will be abated or reduced
as the case may be from the date of such casualty in proportion to the
degree to which Tenant s use of the Premises is impaired during such period
of repair until such use is restored. Except for abatement of rent as
provided hereinabove, Tenant will not be entitled to any compensation or
damages for loss of or interference with Tenant's business or use or access
of all or any part of the Premises or for lost profits or any other
consequential damages of any kind or nature which result from any such
damage repair reconstruction or restoration.
(f) Damage Near End of Term. Landlord and Tenant shall each have the right to
terminate this Lease if any damage to the Premises or the Building occurs
during the last twelve (12) months of the Term of this Lease where Landlord
s contractor estimates in a writing delivered to Landlord and Tenant that
the repair reconstruction or restoration of such damage cannot be completed
within sixty (60) days after the date of such casualty. If either party
desires to terminate this Lease under this Subparagraph (f) it shall
provide written notice to the other party of such election within ten (10)
days after receipt of Landlord's contractor's repair estimates.
(g) Waiver of Termination Right. Landlord and Tenant agree that the foregoing
provisions of this Paragraph 20 are to govern their respective rights and
obligations in the event of any damage or destruction and supersede and are
in lieu of The provisions of any applicable law statute ordinance rule
regulation order or ruling now or hereafter in force which provide remedies
for damage or destruction of leased premises (including without limitation
to the extent the Premises are located in California. The provisions of
California Civil Code Section 1932 Subsection 2 and Section 1933 Subsection
4 and any successor statute or laws of a similar nature).
21. EMINENT DOMAIN.
(a) Substantial Taking. If the whole of The Premises or such part hereof as
shall substantially interfere with Tenant s use and occupancy of the
Premises as contemplated by this Lease is taken for any public or quasi-
public purpose by any lawful power or authority by exercise of the right of
appropriation condemnation or eminent domain or sold to prevent such taking
either party will have the right to terminate this Lease effective as of
the date possession is required to be surrendered to such authority.
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(b) Partial Taking; Abatement of Rent. in the event of a taking of a portion of
the Premises which does not substantially interfere with Tenant s use and
occupancy of the Premises including any temporary taking of ninety (90)
days or less then neither party will have the right to terminate this Lease
and Landlord will thereafter proceed to make a functional unit of the
remaining portion of the Premises (but only to the extent Landlord receives
proceeds therefor from the condemning authority) and rent will be abated
with respect to the part of the Premises which Tenant is deprived of on
account of such taking. Notwithstanding the immediately preceding sentence
to the contrary it any part of the Building or the Project is taken
(whether or not such taking substantially interferes with Tenant s use of
the Premises) Landlord may terminate this Lease upon thirty (30) days prior
written notice to Tenant if Landlord also terminates the leases of the
other tenants of the Building which are leasing comparably sized space for
comparable lease terms.
(c) Condemnation Award. In connection with any taking of the Premises or the
Building Landlord will be entitled to receive the entire amount of any
award which may be made or given in such taking or condemnation without
deduction or apportionment for any estate or interest of Tenant, it being
expressly understood and agreed by Tenant that no portion of any such award
will be allowed or paid to Tenant for any so-called bonus or excess value
of This Lease and such bonus or excess value will be the sole property of
Landlord. Tenant agrees not to assert any claim against Landlord or the
taking authority for any compensation because of such taking (including any
claim for bonus or excess value of this Lease); provided however, if any
portion of the Premises is taken, Tenant will have the right to recover
from the condemning authority (but not from Landlord) any compensation as
may be separately awarded or recoverable by Tenant for the taking of
Tenant's furniture, fixtures, equipment and other personal property within
the Premises for Tenant's relocation expenses and for any loss of goodwill
or other damage to Tenant's business by reason of such taking.
22. DEFAULTS AND REMEDIES.
(a) Defaults. The occurrence of any one or more of the following events will be
deemed a default by Tenant:
(i) The abandonment or vacation of the Premises by Tenant.
(ii) The failure by Tenant to make any payment of rent or additional rent or any
other payment required to be made by Tenant hereunder as and when due where
such failure continues for a period of three (3) days after written notice
thereof from Landlord to Tenant; provided however that any such notice will
be in lieu of and not in addition to any notice required under applicable
law (including without limitation to the extent the Premises are located in
California the provisions of California Code of Civil Procedure Section
1161 regarding unlawful detainer actions or any successor statute or law of
a similar nature).
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(iii) The failure by Tenant to observe or perform any of the express or implied
covenants or provisions of this Lease to be observed or performed by
Tenant other than as specified in Subparagraph 22(a)(i) or (ii) above
where such failure continues for a period of five (5) days after written
notice thereof from Landlord to Tenant The provisions of any such notice
will be in lieu of and not in addition to any notice required under
applicable law (including without limitation to the extent the Premises
are located in California, California Code of Civil Procedure Section
1161 regarding unlawful detainer actions and any successor statute or
similar law). It the nature of Tenants default is such that more than
five (5) days are reasonably required for its cure then Tenant will not
be deemed to be in default if Tenant with Landlord's concurrence
commences such cure within such five (5) day period and thereafter
diligently prosecutes such cure to completion.
(iv) (A) The making by Tenant of any general assignment for the benefit of
creditors; (B) the Fling by or against Tenant of a petition to have
Tenant adjudged a bankrupt or a petition for reorganization or
arrangement under any law relating to bankruptcy (unless in the case
of a petition filed against Tenant the same is dismissed within sixty
(60) days); (C) the appointment of a trustee or receiver to take
possession of substantially all of Tenant s assets located at the
Premises or of Tenant s interest in this Lease where possession is not
restored to Tenant within thirty (30) days; or (D) the attachment
execution or other judicial seizure of substantially all of Tenant s
assets located at the Premises or of Tenant s interest in this Lease
where such seizure is not discharged within thirty (30) days.
(b) Landlord's Remedies; Termination. In the event of any default by Tenant in
addition to any other remedies available to Landlord at law or in equity
under applicable law (including without limitation to the extent the
Premises are located in California the remedies of Civil Code Section
1951.4 and any successor statute or similar law) Landlord will have the
immediate right and option to terminate this Lease and all rights of Tenant
hereunder. If Landlord elects to terminate this Lease, then to the extent
permitted under applicable law Landlord may recover from Tenant: (i) the
worth at the lime of award of any unpaid rent which had been earned at the
time of such termination plus (ii) the worth at the time of award of the
amount by which the unpaid rent which would have been earned after
termination until the time of award exceeds the amount of such rent loss
that Tenant proves could have been reasonably avoided; plus (iii) the worth
at the lime of award of the amount by which the unpaid rent for the balance
of the Term after the time of award exceeds the amount of such rent loss
that Tenant proves could be reasonably avoided plus (iv) any other amount
necessary to compensate Landlord for all the detriment proximately caused
by Tenant's failure to perform its obligations under this Lease or which in
the ordinary course of things results therefrom including but not limited
to: attorneys fees and costs; brokers commissions; the costs of
refurbishment alterations renovation and repair of the Premises and removal
(including the repair of any damage caused by such removal) and storage (or
disposal) of Tenant's personal property equipment fixtures alterations the
Tenant improvements and any other items which Tenant is required under this
Lease to remove but does not remove as well as the unamortized value of any
tree rent reduced rent free parking reduced rate parking and any tenant
improvement allowance or other costs or economic concessions
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provided paid granted or incurred by Landlord pursuant to this Lease. As
used in Subparagraphs 22(b)(i) and (ii) above the worth at the time of
award is computed by allowing interest at the interest Rate. As used in
Subparagraph 22(b)(iii) above the worth at the time of award is computed by
discounting such amount al the discount rate of the Federal Reserve Bank of
San Francisco at the time of award plus one percent (1%).
(c) Landlord s Remedies; Re-Entry Rights. In the event of any default by Tenant
in addition to any other remedies available to Landlord under {his Lease at
law or in equity Landlord will also have the right with or without
terminating this Lease to re-enter the Premises and remove all persons and
property from the Premises; such property may be removed and stored in a
public warehouse or elsewhere and/or disposed of at the sole cost and
expense of and for the account of Tenant in accordance with the provisions
of Paragraph 13 of this Lease or any other procedures permitted by
applicable law. No reentry or taking possession of the Premises by Landlord
pursuant to this Subparagraph 22(c) will be construed as an election to
terminate this Lease unless a written notice of such intention is given to
Tenant or unless the termination thereof is decreed by a court of competent
jurisdiction.
(d) Landlord s Remedies; Re-Letting. If Landlord does not elect to terminate
this Lease Landlord may from time to time without terminating this Lease
either recover all rent as If becomes due or relate the Premises or any
part thereof on terms and conditions as Landlord in its sole and absolute
discretion may deem advisable with the right to make alterations and
repairs to the Premises in connection with such reletting. If Landlord
elects to relet the Premises then rents received by Landlord from such
reletting will be applied: first to the payment of any indebtedness other
than rent due hereunder from Tenant to Landlord; second to the payment of
any cost of such reletting; third to the payment of the cost of any
alterations and repairs to the Premises incurred in connection with such
reletting; fourth to the payment of rent due and unpaid hereunder and the
residue if any will be held by Landlord and applied to payment of future
rent as the same may become due and payable hereunder. Should that portion
of such rents received from such reletting during any month which is
applied to the payment of rent hereunder be less than the rent payable
during that month by Tenant hereunder then Tenant agrees to pay such
deficiency to Landlord immediately upon demand therefor by Landlord. Such
deficiency will be calculated and paid monthly.
(e) Landlord's Remedies; Performance for Tenant. All covenants and agreements
to be performed by Tenant under any of the terms of this Lease are to be
performed by Tenant al Tenant s sole cost and expense and without any
abatement of rent. If Tenant fails to pay any sum of money owed to any
party other than Landlord for which it is liable under this Lease or it
Tenant fails to perform any other act on its part to be performed hereunder
and such failure continues for ten (10) days after notice thereof by
Landlord, Landlord may without waiving or releasing Tenant from its
obligations but shall not be obligated to make any such payment or perform
any such other act to be made or performed by Tenant. Tenant agrees to
reimburse Landlord upon demand for all sums so paid by Landlord and all
necessary incidental costs together with interest thereon at the Interest
Rate from the date of such payment by Landlord
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until reimbursement by Tenant. This remedy shall be in addition to any
other right or remedy of Landlord set forth in this Paragraph 22.
(f) Late Payment. If Tenant fails to pay any installment of rent within seven
(7) days when due or fi Tenant fails to make any other payment for which
Tenant is obligated under this Lease when due, such late amount will accrue
interest at the Interest Rate until such amount is paid by Tenant to
Landlord. In addition Tenant agrees to pay to Landlord concurrently with
such late payment amount as additional rent, a late charge equal to ten
percent (10%) of the amount due to compensate Landlord for the extra costs
Landlord will incur as a result of such late payment. Landlord and Tenant
agree that such late charge represents a fair and reasonable estimate of
the costs that Landlord will incur by reason of any such late payment.
Acceptance of any such interest and late charge will not constitute a
waiver of the Tenant's default with respect to the overdue amount or
prevent Landlord from exercising any of the other rights and remedies
available to Landlord. If Tenant incurs a late charge more than three (3)
times in any period of twelve (12) months during the Lease Term then
notwithstanding that Tenant cures the late payments for which such late
charges are imposed Landlord will have the right to require Tenant
thereafter to pay all installments of Monthly Base Rent quarterly in
advance in the form of a cashiers check throughout the remainder of the
Lease Term. Any payments of any kind returned for insufficient funds will
be subject to an additional handling charge of $25.00 and thereafter
Landlord may require Tenant to pay all future payments of rent or other
sums due by money order or cashier's check.
(g) Rights and Remedies Cumulative. All rights options and remedies of Landlord
contained in this Lease will be construed and held to be cumulative and no
one of them will be exclusive of the other and Landlord shall have the
right to pursue any one or all of such remedies or any other remedy or
relief which may be provided by law or in equity whether or not stated in
this Lease. Nothing in this Paragraph 22 will be deemed to limit or
otherwise affect Tenant's indemnification of Landlord pursuant to any
provision of This Lease.
23. LANDLORD'S DEFAULT. Landlord will not be in default in the performance of
any obligation required to be performed by Landlord under this Lease unless
Landlord fails to perform such obligation within thirty (30) days after the
receipt of written notice from Tenant specifying in detail Landlord's
failure to perform; provided however that it the nature of Landlord's
obligation is such that more than thirty (30) days are required for
performance, then Landlord will not be deemed in default if it commences
such performance within such thirty (30) day period and thereafter
diligently pursues the same to completion. Upon any default by Landlord
Tenant may exercise any of its rights provided at law or in equity subject
to the limitations on liability set forth in Paragraph 35 of This Lease.
24. ASSIGNMENT AND SUBLETTING.
(a) Restriction on Transfer. Except as expressly provided in this Paragraph 24
Tenant will not either voluntarily or by operation of law assign or
encumber this Lease or any interest herein
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or sublet the Premises or any part thereof or permit the use or occupancy
of the Premises by any party other than Tenant (any such assignment
encumbrance sublease or the like will sometimes be referred to as a
Transfer) without the prior written consent of Landlord, which consent
Landlord will not unreasonably withhold. For purposes of this Paragraph 24
it Tenant is a corporation partnership or other entity any transfer
assignment, encumbrance or hypothecation of fifty percent (50%) or more
(individually or in the aggregate) of any stock or other ownership interest
in such entity and/or any transfer, assignment, hypothecation or
encumbrance of any controlling ownership or voting interest in such entity
will be deemed a Transfer and will be subject to all of the restrictions
and provisions contained in this Paragraph 24; provided however, this
provision will not apply to public corporations the stock of which is
traded through a public stock exchange or over the counter system.
(b) Transfer Notice. If Tenant desires to elect a Transfer, then at least
thirty (30) days prior to the date when Tenant desires the Transfer to be
effective (the Transfer Date) Tenant agrees to give Landlord a notice (the
Transfer Notice ) stating the name address and business of the proposed
assignee sublessee or other transferee (sometimes referred to hereinafter
as Transferee) reasonable information (including references) concerning the
character ownership and financial condition of the proposed Transferee the
Transfer Date any ownership or commercial relationship between Tenant and
the proposed Transferee and the consideration and all other material terms
and conditions of the proposed Transfer all in such detail as Landlord may
reasonably require.
(c) Landlords Options. Within fifteen (15) days of Landlords receipt of any
Transfer Notice and any additional information requested by Landlord
concerning the proposed Transferee's financial responsibility, Landlord
will notify Tenant of its election to do one of the following: (i) consent
to the proposed Transfer subject to such reasonable conditions as Landlord
may impose in providing such consent; (ii) refuse such consent which
refusal shall be on reasonable grounds; or (iii) terminate this Lease as to
all or such portion of the Premises which is proposed to be sublet or
assigned and recapture all or such portion of the Premises for reletting by
Landlord.
(d) Additional Conditions. A condition to Landlord's consent to any transfer of
this Lease will be the delivery to Landlord of a true copy of the fully
executed instrument of assignment, sublease, transfer or hypothecation in
form and substance reasonably satisfactory to Landlord. Tenant agrees to
pay to Landlord as additional rent all sums and other consideration payable
to and for the benefit of Tenant by the assignee or sublessee in excess of
the rent payable under this Lease for the same period and portion of the
Premises. In calculating excess rent or other consideration which may be
payable to Landlord under this paragraph Tenant will be entitled to deduct
commercially reasonable third party brokerage commissions and attorneys
fees and other amounts reasonably and actually expended by Tenant in
connection with such assignment or subletting if acceptable written
evidence of such expenditures is provided to Landlord. No Transfer will
release Tenant of Tenant's obligations under This Lease or alter the
primary liability of Tenant to pay the rent and to perform all other
obligations to be performed by Tenant hereunder. Landlord may require that
any Transferee remit directly to Landlord on a monthly
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basis all monies due Tenant by said Transferee. Consent by Landlord to one
Transfer will not be deemed consent to any subsequent Transfer. In the
event of default by any Transferee of Tenant or any successor of Tenant in
the performance of any of the terms hereof, Landlord may proceed directly
against Tenant without the necessity of exhausting remedies against such
Transferee or successor. If Tenant effects a Transfer or requests the
consent of Landlord to any Transfer (whether or not such Transfer is
consummated), then, upon demand, Tenant agrees to pay Landlord a non-
refundable administrative fee of not less than One Hundred Dollars
($100.00) and actual expenses incurred, plus Landlord's reasonable
attorneys' fees.
25. SUBORDINATION. Without the necessity of any additional document being
executed by Tenant for the purpose of effecting a subordination and at the
election of Landlord or any mortgagee or beneficiary with a deed of trust
encumbering the Building and/or the Project or any lessor of a ground or
underlying lease with respect to the Building, this Lease will be subject
and subordinate at all times to: (i) all ground leases or underlying leases
which may now exist or hereafter be executed affecting the Building; and
(ii) the lien of any mortgage or deed of trust which may now exist or
hereafter be executed for which the Building, the Project or any leases
thereof or Landlord's interest and estate in any of said items is specified
as Security. Notwithstanding the foregoing, Landlord reserves the right to
subordinate any such ground leases or underlying leases or any such liens
to This Lease. If any such ground lease or underlying lease terminates for
any reason or any such mortgage or deed of trust is foreclosed or a
conveyance in lieu of foreclosure is made for any reason, at the election
of Landlord's successor in interest, Tenant agrees to attorn to and become
the tenant of such successor in wich event Tenant s right to possession of
The Premises will not be disturbed as long as Tenant is not in default
under this Lease. Tenant hereby waives its rights under any law which gives
or purports to give Tenant any right to terminate or otherwise adversely
affect this Lease and the obligations of Tenant hereunder in the event of
any such foreclosure proceeding or sale. Tenant covenants and agrees to
execute and deliver upon demand by Landlord and in the form reasonably
required by Landlord any additional documents evidencing the priority or
subordination of this Lease and Tenant's attornment agreement with respect
to any such ground lease or underlying leases or the lien of any such
mortgage or deed of trust. If Tenant fails to sign and return any such
documents within ten (10) days of receipt, Tenant will be in default
hereunder.
26. ESTOPPEL CERTIFICATE. Within ten (10) days following any written request
which Landlord may make from time to time, Tenant agrees to execute and
deliver to Landlord an estoppel certificate in Landlord's standard form or
as may reasonably be required by Landlord's lender. Landlord and Tenant
intend that any Statement delivered pursuant to this Paragraph 26 may be
relied upon by any mortgagee , purchaser or prospective purchaser of the
Building or any interest therein. Tenant's failure to deliver such
statement within such time will be conclusive upon Tenant (i) that this
Lease is in full force and effect without modification except as may be
represented by Landlord (ii) that there are no uncured defaults in
Landlord's performance and (iii) that not more than one (1) month's rent
has been paid in advance. Without limiting the foregoing if Tenant fails to
deliver any such statement within such ten (10) day period Landlord may
deliver to Tenant an additional request for such Statement and Tenant's
failure to deliver
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such Statement to Landlord within ten (10) days after delivery of such
additional request will constitute a default under this Lease. Tenant
agrees to indemnify and protect Landlord from and against any and all
claims, damages, losses, liabilities and expenses (including attorneys fees
and costs) attributable to any failure by Tenant to timely deliver any such
estoppel certificate to Landlord as required by this Paragraph 26.
27. BUILDING PLANNING. If Landlord requires the Premises for use in conjunction
with another suite or for other reasons connected with the planning program
for the Building or the Project, Landlord will have the right upon sixty
(60) days prior written notice to Tenant to move Tenant to other space in
the Building of substantially similar size as the Premises and with tenant
improvements of substantially similar age, quality and layout as then
existing in the Premises. Any such relocation will be at Landlord's cost
and expense including the cost of providing such substantially similar
tenant improvements (but not any furniture or personal property) and
Tenant's reasonable moving, telephone installation and stationary
reprinting costs. If Landlord so relocates Tenant, the terms and conditions
of this Lease will remain in full force and effect and apply to the new
space except that (a) a revised Exhibit A will become part of this Lease
and will reflect the location of the new space, (b) Paragraph 1 of This
Lease will be amended to include and state all correct data as to the new
space, (c) the new space will thereafter be deemed to be the Premises and
(d) all economic terms and conditions (e.g. rent, total Operating Expense
Allowance, etc.) will be adjusted on a per square foot basis based on the
total number of rentable square feel of area contained in the new space.
Landlord and Tenant agree to cooperate fully with one another in order to
minimize the inconvenience to Tenant resulting from any such relocation.
28. RULES AND REGULATIONS. Tenant agrees to faithfully observe and comply with
the Rules and Regulations, a copy of which is attached hereto and
incorporated herein by this reference as Exhibit E, and all reasonable and
nondiscriminatory modifications thereof and additions thereto from time to
time put into effect by Landlord. Landlord will not be responsible to
Tenant for the violation or non-performance by any other tenant or occupant
of the Building of any of the Rules and Regulations.
29. MODIFICATION AND CURE RIGHTS OF LANDLORD'S MORTGAGEES AND LESSORS. Tenant
within ten (10) days after request therefor agrees to execute any
reasonable amendments to this Lease which may be requested by any lender or
ground lessor of the Project provided any such amendments do not increase
the obligations of Tenant under this Lease or adversely affect the
leasehold estate created by this Lease. In the event of any default on the
part of Landlord Tenant will give notice by registered or certified mail to
any beneficiary of a deed of trust or mortgage covering The Premises or
ground lessor of Landlord whose address has been furnished to Tenant and
Tenant agrees to offer such beneficiary, mortgagee or ground lessor a
reasonable opportunity to cure The default (including with respect to any
such beneficiary or mortgagee time to obtain possession of the Premises
subject to This Lease and Tenant's rights hereunder by power of sale or a
judicial foreclosure if such should prove necessary to effect a cure).
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30. DEFINITION OF LANDLORD. The term Landlord as used in this Lease, so far as
covenants or obligations on the part of Landlord are concerned, means and
includes only the owner or owners at the time in question of the fee title
of the Premises or the lessees under any ground lease if any. In the event
of any transfer assignment or other conveyance or transfers of any such
title (other than a transfer for security purposes only) Landlord herein
named (and in case of any subsequent transfers or conveyances, the then
grantor) will be automatically relieved from and after the date of such
transfer, assignment or conveyance of all liability as respects. The
performance of any covenants or obligations on the part of Landlord
contained in this Lease thereafter to be performed so long as the
transferee assumes in writing all such covenants and obligations of
Landlord arising after the date of such transfer. Landlord and Landlord's
transferees and assignees have the absolute right to transfer all or any
portion of their respective title and interest in the Project, the
Building, the Premises and/or this Lease without the consent of Tenant and
such transfer or subsequent transfer will not be deemed a violation on
Landlord's part of any of the terms and conditions of This Lease.
31. WAIVER. The waiver by either party of any breach or any term, covenant or
condition herein contained will not be deemed to be a waiver of any
subsequent breach of the same or any other term, covenant or condition
herein contained, nor will any custom or practice which may develop between
the parties in the administration of the terms hereof be deemed a waiver of
or in any way affect the right of either party to insist upon performance
in strict accordance with said terms. The subsequent acceptance of rent or
any other payment hereunder by Landlord will not be deemed to be a waiver
of any preceding breach by Tenant of any term covenant or condition of this
Lease other than the failure of Tenant to pay the particular rent so
accepted regardless of Landlord's knowledge of such preceding breach at the
time of acceptance of such rent. No acceptance by Landlord of a lesser sum
than the basic rent and additional rent or other sum then due will be
deemed to be other than on account of the earliest installment of such rent
or other amount due nor will any endorsement or statement on any check or
any letter accompanying any check be deemed an accord and satisfaction and
Landlord may accept such check or payment without prejudice to Landlord's
right to recover the balance of such installment or other amount or pursue
any other remedy provided in This Lease. The consent or approval of
Landlord to or of any act by Tenant requiring Landlord's consent or
approval will not be deemed to waive or render unnecessary Landlord's
consent or approval to or of any subsequent similar acts by Tenant.
32. PARKING. So long as this Lease is in effect and provided Tenant is not in
default hereunder, Landlord grants to Tenant, Tenant's visitors and guests
a non-exclusive license to use the parking areas which serve the Building
subject to the terms and conditions of this Paragraph 32 and the Rules and
Regulations regarding parking contained in Exhibit E attached hereto.
Tenant will not use or allow any of Tenant's employees or guests to use any
parking spaces which have been specifically assigned by Landlord to other
tenants or occupants or for other uses such as visitor parking or which
have been designated by any governmental entity as being restricted to
certain uses. Landlord may assign any unreserved and unassigned parking
spaces and/or make all or any portion of such spaces reserved if Landlord
reasonably determines that it
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is necessary for orderly and efficient parking or for any other reasonable
reason. Tenant agrees to cause its employees subtenants, assignees,
contractors, suppliers, customers and invitees to comply with the Rules and
Regulations. Landlord reserves the right from time to lime to modify and/or
adopt such other reasonable and non-discriminatory rules and regulations
for the parking facilities as if deems reasonably necessary for the
operation of the parking facilities.
33. FORCE MAJEURE. If either Landlord or Tenant is delayed hindered in or
prevented from the performance of any act required under this Lease by
reason of strikes, lock-outs, labor troubles, inability to procure standard
materials, failure of power, restrictive governmental laws, regulations or
orders or governmental action or inaction (including failure, refusal or
delay in issuing permits, approvals and/or authorizations which is not the
result of the action or inaction of the party claiming such delay), riots,
civil unrest or insurrection, war, fire, earthquake, flood or other natural
disaster, unusual and unforeseeable delay which results from an
interruption of any public utilities (e.g., electricity, gas, water,
telephone) or other unusual and unforeseeable delay not within the
reasonable control of the party delayed in performing work or doing acts
required under the provisions of this Lease, then performance of such act
will be excused for the period of the delay and the period for the
performance of any such act will be extended for a period equivalent to the
period of such delay. The provisions of this Paragraph 33 will not operate
to excuse Tenant from prompt payment of rent or any other payments required
under the provisions of this Lease.
34. SIGNS. Landlord will designate the location on the Premises it any for one
or more Tenant identification sign(s). Tenant has no right to install
Tenant identification signs in any other location in on or about the
Premises or the Project and will not display or erect any other signs,
displays or other advertising materials that are visible from the exterior
of the Building or from within the Building in any interior or exterior
common areas. The size design color and other physical aspects of any and
all permitted sign(s) will be subject to (i) Landlord's written approval
prior to installation which approval may be withheld in Landlord s
discretion (ii) any covenants conditions or restrictions and sign criteria
governing the Project and (iii) any applicable municipal or governmental
permits and approvals. Tenant will be solely responsible for all costs for
installation, maintenance, repair and removal of any Tenant identification
sign(s). If Tenant fails to remove Tenant's sign(s) upon termination of
this Lease and repair any damage caused by such removal, Landlord may do so
at Tenant's sole cost and expense. Tenant agrees to reimburse Landlord for
all costs incurred by Landlord to effect any installation, maintenance or
removal on Tenant's account, which amount will be deemed additional rent
and may include without limitation all sums disbursed, incurred or
deposited by Landlord, including Landlord's costs, expenses and actual
attorneys fees with interest thereon at the Interest Rate from the date of
Landlord's demand until paid by Tenant. Any sign rights granted to Tenant
under this Lease are personal to Tenant and may not be assigned transferred
or otherwise conveyed to any assignee or subtenant of Tenant without
Landlord's prior written consent, which consent Landlord may withhold in
its sole and absolute discretion.
25
<PAGE>
35. LIMITATION ON LIABILITY. In consideration of the benefits accruing
hereunder Tenant on behalf of itself and all successors and assigns of
Tenant covenants and agrees that in the event of any actual or alleged
failure breach or default hereunder by Landlord: (a) Tenant's recourse
against Landlord for monetary damages will be limited to Landlord's
interest in the Building including subject to the prior rights of any
Mortgagee Landlord's interest in the rents of the Building and any
insurance proceeds payable to Landlord; (b) except as may be necessary to
secure jurisdiction of the partnership no partner of Landlord shall be sued
or named as a party in any suit or action and no service of process shall
be made against any partner of Landlord; (c) no partner of Landlord shall
be required to answer or otherwise plead to any service of process; (d) no
judgment will be taken against any partner of Landlord and any judgment
taken against any partner of Landlord may be vacated and set aside at any
time after the fact; (e) no writ of execution will be levied against the
assets of any partner of Landlord; (t) the obligations under this Lease do
not constitute personal obligations of the individual partners, directors,
officers or shareholders of Landlord and Tenant shall not seek recourse
against the individual partners, directors, officers or shareholders of
Landlord or any of their personal assets for satisfaction of any liability
in respect to this Lease; and (g) these covenants and agreements are
enforceable both by Landlord and also by any partner of Landlord.
36. FINANCIAL STATEMENTS. Prior to the execution of this Lease by Landlord and
at any time during the Term of this Lease upon ten (10) days prior written
notice from Landlord Tenant agrees to provide Landlord with a current
financial statement for Tenant and any guarantors of Tenant and financial
statements for the two (2) years prior to the current financial statement
year for Tenant and any guarantors of Tenant. Such statements are to be
prepared in accordance with generally accepted accounting principles and,
if such is the normal practice of Tenant audited by an independent
certified public accountant.
37. QUIET ENJOYMENT. Landlord covenants and agrees with Tenant that upon Tenant
paying the rent required under this Lease and paying all other charges and
performing all of the covenants and provisions on Tenant's part to be
observed and performed under this Lease Tenant may peaceably and quietly
have hold and enjoy the Premises in accordance with This Lease.
38. MISCELLANEOUS.
(a) Conflict of Laws. This Lease shall be governed by and construed solely
pursuant to the laws of the State without giving effect to choice of law
principles thereunder.
(b) Successors and Assigns. Except as otherwise provided in this Lease all of
the covenants conditions and provisions of this Lease shall be binding upon
and shall inure to the benefit of the parties hereto and their respective
heirs personal representatives successors and assigns.
(c) Professional Fees and Costs. If either Landlord or Tenant should bring suit
against the other with respect to this Lease, then all costs and expenses,
including without limitation, actual professional fees and costs such as
appraisers, accountants and attorneys fees and costs incurred
26
<PAGE>
by the party which prevails in such action, whether by final judgment or
out of court settlement, shall be paid by the other party, which obligation
on the part of the other party shall be deemed to have accrued on the date
of the commencement of such action and shall be enforceable whether or not
the action is prosecuted to judgment. As used herein attorneys fees and
costs shall include without limitation attorneys fees costs and expenses
incurred in connection with any (i) post-judgment motions; (ii) contempt
proceedings; (iii) garnishment levy and debtor and third party examination;
(iv) discovery; and (v) bankruptcy litigation. Tenant agrees to pay all
collection agency fees and attorneys lees charged to Landlord in connection
with any late payment or non-payment of rent or any other amounts due under
this Lease including without limitation a fee of $75.00 for the preparation
of any demand for delinquent rent or any notice to pay rent or quit.
(d) Terms and Headings. The words Landlord and Tenant as used herein shall
include The plural as well as the singular. Words used in any gender
include other genders. The paragraph headings of this Lease are not a part
of this Lease and shall have no effect upon the construction or
interpretation of any part hereof.
(e) Time. Time is of the essence with respect to the performance of every
provision of this Lease in which time of performance is a factor.
(f) Prior Agreement; Amendments. This Lease constitutes and is intended by the
parties to be a final, complete and exclusive statement of their entire
agreement with respect to the subject matter of this Lease. This Lease
supersedes any and all prior and contemporaneous agreements and
understandings of any kind relating to the subject matter of this Lease.
There are no other agreements, understandings, representations, warranties
or statements, either oral or in written form, concerning the subject
matter of this Lease. No alteration modification amendment or
interpretation of this Lease shall be binding on the parties unless
contained in a writing which is signed by both parties.
(g) Separability. The provisions of this Lease shall be considered separable
such that it any provision or part of this Lease is ever held to be
invalid, void or illegal under any law or ruling all remaining provisions
of this Lease shall remain in full force and effect to the maximum extent
permitted by law.
(h) Recording. Neither Landlord nor Tenant shall record this Lease nor a short
form memorandum thereof without the consent of the other.
(i) Counterparts. This Lease may be executed in one or more counterparts, each
of which shall constitute an original and all of which shall be one and the
same agreement.
(j) Nondisclosure of Lease Terms. Tenant acknowledges and agrees that the terms
of this Lease are confidential and constitute proprietary information of
Landlord. Disclosure of the terms could adversely affect the ability of
Landlord to negotiate other leases and impair Landlords relationship with
other tenants. Accordingly, Tenant agrees that it, and its partners,
27
<PAGE>
officers, directors, employees, agents and attorneys, shall not
intentionally and voluntarily disclose the terms and conditions of this
Lease to any newspaper or other publication or any other Tenant or apparent
prospective tenant of the Building or other portion of the Project, or real
estate agent, either directly or indirectly, without the prior written
consent of Landlord, provided, however, that Tenant may disclose the terms
to prospective subtenants or assignees under this Lease.
(k) Non-Discrimination. Tenant acknowledges and agrees that there shall be no
discrimination against, or segregation of, any person, group of persons, or
entity on the basis of race, color, creed, religion, age, sex, marital
status, national origin, or ancestry in the leasing, subleasing,
transferring, assignment, occupancy, tenure, use, or enjoyment of the
Premises, or any portion thereof.
39. EXECUTION OF LEASE.
(a) Joint and Several Obligations. If more than one person executes this Lease
as Tenant, their execution of this Lease will constitute their covenant and
agreement that (i) each of them is jointly and severally liable for the
keeping, observing and performing of all of the terms, covenants,
conditions, provisions and agreements of this Lease to be kept, observed
and performed by Tenant, and (ii) the term Tenant as used in this Lease
means and includes each of them jointly and severally.
The act of or notice from, or notice or refund to, or the signature of any
one or more of them, with respect to the tenancy of this Lease, including,
but not limited to, any renewal, extension, expiration, termination or
modification of this Lease, will be binding upon each and all of the
persons executing this Lease as Tenant with the same force and effect as if
each and all of them had so acted or so given or received such notice or
refund or so signed.
(b) Tenant as Corporation or Partnership. If Tenant executes this Lease as a
corporation or partnership, then Tenant and the persons executing this
Lease on behalf of Tenant represent and warrant that such entity is duly
qualified and in good standing to do business in California and that the
individuals executing this Lease on Tenant's behalf are duly authorized to
execute and deliver this Lease on its behalf, and in the case of a
corporation, in accordance with a duly adopted resolution of the board of
directors of Tenant, a copy of which is to be delivered to Landlord on
execution hereof, if requested by Landlord, and in accordance with the by-
laws of Tenant, and, in the case of a partnership, in accordance with the
partnership agreement and the most current amendments thereto, if any,
copies of which are to be delivered to Landlord on execution hereof, if
requested by Landlord, and that this Lease is binding upon Tenant in
accordance with its terms.
(c) Examination of Lease. Submission of this instrument by Landlord to Tenant
for examination or signature by Tenant does not constitute a reservation of
or option for lease, and it
28
<PAGE>
is not effective as a lease or otherwise until execution by and delivery to
both Landlord and Tenant.
IN WITNESS WHEREOF, the parties have caused this Lease to be duly executed by
their duly authorized representatives as of the date first above written.
TENANT: LANDLORD:
Litronic Industries, Inc., Airport Industrial Complex,
a California Corporation a California Limited Partnership
By: /S/ KRIS SHAH By: /S/ JULIE GROOT
------------------------------- -------------------------
Name: Kris Shah Name: Julie A. Groot
Title: Chief Executive Officer Title: Senior Manager
29
<PAGE>
Exhibit 10.18
REVOLVING PROMISSORY NOTE
$900,000 Irvine, California
December 31, 1997
FOR VALUE RECEIVED, Litronic Industries, Inc., a California Corporation
("Company") hereby promises to pay to the order of KRDS, INC., a California
corporation ("KRDS") the principal sum of NINE HUNDRED THOUSAND DOLLARS
($900,000), with interest at the rate of ten percent (10%) per annum, payable as
follows;
1. PRINCIPAL AND INTEREST. Principal and accrued interest shall be due and
payable on March 31, 1999.
2. PREPAYMENT. This Note may be prepaid, in whole or in part, at any time
without penalty or premium. Any prepayment shall be first applied to
accrued interest, then to principal.
It is understood that this Note is a revolving note by its terms and that the
outstanding principal balance may fluctuate from time to time based on the cash
needs of the Company as determined by the Company's Board of Directors.
If this Note is not paid when due, the Company promises to pay all costs of
collection, including reasonable attorneys' fees, whether or not suit is filed.
This Note shall be governed and construed and enforced in accordance with the
laws of the State of California without reference to the principles of conflicts
of law.
IN WITNESS WHEREOF, the Company has caused this Note to be executed by its duly
authorized officers.
LITRONIC INDUSTRIES, INC.
By: /S/ KRIS SHAH
----------------------------
Kris Shah, President
By: /S/ GERALDINE SHAH
----------------------------
Geraldine Shah, Secretary
<PAGE>
Exhibit 10.19
REVOLVING PROMISSORY NOTE
$2,900,000 Irvine, California
February 24, 1998
FOR VALUE RECEIVED, Litronic Industries, Inc., a California Corporation
("Company") hereby promises to pay to the order of KRDS, INC., a California
corporation ("KRDS") the principal sum of TWO MILLION NINE HUNDRED THOUSAND
DOLLARS ($2,900,000), with interest at the rate of ten percent (10%) per annum,
payable as follows;
1. PRINCIPAL AND INTEREST. Principal and accrued interest shall be due and
payable on December 31, 1999.
2. PREPAYMENT. This Note may be prepaid, in whole or in part, at any time
without penalty or premium. Any prepayment shall be first applied to
accrued interest, then to principal.
3. CHANGE OF OWNERSHIP. Principal and accrued interest shall be due on demand
upon the sale of any or all of the assets of the Company to a Person who is
not an affiliate of the Company.
It is understood that this Note is a revolving note by its terms and that the
outstanding principal balance may fluctuate from time to time based on the cash
needs of the Company as determined by the Company's Board of Directors.
If this Note is not paid when due, the Company promises to pay all costs of
collection, including reasonable attorneys' fees, whether or not suit is filed.
This Note shall be governed and construed and enforced in accordance with the
laws of the State of California without reference to the principles of conflicts
of law.
IN WITNESS WHEREOF, the Company has caused this Note to be executed by its duly
authorized officers.
LITRONIC INDUSTRIES, INC.
By: /S/ KRIS SHAH
------------------------------------
Kris Shah, President
By: /S/ GERALDINE SHAH
------------------------------------
Geraldine Shah, Secretary
<PAGE>
Exhibit 10.20
REVOLVING PROMISSORY NOTE
$2,000,000 Irvine, California
December 31, 1997
FOR VALUE RECEIVED, Litronic Industries, Inc., a California Corporation
("Company") hereby promises to pay to the order of KRDS, INC., a California
corporation ("KRDS") the principal sum of TWO MILLION DOLLARS ($2,000,000), with
interest at the rate of ten percent (10%) per annum, payable as follows;
1. PRINCIPAL AND INTEREST. Principal and accrued interest shall be due and
payable on March 31, 1999.
2. PREPAYMENT. This Note may be prepaid, in whole or in part, at any time
without penalty or premium. Any prepayment shall be first applied to
accrued interest, then to principal.
It is understood that this Note is a revolving note by its terms and that the
outstanding principal balance may fluctuate from time to time based on the cash
needs of the Company as determined by the Company's Board of Directors.
If this Note is not paid when due, the Company promises to pay all costs of
collection, including reasonable attorneys' fees, whether or not suit is filed.
This Note shall be governed and construed and enforced in accordance with the
laws of the State of California without reference to the principles of conflicts
of law.
IN WITNESS WHEREOF, the Company has caused this Note to be executed by its duly
authorized officers.
LITRONIC INDUSTRIES, INC.
By: /S/ KRIS SHAH
----------------------------------
Kris Shah, President
By: /S/ GERALDINE SHAH
----------------------------------
Geraldine Shah, Secretary
<PAGE>
Exhibit 10.21
February 4, 1998
Mr. William W. Davis, Sr.
President/CEO
Pulsar Data Systems, Inc.
4500 Forbes Boulevard
Lanham, MD 20706
Dear Mr. Davis:
The purpose of this letter is to memorialize the agreement reached at the
January 29 meeting, and the January 30 telephone conference between
representatives of Pulsar Data Systems, Inc. ("Pulsar") and IBM Credit
Corporation ("IBM Credit").
Pulsar has immediate cash requirements of $2,426,000.00 in excess of its
collateralized credit facility. Pulsar has been unable, as previously agreed in
the October 9, 1997 meeting, to obtain a cash Equity Infusion to cover such
immediate cash requirements and has requested that IBM Credit wire funds to
cover such requirements.
Pulsar will obtain a cash equity infusion in an amount of not less than
$2,000,000.00 by May 31, 1998 or a preliminary commitment for the sale of all or
substantially all of its assets by April 30, 1998. IBM Credit in good faith
agrees to continue to provide funding to Pulsar based on part on the
representations set forth herein.
IBM Credit and Pulsar agree that:
(a) The Shortfall amount (as such term is defined in the Forbearance Agreement)
shall fluctuate and shall note exceed the limits set forth in Schedule A
hereto; and
(b) Pulsar shall pay to IBM Credit a waiver fee in the amount of $30,000.00 in
consideration of the waiver of the December 31, 1997 breach of financial
covenants. Such fee shall be paid in full by Pulsar within 15 days of
billing by IBM Credit. The financial covenants are hereby reset as follows:
<TABLE>
<S> <C> <C> <C> <C>
Covenant 3/98 6/98 9/98 12/98
NAT <.50%> 0.0% .50% 1.0%
WCTO 15 15 15 15
</TABLE>
<PAGE>
Mr. William W. Davis, Sr. 2 February 4, 1998
<TABLE>
<S> <C> <C> <C> <C>
D/TNW 17 15 15 15
</TABLE>
; and
(c) The consignment A/R due from Pax River shall be considered Eligible
Accounts so long as no more than 10% of such cosignment A/R remains
unbilled greater than sixty days by Pulsar. In the event that greater than
10% remains unbilled greater than sixty days, the consignment A/R deemed
Eligible Accounts shall be decreased by the amounts greater than sixty days
unbilled; and
(d) Pulsar shall provide IBM Credit with month-end financials (balance sheets
and income statements) due no later than 35 days after each calendar month;
and
(e) Pulsar shall remove the disclaimer language from all collateral reports;
and
(f) Effective February 1, 1998, Pulsar's interest rate is Prime (as such term
is defined in the IWCF) + 2.375%. The Shortfall Amount shall accrue
interest at a rate of Prime + 6.5%; and
(g) Pulsar shall provide to IBM Credit copies of finalized and executed Pledged
Collateral Agreements whereby William Davis pledges Merrill Lynch accounts
to IBM Credit on or before February 6, 1998. Until these Agreements are
received by IBM Credit, the Shortfall Schedule set forth in Schedule A
shall be decreased by $544,000.00; and
(h) To extend the term of the Forbearance Agreement until May 31, 998 provided
that Pulsar meets all its obligations as set forth herein and provided that
no further defaults.
(i) Per the terms set forth in the October 10, 1998 letter, IBM Credit is
entitled to stock representing a 4% ownership interest on a fully diluted
basis in Pulsar. At the option of William Davis on or before May 31, 1998,
in lieu of the 4% ownership interest, Pulsar shall pay to IBM Credit the
lesser of: (i) 4% of the sales price upon the sale of all or substantially
all its assets, or (ii) $650,000.00.
(j) Additionally, in lieu of the 1/2% ownership interest due to IBM Credit per
the October 10, 1997 letter, Pulsar shall pay IBM Credit $50,000.00 per
month (the "Forbearance Fee"), beginning February 1, 1998 and on the first
of each month until May 31, 1998.
(k) Mr. William Davis agrees that on or before February 28, 1998, he shall
obtain a loan of the cash value on the Life Insurance Policies in an amount
of no less than $1,545,000.00 and to submit such loan proceeds to IBM
Credit immediately upon receipt.
(l) Pulsar shall comply with the terms and conditions of the Audit Letter dated
September 10, 1997 and any subsequent Audit Letter.
<PAGE>
Mr. William W. Davis, Sr. 3 February 4, 1998
Nothing in this letter, the Forbearance Agreement or any of the other
negotiations or actions undertaken pursuant to this letter, shall constitute a
waiver or modification of any of IBM Credit's rights and remedies against Pulsar
or Mr. and Mrs. W. Davis.
Sincerely,
/S/ R.M. FAILE
---------------
R.M. Faile
Account Executive
ACKNOWLEDGED and AGREED to:
By: /S/ WILLIAM W. DAVIS, SR.
----------------------------------
Name: William W. Davis, Sr. as Guarantor and as President and CEO of Pulsar Data
Systems, Inc.
Date: 2/5/98
<PAGE>
SCHEDULE A
----------
<TABLE>
<CAPTION>
<S> <C> <C>
Day 1-31 2,426,000
Week of 2-2 2,426,000
2-9 2,263,000
2-16 2,100,000
2-23 1,937,000
Day 2-28 1,774,000
Week of 3-2 1,774,000
3-9 1,638,000
3-16 1,502,000
3-23 1,366,000
Day 3-31 1,228,000
Week of 4-6 1,228,000
4-13 1,053,000
4-20 878,000
4-27 703,000
Day 4-30 528,000
Week of 5-4 528,000
5-11 434,000
5-18 340,000
5-25 246,000
Day 5-31 151,000
Week of 6-1 0
</TABLE>
<PAGE>
Exhibit 10.22
REVOLVING PROMISSORY NOTE
$600,000 Irvine, California
February 24, 1998
FOR VALUE RECEIVED, Litronic Industries, Inc., a California Corporation
("Company") hereby promises to pay to the order of KRDS, INC., a California
corporation ("KRDS") the principal sum of SIX HUNDRED THOUSAND DOLLARS
($600,000), with interest at the rate of ten percent (10%) per annum, payable as
follows;
1. PRINCIPAL AND INTEREST. Principal and accrued interest shall be due and
payable on December 31, 1999.
2. PREPAYMENT. This Note may be prepaid, in whole or in part, at any time
without penalty or premium. Any prepayment shall be first applied to
accrued interest, then to principal.
3. CHANGE OF OWNERSHIP. Principal and accrued interest shall be due on demand
upon the sale of any or all of the assets of the Company to a Person who is
not an affiliate of the Company.
It is understood that this Note is a revolving note by its terms and that the
outstanding principal balance may fluctuate from time to time based on the cash
needs of the Company as determined by the Company's Board of Directors.
If this Note is not paid when due, the Company promises to pay all costs of
collection, including reasonable attorneys' fees, whether or not suit is filed.
This Note shall be governed and construed and enforced in accordance with the
laws of the State of California without reference to the principles of conflicts
of law.
IN WITNESS WHEREOF, the Company has caused this Note to be executed by its duly
authorized officers.
LITRONIC INDUSTRIES, INC.
By: /S/ KRIS SHAH
--------------------------------
Kris Shah, President
By: /S/ GERALDINE SHAH
--------------------------------
Geraldine Shah, Secretary
<PAGE>
Exhibit 10.23
SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT
-----------------------------------------------
This Second Amendment to Loan and Security Agreement (this "Amendment") is
made and entered into effective as of March 1, 1998, by and among Litronic
Industries, Inc., a California corporation (the "Company"), and Fidelity
Funding, Inc., a Texas corporation ("Fidelity").
A. The Company and Fidelity Funding of California, Inc. ("FFOC") have
entered into that certain Loan and Security Agreement (the "Original
Agreement"), dated as of June 27, 1996, and FFOC has assigned all of its right,
title and interest in, to and under the 1996 Agreement to Fidelity. The Company
and Fidelity have entered into that certain First Amendment to Loan Agreement
(the "First Amendment"), dated June 27, 1997. The 1996 Agreement as amended by
the First Amendment is referred to herein as the "Original Agreement," and the
Original Agreement as amended by this Amendment is referred to herein as the
"Agreement." Capitalized terms used but not defined in this Amendment shall
have the meanings given to them in the Original Agreement.
B. The Company and Fidelity desire to amend the Original Agreement and,
in connection therewith, hereby agree as follows:
1. The definition of "Revolving Loan Rate" in Section 1.1 of the Original
Agreement hereby is amended to read in its entirety as follows:
"REVOLVING LOAN RATE" means a rate of interest equal to the lesser of (a)
the Prime Rate in effect from time to time plus 1.50% per annum and (b) the
maximum rate permitted by applicable law; provided, however, that if (c) the
Company's net income before taxes for the 12-month period ending December 31,
1998 (determined in accordance with GAAP) as reflected in the audited financial
statements for such period delivered by the Company to Fidelity pursuant to
Section 8.3 is at least $100,000 and (d) no Event of Default or event or
circumstance that would with the giving of notice, the passage of time or both,
constitute an Event of Default, has theretofore occurred, effective as of Mach
1, 1999, "REVOLVING LOAN RATE" shall mean a rate of interest equal to the lesser
of (e) the Prime Rate in effect from time to time plus 1.25% per annum and (f)
the maximum rate permitted by applicable law. The Revolving Loan Rate shall be
automatically increased or decreased, as the case may be, without notice to the
Company from time to time as of the effective date of each change in the Prime
Rate.
2. The first sentence of Section 5.1 of the Original Agreement hereby is
deleted and is replaced in its entirety as follows:
The Company shall pay to Fidelity a commitment fee in the amount of
$25,000, payable on the date hereof, and an annual commitment fee in the amount
of $12,500, payable on each February 27 thereafter during the Term.
3. The first sentence of Section 5.2 of the Original Agreement hereby is
amended to read in its entirety as follows:
<PAGE>
As consideration for Fidelity's commitment to advance funds hereunder the
Company shall pay to Fidelity a minimum usage fee (in this section called the
"Minimum Usage Fee") or not less than $6,000 for each calendar month (or
fraction thereof, on a prorated basis) during the Term.
4. Section 5.3 of the Original Agreement hereby deleted.
5. Compliance with the requirements of Section 8.8, 8.9 and 8.10 of the
Original Agreement through March 31, 1998, hereby is waived.
6. Effective as of March 31, 1998, Section 8.8 of the Original Agreement
hereby is amended to read in its entirety as follows:
The Company shall at all times maintain a Tangible Net Worth of not less
than the Tangible Net Worth Requirement. "TANGIBLE NET WORTH REQUIREMENT" means
negative $150,000 until May 31, 1998, $50,000 from June 1, 1998 until December
31, 1998 and for each calendar year thereafter the Tangible Net Worth
Requirement as of the last day of the preceding calendar year plus the greater
of $100,000 and 100% of the Company's Net Profit for the previous calendar year.
7. Effective as of March 31, 1998, Section 8.9 of the Original Agreement
hereby is amended to read in its entirety as follows:
The Company's Net Profit for each fiscal year of the Company shall equal or
exceed $100,000. On and after May 1, 1998, the Company's Net Profit shall not
be negative for any two or more consecutive calendar months. "NET PROFIT" means
net profit after tax determined in accordance with GAAP.
8. Effective as of March 31, 1998, Section 8.10 of the Original Agreement
hereby is amended to read in its entirety as follows:
The Company shall at all times maintain Working Capital of not less than
the Working Capital Requirement. "WORKING CAPITAL REQUIREMENT" means negative
$400,000 until May 31, 1998, negative $300,000 from June 1, 1998 until December
31, 1998 and for each calendar year thereafter the Working Capital Requirement
as of the last day of the preceding calendar year plus the greater of $50,000
and 50% of the Company's Net Profit for the previous calendar year.
9. Section 14.4 of the Original Agreement hereby is amended to read in
its entirety as follows:
The term of this Agreement shall be for a period ending on February 28,
2000 (the original term, and any extension thereof made by Fidelity pursuant to
this section, are herein called the "Term"); provided, however, that Fidelity
may extend the term hereof for additional
2
<PAGE>
one-year periods, if Fidelity elects to do so in its sole discretion, by
notifying the Company in writing at least 30 days before the end of the term
then in effect; and provided further that Fidelity may terminate this Agreement
at any time effective immediately upon the occurrence of an Event of Default;
and provided further that the Company may terminate this Agreement at any time
with 30 days' prior written notice to Fidelity upon the sale of all or
substantially all of the assets of the Company to a Person who is not an
Affiliate of the Company. The Company acknowledges that, except as expressly
provided above, it shall have no right to terminate this Agreement prior to the
end of the Term, termination of this Agreement at any tine prior to the end of
the Term would result in the loss by Fidelity of benefits under this Agreement
and the damages incurred by Fidelity as a result of such termination would be
difficult and impractical to ascertain. Therefore, in the event this Agreement
is terminated prior to the end of the Term for any reason other than the sale of
all or substantially all of the assets of the Company to a Person who is not an
Affiliate of the Company, the Company shall pay to Fidelity an early termination
fee in an amount equal to (x) the average monthly accrued interest and fees
earned by Fidelity hereunder prior to the date of termination multiplied by (y)
the number of months remaining in the Term as of the date of termination, but in
no event shall such early termination fee exceed the maximum amount permitted by
applicable law. Any termination of this Agreement shall not affect Fidelity's
security interest in the Collateral, and this Agreement shall continue to be
effective, until all Obligations have been paid in full.
10. Representations and Warranties of the Company. In order to induce
---------------------------------------------
Fidelity to enter into this Amendment, the Company represents and warrants to
Fidelity that:
(a) The representations and warranties contained in Section 7 of the
Original Agreement are true and correct at and as of the time of the
effectiveness hereof; provided, however, that the Company's current address
at this time is 2030 Main Street, Suite 1200, Irvine, California 92614.
(b) The Company is duly authorized to execute, deliver and perform
its obligations under this Amendment and is and will continue to be duly
authorized to perform its obligations under the Original Agreement as
amended hereby. The Company has duly taken all corporate action necessary
to authorize the execution and delivery of this Amendment and to authorize
the performance of the obligations of the Company hereunder.
(c) The execution and delivery by the Company of this Amendment, the
performance by the Company of its obligations hereunder and the
consummation of the transactions contemplated hereby do not and will not
conflict with any provision of law, statute, rule or regulation or of the
articles of incorporation and bylaws of the Company, or of any material
agreement, judgment, license, order or permit applicable to or binding upon
the Company, or result in the creation of any lien, charge or encumbrance
upon any assets or properties of the Company. Except for those which have
been duly obtained, no consent, approval, authorization or order of any
court or governmental authority or third
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party is required in connection with the execution and delivery by the
Company of this Amendment or to consummate the transactions contemplated
hereby.
(d) The Agreement (including this Amendment) has been duly executed
and delivered by the Company and is a legal and binding instrument and
agreement of the Company, enforceable against the Company in accordance
with its terms, except as limited by bankruptcy, insolvency and similar
laws and by general principles of equity.
(e) No Event of Default or any event that, with the giving of notice,
the passage of time or both, would constitute an Event of Default has
occurred or is continuing.
11. Miscellaneous.
-------------
(a) The Agreement is hereby ratified and confirmed in all respects.
The execution, delivery and effectiveness of this Amendment shall not,
except as expressly provided herein, operate as a waiver of any right,
power or remedy of Fidelity under the Agreement nor constitute a waiver of
any provision thereof.
(b) All representations, warranties, covenants and agreements of the
Company herein shall survive the execution and delivery of this Amendment
and the performance hereof and shall further survive until the Agreement is
terminated.
(c) This Amendment may be separately executed in counterparts and by
the different parties hereto in separate counterparts, each of which when
so executed shall be deemed to constitute one and same Amendment.
(d) The Company agrees to pay Fidelity the reasonable fees, charges
and expenses, not to exceed an aggregate of $2,000, of its in-house counsel
in connection with the negotiation and preparation of this Amendment and
the consummation of the transactions contemplated hereby.
IN WITNESS WHEREOF, the Company and Fidelity have executed this Amendment
as of the date first written above.
FIDELITY: THE COMPANY:
FIDELITY FUNDING, INC., LITRONIC INDUSTRIES, INC.,
a Texas corporation a California corporation
By: /s/ MICHAEL D. HADDAD By: /s/ KRIS SHAH
------------------------- ----------------------------------
Michael D. Haddad Name: Kris Shah
President Title: President
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CONSENT AND AGREEMENT
---------------------
Each of the undersigned hereby consents to the provisions of this Amendment
and the transactions contemplated therein and hereby ratifies and confirms the
general continuing guaranty dated as of June 27, 1996, made by Kris Shah for the
benefit of Fidelity relating to the Company, and agrees that his or her
obligations and covenants thereunder are unimpaired hereby and shall remain in
full force and effect.
/s/ KRIS SHAH
-------------------------
Kris Shah
/s/ GERALDINE M. SHAH
-------------------------
Geraldine Shah
The undersigned hereby consents to the provisions of this Amendment and the
transactions contemplated therein and hereby ratifies and confirms the
subordination agreement dated as of June 27, 1996, made by him for the benefit
of Fidelity relating to the Company, and agrees that his obligations and
covenants thereunder are unimpaired hereby and shall remain in full force and
effect.
/s/ KRIS SHAH
-------------------------
Kris Shah
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Exhibit 10.24
LITRONIC INDUSTRIES, INC.
1998 STOCK OPTION PLAN
1. PURPOSE OF THE PLAN. The purpose of this 1998 Stock Option Plan
("Plan") of Litronic Industries, Inc., a California corporation ("Company' ), is
to provide the Company with a means of attracting and retaining the services of
highly motivated and qualified directors and key personnel. The Plan is intended
to advance the interests of the Company by affording to directors and key
employees, upon whose skill, judgment, initiative and efforts the Company is
largely dependent for the successful conduct of its business, an opportunity for
investment in the Company and the incentives inherent in stock ownership in the
Company. In addition, the Plan contemplates the opportunity for investment in
the Company by employees of companies that do business with the Company. For
purposes of this Plan, the term Company shall include subsidiaries, if any, of
the Company.
2. LEGAL COMPLIANCE. It is the intent of the Plan that all options
granted under it ("Options") shall be either "Incentive Stock Options" ("ISOs"),
as such term is defined in Section 422 of the Internal Revenue Code of 1986, as
amended ("Code"), or non-qualified stock options ("NQOs"); provided, however,
ISOs shall be granted only to employees of the Company. An Option shall be
identified as an ISO or an NQO in writing in the document or documents
evidencing the grant of the Option. All Options that are not so identified as
ISOs are intended to be NQOs. In addition, the Plan provides for the grant of
NQOs to employees of companies that do business with the Company. It is the
further intent of the Plan that it conform in all respects with the requirements
of Rule 16b-3 of the Securities and Exchange Commission under the Securities
Exchange Act of 1934, as amended ("Rule 16b-3"). To the extent that any aspect
of the Plan or its administration is at any time viewed as inconsistent with the
requirements of Rule 16b-3 or, in connection with ISOs, the Code, that aspect
shall be deemed to be modified, deleted or otherwise changed as necessary to
ensure continued compliance with the Rule 16b-3 requirements.
3. ADMINISTRATION OF THE PLAN.
3.1 PLAN COMMITTEE. The Plan shall be administered by a committee
("Commit tee"). The members of the Committee shall be appointed from time to
time by the Board of Directors of the Company ("Board") and shall consist of not
less than two nor more than five persons, who shall be directors of the Company;
provided, however, that if at any time the Board consists of only a sole
director, that sole director shall constitute the Committee.
3.2 GRANTS OF OPTIONS BY THE COMMITTEE. In accordance with the
provisions of the Plan, the Committee, by resolution, shall select those
eligible persons to whom Options shall be granted ("Optionees"); shall determine
the time or times at which each Option shall be granted, whether an Option is an
ISO or an NQO and the number of shares to be subject to each Option; and shall
fix the time and manner in which the Option may be exercised, the Option
exercise price, and
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the Option period. The Committee shall determine the form of option agreement to
evidence the foregoing terms and conditions of each Option, which need not be
identical, in the form provided for in SECTION 7. The option agreement may
include such other provisions as the Committee may deem necessary or desirable
consistent with the Plan, the Code and Rule 16b-3 .
3.3 COMMITTEE PROCEDURES. The Committee from time to time may adopt
whatever rules and regulations for carrying out the purposes of the Plan as it
may deem proper and in the best interests of the Company. The Committee shall
keep minutes of its meetings and records of its actions. A majority of the
members of the Committee shall constitute a quorum for the transaction of any
business by the Committee. The Committee may act at any time by an affirmative
vote of a majority of those members voting. The vote may be taken at a meeting
(which may be conducted in person or by any telecommunication medium) or by
written consent of Committee members without a meeting.
3.4 FINALITY OF COMMITTEE ACTION. The Committee shall resolve all
questions arising under the Plan and option agreements entered into pursuant to
the Plan. Each determination, interpretation, or other action made or taken by
the Committee shall be final and conclusive and binding on all persons,
including, without limitation, the Company, its shareholders, the Committee and
each of the members of the Committee, and the directors, officers and employees
of the Company, including Optionees and their respective successors in interest.
3.5 NON-LIABILITY OF COMMITTEE MEMBERS. No Committee member shall be
liable for any action or determination made by him or her in good faith with
respect to the Plan or any Option granted under it.
4. BOARD POWER TO AMEND, SUSPEND, OR TERMINATE THE PLAN. The Board may,
from time to time, make whatever changes in or additions to the Plan as it may
deem proper and in the best interests of the Company and its shareholders. The
Board may also suspend or terminate the Plan at any time, without notice, and in
its sole discretion. Notwithstanding the foregoing, no change, addition,
suspension, or termination by the Board shall (i) materially impair any option
previously granted under the Plan without the express written consent of the
optionee; or (ii) materially increase the number of shares subject to the Plan,
materially increase the benefits accruing to optionees under the Plan,
materially modify the requirements as to eligibility to participate in the Plan
or alter the method of determining the option exercise price described in
SECTION 8, without shareholder approval.
5. SHARES SUBJECT TO THE PLAN. For purposes of the Plan, the Committee is
authorized to grant Options for up to 1,500,000 shares (such number, and all
numbers of shares referred to in stock option grants or agreements, shall
reflect a stock split which will be implemented in July 1998 and which will
result in the Company having 10,000,000 shares of Common Stock outstanding at
the time of the split) of the Company's common stock ("Common Stock"), or the
number and kind of shares of stock or other securities which, in accordance with
SECTION 13, shall be substituted for shares of Common Stock or to which shares
of Common Stock shall be adjusted. The Committee
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is authorized to grant Options under the Plan with respect to those shares. Any
or all unsold shares subject to an Option which for any reason expires or
otherwise terminates (excluding shares returned to the Company in payment of the
exercise price for additional shares) may again be made subject to grant under
the Plan.
6. OPTIONEES. Options shall be granted only to officers, directors or key
employees of the Company or employees of companies that do business with the
Company designated by the Committee from time to time as Optionees. Any Optionee
may hold more than one option to purchase Common Stock, whether the option is an
Option held pursuant to the Plan or otherwise. An Optionee who is an employee of
the Company ("Employee Optionee") and who holds an Option must remain a
continuous full or part-time employee of the Company from the time of grant of
the Option to him until the time of its exercise, except as provided in SECTION
10.3.
7. GRANTS OF OPTIONS. The Committee shall have the sole discretion to
grant Options under the Plan and to determine whether any Option shall be an ISO
or NQO. The terms and conditions of Options granted under the Plan may differ
from one another as the Committee, in its absolute discretion, determines, as
long as all Options granted under the Plan satisfy the requirements of the Plan.
Upon determination by the Committee that an Option is to be granted to an
Optionee, a written option agreement evidencing the Option shall be given to the
Optionee, specifying the number of shares subject to the Option, the Option
exercise price, whether the Option is an ISO or an NQO, and the other individual
terrns and conditions of the Option. The option agreement may incorporate
generally applicable provisions from the Plan, a copy of which shall be provided
to all Optionees at the time of their initial grants under the Plan. The Option
shall be deemed granted as of the date specified in the grant resolution of the
Committee, and the option agreement shall be dated as of the date of the
resolution. Notwithstanding the foregoing, unless the Committee consists solely
of non-employee directors, any Option granted to an executive officer, director
or 10% beneficial owner for purposes of Section 16 of the Securities Exchange
Act of 1934, as amended ("Section 16 of the 1934 Act"), shall either be (a)
conditioned upon the Optionee' s agreement not to sell the shares of Common
Stock underlying the Option for at least six months after the date of grant or
(b) approved by the entire Board or by the shareholders of the Company.
8. OPTION EXERCISE PRICE. The price per share to be paid by the Optionee
at the time an ISO is exercised shall not be less than 100% of the Fair Market
Value (as hereinafter defined) of one share of the Company's Common Stock on the
date on which the Option is granted. No ISO may be granted under the Plan to any
person who. at the time of grant, owns (within the meaning of Section 424(d) of
the Code) stock possessing more than 10% of the total combined voting power of
all classes of stock of the Company or of any parent thereof, unless the
exercise price of the ISO is at least equal to 110% of Fair Market Value on the
date of grant. The price per share to be paid by the Optionee at the time an NQO
is exercised shall not be less than 85% of the Fair Market Value on the date on
which the NQO is granted, as determined by the Committee. For purposes of the
Plan, the "Fair Market Value" of a share of the Company's Common Stock as of a
given date shall be: (i) the closing price of a share of the Company's Common
Stock on the principal exchange on which shares of the Company's Common Stock
are then trading, if any, on the day immediately preceding
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that date, or, if shares were not traded on that date, then on the next
preceding trading day during which a sale occurred; or (ii) if the Company's
Common Stock is not traded on an exchange but is quoted on Nasdaq or a successor
quotation system, the last sale price for the Common Stock on the day
immediately preceding that date as reported by Nasdaq or the successor quotation
system; or (iii) if the Company's Common Stock is not publicly traded on an
exchange and not quoted on Nasdaq or a successor quotation system, the closing
bid price for the Common Stock on that date as determined in good faith by the
Committee; or (iv) if the Company's Common Stock is not publicly traded, the
fair market value established by the Committee acting in good faith. In
addition, with respect to any ISO, the Fair Market Value on any given date shall
be determined in a manner consistent with any regulations issued by the
Secretary of the Treasury for the purpose of determining fair market value of
securities subject to an ISO plan under the Code.
9. CEILING OF ISO GRANTS. The aggregate Fair Market Value (determined at
the time any ISO is granted) of the Common Stock with respect to which an
Optionee's ISOs, together with incentive stock options granted under any other
plan ofthe Company and any parent, are exercisable for the first time by such
Optionee during any calendar year shall not exceed $100, 000. If an Optionee
holds incentive stock options that become first exercisable (including as a
result of acceleration of exercisability under the Plan) in any one year for
shares having a Fair Market Value at the date of grant in excess of $100,000,
then the most recently granted of the ISOs, to the extent that they are
exercisable for shares having an aggregate Fair Market Value in excess of the
limit, shall be deemed to be NQOs.
10. DURATION, EXERCISABILITY, AND TERMINATION OF OPTIONS.
10.1 OPTION PERIOD. The option period shall be determined by the
Committee with respect to each Option granted. In no event, however, may the
option period exceed ten years from the date on which the Option is granted, or
five years in the case of a grant of an ISO to an Optionee who is a 10%
shareholder at the date on which the Option is granted as described in SECTION
8.
10.2 EXERCISABILITY OF OPTIONS. Each Option shall be exercisable in
whole or in consecutive installments, cumulative or otherwise, during its term
as determined in the discretion of the Committee.
10.3 TERMINATION OF OPTIONS DUE TO TERMINATION OF EMPLOYMENT,
DISABILITY, ORDEATH OF OPTIONEE; TERMINATION FOR"CAUSE", ORRESIGNATION IN
VIOLATION OF AN EMPLOYMENT AGREEMENT. All Options granted under the Plan to any
Employee Optionee shall terminate and may no longer be exercised if the Employee
Optionee ceases, at any time during the period between the grant of the Option
and its exercise, to be an employee of the Company; provided, however, that the
Committee may alter the termination date of the Option if the Optionee transfers
to an affiliate of the Company. Notwithstanding the foregoing, (i) if the
Employee Optionee's employment with the Company terminates for any reason (other
than involuntary dismissal for "cause" or voluntary resignation in violation of
any agreement to remain in the employ of the Company, including, without
limitation, any such agreement pursuant to SECTION 15), he or she may, at any
time before
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the expiration of three months after termination or before expiration of the
Option, whichever first occurs, exercise the Option (to the extent that the
Option was exercisable by him or her on the date of the termination of his or
her employment); (ii) if the Employee Optionee's employment terminates due to
disability (as defined in Section 22(e)(3) of the Code and subject to such proof
of disability as the Committee may require), the Option may be exercised by the
Employee Optionee (or by his guardian(s), or conservator(s), or other legal
representative(s)) before the expiration of 12 months after termination or
before expiration of the Option, whichever first occurs (to the extent that the
Option was exercisable by him or her on the date of the termination of his or
her employment); (iii) in the event of the death of the Employee Optionee, an
Option exercisable by him or her at the date of his or her death shall be
exercisable by his or her legal representative(s), legatee(s), or heir(s), or by
his or her beneficiary or beneficiaries so designated by him or her, as the case
may be, within 12 months after his or her death or before the expiration of the
Option, whichever first occurs (to the extent that the Option was exercisable by
him or her on the date of his or her death); and (iv) if the Employee Optionee's
employment is terminated for "cause" or in violation of any agreement to remain
in the employ of the Company, including, without limitation, any such agreement
pursuant to SECTION 14, his or her Option shall terminate immediately upon
termination of employment, and the Option shall be deemed to have been forfeited
by the Optionee. For purposes of the Plan, "cause" may include, without
limitation, any illegal or improper conduct which (1) injures or impairs the
reputation, goodwill, or business of the Company; (2) involves the
misappropriation of funds of the Company, or the misuse of data, information or
documents acquired in connection with employment by the Company; or (3) violates
any other directive or policy promulgated by the Company. A termination for
"cause" may also include any resignation in anticipation of discharge for
"cause" or resignation accepted by the Company in lieu of a formal discharge for
"cause."
11. MANNER OF OPTION EXERCISE; RIGHTS AND OBLIGATIONS OF OPTIONEES.
11.1 WRITTEN NOTICE OF EXERCISE. An Optionee may elect to exercise an
Option in whole or in part, from time to time, subject to the terms and
conditions contained in the Plan and in the agreement evidencing the Option, by
giving written notice of exercise to the Company at its principal executive
office.
11.2 CASH PAYMENT FOR OPTIONED SHARES. If an Option is exercised for
cash, the exercise notice shall be accompanied by a cashier's or personal check,
or money order, made payable to the Company for the full exercise price of the
shares purchased.
11.3 STOCK SWAP FEATURE. At the time of the Option exercise, and
subject to the discretion of the Committee to accept payment in cash only, the
Optionee may determine whether the total purchase price of the shares to be
purchased shall be paid solely in cash or by transfer from the Optionee to the
Company of previously acquired shares of Common Stock, or by a combination
thereof. If the Optionee elects to pay the total purchase price in whole or in
part with previously acquired shares of Common Stock, the value of the shares
shall be equal to their Fair Market Value on the date of exercise, determined by
the Committee in the same manner used for determining Fair Market Value at the
time of grant for purposes of SECTION 8.
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11.4 INVESTMENT REPRESENTATION FOR NON-REGISTERED SHARES AND LEGALITY
OF ISSUANCE. The receipt of shares of Common Stock upon the exercise of an
Option shall be conditioned upon the Optionee (or any other person who exercises
the Option on his or her behalf as permitted by SECTION 10.3) providing to the
Committee a written representation that, at THE TIME of such exercise, it is the
intent of that person(s) to acquire the shares for investment only and not with
a view toward distribution. The certificate for unregistered shares issued for
investment shall be restricted by the Company as to transfer unless the Company
receives an opinion of counsel satisfactory to the Company to the effect that
the restriction is not necessary under then pertaining law. The providing of the
representation and the restrictions on transfer shall not, however, be required
upon any person' s receipt of shares of Common Stock under the Plan if, at the
time of grant of the Option relating to receipt or upon receipt, whichever is
the appropriate measure under applicable federal or state securities laws, the
shares subject to the Option shall be (i) covered by an effective and current
registration statement under the Securities Act of 1933, as amended, and (ii)
either qualified or exempt from qualification under applicable state securities
laws. The Company shall, however, under no circumstances be required to sell or
issue any shares under the Plan if, in the opinion of the Committee, (i) the
issuance of the shares would constitute a violation by the Optionee or the
Company of any applicable law or regulation of any governmental authority or
(ii) the consent or approval of any governmental body is necessary or desirable
as a condition of, or in connection with, the issuance of the shares.
11.5 SHAREHOLDER RIGHTS OF OPTIONEE. Upon exercise, the Optionee (or
any other person who exercises the Option on his or her behalf as permitted by
Section 10.3) shall be recorded on the books of the Company as the owner of the
shares, and the Company shall deliver to the record owner one or more duly
issued stock certificates evidencing ownership. No person shall have any rights
as a shareholder with respect to any shares of Common Stock covered by an Option
granted pursuant to the Plan until that person has become the holder of record
of the shares. Except as provided in SECTION 13, no adjustments shall be made
for cash dividends or other distributions or other rights as to which there is a
record date preceding the date that person becomes the holder of record of the
shares.
11.6 HOLDING PERIODS FOR TAX PURPOSES. The Plan does not provide that
an Optionee must hold shares of Common Stock acquired under the Plan for any
minimum period of time. Optionees are urged to consult with their own tax
advisors with respect to the tax consequences to them of their individual
participation in the Plan.
12. SUCCESSIVE GRANTS. Successive grants of Options may be made to any
Optionee under the Plan.
13. ADJUSTMENTS.
(a) Except to the extent already contemplated by SECTION 5, if the
outstanding Common Stock is hereafter increased or decreased, or changed into or
exchanged for a different number or kind of shares or other securities of the
Company or of another corporation, by reason of
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a recapitalization, reclassification, reorganization, merger, consolidation,
share exchange or other business combination in which the Company is the
surviving parent corporation, stock split-up, combination of shares or dividend
or other distribution payable in capital stock or rights to acquire capital
stock, appropriate adjustment shall be made by the Committee in the number and
kind of shares for which options may be granted under the Plan. In addition, the
Committee shall make appropriate adjustment in the number and kind of shares as
to which outstanding and unexercised options shall be exercisable, to the end
that the proportionate interest of the holder of the option shall, to the extent
practicable, be maintained as before the occurrence of the event. The adjustment
in outstanding options shall be made without change in the total price
applicable to the unexercised portion of the option but with a corresponding
adjustment in the exercise price per share.
(b) In the event of the dissolution or liquidation of the Company,
any outstanding and unexercised options shall terminate as of a future date to
be fixed by the Committee.
(c) In the event of a Reorganization (as hereinafter defined), then,
(i) If there is no plan or agreement with respect to the
Reorganization ("Reorganization Agreement"), or if the Reorganization Agreement
does not specifically provide for the adjustment, change, conversion, or
exchange of the outstanding and unexercised options for cash or other property
or securities of another corporation, then any outstanding and unexercised
options shall terminate as of a future date to be fixed by the Committee; or
(ii) If there is a Reorganization Agreement, and the
Reorganization Agreement specifically provides for the adjustment, change,
conversion or exchange of the outstanding and unexercised options for cash or
other property or securities of another corporation, then the Committee shall
adjust the shares under the outstanding and unexercised options, and shall
adjust the shares remaining under the Plan which are then available for the
issuance of options under the Plan if the Reorganization Agreement makes
specific provisions therefor, in a manner not inconsistent with the provisions
ofthe Reorganization Agreement for the adjustment, change, conversion, or
exchange of the options and shares.
(d) The term "Reorganization" as used in this Section 13 means any
reorganiza tion, merger, consolidation, share exchange or other business
combination pursuant to which the Company is not the surviving parent
corporation after the effective date of the Reorganization, or any sale or lease
of all or substantially all of the assets of the Company. Nothing herein shall
require the Company to adopt a Reorganization Agreement, or to make provision
for the adjustment, change, conversion, or exchange of any options or the shares
subject thereto, in any Reorganization Agreement which it does adopt.
(e) The Committee shall provide to each optionee then holding an
outstanding and unexercised option not less than 30 calendar days' advanced
written notice of any date fixed by the Committee pursuant to this SECTION 13
and of the terms of any Reorganization Agreement providing for the adjustment,
change, conversion, or exchange of outstanding and unexercised
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options. Except as the Committee may otherwise provide, each optionee shall have
the right during that period to exercise his or her option only to the extent
that the option was exercisable on the date the notice was provided to the
optionee.
Any adjustment to any outstanding ISO pursuant to this SECTION
13, if made by reason of a transaction described in Section 424(a) of the Code,
shall be made so as to conform to the requirements of that Section and the
regulations thereunder. If any other transaction described in Section 424(a) of
the Code affects the Common Stock subject to any unexercised ISO theretofore
granted under the Plan ("old option"), the Board of Directors of the Company or
of any surviving or acquiring corporation may take such action as it deems
appropriate, in conformity with the requirements of that Code Section and the
regulations thereunder, to substitute a new option for the old option, in order
to make the new option, as nearly as may be practicable, equivalent to the old
option, or to assume the old option.
(f) No modification, extension, renewal, or other change in any
option granted under the Plan may be made, after the grant of the option,
without the optionee's consent, unless it is permitted by the provisions of the
Plan and the option agreement. In the case of an ISO, optionees are hereby
advised that certain changes may disqualify the ISO from being considered as
such under Section 422 of the Code, or constitute a modification, extension, or
renewal of the ISO under Section 424(h) of the Code.
(g) All adjustments and determinations under this SECTION 13 shall be
made by the Committee in good faith in its sole discretion.
14. CONTINUED EMPLOYMENT. As determined in the sole discretion of the
Committee at the time of grant and if so stated in a writing signed by the
Company, each Option may have as a condition the requirement of an Employee
Optionee to remain in the employ of the Company, or of its affiliates, and to
render to it his or her exclusive service, at such compensation as may be
determined from time to time by it, for a period not to exceed the term of the
Option, except for earlier termination of employment by or with the express
written consent of the Company or on account of disability or death. The failure
of any Employee Optionee to abide by this agreement as to any Option under the
Plan may result in the termination of all of his or her then outstanding Options
granted pursuant to the Plan. Neither the creation of the Plan nor the granting
of Option(s) under it shall be deemed to create a right in an Employee Optionee
to continued employment with the Company, and each Employee Optionee shall be
and shall remain subject to discharge by the Company as though the Plan had
never come into existence. Except as specifically provided by the Committee in
any particular case, the loss of existing or potential profit in options granted
under this Plan shall not constitute an element of damages in the event of
termination of the employment of an employee even if the termination is in
violation of an obligation of the Company to the employee by contract or
otherwise.
15. TAX WITHHOLDING. The exercise of any Option granted under the Plan is
subject to the condition that if at any time the Company determines, in its
discretion, that the satisfaction of
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withholding tax or other withholding liabilities under any federal, state or
local law is necessary or desirable as a condition of, or in connection with,
the exercise or a later lapsing of time or restrictions on or disposition of the
shares of Common Stock received upon the exercise, then in that event, the
exercise of the Option shall not be effective unless the withholding has been
effected or obtained in a manner acceptable to the Company. When an Optionee is
required to pay to the Company an amount required to be withheld under
applicable income tax laws in connection with the exercise of any Option, the
Optionee may, subject to the approval of the Committee, which approval shall not
have been disapproved at any time after the election is made, satisfy the
obligation, in whole or in part, by electing to have the Company withhold shares
of Common Stock having a value equal to the amount required to be withheld. The
value of the Common Stock withheld pursuant to the election shall be determined
by the Committee, in accordance with the criteria set forth in SECTION 8, with
reference to the date the amount of tax to be withheld is determined. The
Optionee shall pay to the Company in cash any amount required to be withheld
that would otherwise result in the withholding of a fractional share. The
election by an Optionee who is an officer of the Company within the meaning of
Section 16 of the 1934 Act, to be effective, must meet all of the requirements
of Section 16 of the 1934 Act.
16. TERM OF PLAN.
16.1 EFFECTIVE DATE. Subject to shareholder approval, the Plan shall
become effective as of April 1, 1998.
16.2 TERMINATION DATE. Except as to options granted and outstanding
under the Plan prior to that time, the Plan shall terminate at midnight on April
1, 2008, and no Option shall be granted after that time. Options then
outstanding may continue to be exercised in accordance with their terms. The
Plan may be suspended or terminated at any earlier time by the Board within the
limitations set forth in SECTION 4.
17. NON-EXCLUSIVITY OF THE PLAN. Nothing contained in the Plan is intended
to amend, modify, or rescind any previously approved compensation plans,
programs or options entered into by the Company. This Plan shall be construed to
be in addition to and independent of any and all other arrangements. Neither the
adoption of the Plan by the Board nor the submission of the Plan to the
shareholders of the Company for approval shall be construed as creating any
limitations on the power or authority of the Board to adopt, with or without
shareholder approval, such additional or other compensation arrangements as the
Board may from time to time deem desirable.
18. GOVERNING LAW. The Plan and all rights and obligations under it shall
be construed and enforced in accordance with the laws of the State of
California.
19. INFORMATION TO OPTIONEES. Optionees under the Plan who do not
otherwise have access to financial statements of the Company will receive the
Company' s financial statements at least annually.
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LITRONIC INDUSTRIES, INC.
1998 STOCK OPTION PLAN INCENTIVE STOCK OPTION AGREEMENT
This Option Agreement (this "Agreement") is made and entered into by and
between LITRONIC INDUSTRIES, TNC., a California corporation ("Company"), and
_______________ ("Optionee"), as of the 1st day of April, 1998 ("Date of
Grant"). If the Optionee is presently or subsequently becomes employed by a
subsidiary of the Company, the term "Company" shall be deemed to refer
collectively to Litronic Industries, Inc. and the subsidiary or subsidiaries
that employs the Optionee.
RECITALS
A. The Board of Directors of the Company has adopted the Litronic
Industries, Inc. 1998 Stock Option Plan ("Plan") as an employee incentive to
retain key employees, officers, directors, and consultants of the Company and to
enhance the ability of the Company to attract new employees, officers,
directors, and consultants whose services are considered unusually valuable by
providing an opportunity to have a proprietary interest in the success of the
Company.
B. The Committee established to administer the Plan ("Committee") has
approved the granting of options to the Optionee pursuant to the Plan to provide
an incentive to the Optionee to focus on the long-term growth of the Company.
In consideration of the mutual covenants and conditions hereinafter
set forth and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and the Optionee agree
as follows:
1. GRANT OF OPTON. The Company hereby grants to the Optionee the
right and option ("Option") to purchase an aggregate of shares (such number
being subject to adjustment as provided in paragraph 10 below and Section 13 of
the Plan) of the Common Stock of Litronic Industries, Inc. ("Stock") on the
terms and conditions herein set forth. This Option may be exercised in whole or
in part and from time to time as hereinafter provided. The Option granted under
this Agreement is intended to be an "incentive stock option" as set forth in
Section 422 of the Internal Revenue Code of 1986, as amended ("Code").
2. VESTING OF OPTION. The Option shall vest and become exercisable
in accordance with the schedule below:
On December 31, 1998, _______ shares of Common Stock subject to the
Option shall become vested and exercisable. On each December 31
thereafter, provided Optionee is still in the employ of the company as
contemplated by the Plan, an additional ______ shares of Common Stock
subject to the Option shall become vested and exercisable. On December
31, 2002, the final _____ shares of Common Stock subject
<PAGE>
to the Option shall become vested and exercisable, at which time 100%
of the shares of Common Stock subject to the Option shall be vested
and exercisable.
3. PURCHASE PRICE. The price at which the Optionee shall be entitled
to purchase the Stock covered by the Option shall be $0.72 per share, which
price is 100% of the Fair Market Value (as defined in the Plan) of the Stock on
the Date of Grant.
4. TERM OF OPTION. The Option granted under this Agreement shall
expire, unless Otherwise exercised, ten years from the Date of Grant, through
and including the normal close of business of the Company on April 1, 2008
("Expiration Date"), subject to earlier termination as provided in paragraph 8
below.
5. EXERCISE OF OPTION. The Option may be exercised by the Optionee
as to all or any part of the Stock then vested by delivery to the Company of
written notice of exercise and payment of the purchase price as provided in
paragraphs 6 and 7 below.
6. METHOD OF EXERCISING OPTION. Subject to the terms and conditions
of this Agreement, the Option may be exercised by timely delivery to the Company
of written notice, which notice shall be effective on the date received by the
Company ("Effective Date"). The notice shall state the Optionee's election to
exercise the Option the number of shares in respect of which an election to
exercise has been made, the method of payment elected (see paragraph 7 below),
the exact name or names in which the shares will be registered and the taxpayer
identification number of the Optionee. The notice shall be signed by the
Optionee and shall be accompanied by payment of the purchase price of such
shares. If the Option is exercised by a person or persons other than Optionee
pursuant to paragraph 8 below, the notice shall be signed by the other person or
persons and shall be accompanied by proof acceptable to the Company of the legal
right of the person or persons to exercise the Option. All shares delivered by
the Company upon exercise of the Option shall be fully paid and nonassessable
upon delivery.
7. METHOD OF PAYMENT FOR OPTIONS. Payment for shares purchased upon
the exercise of the Option shall be made by the Optionee in cash or such other
method permitted by the Committee and communicated to the Optionee in writing
prior to the date the Optionee exercises all or any portion of the Option.
8. TERMINATION OF EMPLOYMENT.
8.1. GENERAL. If the Optionee terminates employment for any other
reason than for Cause (as that term is defined in the Plan) or voluntary
resignation of any agreement to remain in the employ of the Company, then the
Optionee may at any time within three months after the effective date of
termination of employment exercise the Option to the extent that the Optionee
was entitled to exercise the Option at the date of termination, provided that in
no event shall the Option be exercisable after the Expiration Date. If the
Optionee terminates employment for Cause
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or voluntary resignation of any agreement to remain in the employ of the
Company, the Optionee may at any time within 30 days after the effective date of
such termination of employment exercise the Option to the extent that the
Optionee was entitled to exercise the Option at the date of termination,
provided that in no event shall the Option, or any part thereof, be exercisable
after the Expiration Date.
8.2. DEATH ORDISABILITY OF OPTIONEE. In the event of the death or
Disability (as that term is defined in the Plan) of the Optionee within a period
during which the Option, or any part thereof, could have been exercised by the
Optionee, including three months after termination of employment other than for
Cause or voluntary resignation of any agreement to remain in the employ of the
Company ("Option Period"), the Option shall lapse unless it is exercised within
the Option Period and in no event later than 12 months after the date of the
Optionee's death or Disability by the Optionee or the Optionee's legal
representative or representatives in the case of a Disability or, in the case of
death, by the person or persons entitled to do so under the Optionee's last will
and testament or if the Optionee fails to make a testamentary disposition of the
Option or shall die intestate, by the person or persons entitled to receive the
Option under the applicable laws of descent and distribution. An Option may be
exercised following the death or Disability of the Optionee only if the Option
was exercisable by the Optionee immediately prior to his death or Disability. In
no event shall the Option be exercisable after the Expiration Date. The
Committee shall have the right to require evidence satisfactory to it of the
rights of any person or persons seeking to exercise the Option under this
paragraph 8 to exercise the Option.
9. NONTRANSFERABILITY. The Option granted by this Option Agreement
shall be exercisable only during the term ofthe Option provided in paragraph 4
above and, except as provided in paragraph 8 above, only by the Optionee during
his lifetime and while an Optionee of the Company. This Option shall not be
transferable by the Optionee or any other person claiming through the Optionee,
either voluntarily or involuntarily, except by will or the laws of descent and
distribution or such other events as are set forth in the Plan.
10. ADJUSTMENTS IN NUMBER OF SHARES AND OPTION PRICE. In the event of
a stock dividend or if the Stock is changed into or exchanged for a different
number or class of shares of stock of the Company or of another corporation,
whether through reorganization, recapitalization, stock split-up, combination of
shares, merger or consolidation, there shall be substituted for each remaining
share of Stock then subject to this Option the number and class of shares of
stock into which each outstanding share of Stock is to be so exchanged, all
without any change in the aggregate purchase price for the shares then subject
to the Option, all as set forth in Section 13 of the Plan.
11. DELIVERY OF SHARES. No shares of Stock shall be delivered upon
exercise of the Option until (i) the purchase price has been paid in full in the
manner herein provided; (ii) applicable taxes required to be withheld have been
paid or withheld in full; (iii) approval of any governmental authority required
in connection with the Option, or the issuance of shares thereunder, has been
received by the Company; and (iv) if required by the Committee, the Optionee has
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<PAGE>
delivered to the Committee an Investment Letter in form and content satisfactory
to the Company as provided in paragraph 12 below.
12. SECURITIES ACT. The Company shall not be required to deliver any
shares of Stock pursuant to the exercise of all or any part of the Option if, in
the opinion of counsel for the Company, the issuance would violate the
Securities Act of 1933 or any other applicable federal or state securities laws
or regulations. The Committee may require that the Optionee, prior to the
issuance of any shares pursuant to exercise of the Option. sign and deliver to
the Company a written statement ("Investment Letter") stating (i) that the
Optionee is purchasing the shares for investment and not with a view to the sale
or distribution thereof; (ii) that the Optionee will not sell any shares
received upon exercise of the Option or any other shares of the Company that the
Optionee may then own or thereafter acquire except either (a) through a broker
on a national securities exchange or (b) with the prior written approval of the
Company; and (iii) containing such other terms and conditions as counsel for the
Company may reasonably require to assure compliance with the Securities Act of
1933 or other applicable federal or state securities laws and regulations. The
Investment Letter shall be in form and content acceptable to the Committee in
its sole discretion.
13. FEDERAL AND STATE TAXES. Upon exercise of the Option, or any part
thereof, the Optionee may incur certain liabilities for federal, state or local
taxes and the Company may be required by law to withhold taxes for payment to
taxing authorities. Upon determination by the Company of the amount of taxes
required to be withheld, if any, with respect to the shares to be issued
pursuant to the exercise of the Option, the Optionee shall pay all federal state
and local tax withholding requirements to the Company.
14. DEFINITIONS; COPY OF PLAN. To the extent not specifically
provided herein, all capitalized terms used in this Agreement have the same
meanings ascribed to them in the Plan. By the execution of this Agreement, the
Optionee acknowledges receipt of a copy of the Plan.
15. ADMINISTRATION. This Agreement shall at all times be subject to
the terms and conditions of the Plan and the Plan shall in all respects be
administered by the Committee in accordance with the terms of and as provided in
the Plan. The Committee shall have the sole and complete discretion with respect
to all matters reserved to it by the Plan and decisions of the majority of the
Committee with respect thereto and to this Option Agreement shall be final and
binding upon the Optionee and the Company. In the event of any conflict between
the terms and conditions of this Agreement and the Plan, the provisions of the
Plan shall control.
16. CONTINUATION OF EMPLOYMENT. This Agreement shall not be construed
to confer upon the Optionee any right to continue in the employ of the Company
and shall not limit the right of the Company, in its sole discretion, to
terminate the employment of the Optionee at any time.
17. OBLIGATION TO EXERCISE. The Optionee shall have no obligation to
exercise any option granted by this Agreement.
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<PAGE>
18. GOVERNING LAW. This Agreement shall be interpreted and
administered under the laws of the State of California.
19. AMENDMENTS. This Agreement may be amended only by a written
agreement executed by the Company and the Optionee. The Company and the Optionee
acknowledge that changes in federal tax laws enacted subsequent to the Date of
Grant, and applicable to stock options, may provide for tax benefits to the
Company or the Optionee. In that event, the Company and the Optionee agree that
this Agreement may be amended as necessary to secure for the Company and the
Optionee any benefits that may result from that legislation. Any amendment shall
be made only upon the mutual consent of the parties, which consent (of either
party) may be withheld for any reason.
20. TAX INFORMATION AND NOTICE OF DISQUALIFYING DISPOSITION. This
Option is intended to be eligible for treatment as an Incentive Stock Option
under Section 422 of the Code. Whether this Option will receive that tax
treatment will depend, in part, on the actions by the Optionee after exercise of
this Option. For example, if the Optionee disposes of any of the Stock acquired
under this Option within two years after the Date of Grant or within one year of
the date of exercise of this Option, the Optionee may lose the benefits of Code
Section 422. Accordingly, the Company makes no representations by way of the
Plan, this Agreement, or otherwise, with respect to the actual tax consequences
of the grant or exercise of this Option or the subsequent disposition of the
Stock acquired under this Option.
If the Optionee sells or makes a disposition (within the meaning
of Section 422 of the Code) of any of the Stock acquired under this Option prior
to the later of (i) one year from the date of exercise of this Option, or (ii)
two years from the Date of Grant, the Optionee agrees to give written notice to
the Company of the disposition. The notice shall include the Optionee's name,
the number, exercise price and exercise date of the shares of Stock disposed of,
and the date of disposition.
IN WITNESS WHEREOF, the Company has caused this Agreement to be duly
executed by its officers thereunto duly authorized and the Optionee has hereunto
set his or her hand as of the date first written above.
LITRONIC INDUSTRIES, INC.
By: _____________________________ _________________________________
Kris Shah, President [Optionee]
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<PAGE>
Exhibit 10.25
LITRONIC INC.
1999 STOCK OPTION PLAN
1. PURPOSE OF THE PLAN. The purpose of this 1999 Stock Option Plan
("Plan") of Litronic Inc., a Delaware corporation ("Company"), is to provide the
Company with a means of attracting and retaining the services of highly
motivated and qualified directors and key personnel. The Plan is intended to
advance the interests of the Company by affording to directors and key
employees, upon whose skill, judgment, initiative and efforts the Company is
largely dependent for the successful conduct of its business, an opportunity for
investment in the Company and the incentives inherent in stock ownership in the
Company. In addition, the Plan contemplates the opportunity for investment in
the Company by employees of companies that do business with the Company. For
purposes of this Plan, the term Company shall include subsidiaries, if any, of
the Company.
2. LEGAL COMPLIANCE. It is the intent of the Plan that all options
granted under it ("Options") shall be either "Incentive Stock Options" ("ISOs"),
as such term is defined in Section 422 of the Internal Revenue Code of 1986, as
amended ("Code"), or non-qualified stock options ("NQOs"); provided, however,
ISOs shall be granted only to employees of the Company. An Option shall be
identified as an ISO or an NQO in writing in the document or documents
evidencing the grant of the Option. All Options that are not so identified as
ISOs are intended to be NQOs. In addition, the Plan provides for the grant of
NQOs to employees of companies that do business with the Company. It is the
further intent of the Plan that it conform in all respects with the requirements
of Rule 16b-3 of the Securities and Exchange Commission under the Securities
Exchange Act of 1934, as amended ("Rule 16b-3"). To the extent that any aspect
of the Plan or its administration is at any time viewed as inconsistent with the
requirements of Rule 16b-3 or, in connection with ISOs, the Code, that aspect
shall be deemed to be modified, deleted or otherwise changed as necessary to
ensure continued compliance with the Rule 16b-3 requirements.
3. ADMINISTRATION OF THE PLAN.
3.1 PLAN COMMITTEE. The Plan shall be administered by a committee
("Committee"). The members of the Committee shall be appointed from time to time
by the Board of Directors of the Company ("Board") and shall consist of not less
than two nor more than five persons, who shall be directors of the Company;
provided, however, that if at any time the Board consists of only a sole
director, that sole director shall constitute the Committee.
3.2 GRANTS OF OPTIONS BY THE COMMITTEE. In accordance with the
provisions of the Plan, the Committee, by resolution, shall select those
eligible persons to whom Options shall be granted ("Optionees"); shall determine
the time or times at which each Option shall be granted, whether an Option is an
ISO or an NQO and the number of shares to be subject to each Option; and shall
fix the time and manner in which the Option may be exercised, the Option
exercise price, and the Option period. The Committee shall determine the form of
option agreement to evidence the foregoing terms and conditions of each Option,
which need not be identical, in the form provided for in SECTION 7. The option
agreement may include such other provisions as the Committee may deem necessary
or desirable consistent with the Plan, the Code and Rule 16b-3.
<PAGE>
3.3 COMMITTEE PROCEDURES. The Committee from time to time may adopt
whatever rules and regulations for carrying out the purposes of the Plan as it
may deem proper and in the best interests of the Company. The Committee shall
keep minutes of its meetings and records of its actions. A majority of the
members of the Committee shall constitute a quorum for the transaction of any
business by the Committee. The Committee may act at any time by an affirmative
vote of a majority of those members voting. The vote may be taken at a meeting
(which may be conducted in person or by any telecommunication medium) or by
written consent of Committee members without a meeting.
3.4 FINALITY OF COMMITTEE ACTION. The Committee shall resolve all
questions arising under the Plan and option agreements entered into pursuant to
the Plan. Each determination, interpretation, or other action made or taken by
the Committee shall be final and conclusive and binding on all persons,
including, without limitation, the Company, its shareholders, the Committee and
each of the members of the Committee, and the directors, officers and employees
of the Company, including Optionees and their respective successors in interest.
3.5 NON-LIABILITY OF COMMITTEE MEMBERS. No Committee member shall be
liable for any action or determination made by him or her in good faith with
respect to the Plan or any Option granted under it.
4. BOARD POWER TO AMEND, SUSPEND, OR TERMINATE THE PLAN. The Board may,
from time to time, make whatever changes in or additions to the Plan as it may
deem proper and in the best interests of the Company and its shareholders. The
Board may also suspend or terminate the Plan at any time, without notice, and in
its sole discretion. Notwithstanding the foregoing, no change, addition,
suspension, or termination by the Board shall (i) materially impair any option
previously granted under the Plan without the express written consent of the
optionee; or (ii) materially increase the number of shares subject to the Plan,
materially increase the benefits accruing to optionees under the Plan,
materially modify the requirements as to eligibility to participate in the Plan
or alter the method of determining the option exercise price described in
SECTION 8, without shareholder approval.
5. SHARES SUBJECT TO THE PLAN. For purposes of the Plan, the Committee is
authorized to grant Options for up to 600,000 shares of the Company's common
stock ("Common Stock"), or the number and kind of shares of stock or other
securities which, in accordance with SECTION 13, shall be substituted for shares
of Common Stock or to which shares of Common Stock shall be adjusted. The
Committee is authorized to grant Options under the Plan with respect to those
shares. Any or all unsold shares subject to an Option which for any reason
expires or otherwise terminates (excluding shares returned to the Company in
payment of the exercise price for additional shares) may again be made subject
to grant under the Plan.
6. OPTIONEES. Options shall be granted only to officers, directors or key
employees of the Company or employees of companies that do business with the
Company designated by the Committee from time to time as Optionees. Any Optionee
may hold more than one option to purchase Common Stock, whether the option is an
Option held pursuant to the Plan or otherwise. An Optionee who is an employee of
the Company ("Employee Optionee") and who holds an Option
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must remain a continuous full or part-time employee of the Company from the time
of grant of the Option to him until the time of its exercise, except as provided
in SECTION 10.3.
7. GRANTS OF OPTIONS. The Committee shall have the sole discretion to
grant Options under the Plan and to determine whether any Option shall be an ISO
or NQO. The terms and conditions of Options granted under the Plan may differ
from one another as the Committee, in its absolute discretion, determines, as
long as all Options granted under the Plan satisfy the requirements of the Plan.
Upon determination by the Committee that an Option is to be granted to an
Optionee, a written option agreement evidencing the Option shall be given to the
Optionee, specifying the number of shares subject to the Option, the Option
exercise price, whether the Option is an ISO or an NQO, and the other individual
terms and conditions of the Option. The option agreement may incorporate
generally applicable provisions from the Plan, a copy of which shall be provided
to all Optionees at the time of their initial grants under the Plan. The Option
shall be deemed granted as of the date specified in the grant resolution of the
Committee, and the option agreement shall be dated as of the date of the
resolution. Notwithstanding the foregoing, unless the Committee consists solely
of non-employee directors, any Option granted to an executive officer, director
or 10% beneficial owner for purposes of Section 16 of the Securities Exchange
Act of 1934, as amended ("Section 16 of the 1934 Act"), shall either be (a)
conditioned upon the Optionee's agreement not to sell the shares of Common Stock
underlying the Option for at least six months after the date of grant or (b)
approved by the entire Board or by the shareholders of the Company.
8. OPTION EXERCISE PRICE. The price per share to be paid by the Optionee
at the time an ISO is exercised shall not be less than 100% of the Fair Market
Value (as hereinafter defined) of one share of the Company's Common Stock on the
date on which the Option is granted. No ISO may be granted under the Plan to any
person who, at the time of grant, owns (within the meaning of Section 424(d) of
the Code) stock possessing more than 10% of the total combined voting power of
all classes of stock of the Company or of any parent thereof, unless the
exercise price of the ISO is at least equal to 110% of Fair Market Value on the
date of grant. The price per share to be paid by the Optionee at the time an NQO
is exercised shall not be less than 85% of the Fair Market Value on the date on
which the NQO is granted, as determined by the Committee. For purposes of the
Plan, the "Fair Market Value" of a share of the Company's Common Stock as of a
given date shall be: (i) the closing price of a share of the Company's Common
Stock on the principal exchange on which shares of the Company's Common Stock
are then trading, if any, on the day immediately preceding that date, or, if
shares were not traded on that date, then on the next preceding trading day
during which a sale occurred; or (ii) if the Company's Common Stock is not
traded on an exchange but is quoted on Nasdaq or a successor quotation system,
the last sale price for the Common Stock on the day immediately preceding that
date as reported by Nasdaq or the successor quotation system; or (iii) if the
Company's Common Stock is not publicly traded on an exchange and not quoted on
Nasdaq or a successor quotation system, the closing bid price for the Common
Stock on that date as determined in good faith by the Committee; or (iv) if the
Company's Common Stock is not publicly traded, the fair market value established
by the Committee acting in good faith. In addition, with respect to any ISO, the
Fair Market Value on any given date shall be determined in a manner consistent
with any regulations issued by the Secretary of the Treasury for the purpose of
determining fair market value of securities subject to an ISO plan under the
Code.
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9. CEILING OF ISO GRANTS. The aggregate Fair Market Value (determined at
the time any ISO is granted) of the Common Stock with respect to which an
Optionee's ISOs, together with incentive stock options granted under any other
plan of the Company and any parent, are exercisable for the first time by such
Optionee during any calendar year shall not exceed $100,000. If an Optionee
holds incentive stock options that become first exercisable (including as a
result of acceleration of exercisability under the Plan) in any one year for
shares having a Fair Market Value at the date of grant in excess of $100,000,
then the most recently granted of the ISOs, to the extent that they are
exercisable for shares having an aggregate Fair Market Value in excess of the
limit, shall be deemed to be NQOs.
10. DURATION, EXERCISABILITY, AND TERMINATION OF OPTIONS.
10.1 OPTION PERIOD. The option period shall be determined by the
Committee with respect to each Option granted. In no event, however, may the
option period exceed ten years from the date on which the Option is granted, or
five years in the case of a grant of an ISO to an Optionee who is a 10%
shareholder at the date on which the Option is granted as described in SECTION
8.
10.2 EXERCISABILITY OF OPTIONS. Each Option shall be exercisable in
whole or in consecutive installments, cumulative or otherwise, during its term
as determined in the discretion of the Committee.
10.3 TERMINATION OF OPTIONS DUE TO TERMINATION OF EMPLOYMENT,
DISABILITY, OR DEATH OF OPTIONEE; TERMINATION FOR "CAUSE", OR RESIGNATION IN
VIOLATION OF AN EMPLOYMENT AGREEMENT. All Options granted under the Plan to any
Employee Optionee shall terminate and may no longer be exercised if the Employee
Optionee ceases, at any time during the period between the grant of the Option
and its exercise, to be an employee of the Company; provided, however, that the
Committee may alter the termination date of the Option if the Optionee transfers
to an affiliate of the Company. Notwithstanding the foregoing, (i) if the
Employee Optionee's employment with the Company terminates for any reason (other
than involuntary dismissal for "cause" or voluntary resignation in violation of
any agreement to remain in the employ of the Company, including, without
limitation, any such agreement pursuant to SECTION 15), he or she may, at any
time before the expiration of three months after termination or before
expiration of the Option, whichever first occurs, exercise the Option (to the
extent that the Option was exercisable by him or her on the date of the
termination of his or her employment); (ii) if the Employee Optionee's
employment terminates due to disability (as defined in Section 22(e)(3) of the
Code and subject to such proof of disability as the Committee may require), the
Option may be exercised by the Employee Optionee (or by his guardian(s), or
conservator(s), or other legal representative(s)) before the expiration of 12
months after termination or before expiration of the Option, whichever first
occurs (to the extent that the Option was exercisable by him or her on the date
of the termination of his or her employment); (iii) in the event of the death of
the Employee Optionee, an Option exercisable by him or her at the date of his or
her death shall be exercisable by his or her legal representative(s),
legatee(s), or heir(s), or by his or her beneficiary or beneficiaries so
designated by him or her, as the case may be, within 12 months after his or her
death or before the expiration of the Option, whichever first occurs (to the
extent that the Option was exercisable by him or her on the date of his or her
death); and (iv) if the Employee Optionee's employment is terminated for "cause"
or in violation of any agreement to remain in the employ of the Company,
including, without limitation, any such agreement pursuant to
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SECTION 14, his or her Option shall terminate immediately upon termination of
employment, and the Option shall be deemed to have been forfeited by the
Optionee. For purposes of the Plan, "cause" may include, without limitation, any
illegal or improper conduct which (1) injures or impairs the reputation,
goodwill, or business of the Company; (2) involves the misappropriation of funds
of the Company, or the misuse of data, information or documents acquired in
connection with employment by the Company; or (3) violates any other directive
or policy promulgated by the Company. A termination for "cause" may also include
any resignation in anticipation of discharge for "cause" or resignation accepted
by the Company in lieu of a formal discharge for "cause."
11. MANNER OF OPTION EXERCISE; RIGHTS AND OBLIGATIONS OF OPTIONEES.
11.1 WRITTEN NOTICE OF EXERCISE. An Optionee may elect to exercise an
Option in whole or in part, from time to time, subject to the terms and
conditions contained in the Plan and in the agreement evidencing the Option, by
giving written notice of exercise to the Company at its principal executive
office.
11.2 CASH PAYMENT FOR OPTIONED SHARES. If an Option is exercised for
cash, the exercise notice shall be accompanied by a cashier's or personal check,
or money order, made payable to the Company for the full exercise price of the
shares purchased.
11.3 STOCK SWAP FEATURE. At the time of the Option exercise, and
subject to the discretion of the Committee to accept payment in cash only, the
Optionee may determine whether the total purchase price of the shares to be
purchased shall be paid solely in cash or by transfer from the Optionee to the
Company of previously acquired shares of Common Stock, or by a combination
thereof. If the Optionee elects to pay the total purchase price in whole or in
part with previously acquired shares of Common Stock, the value of the shares
shall be equal to their Fair Market Value on the date of exercise, determined by
the Committee in the same manner used for determining Fair Market Value at the
time of grant for purposes of SECTION 8.
11.4 INVESTMENT REPRESENTATION FOR NON-REGISTERED SHARES AND LEGALITY
OF ISSUANCE. The receipt of shares of Common Stock upon the exercise of an
Option shall be conditioned upon the Optionee (or any other person who exercises
the Option on his or her behalf as permitted by SECTION 10.3) providing to the
Committee a written representation that, at the time of such exercise, it is the
intent of that person(s) to acquire the shares for investment only and not with
a view toward distribution. The certificate for unregistered shares issued for
investment shall be restricted by the Company as to transfer unless the Company
receives an opinion of counsel satisfactory to the Company to the effect that
the restriction is not necessary under then pertaining law. The providing of the
representation and the restrictions on transfer shall not, however, be required
upon any person's receipt of shares of Common Stock under the Plan if, at the
time of grant of the Option relating to receipt or upon receipt, whichever is
the appropriate measure under applicable federal or state securities laws, the
shares subject to the Option shall be (i) covered by an effective and current
registration statement under the Securities Act of 1933, as amended, and (ii)
either qualified or exempt from qualification under applicable state securities
laws. The Company shall, however, under no circumstances be required to sell or
issue any shares under the Plan if, in the opinion of the Committee, (i) the
issuance of the shares would constitute a violation by the Optionee or the
Company of any applicable law or regulation of any governmental authority or
(ii) the consent
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or approval of any governmental body is necessary or desirable as a condition
of, or in connection with, the issuance of the shares.
11.5 SHAREHOLDER RIGHTS OF OPTIONEE. Upon exercise, the Optionee (or
any other person who exercises the Option on his or her behalf as permitted by
SECTION 10.3) shall be recorded on the books of the Company as the owner of the
shares, and the Company shall deliver to the record owner one or more duly
issued stock certificates evidencing ownership. No person shall have any rights
as a shareholder with respect to any shares of Common Stock covered by an Option
granted pursuant to the Plan until that person has become the holder of record
of the shares. Except as provided in SECTION 13, no adjustments shall be made
for cash dividends or other distributions or other rights as to which there is a
record date preceding the date that person becomes the holder of record of the
shares.
11.6 HOLDING PERIODS FOR TAX PURPOSES. The Plan does not provide that
an Optionee must hold shares of Common Stock acquired under the Plan for any
minimum period of time. Optionees are urged to consult with their own tax
advisors with respect to the tax consequences to them of their individual
participation in the Plan.
12. SUCCESSIVE GRANTS. Successive grants of Options may be made to any
Optionee under the Plan.
13. ADJUSTMENTS.
(a) Except to the extent already contemplated by SECTION 5, if the
outstanding Common Stock is hereafter increased or decreased, or changed into or
exchanged for a different number or kind of shares or other securities of the
Company or of another corporation, by reason of a recapitalization,
reclassification, reorganization, merger, consolidation, share exchange or other
business combination in which the Company is the surviving parent corporation,
stock split-up, combination of shares or dividend or other distribution payable
in capital stock or rights to acquire capital stock, appropriate adjustment
shall be made by the Committee in the number and kind of shares for which
options may be granted under the Plan. In addition, the Committee shall make
appropriate adjustment in the number and kind of shares as to which outstanding
and unexercised options shall be exercisable, to the end that the proportionate
interest of the holder of the option shall, to the extent practicable, be
maintained as before the occurrence of the event. The adjustment in outstanding
options shall be made without change in the total price applicable to the
unexercised portion of the option but with a corresponding adjustment in the
exercise price per share.
(b) Upon the dissolution or liquidation of the Company, any
outstanding and unexercised options shall terminate as of a future date to be
fixed by the Committee.
(c) Upon a Reorganization (as hereinafter defined), then,
(i) If there is no plan or agreement with respect to the
Reorganization ("Reorganization Agreement"), or if the Reorganization Agreement
does not specifically provide for the adjustment, change, conversion, or
exchange of the outstanding and unexercised options for cash
6
<PAGE>
or other property or securities of another corporation, then any outstanding and
unexercised options shall terminate as of a future date to be fixed by the
Committee; or
(ii) If there is a Reorganization Agreement, and the Reorganization
Agreement specifically provides for the adjustment, change, conversion or
exchange of the outstanding and unexercised options for cash or other property
or securities of another corporation, then the Committee shall adjust the shares
under the outstanding and unexercised options, and shall adjust the shares
remaining under the Plan which are then available for the issuance of options
under the Plan if the Reorganization Agreement makes specific provisions
therefor, in a manner not inconsistent with the provisions of the Reorganization
Agreement for the adjustment, change, conversion, or exchange of the options and
shares.
(d) The term "Reorganization" as used in this SECTION 13 means any
reorganization, merger, consolidation, share exchange or other business
combination pursuant to which the Company is not the surviving parent
corporation after the effective date of the Reorganization, or any sale or lease
of all or substantially all of the assets of the Company. Nothing herein shall
require the Company to adopt a Reorganization Agreement, or to make provision
for the adjustment, change, conversion, or exchange of any options or the shares
subject thereto, in any Reorganization Agreement which it does adopt.
(e) The Committee shall provide to each optionee then holding an
outstanding and unexercised option not less than 30 calendar days' advanced
written notice of any date fixed by the Committee pursuant to this SECTION 13
and of the terms of any Reorganization Agreement providing for the adjustment,
change, conversion, or exchange of outstanding and unexercised options. Except
as the Committee may otherwise provide, each optionee shall have the right
during that period to exercise his or her option only to the extent that the
option was exercisable on the date the notice was provided to the optionee.
Any adjustment to any outstanding ISO pursuant to this SECTION 13, if
made by reason of a transaction described in Section 424(a) of the Code, shall
be made so as to conform to the requirements of that Section and the regulations
thereunder. If any other transaction described in Section 424(a) of the Code
affects the Common Stock subject to any unexercised ISO theretofore granted
under the Plan ("old option"), the Board of Directors of the Company or of any
surviving or acquiring corporation may take such action as it deems appropriate,
in conformity with the requirements of that Code Section and the regulations
thereunder, to substitute a new option for the old option, in order to make the
new option, as nearly as may be practicable, equivalent to the old option, or to
assume the old option.
(f) No modification, extension, renewal, or other change in any option
granted under the Plan may be made, after the grant of the option, without the
optionee's consent, unless it is permitted by the provisions of the Plan and the
option agreement. In the case of an ISO, optionees are hereby advised that
certain changes may disqualify the ISO from being considered as such under
Section 422 of the Code, or constitute a modification, extension, or renewal of
the ISO under Section 424(h) of the Code.
7
<PAGE>
(g) All adjustments and determinations under this SECTION 13 shall be
made by the Committee in good faith in its sole discretion.
14. CONTINUED EMPLOYMENT. As determined in the sole discretion of the
Committee at the time of grant and if so stated in a writing signed by the
Company, each Option may have as a condition the requirement of an Employee
Optionee to remain in the employ of the Company, or of its affiliates, and to
render to it his or her exclusive service, at such compensation as may be
determined from time to time by it, for a period not to exceed the term of the
Option, except for earlier termination of employment by or with the express
written consent of the Company or on account of disability or death. The failure
of any Employee Optionee to abide by this agreement as to any Option under the
Plan may result in the termination of all of his or her then outstanding Options
granted pursuant to the Plan. Neither the creation of the Plan nor the granting
of Option(s) under it shall be deemed to create a right in an Employee Optionee
to continued employment with the Company, and each Employee Optionee shall be
and shall remain subject to discharge by the Company as though the Plan had
never come into existence. Except as specifically provided by the Committee in
any particular case, the loss of existing or potential profit in options granted
under this Plan shall not constitute an element of damages in the event of
termination of the employment of an employee even if the termination is in
violation of an obligation of the Company to the employee by contract or
otherwise.
15. TAX WITHHOLDING. The exercise of any Option granted under the Plan is
subject to the condition that if at any time the Company determines, in its
discretion, that the satisfaction of withholding tax or other withholding
liabilities under any federal, state or local law is necessary or desirable as a
condition of, or in connection with, the exercise or a later lapsing of time or
restrictions on or disposition of the shares of Common Stock received upon the
exercise, then in that event, the exercise of the Option shall not be effective
unless the withholding has been effected or obtained in a manner acceptable to
the Company. When an Optionee is required to pay to the Company an amount
required to be withheld under applicable income tax laws in connection with the
exercise of any Option, the Optionee may, subject to the approval of the
Committee, which approval shall not have been disapproved at any time after the
election is made, satisfy the obligation, in whole or in part, by electing to
have the Company withhold shares of Common Stock having a value equal to the
amount required to be withheld. The value of the Common Stock withheld pursuant
to the election shall be determined by the Committee, in accordance with the
criteria set forth in SECTION 8, with reference to the date the amount of tax to
be withheld is determined. The Optionee shall pay to the Company in cash any
amount required to be withheld that would otherwise result in the withholding of
a fractional share. The election by an Optionee who is an officer of the Company
within the meaning of Section 16 of the 1934 Act, to be effective, must meet all
of the requirements of Section 16 of the 1934 Act.
16. TERM OF PLAN.
16.1 EFFECTIVE DATE. Subject to shareholder approval, the Plan shall
become effective as of February __, 1999.
16.2 TERMINATION DATE. Except as to options granted and outstanding
under the Plan prior to that time, the Plan shall terminate at midnight on
February __, 2009, and no Option shall
8
<PAGE>
be granted after that time. Options then outstanding may continue to be
exercised in accordance with their terms. The Plan may be suspended or
terminated at any earlier time by the Board within the limitations set forth in
SECTION 4.
17. NON-EXCLUSIVITY OF THE PLAN. Nothing contained in the Plan is intended
to amend, modify, or rescind any previously approved compensation plans,
programs or options entered into by the Company. This Plan shall be construed to
be in addition to and independent of any and all other arrangements. Neither the
adoption of the Plan by the Board nor the submission of the Plan to the
shareholders of the Company for approval shall be construed as creating any
limitations on the power or authority of the Board to adopt, with or without
shareholder approval, such additional or other compensation arrangements as the
Board may from time to time deem desirable.
18. GOVERNING LAW. The Plan and all rights and obligations under it shall
be construed and enforced in accordance with the laws of the State of Delaware.
19. INFORMATION TO OPTIONEES. Optionees under the Plan who do not
otherwise have access to financial statements of the Company will receive the
Company's financial statements at least annually.
9
<PAGE>
Exhibit 10.26
General Services Administration
Federal Supply Service
Washington, DC 20406
Dear FSS Contractor,
Attached is a modification to your contract under the FSC Group 70, Part 1,
Sections B/C FSS Schedule to add ADP Services (SIN 132-51). Also included are
corrections and clarifications.
Please note that this modification deletes information for Ordering Offices
clauses 3a and 3b. entitled SCHEDULE ORDERS MUST BE CONTRACT SPECIFIC and NOT
SPECIFICALLY PRICES (NSP) ITEMS.
These clauses are not necessary because purchasing of incidental, non-schedule
items on a delivery order to a schedule contractor is permitted so long as the
cost of the non-FSS schedule items are small compared to the total cost of the
procurement.
NOTE: Contractors are reminded:
1. Per Section H.3(c), within 60 days for contract award or April 1, 1996
(which ever is later), the contractor must provide a written certification to
the Contracting Officer that the contractor is registered with the Central
Contractor Registration Database (CCR).
In order for contractors to register with the CCR, they should download the
Contractor Registration Program (CRP) from the Internet. There are two ways to
access this information.
a. File transfer Protocol (FTP), use lower case when entering data:
.Name - ftp.netcom.com
.Directory - pub/an/anoel
.Download Three Files - disk1.zip, disk2,zip, and disk3.zip
b. World Wide Web URL: http:\\www.saecrc.org
c. Please direct all questions regarding the CRP to 1800/683-9763.
2. Per Section H.3(d), the contractor shall, within 60 calendar days after
April 1, 1996 or date of aware, whichever is later, provide a written EDI
Implementation Plan to the Contracting Officer.
In this plan, the contractor is requested to provide a date when they expect to
have each X.12 compliant file(s) implemented. See example below.
IMPLEMENTATION
FILE DATE
810 MM/DD/YY
832 MM/DD/YY
<PAGE>
850 MM/DD/YY
824 MM/DD/YY
We are looking forward to your offer for ADP Services.
Sincerely,
/S/ ROY B. CHISHOLM
- --------------------------------
Roy B. Chisholm
Director, ADP Acquisition Center
<PAGE>
AMENDMENT OF SOLICITATION OF CONTRACT
1. AMENDMENT MODIFICATION NO.
MODIFICATION #
3. EFFECTIVE DATE
4. REQUISITION PURCHASE REQ NO.
5. PROJECT NO.
6. __/FSS/FCI
CRYSTAL MALL #4, ROOM 1017
__ JEFFERSON DAVIS HIGHWAY
ARLINGTON, VA 22202
7. ADMINISTERED BY (if other than Item 5) CODE ___________
8. NAME AND ADDRESS OF CONTRACTOR (No., street, country, state and ZIP Code)
Pulsar Data Systems, Inc.
4500 Forbes Blvd, Suite 300
Lanham,
MD 20706
(X) 9A. AMENDMENT OF SOLICITATION NO.
9B. DATED (SEE ITEM 11)
10A. MODIFICATION OF CONTRACT/ORDER NO.
GS-35F-4232D
10B DATED (SEE ITEM 13)
5/3/96
FACILITY CODE
11. THIS ITEM ONLY APPLIES TO AMENDMENTS OF SOLICITATIONS
The above numbered solicitation is amended as set forth in Item 14. The hour
and date specified for receipt of Offers
_____ is extended ______ is not extended.
must acknowledge receipt of this amendment prior to the hour and date
specified in the solicitation or as amended, by one of the following methods:
completing items 8 and 15. and returning ___ copies of the amendment; (b) By
acknowledging receipt of this amendment on each copy of the of offer ___ed; or
(c) By separate letter or telegram which includes a reference to the
solicitation and amendment numbers. FAILURE OF YOUR ACKNOWLEDGMENT TO BE
RECEIVED AT THE PLACE DESIGNATED FOR THE RECEIPT OF OFFERS PRIOR TO THE HOUR AND
DATE SPECIFIED MAY RESULT IN REJECTION OF YOUR OFFER. If by this amendment you
desire to change an offer already submitted, such change may be made by telegram
or letter, provided each telegram or letter makes reference to the solicitation
and this amendment, and is received prior to the opening hour and date
specified.
12. ACCOUNTING AND APPROPRIATION DATA (if required))
13. THIS ITEM APPLIES ONLY TO MODIFICATIONS OF CONTRACTS/ORDERS, IT MODIFIES
THE CONTRACT/ORDER NO. AS DESCRIBED IN ITEM 14.
THIS CHANGE ORDER IS ISSUED PURSUANT TO: (Specify authority) THE CHANGES
SET FORTH IN ITEM 14 ARE MADE IN THE CONTRACT ORDER NO. IN ITEM 10A.
<PAGE>
THIS SUPPLEMENTAL AGREEMENT IS ENTERED INTO PURSUANT TO AUTHORITY OF:
THE ABOVE NUMBERED CONTRACT/ORDER IS MODIFIED TO REFLECT THE ADMINISTRATIVE
CHANGES (such as changes in paying office, appropriation, date, etc.) SET FORTH
IN ITEM 14, PURSUANT TO THE AUTHORITY OF FAR 43.103(b).
THIS SUPPLEMENTAL AGREEMENT IS ENTERED INTO PURSUANT TO AUTHORITY OF:
OTHER (Specify type of modification and authority) PER SECTION G.1
IMPORTANT: Contractor __ is not, X is required to sign this document
-----
and return 2 copies of the issuing office.
DESCRIPTION OF AMENDMENT/MODIFICATION (Organized by UCF section headings,
including solicitation/contract subject matter where feasible.)
The above referenced contract under FSC Group 70, Information Technology
Multiple Award Schedule, is hereby modified as follows:
provided herein, all terms and conditions of the document referenced in
Item 9A or 10A, as heretofore changed, remains unchanged and in full force
____ AND TITLE OF SIGNER (Type of print)
G. Wilkerson, Director of Contracts
CONTRACTOR/OFFEROR
Art H. Wilkerson/S/
(Signature of person authorized to sign)
15C. DATE SIGNED
7/15/98
16A. NAME AND TITLE OF CONTRACTING OFFICER (Type or print)
16B. UNITED STATES OF AMERICA
BY: __________________________
(signature of Contracting Officer)
16C. DATE SIGNED
0-01-152-8070
__ EDITION UNUSABLE
30-105
STANDARD FORM 30 (REV. 10-83)
Prescribed by GSA
<PAGE>
Modification Page 2 of 53 pages
1. Change in Contract Period.
The original contract period was April 1,1996 or Date of Award, whichever is
later, through March 31, 1999.
The new contract period is April 1, 1996 or Date of Award, whichever is later,
through five (5) years from the contract begin date, with a minimum period of
three years from April 1, 1999. For example.
Contract New Contract
Begin Date End Data
April 1, 1996 March 31, 2002
July 5, 1997 July 3, 2002
February 24, 1998 February 23, 2003
2. ADD/REPLACE the following FSC/FPDS Classes to list of products and/or
services being solicited in Section B.2.
SIN 132-8 PURCHASE OF EQUIPMENT
FSC CLASS 7042 - MINI AND MICRO COMPUTER CONTROL DEVICES
___ Microcomputer Control Devices
___ Telephone Answering and Voice Messaging Systems
FSC CLASS 6020 - FIBER OPTIC CABLE ASSEMBLIES AND HARNESSES
___ Fiber Optic Cable Assemblies and Harnesses
FSC CLASS 5805 - TELEPHONE AND TELEGRAPH EQUIPMENT
___ Telephone Equipment
___ Audio and Video Teleconferencing Equipment
FSC CLASS 5820 - RADIO AND TELEVISION COMMUNICATION EQUIPMENT, EXCEPT AIRBORNE
___ Two-Way Radio Transmission/Receivers/Antennas
___ Broadcast Band Radio Transmitters/Receivers/Antennas
<PAGE>
Modification Page 3 of 53 Pages
___ Microwave Radio Equipment/Antennas and waveguides
___ Satellite Communications Equipment
FSC CLASS 5826 - RADIO NAVIGATION EQUIPMENT, AIRBORNE
Airborne Radio Navigation Equipment
FSC CLASS 5830 - INTERCOMMUNICATION AND PUBLIC ADDRESS
SYSTEMS, EXCEPT AIRBORNE
Pagers and Public Address Systems (wired and wireless
transmission, including background music systems)
(NOTE: Pager, Transmissions Services are excluded from this
solicitation.)
FSC CLASS 5841 - RADAR EQUIPMENT, AIRBORNE
___ Airborne Radar Equipment
FSC CLASS 5895 - MISCELLANEOUS COMMUNICATION EQUIPMENT
___ Miscellaneous Communications Equipment
Indicate if the following is being offered in support of SIN
132-8 PURCHASE OF EQUIPMENT
___ Installation for equipment offered under SIN 132-8
(FPDS Code N070)
___ Deinstallation for equipment offered under SIN 132-8
(FPDS Code N070):
___ Reinstallation for equipment offered under SIN 132-8 FPDS Code N070)
NOTE: Installation must be incidental to, in conjunction with and in direct
support of, the products sold under SIN 132-8 on this contract and cannot be
purchased separately.
<PAGE>
Modification Page 4 of 53 Pages
SPECIAL ITEM NO. 132-51 INFORMATION TECHNOLOGY PROFESSIONAL SERVICES
___ IT Facility Operation and Maintenance (FPDS CODE D301)
X IT Systems Development Services (PDS CODE D302)
- ---
X IT Systems Analysis Services (FPDS Code D306)
- ---
X Automated Information Systems Design and Integration
- ---
Services (FPDS Code D307)
___ Programming Services (FPDS Code D308)
___ Millennium Conversion Services (Y2K)
___ IT Backup and Security Services (FPDS Code D310)
___ IT Data Conversion Services (FPDS Code D311)
___ Computer Aided Design/Computer Aided Manufacturing (CAD/CAM) Services (FPDS
Code D313)
X IT Network Management Services (FPDS Code D316))
- ---
___ Automated News Services, Data Services, or Other Information
Services (FPDS Code D317)
___ Other Information Technology Services, Not Elsewhere Classified (FPDS Code
D399)
Note: All non-professional labor categories must be incidental to and used
solely to support hardware, software and/or professional services, and cannot
be purchased separately.
SIN 132-52 ELECTRONIC COMMERCE SERVICES
___ Navigation Services
3. DELETE from Section C.1 the list of EXCLUDED ITEMS and REPLACE with the
following:
NOTE: The following ARE EXCLUDED from the Information Technology
Schedule:- )
<PAGE>
Modification Page 5 of 53 Pages
i. Radar Equipment (except airborne radar equipment).
Offers for radar equipment (other than airborne radar equipment) must be made to
the GSA Federal Supply Service under FSC Group 58, Part IX. Contact Mr. William
Glacken on (215) 656-3835.
ii. Electrical Equipment - e.g., Uninterruptible Power Supplies, Computer Back-
Up Power Systems, Surge Suppressers, Power Line Conditioners, Surge Absorbers,
etc. may be offered under this solicitation only in conjunction with the IT
equipment these devices support. Offers which are limited to the electrical
equipment cited above should be made to the GSA Federal Supply Service under FSC
Group 61, Part V, Section B. Contact Mr. Dwight Young on (817) 978-8372.
iii. Training Courses for products which are outside the scope of this Schedule.
iv. Diskettes, Disk Cartridges, Disk Packs, Tape Cartridges, Tapes, and Optical
Disks, may be offered only in conjunction with the hardware devices which
utilize these supply items. Offers which do not include the hardware devices
may be made under Federal Supply Schedule FSC Group 58, Part V. Contact (212)
264-2692.
v. Carrying cases, except one per portable CPU purchase.
vi. Financial Management Software that specifically covers complete primary-
accounting systems that meet-Joint Financial Management Improvement Program
(JFMIP) Core Financial System Requirements. Contact Ms. Kathy Wood, GSA, Federal
Technology Service, on (703) 756-4214.
vii. Subscription services for databases on magnetic media and/or on optical
disk. Contact Ms. Mary Ann DeFeo on (212) 264-2306.
viii. Any products which are not U.S. Made End Products, Designated Country End
Products, Caribbean Basin Country End Products, Canadian End Products, or
Mexican End Products in accordance with FAR 25.402(c) and General Services
Administration Acquisition Regulation (GSAR) 525.402(a).
ix. Any products or services that are not "commercial" as defined in accordance
with FAR 52.202-l(c).
<PAGE>
Modification Page 5 of 53 Pages
4. ADD the following new paragraph to the end of Section F:
F.5 DELIVERY PRICES (F-FCI-202-G) (DEC 1997)
(a) Prices offered must cover delivery as provided below to destinations located
within the 48 contiguous States and the District of Columbia.
(b) The Offeror is requested to indicate below whether or not prices submitted
cover delivery f.o.b. destination in Alaska, Hawaii, the Commonwealth of Puerto
Rico, and such overseas locations as specified:
(Yes) (No)
Alaska X
Hawaii | X
Puerto Rico X
Overseas Locations X
Specify: ____________________________________________
_____________________________________________________
_____________________________________________________
(c) When deliveries are made to destinations outside the 48 contiguous States;
i.e., Alaska, Hawaii, the Commonwealth of Puerto Rico, and such overseas
locations as specified, and are not covered by paragraph (b), above, the
following conditions will apply:
(1) Delivery will be f.o.b. inland carrier, point of exportation (FAR 52.247-
38), with the transportation charges to be paid by the Government from point of
exportation to destination in Alaska, Hawaii, the Commonwealth of Puerto Rico,
and such overseas locations specified, as designated by the ordering office.
The Contractor shall add the actual cost of transportation to destination from
the point of exportation in the 48 contiguous States nearest to the designated
destination. Such costs will, in all cases, be based upon the lowest regularly
established rates on file with the Interstate Commerce Commission, the U.S.
Maritime Commission (if shipped by water), or any State regulatory body, or
those published by the U.S. Postal Service; and must be supported by paid
freight or express receipt or by a statement of parcel post charges including
weight of shipment.
(2) The right is reserved to ordering agencies to furnish Government bills of
lading.
(d) Ordering offices will be required to pay differential) between freight
charges and express charges where express deliveries are desired by the
Government.
<PAGE>
Modification Page 7 of 53 Pages
5. DELETE Section G.1 MODIFICATIONS in its entirety and REPLACE with the
following:
G.1.A MODIFICATIONS (MULTIPLE AWARD SCHEDULE)(GSAR 552.243-72) (AUG 1997) (FCI
DEVIATION-DEC 1997)
(a) General. The Contractor may request a contract modification by submitting a
request to the Contracting Officer for approval, except as noted in paragraph
(d) of this clause. At a minimum, every request shall describe the proposed
change(s) and provide the rationale for the requested change(s).
(b) Types of Modifications.
(1) Additional items/additional SINs. When requesting additions, the following
information must be submitted:
(i) Information requested in paragraphs (1) and (2) of the Commercial Sales
Practice Format to add SINs.
(ii) Discount information for the new items(s) or new SIN(s). Specifically,
submit the information requested in paragraphs 3 through 5 of the Commercial
Sales Practice Format. If this information is the same as the initial award, a
statement to that effect may be submitted instead.
NOTE: Tho format for the Commercial Sales Practices is found in item G.1.B.
(iii) Information about the new item(s) or new SIN(s) as described in 552.212-
70, Preparation of Offer (Multiple Award Schedule) is required.
NOTE: Preparations of Offer (Multiple Award Schedules) paragraph is item G.1.C.
(iv) Delivery time(s) for the new item(s) or the item(s) under the new SIN(s)
must be submitted in accordance with 552.211-78, Commercial Delivery Schedule
(Multiple Award Schedules).
NOTE: The Commercial Delivery Schedule (Multiple Award Schedules) reference is
F-FSS-265, April 1995 for this contract.
<PAGE>
Modification Page 8 of 53 Pages
(v) Production point(s) for the new item(s) or the item(s) under the new SIN(s)
must be submitted if required by 52.215-6, Place of Performance.
NOTE: The Place of Performance reference is 52.215-20 for this
contract.
(vi) Any information requested by 52.212-3(f), Offerors Representations and
Certifications - Commercial Items, that may be necessary to assure compliance
with 552.225-9, Trade Agreements Act (I.2).
(2) Deletions. The Contractors shall provide an explanation for the deletion.
The Government reserves the right to reject any subsequent offer of the same
item or a substantially equal item at a higher price during the same contract
period, if the Contracting Officer finds the higher price to be unreasonable
when compared with the deleted item.
(3) Price Reduction. The Contractor shall indicate whether the price reduction
falls under the item (i), (ii), or (iii) of subparagraph (c)(l) of the Price
Reductions clause at 552.238-76 (I.14). If the price reduction falls under item
(i), the Contractor shall submit a copy of the dated commercial pricelist(s). If
the price reduction falls under item (ii) or (iii), the Contractor shall submit
a copy of the applicable pricelist(s), bulletins or letters or customer
agreements which outline the effective date, duration, terms and conditions of
the price reduction.
(c) Effective dates. The effective date of any modification is the date
specified in the modification, except as otherwise provided ln the Price
Reductions clause at 552.238-76 (I.14).
(d) Electronic file updates. The Contractor shall update electronic file
submissions to reflect all modifications. Except for price reductions and
corrections, the Contractor shall obtain the Contracting Officer's approval
before transmitting changes. Price reductions and correction may be transmitted
without prior approval. However, the Contracting Officer shall be notified as
set forth in the Price Reductions clause at 552.238-76 (I.14).
(e) Amendments to paper Federal Supply Schedule Prie lists. The Contractor
shall distribute a supplemental paper Federal Supply Schedule Pricelist
reflecting accepted changes within 15 days after the effective date of the
modification. At a minimum, distribution shall be made to these ordering
activities that previously received the basic document. In addition, two copies
of the supplemental pricelist shall be submitted to the contracting officer, and
two copies shall be submitted to the FSS Schedule Information Center.
<PAGE>
Modification Page 9 of 53 Pages
G.1.B C OMMERCIAL SALES PRACTICES FORMAT (CSP-1)
Name of Offeror: Pulsar Data Systems, Inc.
SIN(s): 132-8, 132-51, 132-33d, 132-12
NOTE: Please refer to clause 552.212-70, PREPARATION OF OFFER (MULTIPLE AWARD
SCHEDULE), for additional information concerning your offer. Provide the
following information for each SIN (or group of SINs or SubSIN) for which
information is the same.
(1) Provide the dollar value of sales to the general public at or based on an
established catalog or market price during the previous 12 month period or the
Offeror's last fiscal year. $150M. State beginning and ending of the 12 month
period. Beginning $70M Ending $80M. In the event that a dollar value is not an
appropriate measure of the sales, provide and describe your own measure of the
sales of the item(s).
(2) Show your total projected annual sales to the Government under this contract
for the contract term, excluding options, for each SIN offered. If you
currently hold a Federal Supply Schedule contract for the SIN the total
projected annual sales should be based on your most recent 12 months of sales
under that contract. SIN 132-8 $89M; SIN 132-51 $12M; SIN 132-33 $8M
(3) Based on your written discounting policies (standard commercial sales-
practices in the event you do not have written discounting policies), are the
discounts and any concessions which you offer the Government equal-to or better
than your best price (discount and concessions in any combination) offered to
any customer acquiring the same items regardless of quantity or terms and
conditions? YES X NO . (See definition of "concession" and "discount" in
--- ---
552.212-70.)
(4) (a) Based on your written discounting policies (standard commercial sales
practices in the event you do not have written discounting policies), provide
information as requested for each SIN (or group of SINs for which the
information is the same) in accordance with the instructions at Table 515-1
which is provided in this solicitation for your convenience. The information
should be provided in the chart below or in an equivalent format developed by
the Offeror. Rows should be added to accommodate as many customers as required.
See definition of "concession" and "discount" in 552.212-70.
<PAGE>
Modification Page 10 of 53 Pages
Column 1 Column 2 Column 3 Column 4 Column 5
Customer Discount Quantity/Volume FOB Term Concessions
(b) Do any deviations from your written policies or standard commercial sales
practices disclosed in the above chart ever result in better discounts (lower
prices) or concessions than indicated? YES ______ NO ________. If YES, explain
deviations in accordance with the instructions at Table 515-1 which is provided
in this solicitation for your convenience .
(5) If you are a dealer/reseller without significant sales to the general
public, you should provide manufacturers information required by paragraphs (1)
through (4) above for each item/SIN offered, if the manufacturer's sales under
any resulting contract are expected to exceed S500,000. You must also obtain
written authorization from the manufacturer(s) for Government access, at any
time before award or before agreeing to a modification, to the manufacturer's
sales records for the purpose of verifying the information submitted by the
manufacturer. The information is required in order to enable the Government to
make a determination that the offered price is fair and reasonable. To expedite
the review and processing of offers, you should advise the manufacturer(s) of
this requirement. The Contracting Officer may require the information be
submitted on electronic media with commercially available spreadsheet(s). The
information may be provided by the manufacturer directly to the Government. If
the manufacturer's item(s) is being offered by multiple dealers/resellers, only
one copy of the requested information should be submitted to the Government. In
addition, you must submit the following information along with a listing of
contact information regarding each of the manufacturers whose products and/or
services are included in the offer (include the manufacturers name, address, the
manufacturers contact point, telephone number, and FAX number) for each model
offered by SIN:
(a) Manufacturer's Name
(b) Manufacturer's Part Number
(c) Dealer's/Reseller's Part Number
(d) Product Description,
(e) Manufacturer's List Price.
(f) Dealer's/Resellers percentage discount from List Price or net prices
<PAGE>
Modification Page 11 of 53 Pages
TABLE 515-1
INSTRUCTIONS FOR COMMERCIAL SALES PRACTICES FORMAT
If you responded "YES" to question (3), on the COMMERCIAL SALES PRACTICES
FORMAT, complete the chart in question (4)(a) for the customer(s) who receive
your best discount. If you responded "NO" complete the chart in question (4)(a)
showing your written policies or standard sales practices for all customers or
customer categories to whom you sell at a price (discounts and concessions in
combination) that is equal to or better than the price(s) offered to the
Government under this solicitation or with which the Offeror has a current
agreement to sell at a discount which equals or exceeds the discount(s) offered
under this solicitation. Such agreement shall be in effect on the date the offer
is submitted or contain an effective date during the proposed multiple award
schedule contract period. If your offer is lower than your price to other
customers or customer categories you will be aligned with the customer or
category of customer that receives your best price for purposes of the Price
Reductions clause at 552.238-76. The Government expects you to provide
information required by the format in accordance with these instructions that
is, to the best of your knowledge and belief, current, accurate, and complete as
of 14 calendar days prior to its submission. You must also disclose any changes
in your pricelist(s), discounts and/or discounting policies which occur after
the offer is submitted, but before the close of negotiations. If your discount
practices vary by model or product line, the discount information should be by
model or product line as appropriate. You may limit the number of models or
product lines reported to those which exceed 75% of actual historical Government
sales (commercial sales may be substituted if Government sales are unavailable)
value of the special item number (SIN).
Column 1-Identify the applicable customer or category of customer. A "customer"
is any entity, except the Federal Government, which acquires supplies or
services from the Offeror. The term customer includes, but is not limited to
original equipment manufacturers, value added resellers, state and local
governments, distributors, educational institutions (an elementary, junior high,
or degree granting school which maintains a regular facility and established
curriculum and an organized body of students), dealers, national accounts, and
end users. In any instance where the Offeror is asked to disclose information
for a customer, the Offeror may disclose information by category of customer if
the Offeror's discount policies or practices are the same for all customers in
the category. (Use a separate line for each customer or category of customer.)
Modification Page '2 cr j3 2ages
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Modification Page 12 of 53 Pages
Column 2-Identify the discount. The term "discount" is as defined in
solicitation clause 552.212-70 Preparation of Offer (Multiple Award Schedule).
Indicate the best discount (based on your written discounting policies or
standard commercial discounting practices if you do not have written discounting
policies) at which you sell to the customer or category of customer identified
in column 1, without regard to quantity; terms and conditions of the agreements
under which the discounts are given; and whether the agreements are written or
oral. Net prices or discounts off of other pricelists should be expressed as
percentage discounts from the pricelist which is the basis for your offer. If
the discount disclosed is a combination of various discounts (prompt payment,
quantity, etc.), the percentage should be broken out for each type of discount.
If the pricelists which are the basis of the discounts given to the customers
identified in the chart are different than the pricelist submitted upon which
your offer is based, identify the type or title and date of each pricelist. The
Contracting Officer may require submission of these pricelists. To expedite
evaluation, Offerors may provide these pricelists at the time of submission.
Column 3-Identify tho quantity or volume of sales. Insert the minimum quantity
or sales volume which the identified customer or category of customer must
either purchase/order, per order or within a specified period, to earn the
discount. When purchases/orders must be placed within a specified period to earn
a discount indicate the time period.
Column 4-Indicate tho FOB delivery term for each identified customer. (See FAR
47.3 for an explanation of FOB delivery terms.)
Column 5-Indicate concession regardless of quantity granted to the identified
customer or category of customer. Concessions are defined in solicitation clause
552.212-70 Preparation of Offers (Multiple Award Schedule). If the space
provided is inadequate, the disclosure should be made on a separate sheet by
reference. If you respond "YES" to question 4(b) in the Commercial Sales
Practices Format, provide an explanation of the circumstances under which you
deviate from your written policies or standard commercial sales practices
disclosed in the chart on the Commercial Sales Practices Format and explain how
often they occur. Your explanation should include a discussion of situations
that lead to deviations from standard practice, an explanation of how often they
occur, and the controls you employ to assure the integrity of your pricing.
Examples of typical
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Modification Page 13 of 53 Pages,
deviations may include, but are not limited to, one time goodwill discounts to
charity organizations or to compensate an otherwise disgruntled customer; a
limited sale of obsolete or damaged goods; the sale of sample goods to a new
customer; or the sales of prototype goods for testing purposes.
If deviations from your written policies or standard commercial sales practices
disclosed in the chart on the Commercial Sales Practices Format are so
significant and/or frequent that the Contracting Officer cannot establish
whether the price(s) offered is fair and reasonable, then you may be asked to
provide additional information. The Contracting Officer may ask for information
to demonstrate that you have made substantial sales of the item(s) in the
commercial market consistent with the information reflected on the chart on the
Commercial Sales Practices Format, a description of the conditions surrounding
those sales deviations, or other information that may be necessary in order for
the Contracting Officer to determine whether your offered price(s) is fair and
reasonable. In cases where additional information is-requested, the Contracting
Officer will target the request in order to limit the submission of data to that
needed to establish the reasonableness of the offered price.
G.1.C PREPARATION OF OFFER (MULTIPLE AWARD SCHEDULE)
(GSAR 552.212-70) (AVG 1997)
(a) Definitions. Concession, as used in this solicitation, means a benefit,
enhancement or privilege (other than a discount), which either reduces the
overall cost of a customer's acquisition or encourages a customer to consummate
a purchase. Concessions include, but are not limited to, freight allowance,
extended warranty, extended price guarantees, free installation and bonus goods.
Discount, as used in this solicitation, means a reduction to catalog prices
(published or unpublished). Discounts include, but are not limited to, rebates,
quantity discounts, purchase option credits, and any other terms or conditions
other than concessions which reduce the amount of money .a customer ultimately
pays for goods or services ordered or received. Any net price lower than the
list price is considered a "discount" by the percentage difference from the list
price to the net price.
(b) For each Special Item Number (SIN) included in an offer, the Offeror shall
provide the information outlined in paragraph (c). Offerors may provide a single
response covering more than one SIN, if the information disclosed is the same
for all products
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Modification Page 14 of 53 Pages
under each SIN. If discounts and concessions vary by model or product line,
Offerors shall ensure that information is clearly annotated as to item or items
referenced.
(c) Provide information described below for each SIN:
(l) Two copies of the Offeror's current published (dated or otherwise
identified) commercial descriptive catalogs and/or pricelists from which
discounts are offered. If special catalogs or pricelists are printed for the
purpose of this offer, such descriptive catalogs or pricelists shall include a
statement indicating the special catalogs or pricelists represent a verbatim
extract from the Offeror's commercial catalogs and/or pricelists and identify
the descriptive catalogs and/or pricelists from which the information has been
extracted.
(2) Next to each offered item in the commercial catalog and/or pricelist, the
Offeror shall write the special item number (SIN) under which the item is being
offered. Unless a special catalog or pricelist is submitted, all other items
shall be marked "excluded," lined out, and initialed by the Offeror.
(3) The discount(s) offered under this solicitation. The description of
discounts offered shall include all discounts, such as prompt payment discounts,
quantity/dollar volume discounts (indicate whether models/products can be
combined within the SIN or whether SINs can be combined to earn discounts),
blanket purchase agreement discounts, or purchase option credits. If the terms
of sale appearing in the commercial catalogs or pricelist on which an offer is
based are in conflict with the terms of this solicitation, the latter shall
govern.
(4) A description of concessions offered under this solicitation which are not
granted to other customers. Such concessions may include,-but are not limited
to, an extended warranty, a return/exchange goods policy, or enhanced or
additional services.
(5) If the Offeror is a dealer/reseller or the Offeror will use dealers to
perform any aspect of contract awarded under this solicitation, describe the
functions, if any, that the dealer/reseller will perform.
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Modification Page 15 of 53 Pages
G.1.D REQUIREMENTS FOR COST OR PRICING DATA OR INFORMATION OTHER THAN COST OR
PRICING DATA-MODIFICATIONS (FAR 52.215-21) (OCT 1997) (ALTERNATE IV-OCT 1997)
(VARIATION I-AUG 1997)
(a) Submission of cost or pricing data is not required.
(b) Provide information described below.
(1) Information required by the clause at 552.243-72, Modifications (Multiple
Award Schedule);
(2) Any additional supporting information requested by the Contracting Officer.
The Contracting Officer may require additional supporting information, but only
to the extent necessary to determine whether the price(s) offered is fair and
reasonable.
(3) By submitting a request for modification, the Contractor grants the
Contracting Officer or an authorized representative the right to examine, at any
time before agreeing to a modification, books, records, documents, papers, and
other directly pertinent records to verify the pricing, sales and other data
related to the supplies or services proposed in order to determine the
reasonableness of price(s). Access does not extend to Contractor's cost or
profit information or other data relevant solely to the Contractor's
determination of the prices to be offered in the catalog or marketplace.
6. DELETE Section G.3 CONTRACTOR'S REPORT OF SALES in its entirety and REPLACE
with the following:
G.3 CONTRACTOR'S REPORT OF SALES (GSAR 552.238-72) (FEB 1998)
(FCI DEVLATION--DEC 1997)
(a) The Contractor must report the quarterly dollar value (in U.S. dollars and
rounded to the nearest whole dollar) of sales under the contract by calendar
quarter (i.e., January-March, April-June, July-September, and October-December).
The dollar value of a sale is the price paid by the schedule user for products
and services on a schedule contract delivery order, as recorded by the
Contractor. The reported contract sales value must include the Industrial
Funding Fee (see Clause 552.238-77).
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Modification Page 16 of 53 Pages
(b) The Contractor must report the quarterly dollar value of sales on electronic
GSA Form 72A, Contractor's Report of Sales, to the FSS Vendor Support Center
(VSC) Website at Internet, http://VSC.gsa.gov. Sales shall be reported
separately for each National Stock Number (NSN), Special Item Number (SIN), or
subitem. If no sales occur, the Contractor shall show zero on the report for
each separate National Stock Number (NSN), Special Item Number (SIN), or
subitem.
(c) The Contractor must register with the FSS Vendor Support Center (VSC) before
using the automated reporting system. To register, the Contractor (or his
authorized representative) must call the VSC at (703) 305-6235 and provide the
necessary information regarding the company, contact name(s), and telephone
number(s). The VSC will then issue a 72A specific password and provide other
information needed to access the reporting system. Instructions for electronic
reporting are available at the VSC Website or by calling the above phone number.
(d) The Contractor must convert the total value of any sales made in foreign
currency to U.S. dollars using the "Treasury Reporting Rates of Exchange,"
issued by the U.S. Department of Treasury, Financial Management Service. The
contractor must use the issue of the Treasury report in effect on the last day
of the reporting quarter. The report is available from:
Department of the Treasury
Financial Management Service
International Funds Branch
3700 East-West Highway
PGCII, Room 5Al9
Hyattsville, MD 20782
Telephone: (202) 874-7994
Internet:
http://www.ustreas.gov/treasury/bureaus/finman/intn.html
(e) The report is due 30 days following the completion cf the reporting period.
The Contractor must provide a close-out report within 120 days after the
expiration date of the contract. This close-out report must cover all sales not
shown in the final quarterly report and reconcile all errors and credits. If all
contract sales are reported and all errors and credits on the final quarterly
report are reconciled, then the Contractor shall show zero sales in the close-
out report.
(f) The Government reserves the right to inspect without further notice, such
records of the Contractor as pertain to sales under this contract. Willful
failure or refusal to submit the required
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Modification Page 17 of 53 Pages
reports, or falsification thereof, constitutes sufficient cause for terminating
the contract for cause under the termination provisions of this contract.
7. DELETE Section H.1 OPTION TO EXTEND in its entirety and REPLACE with the
following:
F.1.A OPTION TO EXTEND THE TERM OF THE CONTRACT
(I-FSS-164-A) (AUG 1995)
The Government may require continued performance of this contract for an
additional 5 year period. The option clause may not be exercised more than one
time. When the option to extend the term of this contract is exercised the
following conditions are applicable:
(a) The Contracting Officer may exercise the option by providing a written
notice to the Contractor ten (10) months before expiration of the contract.
(b) When the Government exercises its option to extend the term of this
contract, prices in effect at the time the option is exercised will remain in
effect during the option period, unless an adjustment is made in accordance with
another contract clause (e.g., Economic Price Adjustment Clause or Price
Reductions Clause).
H.1.B NOTICE REGARDING OPTION(S) (GSAR 552.217-71) (NOV 1992)
The General Services Administration (GSA) has included an option to extend the
term of the contract in order to demonstrate the value it places on quality
performance by providing a mechanism for continuing a contractual relationship
with a successful Offeror that performs at a level which meets or exceeds GSA's
quality performance expectations as communicated to the Contractor, in writing,
by the Contracting Officer or designated representative. When deciding whether
to exercise the option, the Contracting Officer will consider the quality of the
Contractor's past performance under this contract in accordance with 48 CFR
517.207.
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Modification Page 18 of 53 Pages
8. DELETE Section H.9 YEAR 2000 WARRANTY COMMERCIAL SUPPLY ITEMS in its entirety
and REPLACE with the following:
H.9 YEAR 2000 WARRANTY COMMERCIAL SUPPLY ITEMS
(I-FSS-550-A)(AUG 1997)
As used in this clause, "Year 2000 compliant" means information technology that
accurately processes date/time data (including, but not limited to, calculating,
comparing, and sequencing) from, into, and between the twentieth and twenty-
first centuries, and the years 1999 and 2000 and leap year calculations.
Furthermore, Year 2000 compliant information technology, when used in
combination with other information technology, shall accurately process
date/time if the other information technology properly exchanges date/time data
with it.
(a) All currently awarded products that are not Year 2000 compliant must be
deleted from this contract no later than December 31, 1999.
(b) Any contract modifications, adding new items under clause 552.243-72,
Modifications (Multiple Award Schedule), must meet the warranty requirement in
paragraph c, below.
(c) The Contractor warrants that each hardware, software, and firmware product
delivered under this contract shall be able to accurately process date data
(including, but not limited to, calculating, comparing, and sequencing) from,
into, and between the twentieth and twenty-first centuries, including leap year
calculations, when used in accordance with the product documentation provided by
the Contractor, provided that all listed or unlisted products (e.g. hardware,
software, firmware) used in combination with such listed product properly
exchange date data with it. If the contract requires that specific listed
products must perform as a system in accordance with the foregoing warranty,
then that warranty shall apply to those listed products as a system. The
duration of this warranty and the remedies-available to the Government for
breach of this warranty shall be as defined in, and subject to, the terms and
limitations of the Contractor's standard commercial warranty or warranties
contained in this contract, provided that notwithstanding any provision to the
contrary in such commercial warranty or warranties, the remedies available to
the Government under this warranty shall include repair or replacement of any
listed product whose non-compliance is discovered and made known to the
Contractor in writing within ninety 190) days after acceptance. Nothing in this
warranty shall be construed to limit
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Modification Page 19 of 53 Pages
any rights or remedies the Government may otherwise have under this contract
with respect to defects other than Year 2000 performance.
9. DELETE Section 1.4 EXAMINATION OF RECORDS BY GSA in its entirety and REPLACE
with the following:
I.4 EXAMINATION OF RECORDS BY GSA (MULTIPLE AWARD SCHEDULE) (GSAR 552.215-71)
(AUG 1997)
The Contractor agrees that the Administrator of General Services or any duly
authorized representative shall have access to and the right to examine any
books, documents, papers and records of the Contractor involving transactions
related to this contract for overbillings, billing errors, compliance with the
Price Reductions clause and--compliance with the Industrial Funding Fee clause
of this contract. This authority shall expire 3 years after final payment. The
basic contract and each option shall be treated as separate contracts for
purposes of applying this clause.
10. DELETE Section 1.6 PAYMENTS BY ELECTRONIC FUNDS
TRANSFER in its entirety and REPLACE with the following:
I.6 INVOICE PAYMENTS (GSAR 552.232-70).(MAR 1998)
(a) The due date for making invoice payments by the designated
payment office is:
(1) For orders placed electronically by the General Services Administration
(GSA) Federal Supply Service(FSS), and to be paid by GSA through electronic
funds transfer (EFT), the later of the following two events:
(i) The 10th day after the designated billing office receives a proper invoice
from the contractor. If the designated billing office fails to annotate the
invoice with the date of receipt at the time of receipt, the invoice payment due
date shall be the 10th day after the date of the Contractor's invoice; provided
the Contractor submitted a proper invoice and no disagreements exists over
quantity, quality, or Contractor compliance with contract requirements.
(ii) The 10th day after Government acceptance of supplies delivered or services
performed by the Contractor.
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Modification Page 20 of 53 Pages
(2) For all other orders, the later of the following two events:
(i) The 30th day after the designated billing office receives a proper invoice
from the Contractor. If the designated billing office fails to annotate the
invoice with the date of receipt at the time of receipt, the invoice payment due
date shall be the 30th day after the date of the Contractor's invoice; provided
the Contractor submitted a proper invoice and no disagreement exists over
quantity, quality, or Contractor compliance with contract requirements.
(ii) The 30th day after Government acceptance of supplies delivered or services
performed by the Contractor.
(3) On a final invoice, if the payment amount is subject to contract settlement
actions, acceptance occurs on the effective
date of the contract settlement. .
(b) The General Services Administration will issue payment on the due date in
(a)(1) above if the Contractor complies with full cycle electronic commerce.
Full cycle electronic commerce includes all the following elements:
(1) The Contractor must receive and fulfill electronic data interchange (EDI)
purchase orders (transaction set 850).
(2) The Contractor must generate and submit to the Government valid EDI invoices
(transaction set 810).
(3) The Contractor's financial institution must receive and process, on behalf
of the Contractor, EFT payments through the Automated Clearing House (ACH)
system.
(4) The EDI transaction sets in (b)(1) through (b)(3) above must adhere to
implementation conventions provided by GSA.
(c) If any of the conditions in (b) above do not occur, the 10 day payment due
dates in (a)(1) become 30 day payment due dates.
(d) All other provisions of the Prompt Payment Act (31 U.S.C. 3901 et seq.) and
Office of Management and Budget (OMB) Circular
A-125, Prompt Payment, apply.
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Modification Page 21 of 53 Pages
i.7 DELETE Section 1.7 PAYMENT BY CREDIT CARD in its entirety and REPLACE with
the following:
I.7 PAYMENT BY PURCHASE CARD (GSAR 552.232-80) (DEC 1989) (VARIATION I) (MAR
1998) ,
(a) Definitions: "Government purchase card" means the uniquely numbered credit
card issued to named individual Government employees or entities to pay for
official Government purchases. "Oral delivery order" means an order placed
orally either in person or by telephone, which is paid for by Government
purchase card.
(b) Contractors are required to accept the Government purchase card for payments
equal to or less than the micro-purchase threshold for oral or written delivery
orders. This is not intended to limit the acceptance of the Government purchase
card under this contract for dollar amounts that exceed this threshold if
otherwise agreeable between the Contractor and the customer; therefore,
Contractors are encouraged to accept payment by the Government purchase card for
all orders. If the Contractor is unwilling to accept payment by the Government
purchase card for a delivery order, the Contractor must so advise the ordering
agency within 24 hours of receipt of order.
(c) The Contractor shall not process a transaction for payment through the
credit card clearinghouse until the purchased supplies have been shipped or
services performed. Unless the cardholder requests correction or replacement of
a defective or faulty item in accordance with other contract requirements, the
Contractor shall immediately credit a cardholder's account for items returned as
defective or faulty.
12. DELETE Section 1.13 INVOICE REQUIREMENTS in its entirety and REPLACE with
the following:
I.13 INVOICE
The Contractor shall submit an original invoice and three copies (or electronic
invoice, if authorized,) to the address designated 141 the delivery or task
order to receive invoices. An invoice must include- .
(1) Name and address of the Contractor;
(2) Invoice date;
(3) Contract number, contract line item number and, if
applicable, the order number;
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Modification Page 22 of 53 Pages
(4) Description, quantity, unit of measure, unit price and extended price of the
items delivered;
(5) Shipping number and date of shipment including the bill of lading number and
weight of shipment if shipped on Government bill of lading;
(6) Terms of any prompt payment discount offered
(7) Name and address of official to whom payment is to be sent; and
(8) Name, title, and phone number of person to be notified in event of defective
invoice.
Invoices will be handled in accordance with the Prompt Payment Act (31 U.S.C.
3903) and Office of Management and Budget (OMB) Circular A-125, Prompt Payment.
Contractors are encouraged to assign an identification number to each invoice.
13. DELETE Section 1.25 INDUSTRIAL FUNDING FEE in its entirety and REPLACE with
the following:
I.25 INDUSTRIAL FUNDING FEE (G5AR 552.238-77) {FEB 1998)
(FC: DEVIATION--DEC 1997))
(a) The Contractor must pay the Federal Supply Service, GSA, an Industrial
Funding Fee (IFF). The Contractor must remit the IFF in U.S. dollars within 30
days after the end of each quarterly reporting period as established in clause
552.238-72, Contractor's Report of Sales. The IFF equals one percent (1%) of
the total quarterly sales reported. The IFF reimburses the GSA Federal Supply
Service for the costs of operating the Federal Supply Schedules Program.
Offerors should include the IFF in the prices submitted with their offer. The
fee is included in the award price(s) and reflected in the total amount charged
to ordering activities; consequently, GSA's costs are recouped from these
ordering activities.
(b) The Contractor must remit any monies due as a result of the close out report
required by Clause 552.238-72 at the time the close out report is submitted to
GSA.
(c) The IFF amount due must be paid by check, or electronic funds transfer
through the Automated Clearing House (ACH), to the "General Services
Administration." If the payment involves multiple special item numbers or
contracts, the Contractor may consolidate the IFFs into one payment. To ensure
that the payment is credited properly, the Contractor shall identify the check
or electronic transmission as an "Industrial Funding Fee" and include the
following information: contract number(s);
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Modification Page 23 of 53 Pages
report amount(s); and report period(s). If the Contractor makes payment by
check, provide this information on either the check, check stub, or other
remittance material.
(1) If the payment is made by check, it shall be forwarded
to the following address:
General Services Administration
Accounts Receivable Branch (6BCR)
P.O. Box 70500
Chicago, IL 60673-0500
(2) If the IFF payment is made by electronic funds transfer through ACH, the
Contractor must call GSA, Financial Information Control Branch, Receivables,
Collections and Sales Section (6BCDR) at (contracting officer to insert phone
number) to make arrangements. .
(d) If the full amount of the IFF is not paid within 30 calendar days after the
end of the applicable reporting period, it shall constitute a contract debt to
the United States Government under the terms of FAR 32.6. The Government may
exercise all rights under the Debt Collection Act of 1982, including withholding
or setting off payments and interest on the debt (see FAR 52.232-17, Interest).
(e) Failure to submit sales reports, falsification of sales reports, and/or
failure to pay the IFF in a timely manner may result in termination or
cancellation of this contract. Willful failure or refusal to furnish the
required reports, falsification of sales reports, or failure to make timely
payment of the IFF constitutes sufficient cause for terminating the contract for
cause under the termination provisions of this contract.
14. ADD to the end of Section I - CONTRACT CLAUSES the following clauses:
I.28 PLACEMENT OF ORDERS (GSAR 552.216-73) (JUN 1994)
(ALTERNATE II-JUN 1994) (DEVIATION)
(a) Delivery orders under this contract may be placed by entities authorized to
do so by the Scope of Contract clause (see C.2).
(b) Orders may be placed through Electronic Data Interchange
(EDI) or mailed in paper form. EDI orders shall be placed using the American
National Standards Institute (ANSI) X12 Standardfor Electronic Data Interchange
(EDI) format.
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Modification Page 24 of 53 Pages
(c) If the Contractor agrees, GSA's Federal Supply Service (FSS) will place all
orders by EDI using computer-to-computer EDI. If computer-to-computer EDI is not
possible, FSS will use an alternative EDI method allowing the Contractor to
receive orders by facsimile transmission. Subject to the Contractor's agreement,
other agencies may place orders by EDI.
(d) When computer-to-computer EDI procedures will be used to place orders, the
Contractor shall enter into one or more Trading Partner Agreements (TPA) with
each Federal agency placing orders electronically in order to ensure mutual
understanding by the parties of certain electronic transaction conventions and
to recognize the rights and responsibilities of the parties as they apply to
this method of placing orders. The TPA must identify, among other things, the
third party providers) through which electronic orders are placed, the
transaction sets used, security procedures, and guidelines for implementation.
Federal agencies may obtain a sample format to customize as needed from the
office specified in (g) below.
(e) The Contractor shall be responsible for providing its own hardware and
software necessary to transmit and receive data electronically. Additionally,
each party to the TPA shall be responsible for the costs associated with its use
of third party provider services.
(f) Nothing in the TPA will invalidate any part of this contract between the
Contractor and the General Services Administration. All terms and conditions of
this contract that otherwise would be applicable to a mailed order shall apply
to the electronic order.
(g) The basic content and format of the TPA will be provided by:
General Services Administration
Systems Inventory and Operations Management Center (FCS)
Washington, DC 20406
Telephone: (703) 305-7741
FAX: (703) 305-7720
I.29 CONTRACT SALES CRITERIA (I-FSS-639) (MAR 1998)
A contract will not be awarded unless anticipated sales are expected to exceed
$25,000 for a 1-year period. Resultant contracts will be canceled in accordance
with the cancellation clause unless reported sales are $25,000 for each 12 month
period from date of award and every 12 month period thereafter.
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Modification Page 25 of 53 Pages
15. DELETE Section K.16 COST ACCOUNTING STANDARDS NOTICES AND CERTIFICATION and
REPLACE with the following:
R.16 RESERVED
16. DELETE Section L.10 SIC CODES AND SMALL BUSINESS SIZE STANDARD in its
entirety and REPLACE with the following: L.10 STANDARD INDUSTRIAL
CLASSIFICATION {SIC) CODE AND SMALL BUSINESS SIZE STANDARD (BLOCK 10,
STANDARD FORM 1449)
(a) The standard industrial classification (SIC) codes for this
acquisition and the small business size standards per FAR 19.102,
are as follows:
SIC DESCRIPTION SIZE
DIVISION D - MANUFACTURING
MAJOR GROUP 27 - PRINTING, PUBLISHING, AND ALLIED INDUSTRIES
2741 MISCELLANEOUS PUBLISHING 500
MAJOR GROUP 35 - INDUSTRIAL AND COMMERCIAL MACHINERY AND
COMPUTER EQUIPMENT
3571 ELECTRONIC COMPUTERS 1,000
3572 COMPUTER STORAGE DEVICES 1,000
3575 COMPUTER TERMINALS 1,000
3577 COMPUTER PERIPHERAL EQUIPMENT,N.E.C. 1,000
MAJOR GROUP 36 - ELECTRONIC AND OTHER ELECTRICAL EQUIPMENT AND
COMPONENTS
3643 CURRENT-CARRYING WIRING DEVICES 500
3644 NONCURRENT-CARRYING WIRING DEVICES 500
3651 HOUSEHOLD AUDIO AND VIDEO EQUIPMENT 750
3661 TELEPHONE AND TELEGRAPH APPARATUS 1,000
3663 RADIO AND TELEVISION BROADCASTING AND
3669 COMMUNICATIONS EQUIPMENT - 750
3669 OTHER COMMUNICATIONS EQUIPMENT, N.E.C. 750
<PAGE>
Modification Page 26 of 53 Pages
DIVISION E - TRANSPORTATION, COMMUNICATIONS, ELECTRIC, GAS, AND
SANITARY SERVICES
MAJOR GROUP 48 - COMMUNICATIONS
4812RADIOTELEPHONE COMMUNICATIONS 1,500
4813TELEPHONE COMMUNICATIONS, EXCEPT
RADIOTELEPHONE 1,500
4822TELEGRAPH AND OTHER MESSAGE COMMUNICATIONS $ 5.0
4899COMMUNICATIONS SERVICES, N.E.C. $ 11.0
DIVISION F - WHOLESALE TRADE
MAJOR GROUP 50 - DURABLE GOODS
5045 COMPUTERS AND COMPUTER PERIPHERAL
EQUIPMENT AND SOFTWARE $ 500
DIVISION I - SERVICES
MAJOR GROUP 73 - BUSINESS SERVICES
7359EQUIPMENT RENTAL AND LEASING, N.E.C. $ 5.0
7371COMPUTER PROGRAMS $ 18.0
7372PREPACKAGED SOFTWARE 518.0
7373COMPUTER INTEGRATED SYSTEMS DESIGN 18.0
7374COMPUTER PROCESSING AND DATA PREPARATION
AND PROCESSING SERVICES $ 18.0
7375 INFORMATION RETRIEVAL SERVICES $ 18.0
7376 COMPUTER FACILITIES MANAGEMENT SERVICES 18.0
7377 COMPUTER RENTAL AND LEASING $ 18.0
7378 COMPUTER MAINTENANCE AND REPAIR $ 18.0
7379 COMPUTER RELATED SERVICES, N.E.C. $ 18.0
7389 BUSINESS SERVICES, N.E.C. $ 5.0
NOTES: SIZE STANDARDS PRECEDED BY A DOLLAR SIGN ($) ARE IN MILLIONS OF DOLLARS.
ALL OTHERS ARE IN NUMBER OF EMPLOYEES UNLESS SPECIFIED OTHERWISE. N.E.C.: NOT
ELSEWHERE CLASSIFIED.
(b) The small business size standard for a concern which submits an offer in its
own name, other than on a construction or service contract, but which proposes
to furnish a product which it did not itself manufacture, is 500 employees.
(c) If the Offeror represents different business sizes than indicated in
paragraph G.l(c) for any proposed SIN, indicate
below the SIC code and the business size.
<PAGE>
Modification Page 27 of 53 Pages
Special Item Number Standard Industry Business
(SIN) Classification (SIC) Size
132-3 Leasing of
Equipment
132-8 Purchase of
Equipment
132-12 Maintenance of
Equipment, Repair
Service and/or
Repair/Spare Parts
132-32 Term Software
License
132-33 Perpetual
Software License
132-34 Maintenance of
Software.
132-50 Training Courses
132-51 Professional
Information Technology
Services.
132-52 Electronic
Commerce Services.
17. DELETE from ATTACHMENT I the section entitled INFORMATION FOR ORDERING-
OFFICES and REPLACE with the following:
INFORMATION FOR ORDERING OFFICES
SPECIAL NOTICE TO AGENCIES:
Small Business Participation
SBA strongly supports the participation of small business concerns in the
Federal Supply Schedules Program. To enhance Small Business Participation SBA
policy allows agencies to include in their procurement base and goals, the
dollar value of -orders expected to be placed against the Federal Supply
Schedules, and to report accomplishments against these goals.
For orders exceeding the micropurchase threshold, FAR 8.404 requires agencies to
consider the catalogs/pricelists of at least three schedule contractors or
consider reasonably available
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Modification Page 28 of 53 Pages
information by using the GSA Advantage!TM on-line shopping service
(www.fss.gsa.gov). The catalogs/pricelists, GSA Advantage!TM and the Federal
Supply Service Home Page (www.fss.gsa.gov) contain information on a broad array
of products and services offered by small business concerns.
This information should be used as a tool to assist ordering activities in
meeting or exceeding established small business goals. It should also be used as
a tool to assist in including small, small disadvantaged, and women-owned small
businesses among those considered when selecting pricelists for a best value
determination.
For orders exceeding the micropurchase threshold, customers are to give
preference to small business concerns when two or more items at the same
delivered price will satisfy their requirement.
1. Geographic Scope of Contract:
**The minimum acceptable geographic scope of contract is the 48 contiguous
states and the District of Columbia. If the scope includes Alaska, Hawaii, or
the Commonwealth of Puerto Rico, identify these locations. Any overseas
locations must also be specifically identified.**
2. Contractor's Ordering Address and Payment Information:
**The Contractor should insert the complete address(es) for ordering (see
paragraph G.8) and payment (see paragraph G.10.**
Contractors are required to accept the Government purchase card for payments
equal to or less than the micro-purchase threshold for oral or written delivery
orders. Government purchase cards will/will not be acceptable for payment above
the micro-purchase threshold. In addition, bank account information for wire
transfer payments will be shown on the invoice.
**Choose the appropriate language "will" or "will not" in the second sentence.
Copy the first and third sentence.**
The following telephone number(s) can be used by ordering agencies to obtain
technical and/or ordering assistance:
**Insert the telephone numbers.**
<PAGE>
Modification Page 29 of 53 Pages
3. LIABILITY FOR INJURY OR DAMAGE
The Contractor shall not be liable for any injury to Government personnel or
damage to Government property arising from the use of equipment maintained by
the Contractor, unless such injury or damage is due to the fault or negligence
of the Contractor.
4. Statistical Data for Government Ordering Office Completion of Standard Form
279:
Block 9: G. Order/Modification Under Federal Schedule
Block 16: Data Universal Numbering System (DUNS)
Number: 11-807-6561
Block 30: Type of Contractor - A
**Copy the applicable letter and corresponding language from the following
list**
A. Small Disadvantaged Business
8. Other Small Business
C. Large Business
G. Other Nonprofit Organization
L. Foreign Contractor
Block 31: Woman-Owned Small Business - NO
**Yes or No**
Block 36: Contractors Taxpayer Identification Number (TIN)
51-275037
4a. CAGE Code: OMOC7
**CAGE Codes are assigned by the Defense Logistics Agency. If you do not
currently have a CAGE Code, GSA will supply you with the form necessary to
obtain a CAGE Code at a later date.**
5. FOB Destination
6. DELIVERY SCHEDULE
a. TIME OF DELIVERY: The Contractor shall deliver to destination within the
number of calendar days after receipt of order (ARO), as set forth below:
SPECIAL ITEM NUMBER DELIVERY TIME (Days ARO)
132-8 30
132-33 30
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Modification Page 30 of 53 Pages
**NOTE: The Time of Delivery stated should be identical to that shown under
paragraph B.2, PRODUCTS AND SERVICES OFFERED/SCHEDULE OF ITEMS. If Expedited
Delivery and/or Overnight and 2-Day Delivery are offered under paragraph C.12,
COMMERCIAL DELIVERY SCHEDULE (MULTIPLE AWARD SCHEDULE), provide information in
this section of the pricelist.**
N/A
b. URGENT REQUIREMENTS: When the Federal Supply Schedule contract delivery
period does not meet the bona fide urgent delivery requirements of an ordering
agency, agencies are encouraged, if time permits, to contact the Contractor for
the purpose of obtaining accelerated delivery. The Contractor shall replay to
the inquiry within 3 workdays after receipt. (Telephonic replies shall be
confirmed by the Contractor in writing.) If the Contractor offers an
accelerated delivery time acceptable to the ordering agency, any order(s) placed
pursuant to the agreed upon accelerated delivery time frame shall be delivered
within this shorter delivery time and in accordance with all other terms and
conditions of the contract.
7. Discounts: Prices shown are NET Prices; Basic Discounts have been deducted.
a. Prompt Payment: N/A% - __ days from receipt of
invoice or date of acceptance, whichever is later.
b. Quantity
c. Dollar Volume
d. Government Educational Institutions
**If Government Educational Institutions as offered special discounts, which are
greater than the discounts offered to other Government customers, specify such
discounts. Otherwise, state that Government Educational Institutions are
offered the same discounts as all other Government customers.**
e. Other
**Provide complete information to explain all of the discounts offered. Copy
the language in paragraphs "a" through "f" as applicable to your proposal.**
<PAGE>
Modification Page 31 of 53 Pages
8. Trade Agreements Act of 1979, as amended:
All items are U.S. made end products, designated country end products, Caribbean
Basin country end products, Canadian end products, or Mexican end products as
defined in the Trade Agreements Act of 1979, as amended.
9. Statement Concerning Availability of Export Packing:
NONE
10. Sma11 Requirements: The minimum dollar value of orders to be issued is
$100.
**See C.9, ORDER LIMITATIONS, paragraph (a) Minimum Order.**
11. Maximum Order: (All dollar amounts are exclusive of any discount for prompt
payment.)
a. Special Item-Number 132-3 - Leasing of Equipment
The maximum dollar value per order for all leased equipment will be $500,000.
b. Special Item Number 132-8 - Purchase of Equipment
The maximum dollar value per order for all purchased equipment will be $500,000.
c. Special Item Number 132-12 - Repair Parts/Spare Parts
The maximum dollar value per order for all repair parts/spare parts will be
$10,000.
d. Special Item Number 132-32 - Term Software Licenses
The maximum dollar value per order for all term software licenses will be
$50,000 or $500,000.
e. Special Item Number 132-33 - Perpetual Software Licenses
The maximum dollar value per order for all perpetual software licenses will be
$50,000 or $500,000.
f. Special Item Number 132-50 - Training Courses
The maximum dollar value per order for all training courses will
be S25,000.
<PAGE>
Modification Page 32 of 53 Pages
g. Special Item Number 132-51 - Information Technology (IT) Professional
Services
The maximum dollar value per order for all IT Professional services will be
$500,000.
h. Special Item Number 132-52 - Electronic Commerce (EC) Services
The maximum dollar value per order for all EC services will be $500,000.
Note: Maximum Orders do not apply to Special Item Numbers 132-12 Maintenance and
Repair Service (except for Repair Parts/Spare Parts) or 132-34 Maintenance of
Software.
12. USE OF FEDERAL SUPPLY SERVICE INFORMATION TECHNOLOGY SCHEDULE CONTRACTS. In
accordance with FAR 8.404:
[NOTE: Special ordering procedures have been established for Special Item
Numbers (SINs) 132-51 IT Professional Services and 132-52 EC Services; refer to
the terms and conditions for those SINs.]
Orders placed pursuant to a Multiple Award Schedule (MAS), using the procedures
in FAR 8.404, are considered to be issued pursuant to full and open competition.
Therefore, when placing orders under Federal Supply Schedules, ordering offices
need not seek further competition, synopsize the requirement, make a separate
determination of fair and reasonable pricing, or consider small business set-
asides in accordance with subpart 19.5. GSA has already determined the prices
of items under schedule contracts to be fair and reasonable. By placing an
order against a schedule using the procedures outlined below, the ordering
office has concluded that the order represents the best value and results in the
lowest overall cost alternative (considering price, special features,
administrative costs, etc.) to meet the Government's needs.
a. Orders placed at or below the micro-purchase threshold. Ordering offices can
place orders at or below the micro-purchase threshold with any Federal Supply
Schedule Contractor.
b. Orders excluding the micro-purchase threshold but not exceeding the maximum
order threshold. Orders should be placed with the Schedule Contractor that can
provide the supply or service that represents the best value. Before placing an
order,) ordering offices should consider reasonably available information
<PAGE>
Modification Page 33 of 53 Pages
about the supply or service offered under MAS contracts by using the "GSA
Advantage!" on-line shopping service, or by reviewing the catalogs/pricelists of
at least three Schedule Contractors and selecting the delivery and other options
available under the schedule that meets the agency's needs. In selecting the
supply or service representing the best value, the ordering office may consider-
(1) Special features of the supply or service that are required in effective
program performance and that are not provided by a comparable supply or service;
(2) Trade-in considerations;
(3) Probable life of the item selected as compared with that of a comparable
item;
(4) Warranty considerations;
(5) Maintenance availability;
(6) Past performance; and
(7) Environmental and energy efficiency considerations.
c. Orders exceeding the maximum order threshold. Each schedule contract has an
established maximum order threshold. This threshold represents the point where
it is advantageous for the ordering office to seek a price reduction. In
addition to following the procedures in paragraph b, above, and before placing
an order that exceeds the maximum order threshold, ordering offices shall--
(1) Review additional Schedule Contractors' catalog pricelists or use the "GSA
Advantage!" on-line shopping service;
(2) Based upon the initial evaluation, generally seek price reductions from the
Schedule Contractor(s) appearing to provide the best value (considering price
and other factors); and
(3) After price reductions have been sought, place the order with the Schedule
Contractor that provides the best value and results in the lowest overall cost
alternative. If further price reductions are not offered, an order may still be
placed, 8 if the ordering office determines that it is appropriate.
<PAGE>
Modification Page 34 of 53 Pages
NOTE: For orders exceeding the maximum order threshold, the Contractor may:
(1) Offer a new lower price for this requirement (the Price Reductions clause is
not applicable to orders placed over the maximum order in FAR 52.216-19 Order
Limitations);
(2) Offer the lowest price available under the contract; or
(3) Decline the order (orders must be returned in accordance with FAR 52.216-
19).
d. Blanket purchase agreements (BPAs). The establishment of Federal Supply
Schedule BPAs is permitted when following the ordering procedures in FAR 8.404.
All schedule contracts contain BPA provisions. Ordering offices may use BPAs to
establish accounts with Contractors to fill recurring requirements. BPAs should
address the frequency of ordering and invoicing, discounts, and delivery
locations and times.
e. Price reductions. In addition to the circumstances outlined in paragraph c,
above, there may be instances when ordering offices will find it advantageous to
request a price reduction. For example, when the ordering office finds a
schedule supply o. service elsewhere at a lower price or when a BPA is being
established to fill recurring requirements, requesting a price reduction could
be advantageous. The potential volume of orders under these agreements,
regardless of the size of the individual order, may offer the ordering office
the opportunity to secure greater discounts. Schedule Contractors are not
required to pass on to all schedule users a price reduction extended only-to an
individual agency for a specific order.
f. Small business. For orders exceeding the micro-purchase threshold, ordering
offices should give preference to the items of small business concerns when two
or more items at the same delivered price will satisfy the requirement.
g. Documentation. Orders should be documented, at a minimum, by identifying the
Contractor the item was purchased from, the item purchased, and the amount paid.
If an agency requirement in excess of the micro-purchase threshold is defined so
as to require a particular brand name, product, or feature of a product peculiar
to one manufacturer, thereby precluding consideration of a product manufactured
by another company, the
<PAGE>
Modification Page 35 of 53 Pages
ordering office shall include an explanation in the file as to why the
particular brand name, product, or feature is essential to satisfy the agency's
needs.
13. FEDERAL INFORMATION TECHNOLOGY/TELECOMMUNICATIONS STANDARDS REQUIREMENTS:
Federal departments and agencies acquiring products from this Schedule must
comply with the provisions of the Federal Standards Program, as appropriate
(reference: NIST Federal Standards Index). Inquiries to determine whether or
not specific products listed herein comply with Federal Information Processing
Standards (FIPS) or Federal telecommunication Standards (FED-STDS), which are
cited by ordering offices, shall be responded to promptly by the Contractor.
13.1 FEDERAL INFORMATION PROCESSING STANDARDS PUBLICATIONS (FIPS PUBS):
Information Technology products under this Schedule that do not conform to
Federal Information Processing Standards (FIPS) should not be acquired unless a
waiver has been granted in accordance with the applicable "FIPS Publication."
Federal Information Processing Standards Publications (FIPS PUBS) are issued by
the U.S. Department of Commerce, National Institute of Standards and Technology
(NIST), pursuant to National Security Act. Information concerning their
availability and applicability should be obtained from the National Technical
Information Service (NTIS), 5285 Port Royal Road, Springfield, Virginia 22161.
FIPS PUBS include voluntary standards when these are adopted for Federal use.
Individual orders for FIPS PUBS should be referred to the NTIS Sales Office, and
orders for subscription service should be referred to the NTIS Subscription
Officer, both at the above address, or telephone number (703) 487-9650.
13.2 FEDERAL TELECOMMUNICATION STANDARDS (FED STDS): Telecommunication products
under this Schedule that do not conform to Federal Telecommunication Standards
(FED-STDS) should not be acquired unless a waiver has been granted in accordance
with the applicable "FED-STD." Federal telecommunication Standards are issued by
the U.S. Department of Commerce, National Institute of Standards and Technology
(NIST), pursuant to National Security Act. Ordering information and information
concerning the availability of FED-STDS should be obtained from the GSA, Federal
Supply Service, Specification Section, 470 East L'Enfant-Plaza, Suite 8100, SW,
Washington, DC 20407, telephone number (202)619-8925. Please include a self-
addressed mailing label when requesting information by mail. Information
concerning their applicability can be obtained by writing or calling the U.S.
Department of Commerce, National Institute of Standards and Technology,
Gaithersburg, MD 20899, telephone number (301) 975-2833.
<PAGE>
Modification Page 36 of 53 Pages
14. SECURITY REQUIREMENTS. In the event security requirements are necessary,
the ordering activities may incorporate, in their delivery orders, a security
clause in accordance with current laws, regulations, and individual agency
policy; however, the burden of administering the security requirements shall be
with the ordering agency. If any costs are incurred as a result of the
inclusion of security requirements, such costs will not exceed ten percent (10%)
or 5100,000, of the total dollar value of the order, whichever is lessor.
15. CONTRACT ADMINISTRATION FOR ORDERING OFFICES: Any ordering office, with
respect to any one or more delivery orders placed by it under this contract, may
exercise the same rights of termination as might the GSA Contracting Officer
under provisions of FAR 52.212-4, paragraphs (1) Termination for the Goverment's
convenience, and (m) Termination for Cause (See C.1.)
16. GSA Advantage!
GSA Advantage! is an on-line, interactive electronic information and ordering
system that provides on-line access to vendors' schedule prices with ordering
information. GSA Advantage! will allow the user to perform various searches
across all contracts including, but not limited to:
(1) Manufacturer;
(2) Manufacturer's Part Number; and
(3) Product categories.
Agencies can browse GSA Advantage! by accessing the Internet Worldwide Web
utilizing a browser (ex.: NetScape). The Internet address is
http://www.fss.gsa.gov/.
17. PURCHASE OF INCIDENTAL, NON-SCHEDULE ITEMS
For administrative convenience, open market (non-contract) items may be added to
a Federal Supply Schedule Blanket Purchase Agreement (BPA) or an individual
order, provided that the items are clearly labeled as such on the order, all
applicable regulations have been followed, and price reasonableness has been
determined by the ordering activity for the open market (non-contract) items.
18. CONTRACTOR COMMITMENTS, WARRANTIES AND REPRESENTATIONS
a. For the purpose of this contract, commitments, warranties and representations
include, in addition to those agreed to for the entire schedule contract:
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Modification Page 37 of 53 Pages
(1) Time of delivery/installation quotations for individual orders;
(2) Technical representations and/or warranties of products concerning
performance, total system performance and/or configuration, physical, design
and/or functional characteristics and capabilities of a
product/equipment/service/software package submitted in response to requirements
which result in orders under this schedule contract.
(3) Any representations and/or warranties concerning the products made in any
literature, description, drawings and/or specifications furnished by the
Contractor.
b. The above is not intended to encompass items not currently covered by the GSA
Schedule contract.
19. OVERSEAS ACTIVITIES
The terms and conditions of this contract shall apply to all orders for
installation, maintenance and repair of equipment in areas listed in the
pricelist outside the 48 contiguous states and the District of Columbia, except
as indicated below:
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
Upon request of the Contractor, the Government may provide the Contractor with
logistics support, as available, in accordance with all applicable Government
regulations. Such Government support will be provided on a reimbursable basis,
and will only be provided to the Contractor's technical personnel whose services
are exclusively required for the fulfillment of the terms and conditions of this
contract.
20. YEAR 2000 WARRANTY - COMMERCIAL SUPPLY ITEMS
(I-FSS-550-A)(AUG 1997)
As used in this clause, "Year 2000 compliant" means information technology that
accurately processes date/time data (including, but not limited to, calculating,
comparing, and sequencing) from, into, and between the twentieth and twenty-
first centuries, and the years 1999 and 2000 and leap year calculations.
Furthermore, Year 2000 compliant information technology, when used in
combination with other information technology, shall accurately process date
time if the other information technology properly exchanges date/time data with
it.
<PAGE>
Modification Page 38 of 53 Pages
(a) All currently awarded products that are not Year 2000 compliant must be
deleted from this contract no later than December 31, 1999.
(b) Any contract modifications, adding new items under clause 552.243-72,
Modifications (Multiple Award Schedule), must meet the warranty requirement in
paragraph c, below.
(c) The Contractor warrants that each hardware, software, and firmware product
delivered under this contract shall be able to accurately process date data
(including, but not limited to, calculating, comparing, and sequencing) from,
into, and between the twentieth and twenty-first centuries, including leap year
calculations, when used in accordance with the product documentation provided by
the Contractor, provided that all listed or unlisted products (e.g. hardware,
software, firmware) used in combination with such listed product properly
exchange date data with it. If the contract requires that specific listed
products must perform as a system in accordance with the foregoing warranty,
then that warranty shall apply to those listed products as a system. The
duration of this warranty and the remedies available to the Government for
breach of this warranty shall be as defined in, and subject to, the terms and
limitations of the Contractor's standard commercial warranty or warranties
contained in this contract, provided that notwithstanding any provision to the
contrary in such commercial warranty or warranties, the remedies available to
the Government under this warranty shall include repair or replacement of any
listed product whose non-compliance is discovered and made known to the-
Contractor in writing within ninety (90) days after acceptance. Nothing in this
warranty shall be construed to limit any rights or remedies the Government may
otherwise have under this contract with respect to defects other than Year 2000
performance.
21. BLANKET PURCHASE AGREEMENTS (BPAs)
Federal Acquisition Regulation (FAR) 13.201(a) defines Blanket Purchase
Agreements (BPAs) as "...a simplified method of filling anticipated repetitive
needs for supplies or services by establishing 'charge accounts' with qualified
sources of supply." The use of Blanket Purchase Agreements under the Federal
Supply Schedule Program is authorized in accordance with FAR 13.202(c)(3), which
reads, in part, as follows:
"BPAs may be established with Federal Supply Schedule Contractors, ( if not
inconsistent with the terms of the applicable schedule contract."
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Modification Page 39 of 53 Pages
Federal Supply Schedule contracts contain BPA provisions to enable schedule
users to maximize their administrative and purchasing savings. This feature
permits schedule users to set up "accounts" with Schedule Contractors to fill
recurring requirements. These accounts establish a period for the BPA, and
generally address issues such as the frequency of ordering and invoicing,
authorized callers, discounts, delivery locations and times. Agencies may
qualify for the best quantity/volume discounts available under the contract,
based on the potential volume of business that may be generated through such an
agreement, regardless of the size of the individual orders. In addition,
agencies may be able to secure a discount higher than that available in the
contract based on the aggregate volume of business possible under a BPA.
Finally, Contractors may be open to a progressive type of discounting where the
discount would increase once the sales accumulated under the BPA reach certain
prescribed levels. Use of a BPA may be particularly useful with the new Maximum
Order feature. See the Suggested Format, contained in this Schedule Pricelist,
for customers to consider when using this purchasing tool.
22. CONTRACTOR TEAM ARRANGEMENTS
Federal Supply Schedule Contractors may use "Contractor Team Arrangements" (see
FAR 9.6) to provide solutions when responding to a customer agency requirements.
The policy and procedures outlined in this part will provide more flexibility
and allow innovative acquisition methods when using the Federal Supply
Schedules. See the additional information regarding Contractor Team Arrangements
in this Schedule Pricelist.
<PAGE>
Modification Page 40 of 53 Pages
18. DELETE from ATTACHMENT I the section entitled TERMS AND CONDITIONS
APPLICABLE TO INFORMATION TECHNOLOGY PROFESSIONAL SERVICES (SPECIAL ITEM 132-51)
AND ELECTRONIC COMMERCE SERVICES (SPECIAL ITEM 132-52) FOR GENERAL PURPOSE
INFORMATION TECHNOLOGY SERVICES and REPLACE with the following:
TERMS AND CONDITIONS APPLICABLE TO INFORMATION TECHNOLOGY (IT) PROFESSIONAL
SERVICES (SPECIAL ITEM NUMBER 132-51) AND
ELECTRONIC COMMERCE (EC) SERVICES (SPECIAL ITEM NUMBER 132-52)
**The phrase, "Information Technology (IT) Professional
Services/Electronic Commerce (EC) Services" in the following;
paragraphs may need to be revised in order to be consistent with
the Offeror's proposal; e.g., if only IT Professional Services
zre offered, all references to EC Services should be deleted.**
1. SCOPE
a. The prices, terms and conditions stated under Special Item Number 132-51
Information Technology Professional Services and Special Item Number 132-52
Electronic Commerce Services apply exclusively to IT/EC Services within the
scope of this Information Technology Schedule.
b. The Contractor shall provide services at the Contractor's facility and/or at
the Government location, as agreed to by the Contractor and the ordering office.
**NOTE: Include paragraph 2, only if hourly rates for IT Professional Services
are offered.**
2. ORDERING PROCEDURES
a. Procedures for IT professional services priced on GSA schedule at hourly
rates.
(1) FAR 8.402 contemplates that GSA may occasionally find it necessary to
establish special ordering procedures for individual Federal Supply Schedules or
for some Special It Numbers (SINs) within a Schedule. GSA has established
special ordering procedures for IT professional services (SIN 132-51)
<PAGE>
Modification Page 41 of 53 Pages
that are priced on schedule at hourly rates. These special ordering procedures
which are outlined herein take precedence over the procedures in FAR 8.404.
(2) The GSA has determined that the rates for IT professional services contained
in this pricelist are fair and reasonable. However, the ordering office using
this contract is responsible for considering the level of effort and mix of
labor proposed to perform a specific task being ordered and for making a
determination that the total firm-fixed price or ceiling price is fair and
reasonable.
(3) When ordering IT professional services ordering offices
shall
(i) Prepare a Request for quotation:
(A) A performance-based statement of work that outlines, at a minimum, the work
to be performed, location of work, period of performance, deliverable schedule,
applicable standards, acceptance criteria, and any special requirements (i.e.,
security clearances, travel, special knowledge, etc.) should be prepared.
(B) A request for quotation should be prepared which includes the performance-
based statement of work and requests the contractors submit either a firm-fixed
price or a ceiling price to provide the services outlined in the statement of
work. A firm-fixed price order shall be requested, unless the ordering office
makes a determination that it is not possible at the time of placing the order
to estimate accurately the extent or duration of the work or to anticipate cost
with any reasonable degree of confidence. When such a determination is made, a
labor hour or time-and-materials-proposal may be requested. The firm fixed
price shall be based on the hourly rates in the schedule contract and shall
consider the mix of labor categories and level of effort required to perform the
services described in the statement of work. The firm-fixed price of the order
should also include any travel costs or other incidental costs related to
performance of the services ordered, unless the order provides for reimbursement
of travel costs at the rates provided in the Federal Travel or Joint Travel
Regulations. A ceiling price must be established for labor; hour and time and
material orders.
(C) The request for quotation may request the contractors, if necessary or
appropriate, submit a project plan for performing the task and information on
the contractor's experience and/or past performance performing similar tasks.
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Modification Page 42 of 53 Pages
(D) The request for quotation shall notify the contractors what basis will be
used for selecting the contractor to receive the order. The notice shall
include the basis for determining whether the contractors are technically
qualified and provide an explanation regarding the intended use of any
experience and/or past performance information in determining technical
acceptability of responses. If consideration will be limited to schedule
contractors who are small business concerns as permitted by paragraph (ii)(A)
below, the request for quotations shall notify the contractors that will be the
case.
(ii) Transmit the Request for quotation to Contractors:
(A) Based upon an initial evaluation of catalogs and pricelists, the ordering
office should identify the contractors that appear to offer the best value
(considering the scope of services offered, hourly rates and other factors such
as contractors' locations, as appropriate). When buying IT professional services
under SIN 132-51 ONLY, the ordering office, at its discretion, may limit
consideration to those schedule contractors that are small business concerns.
This limitation is not applicable when buying supplies and/or services under
other SINs as well as SIN 132-51. The limitations may only be used when at least
three (3) small businesses that appear to offer services that will meet the
agency's needs are available, if the order is estimated to exceed the micro-
purchase threshold.
(B) - The request for quotation-should be to three (3) contractors if the
proposed order is estimated to exceed the micro-purchase threshold, but not to
exceed the maximum order threshold. For proposed orders exceeding the maximum
order threshold, the request for quotation should be provided to additional
contractors that offer services that will meet the agency's needs. Ordering
offices should strive to minimize the contractors' costs associated with
responding to requests for proposals for specific orders. Requests should be
tailored to the minimum level necessary for adequate evaluation and selection
for order placement.
(iii) Evaluate Proposals and select the contractor to
receive the order:
After responses have been evaluated against the factors identified in the
request for quotation, the order should
be placed with the schedule contractor that represents the best
value and results in the lowest overall cost alternative
(considering price, special qualifications, administrative costs, etc.) to meet
the Government's needs.
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Modification Page 43 of 53 Pages
(4) The establishment of Federal Supply Schedule Blanket Purchase Agreements
(BPAs) for recurring services is permitted when the procedures outlined herein
are followed. All BPAs for services must define the services that may be
ordered under the BPA, along with delivery or performance time frames, billing
procedures, etc. The potential volume of orders under BPAs, regardless of the
size of individual orders, may offer the ordering office the opportunity to
secure volume discounts. When establishing BPAs ordering offices shall
(i) Inform contractors in the request for quotation (based on the agency's
requirement) if a single BPA or multiple BPAs will be established, and indicate
the basis that will be used for selecting the contractors to be awarded the
BPAs.
(A) SINGLE 8PA: Generally, a single BPA should be established when the ordering
office can define the tasks to be ordered under the BPA and establish a firm-
fixed price or ceiling price for individual tasks or services to be ordered.
When this occurs, authorized users may place the order directly under the
established BPA when the need for service arises. The schedule contractor that
represents the best value and results in the lowest overall cost alternative to
meet the agency's needs should be awarded the BPA.
(B) MULTIPLE BPAs: When the ordering office determines multiple BPAs are needed
to meet its requirements, the ordering office should determine which contractors
can meet any technical qualifications before establishing the BPAs. When
multiple BPAs are established, the authorized users must follow the procedure in
(3)(ii)(B) above, and then place the order with the schedule contractor that
represents the best value and results in the lowest overall cost alternative to
meet the agency's needs.
(ii) Review BPAs periodically. Such reviews shall be conducted at least
annually. The purpose of the review is to determine whether the BPA still
represents the best value (considering price, special qualifications, etc.) and
results in the lowest overall cost alternative to meet the agency's needs.
(5) The ordering office should give preference to small business concerns when
two or more contractors can provide the services at the same firm-fixed price or
ceiling price.
<PAGE>
Modification Page 44 of 53 Pages
(6) When the ordering office's requirement involves both products as well as IT
professional services, the ordering office should total the prices for the
products and the firm-fixed price for the services and select the contractor
that represents the greatest value in terms of meeting the agency's total needs.
(7) The ordering office, at a minimum, should document orders by identifying the
contractor the services were purchased from, the services purchased, and the
amount paid. If other than a firm-fixed price order is placed, such
documentation should include the basis for the determination to use a labor-hour
or time-and-materials order. For agency requirements in excess of the micro-
purchase threshold, the order file should document the evaluation of schedule
contractors' proposals that formed the basis for the selection of the contractor
that received the order and the rationale for any trade-offs made in making the
selection.
b. Ordering Procedures for other services available on schedule at fixed prices
for specifically defined services or tasks.
Orders placed pursuant to a Multiple Award Schedule (MAS), using the procedures
in FAR 8.404, are considered to be issued pursuant to full and open competition.
Therefore, when placing orders under Federal Supply Schedules, ordering offices
need not seek further competition, synopsize the requirement, make a separate
determination of fair and reasonable pricing, or consider small business set-
asides in accordance with subpart 19.5. GSA has already determined the prices of
items under schedule contracts to be fair and reasonable. By placing an order
against a schedule using the procedures outlined below, the ordering office has
concluded that the order represents the best value and results in the lowest
overall cost alternative (considering price, special features, administrative
costs, etc.) to meet the Government's needs.
(1) Orders placed at or below tho macro-purchase threshold. Ordering offices can
place orders at or below the micro-purchase threshold with any Federal Supply
Schedule Contractor.
(2) Orders excluding the macro-purchase threshold but not exceeding the maximum
order threshold. Orders should be placed with the Schedule Contractor that can
provide the supply or service that represents the best value. Before placing an
order, ordering offices should consider reasonably available information about
the service offered under MAS contracts by using the "GSA Advantage!" on-line
shopping service, or by reviewing the, catalogs/pricelists of at least three
Schedule Contractors and selecting the delivery and other options available
under the
<PAGE>
Modification Page 45 of 53 Pages
schedule that meets the agency's needs. In selecting the service representing
the best value, the ordering office may consider (i) special features of the
service that are required in effective program performance and that are not
provided by a comparable service; and (ii) past performance.
(3) Orders exceeding the maximum order threshold. Each schedule contract has an
established maximum order threshold. This threshold represents the point where
it is advantageous for the ordering office to seek a price reduction. In
addition to following the procedures in paragraph b, above, and before placing
an order that exceeds the maximum order threshold, ordering offices shall
(i) Review additional Schedule Contractors' catalogs/pricelists or use the "GSA
Advantage!" on-line shopping service;
(ii) Based upon the initial evaluation, generally seek price reductions from the
Schedule Contractor(s) appearing to provide the best value (considering price
and other factors); and
(iii) After price reductions have been sought, place
the order with the Schedule Contractor that provides the best value and results
in the lowest overall cost alternative. If further price reductions are not
offered, an order may still be placed, if the ordering office determines that it
is appropriate.
NOTE: For orders exceeding the maximum order threshold, the Contractor may:
(A) Offer a new lower price for this requirement (the Price Reductions clause is
not applicable to orders placed over the maximum order in FAR 52.216-19 Order
Limitations);
(B) Offer the lowest price available under the contract; or
(C) Decline the order (orders must be returned in accordance with FAR
52.216-19).
(4) Blanket purchase agreements (BPAs). The establishment of Federal Supply
Schedule BPAs is permitted when following the ordering procedures in FAR 8.404.
All schedule contracts contain BPA provisions. Ordering offices may use BPAs to
establish accounts with Contractors to fill recurring requirements. BPAs should
address the frequency of ordering and invoicing, discounts, and delivery
locations and times.
<PAGE>
Modification Page 46 of 53 Pages
(5) Price reductions. In addition to the circumstances outlined in paragraph
(3), above, there may be instances when ordering offices will find it
advantageous to request a price reduction. For example, when the ordering office
finds a schedule service elsewhere at a lower price or when a BPA is being
established to fill recurring requirements, requesting a price reduction could
be advantageous. The potential volume of orders under these agreements,
regardless of the size of the individual order, may offer the ordering office
the opportunity to secure greater discounts. Schedule Contractors are not
required to pass on to all schedule users a price reduction extended only to an
individual agency for a specific order.
(6) Small business. For orders exceeding the micro purchase threshold, ordering
offices should give preference to the items of small business concerns when two
or more items at the same delivered price will satisfy the requirement.
(7) Documentation. Orders should be documented, at all, minimum, by identifying
the Contractor the item was purchased from, the item purchased, and the amount
paid. If an agency requirement in excess of the micro-purchase threshold is
defined so as to require a particular brand name, product, or feature of a
product peculiar to one manufacturer, thereby precluding consideration of a
product manufactured by another company, the ordering office shall include an
explanation in the file as to why the particular brand name, product, or feature
is essential to satisfy the agency's needs.
3. ORDER
a. Agencies may use written orders, EDI orders, blanket purchase agreements,
individual purchase orders, or task orders for ordering services under this
contract. Blanket Purchase Agreements shall not extend beyond the end of the
contract period; all services and delivery shall be made and the contract terms
and conditions shall continue in effect until the completion of the order.
Orders for tasks which extend beyond the fiscal year for which funds are
available shall include FAR 52.232-19 Availability of Funds for the Next Fiscal
Year. The purchase order shall specify the availability of funds and the period
for which funds are available.
b. All task orders are subject to the terms and conditions of the contract. In
the event of conflict between a task order and the contract, the contract will
take precedence.
<PAGE>
Modification Page 47 of 53 Pages
4. PERFORMANCE OF SERVICES
a. The Contractor shall commence performance of services on the date agreed to
by the Contractor and the ordering office.
b. The Contractor agrees to render services only during normal working hours,
unless otherwise agreed to by the Contractor and the ordering office.
c. The Contractor guarantees the satisfactory completion of the IT/EC Services
performed under the task order and that all contract personnel utilized in the
performance of IT/EC services under the task order shall have the education,
experience, and expertise as stated in the task order.
d. Any Contractor travel required in the performance of IT/EC Services must
comply with the Federal Travel Regulation or Joint Travel Regulations, as
applicable, in effect on the daters) the travel is performed. Established
Federal Government per diem rates will apply to all Contractor travel.
Contractors cannot use GSA city pair contracts.
5. INSPECTION OF SERVICE
The Inspection of Services-Fixed Price (AUG 1996) clause at FAR 52.246-4 applies
to firm-fixed price orders placed under this contract. The Inspection-Time-and-
Materials and Labor-Hour (JAN 1986) clause at FAR 52.246-6 applies to time and
materials and labor-hour orders placed under this contract.
6. RESPONSIBILITIES OF THE CONTRACTOR
The Contractor shall comply with all laws, ordinances, and regulations (Federal,
State, City, or otherwise) covering work of this character.
7. RESPONSIBILITIES OF THE GOVERNMENT
Subject to security regulations, the ordering office shall permit Contractor
access to all facilities necessary to perform the requisite IT/EC Services.
8. INDEPENDENT CONTRACTOR
All IT/EC Services performed by the Contractor under the terms of this contract
shall be as an independent Contractor, and not as an agent or employee of the
Government.
<PAGE>
Modification Page 48 of 53 Pages
9. ORGANIZATIONAL CONFLICTS OF INTEREST
a. Definitions.
"Contractor" means the person, firm, unincorporated association, joint venture,
partnership, or corporation that is a party to this contract.
"Contractor and its affiliates" and "Contractor or its affiliates" refers to the
Contractor, its chief executives, directors, officers, subsidiaries, affiliates,
subcontractors at any tier, and consultants and any joint venture involving the
Contractor, any entity into or with which the Contractor subsequently merges or
affiliates, or any other successor or assignee of the Contractor.
An "Organizational conflict of interest" exists when the nature of the work to
be performed under a proposed Government contract, without some restriction on
activities by the Contractor and its affiliates, may either (i) result in an
unfair competitive advantage to the Contractor or its affiliates or (ii) impair
the Contractor's or its affiliates' objectivity in performing contract work.
b. To avoid an organizational or financial conflict of interest and to avoid
prejudicing the best interests of the Government, ordering offices may place
restrictions on the Contractors, its affiliates, chief executives, directors,
subsidiaries and subcontractors at any tier when placing orders against schedule
contracts. Such restrictions shall be consistent with FAR 9.505 and shall be
designed to avoid, neutralize, or mitigate organizational conflicts of interest
that might otherwise exist in situations related to individual orders placed
against the schedule contract. Examples of situations, which may require
restrictions, are provided at FAR 9.508.
10. INVOICES
The Contractor, upon completion of the work ordered, shall submit invoices for
IT/EC services. Progress payments may be authorized by the ordering office on
individual orders if appropriate. Progress payments shall be based upon
completion of defined milestones or interim products. Invoices shall be
submitted monthly for recurring services performed during the preceding month.
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Modification Page 49 of 53 Pages
11. PAYMENTS
For firm-fixed price orders the Government shall pay the Contractor, upon
submission of proper invoices or vouchers, the prices stipulated in this
contract for service rendered and accepted. Progress payments shall be made
only when authorized by the order. For time-and-materials orders, the Payments
under Time-and-Materials and Labor-Hour Contracts (Alternate I (APR 1984)) at
FAR 52.232-7 applies to time-and-materials orders placed under this contract.
For labor-hour orders, the Payment under Time-and-Materials and Labor-Hour
Contracts (FEB 1997) (Alternate II (JAN 1986)) at FAR S2.232-7 applies to labor-
hour orders placed under this contract.
12. RESUMES
Resumes shall be provided to the GSA Contracting Officer or the user agency upon
request.
13. INCIDENTAL SUPPORT COSTS
Incidental support costs are available outside the scope of this contract. The
costs will be negotiated separately with the ordering agency in accordance with
the guidelines set forth in the FAR.
14. APPROVAL OF SUBCONTRACTS
The ordering activity may require that the Contractor receive, from the ordering
activity's Contracting Officer, written consent before placing any subcontract
for furnishing any of the work called for in a task order.
15. DESCRIPTION OF IT/EC SERVICES AND PRICING
**NOTE TO CONTRACTORS: The information provided below is designed to assist
Contractors in providing complete descriptions and pricing information for the
IT/EC Services offered. This language should NOT be printed as part of the
Information Technology Schedule Pricelist; instead, Contractors should provide
the same type of information as it relates to the IT/EC Services offered under
the contract.**
a. The Contractor shall provide a description of each type of
IT/EC Service offered under Special Item Numbers 132-51 and 132-52. IT/EC
Services should be presented in the same manner as the Contractor sells to its
commercial and other Government
<PAGE>
Modification Page 50 of 53 Pages
customers. If the Contractor is proposing hourly rates, a description of all
corresponding commercial job titles (labor categories) for those individuals who
will perform the service should be provided.
b. Pricing for all IT/EC Services shall be in accordance with the Contractor's
customary commercial practices; e.g., hourly rates, monthly rates, term rates,
and/or fixed prices.
The following is an Example of the manner in which the description of a
commercial job title should be presented:
EXAMPLE:
Commercial Job Title: System Engineer
Minimum General Experience: Three (3) years of technical experience which
applies to systems analysis and design techniques for complex computer systems.
Requires competence in all phases of systems analysis techniques, concepts and
methods; also requires knowledge of available hardware, system software,
input/output devices, structure and management practices.
Functional Responsibility: Guides users in formulating requirements, advises
alternative approaches, conducts feasibility studies.
Minimum Education: Bachelor's Degree in Computer Science
19. ADD the following to the end of the Terms and Conditions and prior to the
prices of the FEDERAL SUPPLY SERVICE AUTHORIZED INFORMATION TECHNOLOGY SCHEDULE
PRICELIST (formerly known as Attachment I of the solicitation).
**Include the following in the proposed FSS IT Schedule Price-list.**
USA COMMITMENT TO PROMOTE
SMALL BUSINESS PARTICIPATION
PROCUREMENT PROGRAMS
PREAMBLE
(Name of Company) provides commercial products and services to the Federal
Government. We are committed to promoting participation of small, small
disadvantaged and women-owned small businesses in our contracts. We pledge to
provide opportunities to the small business community through reselling
opportunities,c mentor-protege programs, joint ventures, teaming arrangements,
and subcontracting.
<PAGE>
Modification Page 51 of 53 Pages
COMMITMENT
To actively seek and partner with small businesses.
To identify, qualify, mentor and develop small, small disadvantaged and women-
owned small businesses by purchasing from these businesses whenever practical.
To develop and promote company policy initiatives that demonstrate our support
for awarding contracts and subcontracts to small business concerns.
To undertake significant efforts to determine the potential of small, small
disadvantaged and women-owned small business to supply products and services to
our company.
To insure procurement opportunities are designed to permit the maximum possible
participation of small, small disadvantaged, and women-owned small businesses.
To attend business opportunity workshops, minority business enterprise seminars,
trade fairs, procurement conferences, etc., to identify and increase small
businesses with whom to partner.
To publicize in our marketing publications our interest in meeting small
businesses that may be interested in subcontracting opportunities.
We signify our commitment to work in partnership with small, small disadvantaged
and women-owned small businesses to promote and increase their participation in
Federal Government contracts. To accelerate potential opportunities please
contact (Insert Company Point of contact, phone number, e-mail address, fax
number).
<PAGE>
Modification Page 52 of 53 Pages
20. In order to assist GSAJFSS in updating our database, please, PROVIDE/UP DATE
the following information:
(a) Offerors are to insert the ordering information below:
ORDERING ADDRESS: 4500 Forbes Blvd., Suite 300
Lanham, MD ZIP CODE: 20706
ORDERING FACSIMILE: 301-459-9210
(b) Offerors are required to designate a person to be contacted for prompt
contract administration.
NAME: Earl G. Wilkerson
TITLE: GSA Contracts Manager
ADDRESS: 4500 Forbes Blvd., Suite 300
Lanham, MD ZIP CODE: 20706
TELEPHONE NO.: ( 301 ) 459-2650 x3314 FAX NO.:( 301 ) 459-9210
E-MAIL ADDRESS [email protected]
(c) Contractor compliance with the GSA Form 72A reporting requirements and the
Industrial Funding Fee will be delegated to a GSA Administrative Contracting
Officer. The Contract Management Zone will be determined based upon the location
of the individual designated by the Contractor for administration of the
contract's GSA Form 72A reporting. The name of this individual, along with the
person responsible for questions concerning the Industrial Funding Fee, must be
provided by the Contractor prior to the award of a contract.
GSA FORM 72A:
NAME: Earl G. Wilkerson
ADDRESS: 4500 Forbes Blvd., Suite 300
Lanham, MD ZIP CODE: 20706
TELEPHONE NO.: (301)459-2560 x3314 FAX NO.: (301) 459-9210
E-MAIL ADDRESS: [email protected]
<PAGE>
Modification Page 53 of 53 Pages
INDUSTRIAL FUNDING FEE:
NAME: Earl G. Wilkerson
ADDRESS: 4500 Forbes Blvd. Suite 300
Lanham, MD ZIP CODE: 20706
TELEPHONE NO.: (301) 459-2650 Ext. 3314 FAX NO.: (301) 459-9210
E-MAIL ADDRESS: [email protected]
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Exhibit 10.27
DEED OF LEASE AGREEMENT
THIS DEED OF LEASE AGREEMENT (hereinafter referred to as "Lease"), made
this 11th day of August 1998, by and between Massachusetts Mutual Life Insurance
Company, a corporation organized and existing under the laws of Maryland
(hereinafter referred to as the "Landlord") and Pulsar Data Systems, Inc., a
Corporation organized and existing under the laws of Maryland (hereinafter
referred to as the "Tenant").
WITNESSETH, THAT FOR AND IN CONSIDERATION of the mutual entry into this
Lease by the parties hereto, and for other good and valuable consideration, the
receipt and adequacy of which are hereby acknowledged by each party hereto, the
Landlord hereby leases to the Tenant and the Tenant hereby leases from the
Landlord all of that real property, situated and lying in Prince George's
County, Maryland, which consists of the space (containing 12,790 rentable square
feet of floor area) outlined in Exhibit A attached hereto and made a part hereof
(hereinafter referred to as the "Premises") and located in a building
(hereinafter referred to as the "Building") at 4390 Parliament Place, Lanham,
Maryland (the Premises, the remainder of the Building, such tract of land, other
buildings thereon, and any other buildings or improvements to be constructed
thereon being hereinafter referred to collectively as the "Property").
SUBJECT TO THE OPERATION AND EFFECT of any and all instruments and matters
of record or in fact.
UPON THE TERMS AND SUBJECT TO THE CONDITIONS which are hereinafter set
forth:
SECTION 1. TERM.
1.1. LENGTH. This Lease shall be for a term (hereinafter referred to as
the "Term") (a) commencing on the first day after the date on which the Landlord
substantially completes the improvements to be made to the Premises under the
provisions of Section 5 and tenders possession thereof to the Tenant (herein-
after referred to as the "Commencement Date, except that if the date of such
commencement is hereafter advanced or postponed by written agreement of the
parties hereto, the date to which it is advanced or postponed shall thereafter
be the "Commencement Date"), and (b) terminating at 12:01 A.M., local time, on
the fifth (5th) anniversary of the first (1st) day of the first (1st) full
calendar month during the Term (hereinafter referred to as the "Termination
Date," except that if the date of such termination is hereafter advanced or
postponed pursuant to any provision of this Lease, or by written agreement of
the parties hereto, the date to which it is advanced or postponed shall
thereafter be the Termination Date).
1.2. Taking of possession by Tenant shall be deemed conclusively to
establish that said buildings and other improvements have been completed in
accordance with the plans and specifications and that the Premises are in good
and satisfactory condition, as of when possession
<PAGE>
was so taken. Tenant acknowledges that no representations as to the repair of
the Premises have been made by Landlord, unless such are expressly set forth in
this Lease. After such "Commencement Date" Tenant shall, upon demand, execute
and deliver to Landlord a letter of acceptance of delivery of the Premises. In
the event of any dispute as to substantial completion or work performed or
required to be performed by Landlord, the certificate of Landlord's architect or
general contractor shall be conclusive.
1.3. SURRENDER. The Tenant shall at its expense, at the expiration of the
Term/1/ or upon any earlier termination of this Lease, (a) promptly surrender
to the Landlord possession of the Premises (including any fixtures or other
improvements which, under the provisions of Section 5, are owned by the
Landlord) in good order and repair (ordinary wear and tear excepted) and broom
clean, (b) remove therefrom the Tenant's signs, goods and effects and any
machinery, trade fixtures and equipment used in conducting the Tenant's trade or
business and not owned by the Landlord, and (c) repair any damage to the
Premises or the Building caused by such removal.
1.4 HOLDING OVER.
1.4.1. If the Tenant continues to occupy the Premises after the
expiration of the Term or any earlier termination of this Lease after obtaining
the Landlord's express, written consent thereto,
(a) such occupancy shall (unless the parties hereto otherwise agree in
writing) be deemed to be under a month-to-month tenancy, which shall continue
until either party hereto notifies the other in writing, by at least thirty (30)
days before the end of any calendar month, that the notifying party elects to
terminate such tenancy at the end of such calendar month, in which event such
tenancy shall so terminate;
(b) anything contained in the foregoing provisions of this Section to
the contrary notwithstanding, the rental payable for each such monthly period
shall equal one-twelfth (1/12) of the Base Rent and the Additional Rent payable
under the provisions of subsection 2.2 (calculated in accordance with such
provisions of subsection 2.2 as if this Lease had been renewed for a period of
twelve (12) full calendar months after such expiration or earlier termination of
the Term or such renewal); and
(c) such month-to-month tenancy shall be upon the same terms and
subject to the same conditions as those set forth in the provisions of this
Lease; provided, that if the Landlord gives the Tenant, by at least thirty (30)
days before the end of any calendar month during such month-to-month tenancy,
written notice that such terms and conditions (including any thereof relating to
the amount or payment of Rent) shall, after such month, be modified in
- -------------
/1/ or any extension thereof
2
<PAGE>
any manner specified in such notice, then such tenancy shall, after such month,
be upon the said terms and subject to the said conditions, as so modified.
1.4.2. If the Tenant continues to occupy the Premises after the
expiration of the Term or any earlier termination of this Lease without
obtaining the Landlord's express, written consent thereto, such occupancy shall
be on the same terms and subject to the same conditions as those set forth in
the provisions of paragraph 1.4.1, except that, anything contained in the
provisions of this Lease to the contrary notwithstanding, (a) the rental payable
during the period of such occupancy shall equal/2/ of the rental which would be
payable during such period under the provisions of subparagraph 1.4.1.(b), had
the Tenant obtained the Landlord's express, written consent to such occupancy,
as aforesaid, and (b) nothing in the provisions of paragraph 1.4.1 or any other
provision of this Lease shall be deemed in any way to alter or impair the
Landlord's right immediately to evict the Tenant or exercise its other rights
and remedies under the provisions of this Lease or applicable law on account of
the Tenant's occupancy of the Premises without having obtained such consent.
1 OR ANY EXTENSION THEREOF
2 ONE HUNDRED FIFTY PERCENT (150%) FOR THE FIRST THREE (3) MONTHS AND TWO
HUNDRED PERCENT (200%) THEREAFTER
SECTION 2. RENT
2.1. AMOUNT. As rent for the Premises (all of which is hereinafter referred
to collectively as "Rent"), the Tenant shall pay to the Landlord in advance,
without demand, deduction or set off, for the entire Term hereof, all of the
following:
2.1.1. Base Rent. An annual rent in the amounts specified in
Exhibit D.
2. 1.2. Additional Rent. Additional rent (hereinafter referred to as
"Additional Rent") in the amount of any payment referred to as such in any
provision of this Lease which accrues while this Lease is in effect.
2. 1.3. Lease Year. As used in the provisions of this Lease, the term
"Lease Year" means (a) the period commencing on the Commencement Date and
terminating on the first (1st) anniversary of the last day of the calendar month
containing the Commencement Date, and (b) each successive period of twelve ( 12)
calendar months thereafter during the Term.
- -------------
/2/ one hundred fifty percent (150%) for the first three (3) months and two
hundred percent (200%) thereafter
3
<PAGE>
2.2. ANNUAL OPERATING COSTS/3/
2.2.1. Taxes.
(a) Tenant agrees to pay before they become delinquent all taxes,
assessments and governmental charges of any kind and nature whatsoever
(hereinafter referred to as "Taxes") lawfully levied or assessed against the
Building and the grounds, parking areas, driveways and alleys around the
Building. Tenant shall furnish to Landlord, not later than twenty (20) days
before the date any such Taxes become delinquent, official receipts of the
appropriate taxing authority or other evidence satisfactory to Landlord
evidencing payment thereof. If Tenant should fail to pay any Taxes, assessments
or governmental charges required to be paid by Tenant hereunder, in addition to
any other remedies provided herein, Landlord may, if it so elects, pay such
Taxes, assessments and governmental charges. Any sums so paid by Landlord shall
be deemed to be Additional Rent owing by Tenant to Landlord and due and payable
on demand by Landlord, together with interest thereon at the rate of twelve
percent (12%) per annum from the date paid by Landlord to the date of repayment
by Tenant.
(b) In the event the Premises constitute a portion of a multiple
occupancy building, in lieu of Tenant paying the Taxes as provided above,
Landlord agrees to pay, before they become delinquent, all Taxes lawfully levied
or assessed against such Building and the grounds, parking areas, driveways and
alleys around the Building, and Tenant agrees to pay to Landlord, as Additional
Rent, upon demand, the amount of Tenant's proportionate share of such Taxes paid
by Landlord. Tenant's proportionate share means the percentage assigned to the
Premises for purposes of allocating Taxes as set forth herein and other Annual
Operating Costs as set forth in Subsection 2.2.2 below and represents the
approximate and (for purposes of this Lease) hereby agreed upon proportion which
the floor area of the Premises bears to the aggregate net rentable space within
the Building and the Property and shall be twenty two and 40/100 percent (22.40
%) of the Building and twenty two and 40/00 percent (22.40 % ) of the Property.
2.2.2. Maintenance.
(a) Maintenance by Tenant. Tenant shall, at its own cost and expense,
keep and maintain all parts of the Premises in good condition, promptly making
all necessary repairs and replacements, interior and non-structural, ordinary
and extraordinary, including but not limited to, glass and plate glass, doors
and office entry(s), walls and finish work, floors and floor covering, heating
and air conditioning systems, electrical systems, plumbing work and fixtures,
termite and pest extermination, regular removal of trash and debris. The cost
of maintenance and repair of any common party wall (any wall, divider, partition
or any other structure separating the
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/3/ In no event shall Tenant's annual increase in controllable Annual Operating
Costs (not including, real estate taxes, insurance, utilities and snow
removal) exceed six percent (6%) of the Tenant's previous years costs.
4
<PAGE>
premises from any adjacent premises occupied by other tenants) shall be shared
equally by Tenant and the tenant occupying adjacent premises. Tenant shall not
damage any party wall or disturb the integrity and support provided by any party
wall and shall, at its sole cost and expense, promptly repair any damage or
injury to any party wall caused by Tenant or its employees, agents or invitees.
(b) Maintenance by Landlord. Tenant and its employees, customers and
licensees shall have the non-exclusive right to use the parking areas, if any,
as may be designated by Landlord in writing, subject to such reasonable rules
and regulations as Landlord may from time to time prescribe. Further, in
multiple occupancy buildings, Landlord shall perform the roof, paving, and
landscape maintenance, exterior painting and common sewage line plumbing which
are otherwise Tenant's obligations under Subsection 2.2.2(a) above, and Tenant
shall, in lieu of the obligations set forth under Subsection 2.2.2(a) above with
respect to such items, be liable for its proportionate share (as defined in
Subsection 2.2.1 (b) above) of the cost and expense of Building maintenance and
the tn care for the grounds around the Building, including but not limited to,
the mowing of grass, care of shrubs, general landscaping, maintenance of parking
areas, driveways and alleys, roof maintenance, exterior repainting and common
sewage line plumbing; provided, however, that Landlord shall have the right to
require Tenant to pay such other reasonable proportion of said mowing, shrub
care and general landscaping costs as may be determined by Landlord in its sole
discretion; and further provided that if Tenant or any other particular tenant
of the Building can be clearly identified as being responsible for obstruction
or stoppage of the common sanitary sewage line then Tenant, if Tenant is
responsible, or such other responsible tenant, shall pay the entire cost
thereof, upon demand, as additional rent. Tenant shall pay/4/ when due its
share, determined as aforesaid, of such costs and expenses along with the other
tenants of the Building to Landlord upon demand, as Additional Rent, for the
amount of its share of such costs and expenses in the event Landlord elects to
perform or cause to be performed such work. Such share shall include a
management fee equal to five percent (5%) of the Rent for each Lease Year,
administrative and accounting costs, and a/5/ reserve for asphalt, roof repairs
and repainting.
(c) Maintenance Contract. Tenant shall, at its own cost and expense, enter
into a regularly scheduled preventative maintenance/service contract with a
maintenance contractor for servicing all heating and air conditioning systems
and equipment within the Premises and shall provide Landlord with copies of all
service reports. The maintenance contractor and contract must be approved by
Landlord./6/ The service contract must include all services suggested by the
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/4/ within thirty (30) days
/5/ reasonable
/6/ , which approval shall not be unreasonably withheld, conditioned or
delayed
5
<PAGE>
equipment manufacturer within the operation/maintenance manual and must become
effective (and a copy thereof delivered to Landlord) within thirty (30) days of
the date Tenant takes possession of the Premises. Each Lease year Landlord will
inspect the HVAC system to determine that the aforementioned maintenance is
being performed. If the HVAC system is not being maintained pursuant to this
Section Landlord will send notice of such lack of maintenance to Tenant and
Tenant shall thereafter have thirty (30) days to perform the necessary
maintenance. Failure by Tenant to complete the necessary maintenance in such
thirty (30) day period shall be a material Event of Default and Landlord shall
have the right to cure such Event of Default pursuant to Section 13. Should the
inspection demonstrate a lack of maintenance of the HVAC system, Tenant shall
pay for the cost of such inspection. Thirty days before Tenant vacates the
Premises, Landlord will have the HVAC equipment inspected by a qualified HVAC
mechanic at Landlord's expense. If in the opinion of the HVAC mechanic, the
equipment has not been properly maintained,/7/ then Landlord may authorize
necessary repairs to be made to the system. Such repairs will be deducted from
the Tenant's security deposit. Tenant shall reimburse Landlord for any and all
costs associated with such repairs which exceed the amount of any security
deposit. The remainder of the security deposit, if any, shall be refunded to
Tenant in accordance with the terms of the Lease.
2.2.3. Computation. After the end of each calendar year during the Term,
the Landlord shall compute the total of the Annual Operating Costs incurred for
all of the Property during such calendar year, and shall allocate them to the
net rentable space within the Property in proportion to the respective operating
costs percentages assigned to such spaces; provided, that anything contained in
the foregoing provisions of this subsection 2.2 to the contrary notwithstanding,
wherever the Tenant and/or any other tenant of space within the Property has
agreed in its lease or otherwise to provide any item of such services partially
or entirely at its own expense, or wherever in the Landlord's judgment any such
significant item of expense is not incurred with respect to or for the benefit
of all of the net rentable space within the Property, in allocating the Annual
Operating Costs pursuant to the foregoing provisions of this subsection the
Landlord shall make an appropriate adjustment, using generally accepted
accounting principles, as aforesaid, so as to avoid allocating to the Tenant or
to such other tenant (as the case may be) those Annual Operating Costs covering
such services already being provided by the Tenant or by such other tenant at
its own expense, or to avoid allocating to all of the net rentable space within
the Property those Annual Operating Costs incurred only with respect to a
portion thereof, as aforesaid.
2.2.4. Payment as Additional Rent. The Tenant shall, within fifteen (15)
days after demand therefor by the Landlord (with respect to each calendar year
during the Term), accompanied by a statement setting forth in reasonable detail
the Annual Operating Costs for such calendar year, pay to the Landlord as
Additional Rent the amount of the Tenant's operating
- -------------
/7/ , reasonable wear and tear excepted
6
<PAGE>
costs percentage of the Annual Operating Costs for such calendar year (as
derived and allocated under the provisions of paragraph 2.2.3).
2.2.5. Proration. If only part of any calendar year falls within the Term,
the amount computed as Additional Rent for such calendar year under the
foregoing provisions of this subsection shall be prorated in proportion to the
portion of such calendar year falling within the Term (but the expiration of the
Term before the end of a calendar year shall not impair the Tenant's obligation
hereunder to pay such prorated portion of such Additional Rent for that portion
of such calendar year falling within the Term, which shall be paid on demand, as
aforesaid).
2.2.6. Landlord's right to estimate. Anything contained in the foregoing
provisions of this subsection to the contrary notwithstanding, the Landlord may,
at its discretion, (a) make from time to time during the Term a reasonable
estimate of the Additional Rent which may become due under such provisions for
any calendar year, (b) require the Tenant to pay to the Landlord for each
calendar month during such year one twelfth (1/12) of such Additional Rent, at
the time and in the manner that the Tenant is required hereunder to pay the
monthly installment of the Base Rent for such month, and (c) at the Landlord's
reasonable discretion, increase or decrease from time to time during such
calendar year the amount initially so estimated for such calendar year, all by
giving the Tenant written notice thereof, accompanied by a schedule setting
forth in reasonable detail the expenses comprising the Annual Operating Costs,
as so estimated. In such event, the Landlord shall cause the actual amount of
such Additional Rent to be computed and certified to the Tenant within 120 days
after the end of such calendar year, and the Tenant or the Landlord, as the case
may be, shall promptly thereafter pay to the other the amount of any deficiency
or overpayment therein, as the case may be./8/
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/8/ Right to Audit:
(a) Selection of Accountants: If Tenant disputes the amount of an
adjustment or the proposed estimated increase or decrease in Taxes or
Annual Operating Costs, Tenant shall give Landlord written notice of
such dispute within thirty (30) days after Landlord advises Tenant of
such adjustment or proposed increase or decrease. Tenant's failure to
give such notice shall waive its right to dispute the amounts so
determined. Tenant shall also not be entitled to dispute the foregoing
amounts if Tenant is then in default hereunder. If Tenant is entitled
to and timely objects, Tenant shall have the right to engage its own
accountants ("Tenants Accountants") for the purposes of verifying the
accuracy of the statement in dispute, or the reasonableness of the
adjustment or estimated increase or decrease. If Tenant's Accountants
determine that an error has been made, Landlord and Tenant's
Accountants shall endeavor to agree upon the matter. If they cannot
agree within twenty (20) days from the date Tenant's Accountants
commence reviewing Landlord's records, Landlord and Tenant's
Accountants shall jointly
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2.3. WHEN DUE AND PAYABLE.
2.3.1. The Base Rent for any Lease Year shall be due and payable in twelve
(12) consecutive, equal monthly installments, in advance, on the first (lst) day
of each calendar month during such Lease Year; provided, that the first monthly
installment of the Base Rent will be due and payable upon lease execution.
- -------------
select an independent certified public accounting firm (the
"Independent Accountant") which firm shall conclusively determine
whether the adjustment or estimated increase or decreases is
reasonable, and if not, what amount is reasonable. Both parties shall
be bound by such determination. If Tenant's Accountants do not
participate in choosing the Independent Accountant within 20 days from
the date Landlord and Tenant's Accountant's determine that they cannot
agree as to whether or not an error has been made, then Landlord's
determination of the adjustment or estimated increase or decrease
shall be conclusively determined to be reasonable and Tenant shall be
bound hereby.
(b) Payment of Costs: All costs incurred by Tenant in obtaining Tenant's
Accountants and the cost of the Independent Accountant shall be paid by
Tenant unless Tenant's Accountants disclose an error, acknowledge by
Landlord (or found to have conclusively occurred by the Independent
Accountant), of more than ten percent (10%) in the computation of the
total amount of Taxes or Annual Operating Costs as set forth in the
statement submitted by Landlord with respect to the matter in dispute;
in which event Landlord shall pay the reasonable costs incurred by
Tenant in obtaining such audits. No subtenant shall have the right to
conduct an audit and no assignee shall conduct an audit for any period
during which such assignee was not in possession of the Premises.
(c) Continuation of Payments Pending Determination: Tenant shall continue
to timely pay Landlord the amount of the prior year's adjustment and
adjusted Additional Rent determined to be incorrect as aforesaid until
the parties have concurred as to the appropriate adjustment or have
deemed to be bound by the determination of the Independent Accountant
in accordance with the preceding terms. Landlord's delay in submitting
any statement contemplated herein for any Lease Year shall not affect
the provisions of this Paragraph, nor constitute a waiver of Landlord's
rights as set forth herein for said Lease Year or any subsequent Lease
Years during the Lease Term or any extensions thereof.
8
<PAGE>
2.3.2. Any Additional Rent, other than Annual Operating Costs which are due
and payable with each payment of Base Rent, accruing to the Landlord under any
provision of this Lease shall, except as is otherwise set forth herein, be due
and/9/
2.3.3. Each such payment shall be made promptly when due, without any
deduction or setoff whatsoever, and without demand, failing which the Tenant
shall pay to the Landlord as Additional Rent, a late charge equaling/10/ of the
sum of the Base Rent and Additional Rent outstanding.
2.4. WHERE PAYABLE. The Tenant shall pay the Rent, in lawful currency of
the United States of America, to the Landlord by delivering or mailing it
(postage prepaid) to the Landlord's address which is set forth in Section 16, or
to such other address or in such other manner as the Landlord from time to time
specifies by written notice to the Tenant. Any payment made by the Tenant to the
Landlord on account of Rent may be credited by the Landlord to the payment of
any Rent then past due, including late fees, interest and penalties, before
being credited to Rent currently falling due. Any such payment which is less
than the amount of Rent then due shall constitute a payment made on account
thereof, the parties hereto hereby agreeing that the Landlord's acceptance of
such payment (whether or not with or accompanied by an endorsement or statement
that such lesser amount or the Landlord's acceptance thereof constitutes payment
in full of the amount of Rent then due) shall not alter or impair the Landlord's
rights hereunder to be paid all of such amount then due, or in any other
respect.
2.5. TAX ON LEASE. If federal, state or local law now or hereafter imposes
any tax, assessment, levy or other charge (other than any income, inheritance or
estate tax) directly or indirectly upon (a) the Landlord with respect to this
Lease or the value thereof, (b) the Tenant's use or occupancy of the Premises,
(c) the Base Rent, Additional Rent or any other sum payable under this Lease, or
(d) this transaction, then (except if and to the extent that such tax,
assessment, levy or other charge is included in the Annual Operating Costs) the
Tenant shall pay the amount thereof as Additional Rent to the Landlord upon
demand, unless the Tenant is prohibited by law from doing so, in which event the
Landlord may, at its election, terminate this Lease by giving written notice
thereof to the Tenant.
2.6. SECURITY DEPOSIT.
2.6.1. Simultaneously with the entry into this Lease by the parties
hereto, the Tenant shall deposit with the Landlord the sum of twenty-six
thousand two hundred nineteen and 50/100 Dollars ($26,219.50), which shall be
retained by the Landlord as security for the Tenant's
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/9/ within thirty (30) days after Tenant's receipt of invoice.
/10/ twelve percent (12%)
9
<PAGE>
payment of the Rent and performance of all of its other obligations under the
provisions of this Lease./11/
2.6.2. On the occurrence of an Event of Default, the Landlord shall be
entitled, at its sole discretion,
(a) to apply any or all of such sum in payment of (i) any Rent then
due and unpaid, (ii) any expense incurred by the Landlord in curing any such
event of default, and/or (iii) any damages incurred by the Landlord by reason of
such event of default (including, by way of example rather than of limitation,
that of reasonable attorneys' fees); and/or
(b) to retain any or all of such sum to reimburse for any or all
damages suffered by the Landlord by reason of event of such default. If at any
time Landlord draws upon the security deposit in accordance with this section
Tenant upon demand agrees to immediately pay to Landlord an amount sufficient to
return the security deposit to the amount stated above.
2.6.3. On the termination of this Lease, any of such sum which is not so
applied or retained shall be returned to the Tenant within/12/ of the Lease
termination date.
2.6.4. Such sum shall not bear interest while being held by the Landlord
hereunder.
2.6.5. No Mortgagee (as that term is defined by the provisions of Section
12) or purchaser of any or all of the Property at any foreclosure proceeding
brought under the provisions of any Mortgage (as that term is defined by the
provisions of Section 12) shall (regardless of whether the Lease is at the time
in question subordinate to the lien of any Mortgage under the provisions of
Section 12 or otherwise) be liable to the Tenant or any other person for any or
all of such sum (or any other or additional security deposit or other payment
made by the Tenant under the provisions of this Lease), unless both (a) the
Landlord has actually delivered it in cash to such Mortgagee or purchaser, as
the case may be, and (b) it has been specifically identified, and accepted by
the Lender or such purchaser, as the case may be, as such and for such purpose,
then Landlord will have no further liability for return of the security deposit.
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/11/ Notwithstanding anything contained herein to the contrary provided Tenant
hasn't been in default, Landlord will refund one month of the security
deposit in the amount of eight thousand seven hundred thirty-nine and
83/100 ($8,739.83) at the end of the first (1st) Lease Year.
/12/ thirty (30) days
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<PAGE>
SECTION 3. USE OF PREMISES.
3.1 The Tenant shall, continuously throughout the Term occupy and use the
Premises for and only for general office and warehouse purposes.
3.2 In its use of the Premises and the remainder of the Property, the
Tenant shall not violate any applicable law, ordinance or regulation.
3.3 License.
3.3.1 The Landlord hereby grants to the Tenant a non-exclusive license
to use (and to permit its officers, directors, agents, employees and invitees to
use in the course of conducting business at the Premises),
(a) any and all portions of the said tract of land on which the
Building is located (excluding that portion thereof which is improved by any
other building) which, by their nature, are manifestly designed and intended for
common use by the occupants of the Building and of any other improvements on
such tract, for pedestrian ingress and egress to and from the Premises and for
any other such manifest purposes; and
(b) any and all portions of such tract of land as from time to time
are designated (by striping or otherwise) by the Landlord for such purpose, for
the parking of automobiles.
3.3.2. Such license shall be exercised in common with the exercise
thereof by the Landlord, any tenant or owner of the building or any other
building located on such tract, and their respective officers, directors,
agents, employees and invitees, and in accordance with the Rules and Regulations
promulgated from time to time pursuant to the provisions of Section 11.
3.4 SIGNS. The Tenant shall have the right to erect from time to time
within the Premises such signs as it desires, in accordance with applicable law,
except that the Tenant shall not erect any sign within the Premises in any place
where such sign is visible from the exterior of. the Premises, unless the
Landlord has given its express, written consent thereto.
SECTION 4. INSURANCE AND INDEMNIFICATION.
4.1 INCREASE IN RISK. The Tenant
4.1.1. shall not do or permit to be done any act or thing as a result
of which either (a) any policy of insurance of any kind covering (i) any or all
of the Property or (ii) any liability of the Landlord in connection therewith
may become void or suspended, or (b) the insurance risk under any such policy
would (in the opinion of the insurer thereunder) be made greater; and
4. 1.2. shall pay as Additional Rent the amount of any increase in any
premium for such insurance resulting from any breach of such covenant.
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<PAGE>
4.2 INSURANCE TO BE MAINTAINED BY TENANT.
4.2.1. The Tenant shall maintain at its expense, throughout the Term,
insurance against loss or liability in connection with bodily injury, death,
property damage or destruction, occurring within the Premises or arising out of
the use thereof by the Tenant or its agents, employees, officers or invitees,
visitors and guests, under one or more policies of general public liability
insurance having such limits as to each as are reasonably required by the
Landlord from time to time, but in any event of not less than a total of Two
Million Dollars ($2,000,000.00) for bodily injury to or death of all persons or
property damage or destruction in any one occurrence, and (b) Fifty Thousand
Dollars ($50,000.00) Fire Legal Liability. Each such policy shall (a) name as
the insured thereunder the Tenant and the Landlord (and, at the Landlord's
request, any Mortgagee) as additional insureds, (b) by its terms, not be
cancellable without at least thirty (30) days' prior written notice to the
Landlord (and, at the Landlord's request, any such Mortgagee), and (c) be issued
by any insurer of recognized responsibility licensed to issue such policy in the
State of Maryland.
4.2.2. (a) At least five (5) days before the Commencement Date, the Tenant shall
deliver to the Landlord a certificate of each such policy, and (b) at least
thirty (30) days before any such policy expires, the Tenant shall deliver to the
Landlord an original or a signed duplicate copy of a replacement policy
therefor; provided, that so long as such insurance is otherwise in accordance
with the provisions of this Section, the Tenant may carry any such insurance
under a blanket policy covering the Premises for the risks and in the minimum
amounts specified in paragraph 4.2.1, in which event the Tenant shall deliver to
the Landlord two (2) insurer's certificates therefor in lieu of an original or a
copy thereof, as aforesaid.
4.3 INSURANCE TO BE MAINTAINED BY LANDLORD. The Landlord shall maintain
throughout the Term all-risk insurance upon the Building, including as needed
but not limited to Personal Property, Loss of Rents, Glass, Boiler and
Machinery, General Liability and Umbrella Liability in at least such amounts and
having at least such forms of coverage as are required from time to time by the
Landlord's lender. The cost of the premiums for such insurance and of each
endorsement thereto and of any applicable deductibles therefor shall be deemed,
for purposes of the provisions of Section 2, to be a cost of operating and
maintaining the Property.
4.4 WAIVER OF SUBROGATION. If either party hereto is paid any proceeds
under any policy of insurance naming such party as an insured, on account of any
loss, damage or liability, then such party hereby releases the other patty
hereto, to and only to the extent of the amount of such proceeds, from any and
all liability for such loss, damage or liability, notwithstanding that such
loss, damage or liability may arise out of the negligent or intentionally
tortious act or omission of the other party, its agents or employees; provided,
that such release shall be effective only as to a loss, damage or liability
occurring while the appropriate policy of insurance of the releasing party
provides that such release shall not impair the effectiveness of such policy or
the insured's ability to recover thereunder. Each party hereto shall use
reasonable efforts to have a clause to
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<PAGE>
such effect included in its said policies, and shall promptly notify the other
in writing if such clause cannot be included in any such policy.
4.5 LIABILITY OF PARTIES. Except if and to the extent that such party is
released from liability to the other party hereto pursuant to the provision of
subsection 4.4.
4.5.1. the Landlord (a) shall be responsible for, and shall indemnify
and hold harmless the Tenant against and from any and all liability arising out
of, any injury to or death of any person or damage to any property, occurring
anywhere upon the Property, if, only if and to the extent that such injury,
death or damage is proximately caused by the grossly negligent or
intentionally tortious act or omission of the Landlord or its agents, officers
or employees, but (b) shall not be responsible for or be obligated to indemnify
or hold harmless the Tenant against or from any liability for any such injury,
death or damage occurring anywhere upon the Property (including the Premises),
(i) by reason of the Tenant's occupancy or use of the Premises or any other
portion of the Property, or (ii) because of fire, windstorm, act of God or other
cause unless solely caused by such gross negligence or intentionally tortious
act or omission of the Landlord, as aforesaid; and
4.5.2. subject to the operation and effect of the foregoing provisions
of this subsection, the Tenant shall be responsible for, and shall defend,
indemnify and hold harmless the Landlord against and from, any and all liability
or claim of liability (including without limitation reasonable attorney's fees)
arising out of any injury to or death of any person or damage to any property,
occurring within the Premises, or, if caused by Tenant, its employees, agents or
invitees, on the Property.
SECTION 5. IMPROVEMENTS TO PREMISES.
5.1 By Landlord./13/
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/13/ Landlord shall provide a turn key buildout based upon the final approved
space plan dated July 24,1998 and attached hereto in Exhibit B-1. The cost
of any additional improvements or services incurred due to Tenant's
modification of the final approved space plan shall be promptly paid
directly by Tenant to Landlord upon written request by Landlord (to
include invoice with back-up), and failure to pay such sum in accordance
with the schedule below shall constitute an Event of Default under the
Lease. Landlord's contractor shall perform all work to be done within the
Premises, with the exception of Tenant's telephone and data cabling.
In the event the cost of the improvement exceeds the Allowance, Tenant
shall repay such costs in accordance with the following schedule; (a)
seventy five percent (75%) upon requisition of the improvements and (b)
twenty five percent (25%) upon the substantial completion of the
improvements.
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5.1.1. The Landlord/14/ shall make the improvements to the Premises
which are set forth in the plans and specifications attached hereto as Exhibit
B-1.
5.1.2. [Deleted]
5.1.3. the Landlord shall use reasonable efforts to complete such
improvements by the date on which the Tenant is entitled to occupy the Premises
pursuant to this Lease, but shall have no liability to the Tenant hereunder if
prevented from doing so by reason of any (a) strike, lock-out or other labor
troubles, (b) governmental restrictions or limitations, (c) failure or shortage
of electrical power, gas, water, fuel oil, or other utility or service, (d)
riot, war, insurrection or other national or local emergency (e) accident,
flood, fire or other casualty, (f) adverse weather condition, (g) other act of
God, (h) inability to obtain a certificate of occupancy, or (i) shortage of
materials or labor, or (j) other cause similar or dissimilar to any of the
foregoing and beyond the Landlord's reasonable control. In such event, (a) the
Commencement Date shall be postponed for a period equaling the length of such
delay, (b) the Termination Date shall be determined pursuant to the provisions
of subsection 1.1 by reference to the Commencement Date as so postponed, and (c)
the Tenant shall accept possession of the Premises within three (3) days after
such completion. If Tenant does not submit drawings or approvals in a timely
manner and, as a result, the Landlord cannot deliver the Premises timely, the
Lease Commencement Date shall not be postponed.
5.2 By Tenant. The Tenant shall not make any alteration, addition or
improvement to the Premises without first obtaining the Landlord's written
consent thereto. If the Landlord consents to any such proposed alteration,
addition or improvement, it shall be made at the Tenant's sole expense (and the
Tenant shall hold the Landlord harmless from any cost incurred on account
thereof), and at such time and in such manner as not unreasonably to interfere
with the use and enjoyment of the remainder of the Property by any tenant
thereof or other person.
5.3 Mechanics' lien. The Tenant shall (a) immediately after it is filed or
claimed, bond or have released any mechanics', materialman's or other lien filed
or claimed against any or all of the Premises, the Property, or any other
property owned or leased by the Landlord, by reason of labor or materials
provided for the Tenant or any of its contractors or subcontractors (other than
labor or materials provided by the Landlord pursuant to the provisions of
subsection 5.1), or otherwise arising out of the Tenant's use or occupancy of
the Premises or any other portion of the Property, and (b) defend, indemnify and
hold harmless the Landlord against and from any and all liability, claim of
liability or expense (including, by way of example rather than of limitation,
that of reasonable attorneys' fees) incurred by the Landlord on account of any
such lien or claim.
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/14/ at its sole cost and expense
14
<PAGE>
5.4 Fixtures. Any and all improvements, repairs, alterations and all other
property attached to, used in connection with or otherwise installed within the
Premises by the Landlord or the Tenant shall, immediately on the completion of
their installation, become the Landlord's property without payment therefor by
the Landlord, except that any machinery, equipment or fixtures installed by the
Tenant and used in the conduct of the Tenant's trade or business (rather than to
service the Premises or any of the remainder of the Building or the Property
generally) shall remain the Tenant's property.
SECTION 6. UTILITIES AND SERVICES.
6.1 Utilities. Landlord agrees to provide at its cost water and electricity
service connections into the Premises and telephone service connections to the
Building, but Tenant shall pay for all water, gas, heat, light, power,
telephone, sewer, sprinkler charges, meter installation charges, and other
utilities and services used on or from the Premises, together with any taxes,
penalties, surcharges or the like pertaining thereto and any maintenance charges
for utilities and shall furnish all electric light bulbs and tubes. If any such
services are not separately metered to Tenant, Tenant shall pay its
proportionate share as determined by Landlord of all charges jointly metered
within the Building.
6.2 Interruption. The Landlord shall have no liability to the Tenant for
any compensation or reduction of rent on account of any failure, modification or
interruption of any such service which either (a) arises out of any of the
causes enumerated in the provisions of subsection 5. 1.3, or (b) is required by
applicable law (including, by way of example rather than of limitation, any
federal law or regulation relating to the furnishing or consumption of energy or
the temperature of buildings).
SECTION 7. LANDLORD'S RIGHT OF ENTRY.
The Landlord and its agents shall be entitled to enter the Premises at any
reasonable time (a) to inspect the Premises, (b) to exhibit the Premises to any
existing or prospective purchaser, tenant/15/ or Mortgagee thereof, (c) to make
any alteration, improvement or repair to the Building or the Premises, or (d)
for any other purpose relating to the operation or maintenance of the Property;
provided that the Landlord shall (a) (unless doing so is impractical or
unreasonable because of emergency) give the Tenant at least twenty-four (24)
hours' prior notice of its intention to enter the Premises, and (b) use
reasonable efforts to avoid thereby interfering more than is reasonably
necessary with the Tenant's use and enjoyment thereof.
SECTION 8. FIRE AND OTHER CASUALTIES.
8.1 General. If the Premises are damaged by fire or other casualty during
the term,
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/15/ (if during the last six (6) months of the Term)
15
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8.1.1. the Landlord shall, with reasonable promptness (taking into
account the time required by the Landlord to effect a settlement with, and to
procure any insurance proceeds from, any insurer against such casualty, but in
any event within/16/ days after the date of such casualty), substantially
restore the premises to their condition immediately before such casualty, and
may temporarily enter and possess any or all of the Premises for such purpose
(provided, that the Landlord shall not be obligated to repair, restore or
replace any fixture, improvement, alteration, furniture, or other property
owned, installed or made by the Tenant), but
8.1.2. the times for commencement and completion of any such restoration shall
be extended for the period of any delay occasioned by the Landlord in doing so
arising out of any of the causes enumerated in the provisions of subsection 5.1.
If the Landlord undertakes to restore the Premises and such restoration is not
accomplished within the said period of/17/ days plus the period of any extension
thereof, as aforesaid, the Tenant may terminate this Lease by giving written
notice thereof to the Landlord within thirty (30) days after the expiration of
such period, as so extended; and
8.1.3. So long as the Tenant is deprived of the use of any or all of
the Premises on account of such casualty, the Base Rent and any Additional Rent
payable under the provisions of subsection 2.2 shall be abated in proportion to
the number of square feet of the Premises rendered substantially unfit for
occupancy by such casualty, unless, because of any such damage, the undamaged
portion of the Premises is made materially unsuitable for use by the Tenant for
the purposes set forth in the provisions of Section 3, in which event the Base
Rent and any such Additional Rent shall be abated entirely during such period of
deprivation.
8.2 SUBSTANTIAL DESTRUCTION. Anything contained in the foregoing provisions
of this Section to the contrary notwithstanding,
8.2.1. if during the Term the Building is so damaged by fire or other
casualty that (a) either the Premises or (whether or not the Premises are
damaged) the Building is rendered substantially unfit for occupancy, as
reasonably determined by the Landlord, or (b) the Building is damaged to the
extent that the Landlord reasonably elects to demolish the Building, or if any
Mortgagee requires that any or all of such insurance proceeds be used to retire
any or all of the debt secured by its Mortgage, then in any such case the
Landlord may elect to terminate this Lease, as of the date of such casualty by
giving written notice thereof to the Tenant within thirty (30) days after the
date of such casualty; and
8.2.2. in such event, (a) the Tenant shall pay to the Landlord the
Base Rent and any Additional Rent payable by the Tenant hereunder and accrued
through the date of such
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/16/ one hundred eighty (180)
/17/ one hundred eighty (180)
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termination, (b) the Landlord shall repay to the Tenant any and all prepaid Rent
for periods beyond such termination, and (c) the Landlord may enter upon and
repossess the Premises without further notice.
8.3 TENANT'S NEGLIGENCE. Anything contained in any provision of this Lease
to the contrary notwithstanding, if any such damage to the Premises, the
Building or both are caused by or result from the negligent or intentionally
tortious act or omission of the Tenant, those claiming under the Tenant or any
of their respective officers, employees, agents or invitees,
8.3.1. the Rent shall not be suspended or apportioned as aforesaid,
and
8.3.2. except if and to the extent that the Tenant is released from
liability therefor pursuant to the provisions of subsection 4.4, the Tenant
shall pay to the Landlord upon demand, as Additional Rent, the cost of (a) any
repairs and restoration made or to be made as a result of such damage, or (b)
(if the Landlord elects not to restore the Building) any damage or loss which
the Landlord incurs as a result of such damage.
SECTION 9. CONDEMNATION.
9.1 RIGHT TO AWARD.
9.1.1. If any or all of the Premises are taken by the exercise of any
power of eminent domain or are conveyed to or at the direction of any
governmental entity under a threat of any such taking (each of which is
hereinafter referred to as a "Condemnation"), the Landlord shall be entitled to
collect from the condemning authority thereunder the entire amount of any award
made in any such proceeding or as consideration for such conveyance, without
deduction therefrom for any leasehold or other estate held by the Tenant under
this Lease.
9.1.2. The Tenant hereby (a) assigns to the Landlord all of the
Tenant's right, title and interest, if any, in and to any such award; (b) waives
any right which it may otherwise have in connection with such Condemnation,
against the Landlord or such condemning authority, to any payment for (i) the
value of the then-unexpired portion of the Term, (ii) leasehold damages, and
(iii) any damage to or diminution of the value of the Tenant's leasehold
interest hereunder or any portion of the Premises not covered by such
Condemnation; and (c) agrees to execute any and all further documents which may
be required to facilitate the Landlord's collection of any and all such awards.
9.1.3. Subject to the operation and effect of the foregoing
provisions of this Section, the Tenant may seek, in a separate proceeding, a
separate award on account of any damages or costs incurred by the Tenant as a
result of such Condemnation, so long as such separate award in no way diminishes
any award or payment which the Landlord would otherwise receive as a result of
such Condemnation and Tenants right of recovery is limited to moving expenses
and the cost of trade fixtures.
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9.2 EFFECT OF CONDEMNATION.
9.2.1. If (a) all of the Premises are covered by a Condemnation, or
(b) any part of the Premises is covered by a Condemnation and the remainder
thereof is insufficient for the reasonable operation therein of the Tenant's
business, or (c) any of the Building is covered by a Condemnation and, in the
Landlord's reasonable opinion, it would be impractical to restore the remainder
thereof, or (d) any of the rest of the Property is covered by a Condemnation
and, in the Landlord's reasonable opinion, it would be impractical to continue
to operate the remainder of the Property thereafter, then, in any such event,
the Term shall terminate on the date on which possession of so much of the
Premises, the Building or the rest of the Property, as the case may be, as is
covered by such Condemnation is taken by the condemning authority thereunder,
and all Rent (including, by way of example rather than of limitation, any
Additional Rent payable under the provision of subsection 2.2), taxes and other
charges payable hereunder shall be apportioned and paid to such date.
9.2.2. If there is a Condemnation and the Term does not terminate
pursuant to the foregoing provision of this subsection, the operation and effect
of this Lease shall be unaffected by such Condemnation, except that the Base
Rent shall be reduced in proportion to the square footage of floor area, if any,
of the Premises covered by such Condemnation.
9.3 If there is a Condemnation, the Landlord shall have no liability to the
Tenant on account of any (a) interruption of the Tenant's business upon the
Premises, (b) diminution in the Tenant's ability to use the Premises, or (c)
other injury or damage sustained by the Tenant as a result of such Condemnation.
9.4 Except for any separate proceeding brought by the Tenant under the
provisions of paragraph 9.1.3., the Landlord shall be entitled to conduct any
such condemnation proceeding and any settlement thereof free of interference
from the Tenant, and the Tenant hereby waives any right which it otherwise has
to participate therein.
SECTION 10. ASSIGNMENT AND SUBLETTING.
10.1 The Tenant hereby acknowledges that the Landlord has entered into this
Lease because of the Tenant's financial strength, goodwill, ability and
expertise and that, accordingly, this Lease is one which is personal to the
Tenant, and agrees for itself and its successors and assigns in interest
hereunder that it will not (a) assign any of its rights under this Lease, or (b)
make or permit any total or partial sale, lease, sublease, assignment,
conveyance, license, mortgage, pledge, encumbrance, or a transfer of a
controlling interest in Tenant, or other transfer of any or all of the Premises
or the occupancy or use thereof (each of which is hereinafter referred to as a
"Transfer"), without first obtaining the Landlord's written consent thereto
(which
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<PAGE>
consent/18/ and, if given, shall not constitute a consent to any subsequent such
Transfer, whether by the person hereinabove named as the "Tenant" or by any such
transferee). The Landlord shall be entitled, at its sole discretion, to
condition any such consent upon the entry by such person into an agreement with
(and in form and substance satisfactory to) the Landlord, by which it assumes
all of the Tenant's obligations hereunder. Any person to whom any Transfer is
attempted without such consent shall have no claim, right or remedy whatsoever
hereunder against the Landlord, and the Landlord shall have no duty to recognize
any person claiming under or through the same. No such action taken with or
without the Landlord's consent shall in any way relieve or release the Tenant
from liability for the timely performance of all of the Tenant's obligations
hereunder. The Tenant hereby acknowledges that any merger, consolidation or
other restructuring of ownership interests in Tenant constitutes a Transfer
hereunder. As additional rent, Tenant shall reimburse Landlord promptly for
reasonable legal and other expenses incurred by Landlord in connection with any
request by Tenant for consent to assignment or subletting; no
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/18/ shall not be unreasonably withheld, conditioned or delayed, so long as
such transferee meets Landlord's reasonable criteria, which criteria are
as follows:
a. The financial strength of the proposed assignee or subtenant, both in
terms of net worth and in terms of reasonably anticipated cash flow
over the Lease term, is not materially less than Tenant's financial
strength at the time this Lease was signed or at the time of such
assignment or sublease, whichever is greater.
b. The proposed assignee or subtenant will not burden the Premises
and/or Common Areas to an extent substantially disproportionate to
typical tenants of the Building, whether through disproportionate
demand for landlord services or utilities, disproportionate bearing
weights on floor areas, disproportionate parking requirements,
deterioration of floors or other elements of the Building, or
otherwise.
c. The proposed assignee or subtenant does not intend to make
substantial alterations to the Premises which would, in Landlord's
reasonable judgement, result in a material net decrease in the value
of the Premises as improved.
d. The proposed assignee's or subtenant's use of the Premises will, in
Landlord's sole judgment, be compatible with the uses of the other
tenants in the Building or will be appropriate for a Class A office
building.
e. Any other basis on which Landlord can reasonably refuse to withhold
its consent to the proposed assignment or sublease, including any
failure of the proposed assignee or subtenant to meet any of the
reasonable criteria of Landlord that Tenant was required to meet
prior to the execution of this Lease.
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assignment or subletting shall affect the continuing primary liability of Tenant
(which, following assignment, shall be joint and several with the assignee); no
consent to any of the foregoing in a specific instance shall operate as a waiver
in any subsequent instance. In the event that any assignee or subtenant pays to
Tenant any amounts in excess of the Annual Rent and additional rent then payable
hereunder, or pro rata portion thereof on a square footage basis for any portion
of the Premises, Tenant shall promptly pay/19/ said excess to Landlord as and
when received by Tenant.
10.2 Anything contained in the foregoing provisions of this Section to the
contrary notwithstanding, neither the Tenant nor any other person having an
interest in the possession, use or occupancy of the Premises or any other
portion of the Property shall enter into any lease, sublease, license,
concession or other agreement for the possession, use or occupancy of space in
the Premises or any other portion of the Property which provides for any rental
or other payment for such use, occupancy or utilization based in whole or in
part upon the net income or profits derived by any person from the space in the
Premises or other portion of the Property so leased, used or occupied (other
than any amount based on a fixed percentages of receipts or sales).
10.3. /20/In the event of any/21/ transfer without Landlord's consent,
Landlord may, at its sole option, have the right at any time or from time to
time or from time after such Transfer to terminate this Lease as to all or any
portion of the Premises and enter into a direct lease agreement with the
proposed sublessee. Neither Tenant nor any party claiming an interest under or
through Tenant shall interfere with Landlord's exercise of its rights hereunder.
Tenant hereby indemnifies and holds Landlord harmless from and against any and
all liabilities, costs, losses or damages, including reasonable attorneys fees
and court costs, arising from any breach of the provisions of this section by
Tenant.
SECTION 11. RULES AND REGULATIONS.
The Landlord shall have the right to prescribe, at its sole discretion,
reasonable rules and regulations (hereinafter referred to as the "Rules and
Regulations") having uniform applicability to all tenants of the Building
(subject to the provisions of their respective leases) and governing their use
and enjoyment of the Building and the remainder of the Property; provided, that
the Rules and Regulations shall not materially interfere with the Tenant's use
and enjoyment of the Premises, in accordance with the provisions of this Lease,
for the purposes enumerated in the provisions of Section 3. The Tenant shall
adhere to the Rules and Regulations and shall cause its agents,
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/19/ fifty percent (50%) of
/20/ Except for the Transfers to subsidiaries or other affiliates of Tenant,
/21/ other
20
<PAGE>
employees, invitees, visitors and guests to do so. A copy of the Rules and
Regulations in effect on the date hereof is attached hereto as Exhibit C.
SECTION 12. SUBORDINATION; ATTORNMENT AND NON-DISTURBANCE.
12.1. Subordination. This Lease shall be subject and subordinate to the
lien, operation and effect of each mortgage, deed of trust, ground lease and/or
other, similar instrument of encumbrance heretofore or hereafter covering any or
all of the Premises or the remainder of the Property (and each renewal,
modification, consolidation, replacement or extension thereof), (each of which
is herein referred to as a "Mortgage"), all automatically and without the
necessity of any action by either party hereto.
12.2. Attornment and non-disturbance. The Tenant shall, promptly at the
request of the Landlord or the holder of any Mortgage (herein referred to as a
"Mortgagee"), execute, enseal, acknowledge and deliver such further instrument
or instruments
12.2.1. evidencing such subordination as the Landlord or such
Mortgagee deems necessary or desirable, and
12.2.2. (at such Mortgagee's request) attorning to such Mortgagee.
Landlord will use reasonable efforts to obtain an agreement from the Mortgagee
(in such Mortgagee's usual form) that such Mortgagee will, in the event of a
foreclosure of any such mortgage or deed of trust (or termination of any such
ground lease) take no action to interfere with the Tenant's rights hereunder,
except on the occurrence of an Event of Default.
12.3. Anything contained in the provisions of this Section to the contrary
notwithstanding, any Mortgagee may at any time subordinate the lien of its
Mortgage to the operation and effect of this Lease without obtaining the
Tenant's consent thereto, by giving the Tenant written notice thereof, in which
event this Lease shall be deemed to be senior to such Mortgage without regard to
their respective dates of execution, delivery and/or recordation among the Land
Records of the said County, and thereafter such Mortgagee shall have the same
rights as to this Lease as it would have had, were this Lease executed and
delivered before the execution of such Mortgage.
SECTION 13. DEFAULT.
13.1. Definition: As used in the provisions of this Lease, each of the
following events shall constitute, and is hereinafter referred to as, an "Event
of Default":
13.1.1. If the Tenant fails to (a) pay any Rent or any other sum which
it is obligated to pay by any provision of this Lease, when and as due and
payable hereunder and without demand therefor, or (b) perform any of its other
obligations under the provisions of this Lease; or
13.1.2. if the Tenant (a) applies for or consents to the appointment
of a receiver, trustee or liquidator of the Tenant or of all or a substantial
part of its assets, (b) files a voluntary
21
<PAGE>
petition in bankruptcy or admits in writing its inability to pay its debts as
they come due, (c) makes an assignment for the benefit of its creditors, (d)
files a petition or an answer seeking a reorganization or an arrangement with
creditors, or seeks to take advantage of any insolvency law, (e) performs any
other act of bankruptcy, or (f) files an answer admitting the material
allegations of a petition filed against the Tenant in any bankruptcy,
reorganization or insolvency proceeding; or
13.1.3. if (a) an order, judgment or decree is entered by any court of
competent jurisdiction adjudicating the Tenant a bankrupt or insolvent,
approving a petition seeking such a reorganization, or appointing a receiver,
trustee or liquidator of the Tenant or of all or a substantial part of its
assets, or (b) there otherwise commences as to the Tenant or any of its assets
any proceeding under any bankruptcy, reorganization, arrangement, insolvency,
readjustment, receivership or similar law, and if such order, judgment, decree
or proceeding continues unstayed for more than sixty (60) consecutive days;
13.1.4. if the Tenant fails to occupy and assume possession of the
Premises within/22/ days after the Commencement Date;
13.1.5. [deleted]
13.1.6./23/ [deleted]
13.2. Notice to Tenant; grace period. Anything contained in the provisions
of this Section to the contrary notwithstanding, on the occurrence of an Event
of Default the Landlord shall not exercise any right or remedy which it holds
under any provision of this Lease or applicable law unless and until
13.2.1. the Landlord has given written notice thereof to the Tenant,
if written notice is required by this Section for the Event of Default which has
occurred, and
13.2.2. the Tenant has failed, (a) if such Event of Default consists
of a failure to pay money, within five (5) days/24/, or (b) if such Event of
Default consists of something other than a failure to pay
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/22/ thirty (30)
/23/ In the event Tenant should cease to continue to operate its business at
the Premises for a period of forty-five (45) consecutive days for any
reason other than Tenant's alterations, casualty or other reason beyond
Tenant's reasonable control, Landlord shall have the right at any time
thereafter to terminate the Lease and recapture the Premises upon thirty
(30) days prior written notice to Tenant. Landlord shall also have the
option to recapture the Premises upon thirty (30) days prior written
notice to Tenant without terminating the Lease. In such event, Tenant
shall remain liable for the Rent until such time as Landlord leases the
Premises to another party.
/24/ after written notice is received; however, Landlord shall only be
obligated to provide written notice to Tenant twice in each Lease Year;
thereafter, no notice shall be due from Landlord to Tenant and Tenant
shall be in default if it fails to pay such amounts when due.
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<PAGE>
money, within thirty (30) days thereafter actively, diligently and in good faith
to begin to cure such Event of Default and to continue thereafter to do so until
it is fully cured; provided, that
13.2.3. no such notice shall be required, and the Tenant shall be
entitled to no such grace period, (a) in an emergency situation in which the
Landlord acts to cure such Event of Default pursuant to the provisions of
paragraph 13.3.5; or (b) more than twice during any twelve (12) month period, or
(c) if the Tenant has substantially terminated or is in the process of
substantially terminating its continuous occupancy and use of the Premises for
the purpose set forth in the provisions of Section 3, or (d) in the case of any
Event of Default enumerated in the provisions of paragraphs 13.1.2, 13.1.3,
13.1.4 and 13.1.6.
13.3. Landlord's rights on Event of Default. On the occurrence of any Event
of Default, the Landlord may (subject to the operation and effect of the
provisions of subsection 13.2) take any or all of the following actions:
13.3.1. re-enter and repossess the Premises and any and all
improvements thereon and additions thereto;
13.3.2. declare the entire balance of the Rent for the remainder of
the Term to be due and payable, and collect such balance in any manner not
inconsistent with applicable law;
13.3.3. terminate this Lease;
13.3.4. relet any or all of the Premises for the Tenant's account for
any or all of the remainder of the Term as hereinabove defined, or for a period
exceeding such remainder, in which event the Tenant shall pay to the Landlord,
at the times and in the manner specified by the provisions of Section 2, the
Base Rent and any Additional Rent accruing during such remainder, less any
monies received by the Landlord, with respect to such remainder, from such
reletting, as well as the cost to the Landlord of any/25/ attorneys' fees or
of any repairs or other action (including those taken in exercising the
Landlord's rights under any provision of this Lease) taken by the Landlord on
account of such Event of Default;
13.3.5. cure such Event of Default in any other manner (after giving
the Tenant written notice of the Landlord's intention to do so except as
provided in paragraph 13.2.3), in which event the Tenant shall reimburse the
Landlord for all expenses incurred by the Landlord in doing so, plus interest
thereon at the lesser of the rate of/26/ per annum or the highest rate then
permitted on account thereof by applicable law, which expenses and interest
shall be Additional Rent and shall be payable by the Tenant immediately on
demand therefor by the Landlord; and/or
- -------------
/25/ reasonable
/26/ twelve percent (12%)
23
<PAGE>
13.3.6. pursue any combination of such remedies and/or any other
remedy available to the Landlord on account of such Event of Default under
applicable law.
13.4. NO WAIVER. No action taken by the Landlord under the provisions of
this Section shall operate as a waiver of any right which the Landlord would
otherwise have against the Tenant for the Rent hereby reserved or otherwise, and
the Tenant shall remain responsible to the Landlord for any loss and/or damage
suffered by the Landlord by reason of any Event of Default.
13.5. DEFAULT BY LANDLORD. In the event of any default by Landlord,
Tenant's exclusive remedy shall be an action for actual direct damages (Tenant
hereby waiving the benefit of any laws granting it a lien upon the property of
Landlord and/or upon rent due Landlord), but prior to any such action Tenant
will give Landlord written notice specifying such default with particularity,
and Landlord shall thereupon have thirty (30) days in which to cure any such
default. Unless and until Landlord fails to so cure any default after such
notice, Tenant shall not have any remedy or cause of action by reason thereof.
All obligations of Landlord hereunder will be construed as covenants, not
conditions, and all such obligations will be binding upon Landlord only during
the period of its possession of the Premises and not thereafter. The term
"Landlord" shall mean only the owner, for the time being of the Premises and in
the event of the transfer by such owner of its interest in the Premises, such
owner shall thereupon be released and discharged from all covenants and
obligations of the Landlord thereafter accruing, but such covenants and
obligations shall be binding during the lease term upon each new owner for the
duration of such owner's ownership. Notwithstanding any other provision hereof,
Landlord shall not have any personal liability hereunder. In the event of any
breach ol default by Landlord in any term or provision of this Lease Tenant
agrees to look solely to the equity or interest then owned by Landlord in the
Property, however, in no event, shall any deficiency judgment or any money
judgment of any kind be sought or obtained against any Landlord.
SECTION 14. ESTOPPEL CERTIFICATE.
The Tenant shall from time to time, within five (5) days after being
requested to do so by the Landlord or any Mortgagee, execute, enseal,
acknowledge and deliver to the Landlord (or, at the Landlord's request, to any
existing or prospective purchaser, transferee, assignee or Mortgagee of any or
all of the Premises, the Property, any interest therein or any of the Landlord's
rights under this Lease) an instrument in recordable form,
14.1. certifying (a) that this Lease is unmodified and in full force and
effect (or, if there has been any modification thereof, that it is in full force
and effect as so modified, stating therein the nature of such modification); (b)
as to the dates to which the Base Rent and any Additional Rent and other charges
arising hereunder have been paid; (c) as to the amount of any prepaid Rent or
any credit due to the Tenant hereunder; (d) that the Tenant has accepted
possession of the Premises, and the date on which the Term commenced; (e) as to
whether, to the best knowledge, information and belief of the signer of such
certificate, the Landlord or the Tenant is then in default in performing any of
its obligations hereunder (and, if so, specifying the nature of each such
default); and (f) as to any other fact or condition reasonably requested by the
Landlord or such other addressee; and
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<PAGE>
14.2. acknowledging and agreeing that any statement contained in such
certificate may be relied upon by the Landlord and any such other addressee.
14.3 In the event that Tenant fails to deliver in a timely manner the
estoppel certificate described in Section 14, Landlord may complete such a
certificate on behalf of Tenant, which certificate shall be binding against
Tenant as if Tenant itself signed such certificate. For such purpose, Tenant
hereby irrevocably constitutes and appoints Landlord as Tenant's attorney-in-
fact (which appointment shall be deemed coupled with an interest) for and in its
name to prepare and sign on Tenant's behalf such an estoppel certificate, Tenant
hereby ratifying and confirming all the said attorney shall lawfully do or
choose to do or be done by virture hereof, it being understood and agreed that
the aforesaid provisions impose no burden or obligation on the Landlord to do or
perform any act whatsoever. After said estoppel certificate has been prepared by
Landlord, Landlord shall provide Tenant a copy thereof. Unless Tenant modifies
such certificate as may be appropriate to make the certificate fully accurate,
and signs and returns to Landlord the certificate within three (3) days after
receipt from Landlord, Landlord shall be entitled and authorized to sign such
estoppel certificate and deliver to any Mortgagee or other person such estoppel
certificate in the name and on behalf of Tenant.
SECTION 15. QUIET ENJOYMENT.
The Landlord hereby covenants that the Tenant, on paying the Rent and
performing the covenants set forth herein, shall peaceably and quietly hold and
enjoy, throughout the Term, (a) the Premises, and (b) such rights as the Tenant
may hold hereunder with respect to the remainder of the Property.
SECTION 16. NOTICES.
Any notice, demand, consent, approval, request or other communication or
document to be provided hereunder to a party hereto shall be (a) given in
writing, and (b) deemed to have been given (i) forty-eight (48) hours after
being sent as certified or registered mail in the United States mails, postage
prepaid, return receipt requested, upon its hand delivery to such party,
addressed as follows:
IF TO LANDLORD: Cornerstone Real Estate Advisers, Inc.
c/o Cambridge Asset Advisors Limited Partnership
560 Herndon Parkway, Suite 210
Herndon, Virginia 20170
IF TO TENANT: Pulsar Data Systems, Inc.
4390 Parliament Place, Suite R
Lanham, Maryland 20720
Each party may change its notice address by giving written notice of such
change to the other party in accordance with the terms of this Section 16.
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<PAGE>
SECTION 17. LANDLORD'S LIEN./27/
[Deleted]
SECTION 18. GENERAL.
18.1. Effectiveness. This Lease shall become effective upon and only upon
its execution by each party hereto./28/
18.2. Complete understanding. This Lease represents the complete
understanding between the parties hereto as to the subject matter hereof, and
supersedes all prior written or oral negotiations, representations, warranties,
statements or agreements between the parties hereto as to the same.
18.3. Amendment. This Lease may be amended by and only by an instrument
executed and delivered by each party hereto.
18.4. Applicable law. This Lease shall be given effect and construed by
application of the laws of Maryland, and any action or proceeding arising
hereunder shall be brought in the Circuit Court for Prince Georges County,
Maryland, provided, that if such action or proceeding arises under the
Constitution, laws or treaties of the United States of America, or if there is a
diversity of citizenship between the parties thereto so that it is to be brought
in-a United States District Court, it shall be brought in the United States
District Court for the appropriate District in Maryland.
18.5. Waiver. The Landlord shall not be deemed to have waived the exercise
of any right which it holds hereunder unless such waiver is made expressly and
in writing (and no delay or omission by the Landlord in exercising any such
right shall be deemed to be a waiver of its future exercise). No such waiver as
to any instance involving the exercise of any such right shall be deemed a
waiver as to any other such instance, or any other such right.
18.6. Time of essence. Time shall be of the essence of this Lease.
18.7. Headings. The headings of the Sections, subsections, paragraphs and
subparagraphs hereof are provided herein for and only for convenience of
reference, and shall not be considered in construing their contents.
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/27/ Notwithstanding anything contained herein to the contrary, Landlord agrees
to forgive its lien on any furniture, fixture or equipment located in the
Premises, but does not waive any of its rights and or remedies granted
under the Uniform Commercial Code or any statutory lien for Rent in
Landlord's favor.
/28/ and delivery by Landlord to Tenant
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<PAGE>
18.8. Construction. As used herein,
18.8.1. the term "person" means a natural person, a trustee, a
corporation, a partnership and any other form of legal entity; and
18.8.2. all references made (a) in the neuter, masculine or feminine
gender shall be deemed to have been made in all such genders, (b) in the
singular or plural number shall be deemed to have been made, respectively, in
the plural or singular number as well, and (c) to any Section, subsection,
paragraph or subparagraph shall, unless therein expressly indicated to the
contrary, be deemed to have been made to such Section, subsection, paragraph or
subparagraph of this Lease.
18.9. EXHIBITS. Each writing referred to herein as being attached hereto as
an exhibit or otherwise designated herein as an exhibit hereto is hereby made a
part hereof.
18.10. SEVERABILITY. No determination by any court, governmental body or
otherwise that any provision of this Lease or any amendment hereof is invalid or
unenforceable in any instance shall affect the validity or enforceability of (a)
any other such provision, or (b) such provision in any circumstance not
controlled by such determination. Each such provision shall be valid and
enforceable to the fullest extent allowed by, and shall be construed wherever
possible as being consistent with, applicable law.
18.11. DEFINITION OF THE "LANDLORD".
18.11.1. As used herein, the term the "Landlord" means the person
hereinabove named as such, and its heirs, personal representatives, successors
and assigns (each of whom shall have the same rights, remedies, powers,
authorities and privileges as it would have had, had it originally signed this
lease as the Landlord).
18.11.2. No person holding the Landlord's interest hereunder (whether
or not such person is named as the "Landlord" herein) shall have any liability
hereunder after such person ceases to hold such interest, except for any such
liability accruing while such person holds such interest.
18.11.3. Neither the Landlord nor any principal of the Landlord,
whether disclosed or undisclosed, shall have any personal liability under any
provision of this Lease.
18.12. DEFINITION OF THE "TENANT". As used herein, the term the "Tenant"
means each person hereinabove named as such and such person's heirs, personal
representatives, successors and assigns, each of whom shall have the same
obligations, liabilities, rights and privileges as it would have possessed had
it originally executed this Lease as the Tenant; provided, that no such right or
privilege shall inure to the benefit of any assignee of the Tenant, immediate or
remote, unless the assignment to such assignee is made in accordance with the
provisions of Section 10. Whenever two or more persons constitute the Tenant,
all such persons shall be jointly and severally liable for performing the
Tenant's obligations hereunder.
27
<PAGE>
18.13. COMMISSIONS. Each party hereto hereby represents and warrants to the
other that, in connection with the leasing of the Premises hereunder, the party
so representing and warranting has not dealt with any real estate broker, agent
or finder, other than Scheer Partners as Tenant's Agent and Cambridge Property
Group Limited Partnership as Landlords Agent and there is no other commission,
charge or other compensation due on account thereof. Each party hereto
shall indemnify and hold harmless the other against and from any inaccuracy in
such party's representation.
18.14. RECORDATION. This Lease may not be recorded among the Land Records
of the said County or among any other public records, without the Landlord's
prior express, written consent thereto, and any attempt by the Tenant to do so
without having obtained the Landlord's consent thereto shall constitute an Event
of Default hereunder. If this Lease is recorded by either party hereto, such
party shall bear the full expense of any transfer, documentary stamp or other
tax, and any recording fee, assessed in connection with such recordation;
provided, that if under applicable law the recordation of this Lease hereafter
becomes necessary in order for this Lease to be or remain effective, the Tenant
shall bear the full expense of any and all such taxes and fees incurred in
connection therewith.
18.15. APPROVAL BY MORTGAGEES. Anything contained in the provisions of this
Lease to the contrary notwithstanding, the Landlord shall be entitled at any
time hereafter but before the Landlord delivers possession of the Premises to
the Tenant hereunder, to terminate this Lease by giving written notice thereof
to the Tenant, if any Mortgagee fails to approve this Lease for purposes of the
provisions of its Mortgage, and in the manner set forth therein.
18.16 WAIVER OF TRIAL BY JURY. The Tenant hereby waives trial by jury in
any action or proceeding to which the Tenant and the Landlord may be parties,
arising out of or in any way pertaining to (a) this Lease, or (b) the Property.
It is agreed and understood that this waiver constitutes a waiver of trial by
jury of all claims against all parties to such actions or proceedings, including
claims against parties who are not parties to this Lease.
This waiver is knowingly, willingly and voluntarily made by the Tenant, and
the Tenant HEREBY REPRESENTS that no representations of fact or opinion have
been made by any individual to induce this waiver of trial by jury or to in any
way modify or nullify its effect. The Tenant further represents that it has been
represented in the signing of this Lease and in the making of this waiver by
independent legal counsel, selected of its own free will, and that it has had
the opportunity to discuss this waiver with counsel.
18.17. FINANCIAL INFORMATION.
18.18. Authority.
By signing below, the undersigned individuals represent and warrant that
they have all requisite authority to sign this Lease Agreement and to bind the
entity on behalf of which they sign this Lease.
28
<PAGE>
IN WITNESS WHEREOF, each party hereto has executed and ensealed this Lease or
caused it to be executed and ensealed on its behalf by its duly authorized
representatives, the day and year first above written.
WITNESS: LANDLORD: MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY
By: /S/ ROBERT R. VILLENEUVE
- --------------- -----------------------------------------
Mr. Robert R. Villeneuve
Vice President
Date:
----------------------------------------
WITNESS: TENANT: PULSAR DATA SYSTEMS, INC.
- --------------- By: /S/ DARYL B. DAVIS
------------------------------------------
Name: Daryl B. Davis
Title: V. P. Ops.
Date: 8/10/98
29
<PAGE>
AGREEMENT OF LEASE
by and between
MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY
and
PULSAR DATA SYSTEMS, INC.
EXHIBIT A
PREMISES
The Premises consists of approximately 12,790 rentable square feet in 4390
Parliament Place, a 57,089 square foot, office/flex project located at 4390
Parliament Place, Lanham, Prince George's County, Maryland; to be located in the
approximate location shown on the plan attached hereto as Exhibit A- 1.
30
<PAGE>
AGREEMENT OF LEASE
by and between
MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY
and
PULSAR DATA SYSTEMS, INC.
EXHIBIT A-1
SITE PLAN
31
<PAGE>
AGREEMENT OF LEASE
by and between
Massachusetts Mutual Life Insurance Company
and
Pulsar Data Systems, Inc.
EXHIBIT B
TENANT IMPROVEMENTS
[DELETED]
32
<PAGE>
AGREEMENT OF LEASE
by and between
Massachusetts Mutual Life Insurance Company
and
Pulsar Data Systems, Inc.
EXHIBIT B-1
SPACE PLAN
33
<PAGE>
AGREEMENT OF LEASE
by and between
MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY
and
PULSAR DATA SYSTEMS, INC.
EXHIBIT C
CURRENT RULES AND REGULATIONS
1 The sidewalks, lobbies, passages, elevators and stairways shall not be
obstructed by the Tenant and used by the Tenant for any purposes other than
ingress and egress from and to the Tenant's offices. The Landlord shall in all
cases retain the right to control or prevent access thereto by any person whose
presence, in the Landlord's judgment, would be prejudicial to the safety, peace,
character or reputation of the Building or of any tenant of the Property.
2. The toilet rooms, water closets, sinks, faucets, plumbing and other service
apparatus of any kind shall not be used by the Tenant for any purpose other than
those for which they were installed, and no sweepings, rubbish, rags, ashes,
chemicals or other refuse or injurious substances shall be placed therein or
used in connection therewith by the Tenant, or left by the Tenant in the
lobbies, passages, elevators or stairways of the Building.
3. No skylight, window, door or transom of the Building shall be covered or
obstructed by the Tenant, and no window shade, blind, curtain, screen, storm
window, awning or other material shall be installed or placed on any window or
in any window space, except as approved in writing by the Landlord. If the
Landlord has installed or hereafter installs any shade, blind or curtain in the
Premises, the Tenant shall not remove it without first obtaining the Landlord's
written consent thereto.
4. No sign, lettering, insignia, advertisement, notice or other thing shall be
inscribed, painted, installed, erected or placed in any portion of the Premises
which may be seen from outside the Building, or on any window, window space or
other part of the exterior or interior of the Building, unless first approved in
writing by the Landlord. Names on suite entrances shall be provided by and only
by the Landlord and at the Tenant's expense, using in each instance lettering of
a design and in a form consistent with the other lettering in the Building, as
first approved in writing by the Landlord. The Tenant shall/will not erect any
stand, booth or showcase or other article or matter in or upon the Premises
and/or the Building without first obtaining the Landlord's written consent
thereto.
5. The Tenant shall not place any additional lock or security devices upon any
door within the Premises or elsewhere upon the Property without Landlord's
consent, and shall surrender all keys for all such locks at the end of the Term.
The Landlord shall provide the Tenant with one set of keys to the Premises when
the Tenant assumes possession thereof.
34
<PAGE>
6. The delivery of towels, ice, water, food, beverages, newspaper and other
supplies, equipment and furniture will be permitted only under the Landlord's
direction and control.
7. The Tenant shall not do or permit to be done anything which obstructs or
interferes with the rights of any other tenant of the Property. The Tenant shall
not keep anywhere within the Property any matter having an offensive odor, or
any kerosene, gasoline, benzine, camphene, fuel or other explosive or highly
flammable material. No bird, fish or other animal shall be brought into or kept
in or about the Premises.
8. The Tenant shall keep the Premises in a good state of preservation and
cleanliness while in possession of the Premises.
9. If the Tenant desires to install signalling, telegraphic, telephonic,
protective alarm or other wires, apparatus or devices within the Premises, the
Landlord shall direct where and how they are to be installed and, except as so
directed, no installation, boring or cutting shall be permitted. The Landlord
shall have the right (a) to prevent or interrupt the transmission of excessive,
dangerous or annoying current of electricity or otherwise into or through the
Building or the Premises, (b) to require the changing of wiring connections or
layout at the Tenant's expense, to the extent that the Landlord may deem
necessary, (c) to require compliance with such reasonable rules as the Landlord
may establish relating thereto, and (d) in the event of noncompliance with such
requirements or rules, immediately to cut wiring or do whatever else it
considers necessary to remove the danger, annoyance or electrical interference
with apparatus in any part of the Building. Each wire installed by the Tenant
must be clearly tagged at each distributing board and junction box and elsewhere
where required by Landlord, with the number of the office to which such wire
leads and the purpose for which it is used, together with the name of the tenant
or other concern, if any, operating or using it.
10. No furniture, package, equipment, supplies or merchandise may be received
in the Building, or carried up or down in the elevators or stairways, except
during such hours as are designated for such purpose by the Landlord, and only
after Tenant gives notice thereof to the Landlord. The Landlord shall have the
exclusive right to prescribe the method and manner in which any of the same is
brought into or taken out of the Building, and the right to exclude from the
Building any heavy furniture, safe or other article which may create a hazard
and to require it to be located at a designated place in the Premises. The
Tenant shall not place any weight anywhere beyond the safe carrying capacity of
the Building. The cost of repairing any damage to the Building or any other part
of the Property caused by taking any of the same in or out of the Premises, or
any damage caused while it is in the Premises or the rest of the Building, shall
be borne by the Tenant.
11. Without the Landlord's prior written consent, (a) nothing shall be fastened
to (and no hole shall be drilled, or nail or screw driven into) any wall or
partition, (b) no wall, or partition shall be painted, papered or otherwise
covered or moved in any way or marked or broken, (c) no connection shall be made
to any electrical wire for running any fan, motor or other apparatus, device or
equipment, (d) no
35
<PAGE>
machinery of any kind other than customary small business machinery shall be
allowed in the Premises, (e) no switchboard or telephone wiring or equipment
shall be placed anywhere other than where designated by the Landlord, and (f) no
mechanic shall be allowed to work in or about the Building other than one
employed by the Landlord, unless approved in writing by Landlord.
12. The Tenant shall have access to the Premises at all reasonable times. The
Landlord shall in no event be responsible for admitting or excluding any person
from the Premises. In case of invasion, hostile attack, insurrection, mob
violence, riot, public excitement or other commotion, explosion, fire or any
casualty, the Landlord shall have the right to bar or limit access to the
Building to protect the safety of occupants of the Property, or any property
within the Property.
13. The Landlord shall have the right to rescind, suspend or modify the Rules
and Regulations and to promulgate such other Rules or Regulations as, in the
Landlord's reasonable judgment, are from time to time needed for the safety,
care, maintenance, operation and cleanliness of the Building, or for the
preservation of good order therein. Upon the Tenant's having been given notice
of the taking of any such action, the Rules and Regulations as so rescinded,
suspended, modified or promulgated shall have the same force and effect as if in
effect at the time at which the Tenant's lease was entered into (except that
nothing in the Rules and Regulations shall be deemed in any way to alter or
impair any provision of such lease).
14. The use of any room within the Building as sleeping quarters is strictly
prohibited at all times.
15. The Tenant shall keep the windows and doors of the Premises (including
those opening on corridors and all doors between rooms entitled to receive
heating or air conditioning service and rooms not entitled to receive such
service), closed while the heating or air conditioning system is operating, in
order to minimize the energy used by, and to conserve the effectiveness of, such
systems. The Tenant shall comply with all reasonable Rules and Regulations from
time to time promulgated by the Landlord with respect to such systems or their
use.
16. Nothing in these Rules and Regulations shall give any Tenant any right or
claim against the Landlord or any other person if the Landlord does not enforce
any of them against any other tenant or person (whether or not the Landlord has
the right to enforce them against such tenant or person), and no such
nonenforcement with respect to any tenant shall constitute a waiver of the right
to enforce them as to the Tenant or any other tenant or person.
36
<PAGE>
AGREEMENT OF LEASE
by and between
Massachusetts Mutual Life Insurance Company
and
Pulsar Data Systems, Inc.
EXHIBIT D
BASE RENT
RENTAL SQUARE ANNUAL MONTHLY
LEASE YEAR RATE FEET BASE RENT BASE RENT
- ----------------------------------------------------------
1 $8.20 12,790 $104,878.00 $8,739.83
- ----------------------------------------------------------
2 $8.45 12,790 $108,024.34 $9,002.03
- ----------------------------------------------------------
3 $8.70 12,790 $111,265.07 $9,272.09
- ----------------------------------------------------------
4 $8.96 12,790 $ 11,603.02 $9,550.25
- ----------------------------------------------------------
5 $9.23 12, 790 $118,041.11 $9,836.76
- ----------------------------------------------------------
37
<PAGE>
AGREEMENT OF LEASE
by and between
MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY
and
PULSAR DATA SYSTEMS, INC.
EXHIBIT E
LEASE ADDENDUMS
1. Option to Terminate: Provided Tenant is not then in default under the terms
of this Lease, Tenant shall have the one-time right to terminate this Lease as
of the end of the thirty-sixth (36th) month of the Lease Term. Tenant must
provide Landlord at least one hundred eighty (180) days prior written notice
(i.e. 180 days prior to the end of the 36th month of the Lease Term) of its
election to exercise this option to terminate. If Tenant fails to provide
Landlord with such written notice on or before such one hundred eighty (180) day
period, Tenant's option to terminate shall become null and void and Tenant shall
have no further option(s) to terminate. In connection with said termination and
as liquidated damages to compensate Landlord for the damage it will incur in
connection with an early termination, Tenant shall pay a fee to Landlord equal
to all unamortized tenant improvement costs and leasing commissions amortized
over sixty (60) months at a per annum rate often percent (10%) per annum plus
three (3) months Base Rent at the then current rates. The parties acknowledge
that it would be difficult to calculate Landlord's damages in the event of an
early termination and that the above sum is a reasonable estimate of such
damages. Tenant shall pay such sum at the time of its giving the foregoing
notice or such notice shall be null and void and Tenant's option to terminate
shall thereupon be null and void. In addition, the parties shall execute a
termination agreement in connection with such early termination.
2. Right of First Offer: As long as Tenant has not been in default during the
Term of the Lease and is not in default under the Lease at the time of its
exercise of this right, and so long as this right is exercised in connection
with an expansion of Tenant's Premises and for no other purpose, and subject to
the prior rights of any other tenant in the Building, Landlord hereby grants to
Tenant a one-time right of first offer on the terms and conditions contained in
this paragraph to lease the 6,717 square feet in Suite P when it becomes
available and is not subject to the rights of any other tenant (the "Offer
Space"). The rent for such Space shall be the same rate Tenant is then paying
for the Premises, as escalated. Such lease shall be coterminous with the lease
for the existing Premises and if such Term is then less than three (3) Lease
Years, the Term for the existing Premises and the Offer Space shall be extended
so that it will expire at least three (3) Lease Years from the commencement date
of Tenant's lease of the Offer Space. Landlord shall also provide Tenant with a
tenant improvement allowance in the amount equal to the proportionate amount
with respect to the Lease Term remaining for improvements to the Offer Space. In
the event the Offer Space becomes available for lease during the Term, Landlord
shall give notice thereof to Tenant which notice shall contain the foregoing
terms to lease the Offer Space. Within five (5) business days of such notice,
time being of the essence, Tenant shall give Landlord notice that it either does
or does not wish to lease the Offer Space or if Tenant fails to give Landlord
notice of its desires respecting the Offer Space within the foregoing required
five (5) business day period, then Landlord shall be entitled to proceed to
market and/or lease the Offer Space to a third party free and clear of Tenant's
right to first offer and such right shall be deemed terminated in all respects
and Tenant shall have no further rights of first offer.
38
<PAGE>
In the event Tenant gives Landlord a notice as required in the preceding
paragraph that it wishes to lease the Offer Space, then Landlord and Tenant
shall have twenty (20) days from the date of the notice within which to amend
this Lease by adding the Offer Space on the terms and conditions contained in
Landlord's notice. In the event Landlord and Tenant fail to sign such amendment
to this Lease, using good faith efforts, within said twenty (20) day period,
time being of the essence, then Landlord shall be entitled to proceed to market
and/or lease the Offer Space to a third party free
39
<PAGE>
Exhibit 10.28
FORBEARANCE AGREEMENT
This FORBEARANCE AGREEMENT AND AMENDMENT by and between PULSAR DATA SYSTEMS,
INCORPORATED ("Pulsar") and IBM CREDIT CORPORATION ("IBM Credit") is dated as of
the 31st day of August 1998 (the "Forbearance Agreement").
WITNESSETH:
WHEREAS, Pulsar and IBM Credit entered into that certain Inventory and
Working Capital Financing Agreement dated October 30, 1997 (as amended,
supplemented or otherwise modified on or prior to the date hereof and together
with any addenda or other documents executed in connection therewith the
"Financing Agreement"), and all loans made by IBM Credit to Pulsar, and all
other liabilities and obligations at any time owing by Pulsar to IBM Credit are
secured by security interests granted by Pulsar to IBM Credit pursuant to the
terms of the Financing Agreement in all of Pulsar's then existing and thereafter
acquired inventory, equipment, accounts receivable, chattel paper, contract
rights, documents, instruments, general intangibles and other items of personal
property; and
WHEREAS, by Guaranty Agreement (by Individual) dated July 31, 1990, William
W. Davis, Sr. and Lillian Davis (each a "Guarantor" and collectively
"Guarantors") unconditionally guaranteed payment to IBM Credit of all
liabilities at any time owing by Pulsar to IBM Credit (the "Guaranty"); and
WHEREAS, Pulsar, the Guarantors and IBM Credit entered into a letter
agreement dated August 8, 1997 (and as amended, extended, or otherwise modified
from time to time, the "Letter Agreement) whereby IBM Credit agreed to forbear
from taking certain action pursuant to the Financing Agreement; and
WHEREAS, Pulsar is in default under the Financing Agreement; and
WHEREAS, Pulsar requests that IBM Credit forbear from exercising certain
remedies available to IBM Credit under the financing Agreement as a consequence
of Pulsars default in order to afford Pulsar an opportunity to reorganize its
affairs and to pay the indebtedness owing to IBM Credit in accordance with the
terms of the Financing Agreement; and
WHEREAS, IBM Credit agrees to forbear according to the terms and conditions
set forth herein.
NOW, THEREFORE, in consideration of the foregoing and the promises
hereinafter set forth and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, Pulsar, the Guarantors, and IBM
Credit agree as follows:
1. Pulsar acknowledges that it was required to maintain the financial
covenants set forth in Attachment A to the Financing Agreement for the fiscal
quarter ending March 31, 1998,
<PAGE>
and that Pulsar was required to maintain such financial covenants at all times.
Pulsar further acknowledges its actual attainment was as follows:
<TABLE>
<CAPTION>
Covenant Covenant
Covenant Requirement Actual
-------------------------------------------------------------------------------
<S> <C> <C> <C>
(a) Revenue on an Annual Basis to Greater than Zero and
Working Capital Equal to or Less than
15.0:1.0 36.23:10
(b) Net Profit after Tax to Revenue Equal to or Greater than
-0.50 percent -5.20 percent
(c) Total Liabilities to Tangible Greater than Zero and
Net Worth Equal to or Less than 17.0:10 -12.69:1.0
</TABLE>
and therefore, that it is currently in default of the required financial
covenants.
2. Each Guarantor acknowledges that Pulsar is currently in default of its
financial covenants as set forth in Paragraph 1 above. Each Guarantor hereby
acknowledges, reaffirms and restates his or her agreement to personally
unconditionally guarantee the obligations of Pulsar to IBM Credit as set forth
in the Guaranty (by Individual and as modified by this Forbearance Agreement.
3. IBM Credit is willing to forbear, in accordance with the terms of this
Agreement and as long as all the Forbearance Conditions set forth in Paragraphs
7 hereof are met, from exercising remedies available to it as a result of
Pulsar's default under the Financing Agreement.
4. Pulsar agrees that no third party possesses a lien or will be given
any security interest in the assets of Pulsar until the termination of this
Forbearance Agreement except with prior written approval of IBM Credit.
5. IBM Credit's Monitoring and Inspection. In addition to providing to
IBM Credit the information, notices and reports set forth in the Financing
Agreement, Pulsar shall provide to IBM Credit monthly financial reports by the
15th business day of each month for the preceding month. Additionally, IBM
Credit must receive current accounts receivable reports, accounts payable
reports and inventory reports by the 5th business day of each month, for the
preceding month together with any additional reports IBM Credit may reasonably
request within 5 business days of such request.
6. Pulsar shall reimburse IBM Credit for all collection costs and
expenses including reasonable attorneys fees, including but not limited to
corporate counsel fees, arising out of these defaults.
Page 2 of 8
<PAGE>
7. Conditions to Forbearance. The following conditions shall constitute
Forbearance Conditions, the satisfaction of each and every one of which during
the Forbearance Period shall be a condition to the agreement of IBM Credit to
forbear as set forth in Paragraph 3 of this Agreement.
(a) Pulsar and each Guarantor duly and punctually observes, performs
and discharges each and every obligation and covenant on its, his, or her part
to be performed under this Agreement.
(b) IBM Credit completes a satisfactory audit of the business records
of Pulsar. "Satisfactory" shall mean that (i) Pulsar's representation of its
financial condition is materially correct, and (ii) Pulsar's business records do
not indicate any diversion of corporate assets other than in the ordinary course
of business.
(c) No default occurs other than those set forth in Paragraph 1 of
this Agreement that are in existence on the date hereof.
(d) No Guarantor shall revoke or attempt to revoke or terminate his
or her Guaranty.
(e) No representation or warranty made by Pulsar or any Guarantor in
this Agreement proves to have been false or misleading in any material respect.
(f) Pulsar complies at all times with the provisions of Paragraphs 5
and 6 hereof.
(g) Pulsar shall maintain Aggregate Advances outstanding under the
financing Agreement in accordance with the schedule set forth below:
<TABLE>
<S> <C>
Period: Amount:
From the date hereof until August 31, 1998 Borrowing Base* plus $1,300,000
From September 1, 1998 to and including September 30, 1998 Borrowing Base plus $1,000,000
From October 1, 1998 to and including November 1, 1998 Borrowing Base plus $900,000
From November 2, 1998 to and including November 30, 1998 Borrowing Base plus $800,000
From December 1, 1998 to and including January 2, 1999 Borrowing Base plus $700,000
From January 3, 1999 to and including January 31, 1999 Borrowing Base plus $600,000
From February 1, 1999 to and including February 28, 1999 Borrowing Base plus $500,000
From March 1, 1999 to and including March 31, 1999 Borrowing Base plus $400,000
Thereafter Borrowing Base
</TABLE>
*Borrowing Base refers to the Borrowing Base established as a percentage of
Inventory and Accounts as set forth in Attachment A to the Financing Agreement.
Page 3 of 8
<PAGE>
8. Termination of Forbearance. In the event that any one or more of the
Forbearance Conditions is not satisfied, IBM Credit's agreement to forbear as
set forth in Paragraph 3 of this Agreement shall, at IBM Credit's election but
without further notice to or demand upon Pulsar, terminate, and IBM Credit shall
thereupon have and may exercise from time to time all of the remedies available
to it under the Financing Agreement, this Agreement and at law or in equity as a
consequence of an Event of Default.
9. Release of Collateral. After March 31, 1999 and upon confirmation by
IBM Credit that (i) Pulsar at all time complied with the foregoing conditions to
forbearance and (ii) that, in the sole determination of IBM Credit (a) there
exists no default under the Financing Agreement and (b) no Shortfall (as defined
therein) exists, IBM Credit agrees to release its security interest in any and
all collateral pledged by the Guarantors.
10. Amendments to Financing Agreement.
(a) The definition of Termination Date set forth in the Financing
Agreement is deleted in its entirety, substituting in lieu thereof, the
following:
""Termination Date": shall mean October 30, 1999 or each anniversary thereof or
such other date as IBM Credit and Customer may agree to in writing from time to
time."
(b) As of the date hereof, the Financial Covenants set forth in
Attachment A to the Financing Agreement are deleted in their entirety,
substituting in lieu thereof, the following:
Covenant
Covenant Requirement
- -------- -----------
Net Profit after Tax to Revenue Greater than zero percent
(c) Section 7.1 of the Financing Agreement is hereby amended by
inserting immediately following the last sentence of the last paragraph thereof,
the following additional sentence:
"Customer shall cause the audited Financial Statements and
accompanying documents set forth in clause 7.1 (A)(i) to be delivered directly
by the Auditors to IBM Credit only via first class mail."
(d) Section 3.1 of the Financing Agreement is hereby amended by
inserting immediately following subsection v thereof, the following:
"(Y) Accounts arising from Naval Air Warfare Center AD, Patuxent River, MD
to the extent that (i) such Accounts remain unbilled for sixty (60) days or
more from date of invoice;
Page 4 of 8
<PAGE>
and (ii) to the extent that such Accounts unbilled sixty days or more exceed in
aggregate ten percent of all Accounts arising from Pax River but only to the
extent of such excess."
11. Representations and Warranties of Pulsar and each Guarantor. Pulsar
and each Guarantor represents and warrants that:
(a) No default exists under the Financing Agreement, except for those
set forth in Paragraph 1 of this Agreement that are in existence on the dab
hereof.
(b) Subject to the existence of the defaults specified in Paragraph 1
of this Agreement, the representations and warranties of Pulsar contained in the
Financing Agreement were true and correct in all material respects when made and
continue to be true and correct in all material respects on the date hereof.
(c) The execution, delivery and performance by Pulsar of this
Agreement and the consummation of the transactions contemplated hereby are
within the corporate power of Pulsar, have been duly authorized by all necessary
corporate action on the part of Pulsar and do not result in a breach of or
constitute a default under any agreement or instrument to which Pulsar is a
party or by which it or any of its properties are bound.
(d) This Agreement constitutes a legal, valid and binding obligation
of Pulsar enforceable against Pulsar in accordance with its terms.
(e) Each party is entering into this Agreement freely and voluntarily
with the advice of legal counsel of its own choosing.
(f) Each party has freely and voluntarily agreed to the releases,
waivers and undertakings set forth in this Agreement.
12. Reaffirmation of Guaranty. Each Guarantor hereby ratifies and
reaffirms the validity, legality and enforceability of his or her Guaranty and
agrees that his or her Guaranty is and shall remain in full force and in effect
until all obligations of Pulsar to IBM Credit hereunder shall have been paid in
full.
13. Waiver of Limitations Period. Pulsar and each Guarantor hereby
severally waive the benefit of any statute of limitations that might otherwise
bar the recovery of any amount due IBM Credit from any one or more of them.
14. Relationship of Parties; No Third Party Beneficiaries. Nothing in this
Agreement shall be construed to alter the existing debtor-creditor relationship
between Pulsar and IBM Credit. Nor is this Agreement intended to change or
affect in any way the relationship between IBM Credit and any Guarantor to one
that is other than a debtor-creditor relationship. This Agreement is not
intended, nor shall it be construed to create, a partnership or joint venture
Page 5 of 8
<PAGE>
relationship between or among any of the parties hereto. No Person other than a
party hereto is intended to be a beneficiary hereof, and no person other than a
party hereto shall be authorized to rely upon the contents of this Agreement.
15. Entire Agreement; Modification of Agreement. This Agreement and the
Financing Agreement constitute the entire understanding of the parties with
respect to the subject matter hereof and thereof. This Agreement may not be
modified, altered or amended except by agreement in writing signed by all the
parties hereto.
16. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of New York Pulsar hereby waives any
right to change the venue of any action brought by IBM Credit.
17. Nonwaiver of Default. Neither this Agreement nor IBM Credit's
forbearance hereunder shall be deemed a waiver of or consent to the defaults
referenced in Paragraph 1 of this Agreement. Pulsar and each Guarantor agree
that such defaults shall not be deemed to have been waived, released or cured by
virtue of IBM Credit's agreement to forbear pursuant to the terms of this
Agreement or the execution of this Agreement.
18. No Novation, etc. This Agreement is not intended to be, nor shall it
be construed to create, a novation or accord and satisfaction, and except as
otherwise expressly stated herein, the Financing Agreement remains in full force
and effect. Notwithstanding any prior mutual temporary disregard of any of the
terms of the Financing Agreement, the parties agree that the terms of the
Financing Agreement shall be strictly adhered to on and after the date hereof
except as expressly modified by this Agreement.
19. Counterparts; Waivers of Notice of Acceptance. This Agreement may be
executed in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed shall constitute an
original, but all of which taken together shall be one and the same instrument.
In proving this Agreement or the Financing Agreement, it shall not be necessary
to produce or account for more than one such counterpart signed by the party
against whom enforcement is sought. Notice of IBM Credit's acceptance hereof is
hereby waived.
20. The parties hereby acknowledge and agree as follows:
(a) Pulsar is indebted to IBM Credit under the Financing Agreement;
(b) The principal amount owing by Pulsar to IBM Credit, as of the
date hereof is currently $11,930240.68;
Page 6 of 8
<PAGE>
(c) The loan evidenced by the Financing Agreement is in default and
has been in default since October 30,1997,
(d) Pulsar's obligations under the Financing Agreement are secured by
security interests in all of Pulsar's inventory, equipment, accounts receivable,
chattel paper, contract rights, documents, instruments, general intangibles and
other items of personal property;
(e) Pulsar and IBM Credit agree to defer exercise of IBM Credit's
remedies available to it as a result of the defaults set forth in Paragraph 1
until May 7,1999 solely to give Pulsar the ability to reorganize its affairs;
(f) But for the forbearance and other considerations made by IBM
Credit under this Agreement, Pulsar would have no ability to reorganize its
affairs;
(g) Pulsar shall not file any bankruptcy in bad faith; and
(h) IBM Credit shall be entitled, to the extent permitted by law, to
relief from the automatic stay imposed by 11 USC (S)362 on or against the
exercise of any and all rights and remedies available to IBM Credit under this
Agreement or the Financing Agreement upon the filing of a bankruptcy case by or
against Pulsar; Pulsar hereby stipulates that it shall not oppose any motion for
relief from the automatic stay brought by IBM Credit.
21. JURY TRIAL WAIVER. IBM CREDIT, PULSAR AND EACH GUARANTOR HEREBY
IRREVOCABLY WAIVE THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING
(INCLUDING ANY COUNTERCLAIM) OF ANY TYPE IN WHICH THEY ARE PARTIES AS TO ALL
MATTERS ARISING DIRECTLY OR INDIRECTLY OUT OF THIS AGREEMENT OR ANY DOCUMENT,
INSTRUMENT OR AGREEMENT EXECUTED IN CONNECTION HEREWITH.
22. RELEASE OF CLAIMS. TO INDUCE IBM CREDIT TO ENTER INTO THIS AGREEMENT,
PULSAR AND EACH GUARANTOR EACH HEREBY RELEASES, ACQUITS AND FOREVER DISCHARGES
IBM CREDIT AND IBM CREDITS OFFICERS, DIRECTORS, AGENTS, EMPLOYEES, SUCCESSORS
AND ASSIGNS FROM ALL LIABILITIES, CLAIMS, DEMANDS, ACTIONS OR CAUSES OF ACTIONS
OF ANY KIND (IF THERE BE ANY), WHETHER ABSOLUTE OR CONTINGENT, DUE OR TO BECOME
DUE, DISPUTED OR UNDISPUTED, LIQUIDATED OR UNLIQUIDATED, AT LAW OR IN EQUITY,
THAT ANY ONE OR MORE OF THEM NOW HAVE OR EVER HAVE HAD AGAINST IBM CREDIT,
WHETHER ARISING UNDER OR IN CONNECTION WITH THE FINANCING AGREEMENT, THIS
AGREEMENT, THE GUARANTY OR OTHERWISE.
IN WITNESS WHEREOF, the parties hereto have read this entire Agreement and
have caused this Agreement to be duly executed and delivered on the date first
written above.
Page 7 of 8
<PAGE>
ATTEST: PULSAR DATA SYSTEMS, INCORPORATED
[AUTHORIZED SIGNATORY] By: /s/ WILLIAM W. DAVIS, SR.
- ---------------------- -----------------------------
Secretary Title: President/CEO
[Corporate Seal]
WILLIAM W. DAVIS, SR. (GUARANTOR)
By: /s/ WILLIAM W. DAVIS, SR.
------------------------------
Title: President/CEO
LILLIAN A. DAVIS (GUARANTOR)
By: /s/ LILLIAN A. DAVIS
-------------------------------
Title: Executive V. President
IBM CREDIT CORPORATION
By:
----------------------------------
Title:
-------------------------------
Page 8 of 8
<PAGE>
Exhibit 10.29
BUSINESS LOAN AGREEMENT
<TABLE>
<CAPTION>
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<S> <C> <C> <C> <C> <C> <C> <C> <C>
Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials
$3,800,000.00 09-29-1998 02-28-2000 0221440309 RCC4a CBL31 SG
- ------------------------------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan
or item.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Borrower: Litronic Industries, Inc. Lender: BYL BANK GROUP
2030 Main Street #1250 Costa Mesa Office
Irvine, CA 92614 1700 Adams Ave. Ste. 100
Costa Mesa, CA 92626
================================================================================
THIS BUSINESS LOAN AGREEMENT between Litronic Industries, Inc. ("Borrower") and
BYL BANK GROUP ("Lender") is made and executed on the following terms and
conditions. Borrower has received prior commercial loans from Lender or has
applied to Lender for a commercial loan or loans and other financial
accommodations, including those which may be described on any exhibit or
schedule attached to this Agreement. All such loans and financial
accommodations, together with all future loans and financial accommodations from
Lender to Borrower, are referred to in this Agreement individually as the "Loan"
and collectively as the "Loans." Borrower understands and agrees that: (a) in
granting, renewing, or extending any Loan, Lender is relying upon Borrower's
representations, warranties and agreements, as set forth in this Agreement; (b)
the granting, renewing, or extending of any Loan by Lender at all times shall be
subject to Lender's sole judgment and discretion; and (c) all such Loans shall
be and shall remain subject to the following terms and conditions of this
Agreement.
TERM. This Agreement shall be effective as of September 29, 1998, and shall
continue thereafter until all Indebtedness of Borrower to Lender has been
performed in full and the parties terminate this Agreement in writing.
DEFINITIONS. The following words shall have the following meanings when used in
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All
references to dollar amounts shall mean amounts in lawful money of the United
States of America.
AGREEMENT. The word "Agreement" means this Business Loan Agreement, as
this Business Loan Agreement may be amended or modified from time to time,
together with all exhibits and schedules attached to this Business Loan
Agreement from time to time.
BORROWER. The word "Borrower" means Litronic Industries, Inc.. The word
"Borrower" also includes, as applicable, all subsidiaries and affiliates of
Borrower as provided below in the paragraph titled "Subsidiaries and
Affiliates."
<PAGE>
09-29-1998 BUSINESS LOAN AGREEMENT Page 2
Loan No. 0221440309 (Continued)
================================================================================
CERCLA. The word "CERCLA" means the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended.
COLLATERAL. The word "Collateral" means and includes without limitation
all property and assets granted as collateral security for a Loan, whether
real or personal property, whether granted directly or indirectly, whether
granted now or in the future, and whether granted in the form of a security
interest, mortgage, deed of trust, assignment, pledge, chattel mortgage,
chattel trust, factor's lien, equipment trust, conditional sale, trust
receipt, lien, charge, lien or title retention contract, lease or
consignment intended as a security device, or any other security or lien
interest whatsoever, whether created by law, contract, or otherwise.
ERISA. The word "ERISA" means the Employee Retirement Income Security Act
of 1974, as amended.
EVENT OF DEFAULT. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below in the section
titled "EVENTS OF DEFAULT."
GRANTOR. The word "Grantor' means and includes without limitation each and
all of the persons or entities granting a Security Interest in any
Collateral for the Indebtedness, including without limitation all Borrowers
granting such a Security Interest.
GUARANTOR. The word "Guarantor" means and includes without limitation each
and all of the guarantors, sureties, and accommodation parties in
connection with any Indebtedness.
INDEBTEDNESS. The word "Indebtedness" means and includes without
limitation all Loans, together with all other obligations, debts and
liabilities of Borrower to Lender, or any one or more of them, as well as
all claims by Lender against Borrower, or any one or more of them; whether
now or hereafter existing, voluntary or involuntary, due or not due,
absolute or contingent, liquidated or unliquidated; whether Borrower may be
liable individually or jointly with others; whether Borrower may be
obligated as a guarantor, surety, or otherwise; whether recovery upon such
Indebtedness may be or hereafter may become barred by any statute of
limitations; and whether such Indebtedness may be or hereafter may become
otherwise unenforceable.
LENDER. The word "Lender" means WILMINGTON TRUST COMPANY, its successors
and assigns.
LOAN. The word "Loan" means and includes without limitation any and all
commercial loans and financial accommodations from Lender to Borrower,
whether now or hereafter existing, and however evidenced, including without
limitation those loans and financial
<PAGE>
09-29-1998 BUSINESS LOAN AGREEMENT Page 3
Loan No. 0221440309 (Continued)
================================================================================
accommodations described herein or described on any exhibit or schedule
attached to this Agreement from time to time.
NOTE. The word "Note" means and includes without limitation Borrower's
promissory note or notes, in any, evidencing Borrower's Loan obligations in
favor of Lender, as well as any substitute, replacement or refinancing note
or notes therefor.
PERMITTED LIENS. The words "Permitted Liens" mean: (a) liens and security
interests securing indebtedness owned by Borrower to Lender; (b) liens for
taxes, assessments, or similar charges either not yet due or being
contested in good faith; (c) liens of materialmen, mechanics, warehousemen,
or carriers, or other like liens arising in the ordinary course of business
and security obligations which are not yet delinquent; (d) purchase money
liens or purchase money security interests upon or in any property acquired
or held by Borrower in the ordinary course of business to secure
indebtedness outstanding on the date of this Agreement or permitted to be
incurred under the paragraph of this Agreement titled "Indebtedness and
Liens"; (e) liens and security interests which, as of the date of this
Agreement, have been disclosed to and approved by the Lender in writing;
and (f) those liens and security interests which in the aggregate
constitute an immaterial and insignificant monetary amount with respect to
the net value of Borrower's assets.
RELATED DOCUMENTS. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages, deeds
of trust, and all other instruments, agreements and documents, whether now
or hereafter existing, executed in connection with the indebtedness.
SECURITY AGREEMENT. The words "Security Agreement" mean and include
without limitation any agreements, promises, covenants, arrangements,
understandings or other agreements, whether created by law, contract, or
otherwise, evidencing, governing, representing, or creating a Security
Interest.
SECURITY INTEREST. The words "Security Interest" mean and include without
limitation any type of collateral security, whether in the form of a lien,
charge, mortgage, deed of trust, assignment, pledge, chattel mortgage,
chattel trust, factor's lien, equipment trust, conditional sale, trust
receipt, lien or title retention contract, lease or consignment intended as
a security device, or any other security or lien interest whatsoever,
whether created by law, contract, or otherwise.
SARA. The word "SARA" means the Superfund Amendments and Reauthorization
Act of 1996 as now or hereafter amended.
<PAGE>
09-29-1998 BUSINESS LOAN AGREEMENT Page 4
Loan No. 0221440309 (Continued)
================================================================================
CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make the initial
Loan Advance and each subsequent Loan Advance under this Agreement shall be
subject to the fulfillment to Lender's satisfaction of all of the conditions set
forth in this Agreement and in the Related Documents.
LOAN DOCUMENTS. Borrower shall provide to Lender in form satisfactory to
Lender the following documents for the Loan: (a) the Note; (b) Security
Agreements granting to Lender security interests in the Collateral; (c)
Financing Statements perfecting Lender's Security Interests; (d) evidence
of insurance as required below; and (e) any other documents required under
this Agreement or by Lender or its counsel, including without limitation
any guaranties described below.
BORROWER'S AUTHORIZATION. Borrower shall have provided in form and
substance satisfactory to Lender properly certified resolutions, duly
authorizing the execution and delivery of this Agreement, the Note and the
Related Documents, and such other authorizations and other documents and
instruments as Lender or its counsel, in their sole discretion, may
require.
PAYMENT OF FEES AND EXPENSES. Borrower shall have paid to Lender all fees,
charges, and other expenses which are then due and payable as specified in
this Agreement or any Related Document.
REPRESENTATIONS AND WARRANTIES. The representations and warranties set
forth in this Agreement, in the Related Documents, and in any document or
certificate delivered to Lender under this Agreement are true and correct.
NO EVENT OF DEFAULT. There shall not exist at the time of any advance a
condition which would constitute an Event of Default under this Agreement.
REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as
of the date of this Agreement, as of the date of each disbursement of Loan
proceeds, as of the date of any renewal, extension or modification of any Loan,
and at all times any indebtedness exists:
ORGANIZATION. Borrower is a corporation which is duly organized, validly
existing, and in good standing under the laws of the State of Delaware and
is validly existing and in good standing in all states in which Borrower is
doing business. Borrower has the full power and authority to own its
properties and to transact the businesses in which it is presently engaged
or presently proposes to engage. Borrower also is duly qualified as a
foreign corporation and is in good standing in all states in which the
failure to so qualify would have a material adverse effect on its
businesses or financial condition.
<PAGE>
09-29-1998 BUSINESS LOAN AGREEMENT Page 5
Loan No. 0221440309 (Continued)
================================================================================
AUTHORIZATION. The execution, delivery, and performance of this Agreement
and all Related Documents by Borrower, to the extent to be executed,
delivered or performed by Borrower, have been duly authorized by all
necessary action by Borrower; do not require the consent or approval of any
other person, regulatory authority or governmental body; and do not
conflict with, result in a violation of, or constitute a default under (a)
any provision of its articles of incorporation or organization, or bylaws,
or any agreement or other instrument binding upon Borrower or (b) any law,
governmental regulation, court decree, or order applicable to Borrower.
FINANCIAL INFORMATION. Each financial statement of Borrower supplied to
Lender truly and completely disclosed Borrower's financial condition as of
the date of the statement, and there has been no material adverse change in
Borrower's financial condition subsequent to the date of the most recent
financial statement supplied to Lender. Borrower has no material
contingent obligations except as disclosed in such financial statements.
LEGAL EFFECT. This Agreement constitutes, and any instrument or agreement
required hereunder to be given by Borrower when delivered will constitute,
legal, valid and binding obligations of Borrower enforceable against
Borrower in accordance with their respective terms.
PROPERTIES. Except as contemplated by this Agreement or as previously
disclosed in Borrower's financial statements or in writing to Lender and as
accepted by Lender, and except for property tax liens for taxes no
presently due and payable, Borrower owns and has good title to all of
Borrower's properties free and clear of all Security Interests, and has not
executed any security documents or financing statements relating to such
properties. All of Borrower's properties are titled tin Borrower's legal
name, and Borrower has not used, or filed a financing statement under, any
other name for at least the last five (5) years.
HAZARDOUS SUBSTANCES. The term "hazardous waste," "hazardous substance,"
"disposal," "release," and "threatened release," as used in this Agreement,
shall have the same meanings as set forth in the "CERCLA," "SARA," the
Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq.,
the Resource Conservation and Recovery Act, 49 U.S.C. Section 69801, et
seq., or other applicable state or Federal laws, rules or regulations
adopted pursuant to any of the foregoing. Except as disclosed to and
acknowledged by Lender in writing, Borrower represents and warrants that:
(a) During the period of Borrower's ownership of the properties, there has
been no use, generation, manufacture, storage, treatment, disposal,
release, or threatened release of any hazardous waste or substance on,
under, about or from the properties by any prior owners or occupants of any
of the properties, or (ii) any actual or threatened litigation or claims of
any kind by any person relating to such matters. (C) Neither Borrower nor
any tenant, contractor, agent or other authorized user of any of the
properties shall use, generate, manufacture, store, treat, dispose of, or
release any
<PAGE>
09-29-1998 BUSINESS LOAN AGREEMENT Page 6
Loan No. 0221440309 (Continued)
================================================================================
hazardous waste or substance on, about or from any of the properties; and
any such activity shall be conducted in compliance with all applicable
federal, state, and local laws, regulations, and ordinances, including
without limitation those laws, regulations and ordinances described above.
Borrower authorizes Lender and its agents to enter upon the properties to
make such inspections and tests as Lender may deem appropriate to determine
compliance of the properties with this section of the Agreement. Any
inspections or tests made by Lender shall be at Borrower's expense and for
Lender's purposes only and shall not be construed to create any
responsibility or liability on the part of Lender to Borrower or to any
other person. The representations and warranties contained herein are based
on Borrower's due diligence in investigating the properties for hazardous
waste and hazardous substances. Borrower hereby (a) releases and waives any
future claims against Lender for indemnity or contribution in the event
Borrower becomes liable for cleanup or other costs under any such laws, and
(b) agrees to indemnify and hold harmless Lender against any and all
claims, losses, liabilities, damages, penalties, and expenses which Lender
may directly or indirectly sustain or suffer resulting from a breach of
this section of the Agreement or as a consequence of any use, generation,
manufacture, storage, disposal, release or threatened release occurring
prior to Borrower's ownership or interest in the properties, whether or not
the same was or should have been known to Borrower. The provisions of this
section of the Agreement, including the obligation to indemnify, shall
survive the payment of the indebtedness and the termination or expiration
of this Agreement and shall not be affected by Lender';s acquisition of any
interest in any of the properties, whether by foreclosure or otherwise.
LITIGATION AND CLAIMS. No litigation, claim, investigation, administrative
proceeding or similar action (including those for unpaid taxes) against
Borrower is pending or threatened, and no other event has occurred which
may materially adversely affect Borrower's financial condition or
properties, other than litigation, claims, or other events, if any, that
have been disclosed to and acknowledged by Lender in writing.
TAXES. To the best of Borrower's knowledge, all tax returns and reports of
Borrower that are or were required to be filed, have been filed, and all
taxes, assessments and other governmental charges have been paid in full,
except those presently being or to be contested by Borrower in good faith
in the ordinary course of business and for which adequate reserves have
been provided.
LIEN PRIORITY. Unless otherwise previously disclosed to Lender in writing,
Borrower has not entered into or granted any Security Agreements, or
permitted the filing or attachment of any Security Interests on or
affecting any of the Collateral directly or indirectly securing repayment
of Borrower's Loan and Note, that would be prior or that may in any way be
superior to Lender's Security Interests and rights in and to such
Collateral.
<PAGE>
09-29-1998 BUSINESS LOAN AGREEMENT Page 7
Loan No. 0221440309 (Continued)
================================================================================
BINDING EFFECT. This Agreement, the Note, all Security Agreements directly
or indirectly securing repayment of Borrower's Loan and Note and all of the
Related Documents are binding upon Borrower as well as upon Borrower's
successors, representatives and assigns, and are legally enforceable in
accordance with their respective terms.
COMMERCIAL PURPOSES. Borrower intends to use the Loan proceeds solely for
business or commercial related purposes.
EMPLOYEE BENEFIT PLANS. Each employee benefit plan as to which Borrower
may have any liability complies in all material respects with all
applicable requirements of law and regulations, and (i) no Reportable Event
nor Prohibited Transaction (as defined in ERISA) has occurred with respect
to any such plan, (ii) Borrower has not withdrawn from any such plan or
initiated plan or initiated steps to do so, and (iii) no steps have bene
taken to terminate any such plan.
LOCATION OF BORROWER'S OFFICES AND RECORDS. Borrower's place of business,
or Borrower's Chief executive office, if Borrower has more than one place
of business, is located at 2030 Main Street #1250, Irvine, CA 92614.
Unless Borrower has designated otherwise in writing this location is also
the office or offices where Borrower keeps its records concerning the
Collateral.
YEAR 2000. Borrower warrants and represents that all software utilized in
the conduct of Borrower's business will have appropriate capabilities and
compatibility for operation to handle calendar dates falling on or after
January 1, 2000, and all information pertaining to such calendar dates, in
the same manner and with the same functionality as the software does
respecting calendar dates falling on or before December 31, 1999. Further,
Borrower warrants and represents that the data-related user interface
functions, data-fields, and data-related program instructions and functions
of the software include the indication of the century.
INFORMATION. All information heretofore or contemporaneously herewith
furnished by Borrower to Lender for the purposes of or in connection with
this Agreement or any transaction contemplated hereby is, and all
information hereafter furnished by or on behalf of Borrower to Lender will
be, true and accurate in every material respect on the date as of which
such information is dated or certified; and none of such information is or
will be incomplete by omitting to state any material fact necessary to make
such information not misleading.
SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Borrower understands and
agrees that Lender, without independent investigation, is relying upon the
above representations and warranties in extending Loan Advances to
Borrower. Borrower further agrees that the
<PAGE>
09-29-1998 BUSINESS LOAN AGREEMENT Page 8
Loan No. 0221440309 (Continued)
================================================================================
foregoing representations and warranties shall be continuing in nature and
shall remain in full force and effect until such time as Borrower's
Indebtedness shall be paid in full, or until this Agreement shall be
terminated in the manner provided above, whichever is the last to occur.
AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while
this Agreement is in effect, Borrower will:
LITIGATION. Promptly inform Lender in writing of (a) all material adverse
changes in Borrower's financial condition, and (b) all existing and all
threatened litigation, claims, investigations, administrative proceedings
or similar actions affecting Borrower or any Guarantor which would
materially affect the financial condition of Borrower or the financial
condition of any Guarantor.
FINANCIAL RECORDS. Maintain its books and records in accordance with
generally accepted accounting principles, applied on a consistent basis,
and permit Lender to examine and audit Borrower's books and records at all
reasonable times.
ADDITIONAL INFORMATION. Furnish such additional information and
statements, lists of assets and liabilities, agings of receivables and
payables, inventory schedules, budgets, forecasts, tax returns, and other
reports with respect to Borrower's financial condition and business
operations as Lender may request from time to time.
INSURANCE. Maintain fire and other risk insurance, public liability
insurance, and such other insurance as Lender may require with respect to
Borrower's properties and operations, in form, amounts, coverages and with
insurance companies reasonably acceptable to Lender. Borrower, upon request
of Lender, will deliver to Lender from time to time the policies or
certificates of insurance in form satisfactory to Lender, including
stipulations that coverages will not be cancelled or diminished without at
least twenty (20) days' prior written notice to Lender. Each insurance
policy also shall include an endorsement providing that coverage in favor
of Lender will not be impaired in any way by any act, omission or default
of Borrower or any other person. In connection with all policies covering
assets in which Lender holds or is offered a security interest for the
Loans, Borrower will provide lender with such loss payable or other
endorsements as Lender may require.
INSURANCE REPORTS. Furnish to Lender, upon request of Lender, reports on
each existing insurance policy showing such information as Lender may
reasonably request, including without limitation the following: (a) the
name of the insurer; (b) the risks insured; (c) the amount of the policy;
(d) the properties insured; (e) the then current property values on the
basis of which insurance has been obtained, and the manner of determining
those values; and (f) the expiration date of the policy. In addition, upon
request of Lender (however not more
<PAGE>
09-29-1998 BUSINESS LOAN AGREEMENT Page 9
Loan No. 0221440309 (Continued)
================================================================================
often than annually), Borrower will have an independent appraiser
satisfactory to Lender determine, as applicable, the actual cash value or
replacement cost of any Collateral. The cost of such appraisal shall be
paid by Borrower.
OTHER AGREEMENTS. Comply with all terms and conditions of all other
agreements, whether now or hereafter existing, between Borrower and any
other party and notify Lender immediately in writing of any default in
connection with any other such agreements.
LOAN PROCEEDS. Use all Loan proceeds solely for Borrower's business
operations, unless specifically consented to the contrary by Lender in
writing.
TAXES, CHARGES AND LIENS. Pay and discharge when due all of its
indebtedness and obligations, including without limitation all assessments,
taxes, governmental charges, levies and liens, of every kind and nature,
imposed upon Borrower or its properties, income, or profits, prior to the
date on which penalties would attach, and all lawful claims that, if
unpaid, might become a lien or charge upon any of Borrower's properties,
income, or profits. Provided however, Borrower will not be required to pay
and discharge any such assessment, tax, charge, levy, lien or claim so long
as (a) the legality of the same shall be contested in good faith by
appropriate proceedings, and (b) Borrower shall have established on its
books adequate reserves with respect to such contested assessment, tax,
charge, levy, lien, or claim in accordance with generally accepted
accounting practices. Borrower, upon demand of Lender, will furnish to
Lender evidence of payment of the assessments, taxes, charges, levies,
liens and claims and will authorize the appropriate governmental official
to deliver to Lender at any time a written statement of any assessments,
taxes, charges, levies, liens and claims against Borrower's properties,
income or profits.
PERFORMANCE. Perform and comply with all terms, conditions, and provisions
set forth in this Agreement and in the Related Documents in a timely
manner, and promptly notify Lender if Borrower learns of the occurrence of
any event which constitutes an Event of Default under this Agreement or
under any of the Related Documents.
OPERATIONS. Maintain executive and management personnel with substantially
the same qualifications and experience as the present executive and
management personnel; provide written notice to Lender of any change in
executive and management personnel; conduct its business affairs in a
reasonable and prudent manner and in compliance with all applicable
federal, state and municipal laws, ordinances, rules and regulations
respecting its properties, charters, businesses and operations, including
without limitation, compliance with the American With Disabilities Act and
will all minimum funding standards and other requirements of ERISA and
other laws applicable to Borrower's employee benefit plans.
<PAGE>
09-29-1998 BUSINESS LOAN AGREEMENT Page 10
Loan No. 0221440309 (Continued)
================================================================================
INSPECTION. Permit employees or agents of Lender at any reasonable time to
inspect any and all Collateral for the Loan or Loans and Borrower's other
properties and to examine or audit Borrower's books, accounts, and records
and to make copies and memoranda of Borrower's books, accounts, and
records. If Borrower now or at any time hereafter maintains any records
(including without limitation computer generated records and computer
software programs for the generation of such records) in the possession of
a third party, Borrower, upon request of Lender, shall notify such party to
permit Lender free access to such records at all reasonable times and to
provide Lender with copies of any records it may request, all at Borrower's
expense.
COMPLIANCE CERTIFICATE. Unless waived in writing by Lender, provide Lender
at least annually and at all the time of each disbursement of Loan proceeds
with a certificate executed by Borrower's chief financial officer, or other
officer or person acceptable to Lender, certifying that the representations
and warranties set forth in this Agreement are true and correct as of the
date of the certificate and further certifying that, as of the date of the
certificate, no Event of Default exists under this Agreement.
ENVIRONMENTAL COMPLIANCE AND REPORTS. Borrower shall comply in all
respects with all environmental protection federal, state and local laws,
statutes, regulations and ordinances; not cause or permit to exist, as a
result of an intentional or unintentional action or omission on its part or
on the part of any third party, on property owned and/or occupied by
Borrower, any environmental activity where damage may result to the
environment, unless such environmental activity is pursuant to an din
compliance with the conditions of a permit issued by the appropriate
federal, state or local governmental authorities; shall furnish to Lender
promptly and in any event within thirty (30) days after receipt thereof a
copy of any notice, summons, lien, citation, directive, letter or other
communication from any governmental agency or instrumentality concerning
any intentional or unintentional action or omission on Borrower's part in
connection with any environmental activity whether or not there is damage
to the environment and/or other natural resources.
ADDITIONAL ASSURANCES. Make, execute and deliver to Lender such promissory
notes, mortgages, deeds of trust, security agreements, financing
statements, instruments, documents and other agreements as Lender or its
attorneys may reasonably request to evidence and secure the Loans and to
perfect all Security Interests.
NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this
Agreement is in effect, Borrower shall not, without the prior written consent of
Lender:
INDEBTEDNESS AND LIENS. (a) Except for trade debt incurred in the normal
course of business and indebtedness to Lender contemplated by this
Agreement, create, incur or assume indebtedness for borrowed money,
including capital leases, (b) except as allowed as a
<PAGE>
09-29-1998 BUSINESS LOAN AGREEMENT Page 11
Loan No. 0221440309 (Continued)
================================================================================
Permitted Lien, sell, transfer, mortgage, assign, pledge, lease, grant a
security interest in, or encumber any of Borrower's assets, or (c) sell
with recourse any of Borrower's accounts, except to Lender.
CONTINUITY OF OPERATIONS. (a) Engage in any business activities
substantially different than those in which Borrower is presently engaged,
(b) cease operations, liquidate, merge, transfer, acquire or consolidate
with any other entity, change ownership, change its name, dissolve or
transfer or sell Collateral out of the ordinary course of business, (c) pay
any dividends on Borrower's stock (other than dividends payable in its
stock), provided, however that notwithstanding the foregoing, but only so
long as no Event of Default has occurred and is continuing or would result
from the payment of dividends, if Borrower is a "Subchapter S Corporation"
(as defined in the Internal Revenue Code of 1966, as amended), Borrower may
pay cash dividends on its stock to its shareholders from time to time in
amounts necessary to enable the shareholders to pay income taxes and make
estimated income tax payments to satisfy their liabilities under federal
and state law which arise solely from their status as Shareholders of a
Subchapter S Corporation because of their ownership of shares of stock of
Borrower, or (d) purchase or retire any of Borrower's outstanding shares or
alter or amend Borrower's capital structure.
LOANS, ACQUISITIONS AND GUARANTIES. (a) Loan, invest in or advance money
or assets, (b) purchase, create or acquire any interest in any other
enterprise or entity, or (c) incur any obligation as surety or guarantor
other than int he ordinary course of business.
CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to
Borrower, whether under this Agreement or under any other agreement, Lender
shall have no obligation to make Loan Advances or to disburse Loan proceeds if:
(a) Borrower or any Guarantor is in default under the terms of this Agreement or
any of the Related Documents or any other agreement that Borrower or any
Guarantor has with Lender; (b) Borrower or any Guarantor becomes insolvent,
files a petition in bankruptcy or similar proceedings, or is adjudged a
bankrupt; (c) there occurs a material adverse change in Borrower's financial
condition, in the financial condition of any Guarantor, or in the value of any
Collateral securing any Loan; (d) any Guarantor seeks, claims or otherwise
attempts to limit, modify or revoke such Guarantor's guaranty of the Loan or any
other loan with Lender, or (e) Lender in good faith deems itself insecure, even
though no Event of Default shall have occurred.
RIGHT OF SETOFF. Borrower grants to Lender a contractual security interest in,
and hereby assigns, conveys, delivers, pledges, and transfers to Lender all
Borrower's right, title and interest in and to, Borrower's accounts with Lender
(whether checking, savings, or some other account), including without limitation
all accounts held jointly with someone else and all accounts Borrower may open
in the future, excluding however all IRA and Keogh accounts, and all trust
accounts, and all trust accounts for which the grant of a security interest
would be prohibited by law. Borrower
<PAGE>
09-29-1998 BUSINESS LOAN AGREEMENT Page 12
Loan No. 0221440309 (Continued)
================================================================================
authorizes Lender, to the extent permitted by applicable law, to charge or
setoff all sums owing on the Indebtedness against any and all such accounts.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:
DEFAULT ON INDEBTEDNESS. Failure of Borrower to make any payment when due
on the Loans.
OTHER DEFAULTS. Failure of Borrower or any Grantor to comply with or to
perform when due any other term, obligation, covenant or condition
contained in this Agreement or in any of the Related Documents, or failure
of Borrower to comply with or to perform any other term, obligation,
covenant or condition contained in any other agreement between Lender and
Borrower.
DEFAULT IN FAVOR OF THIRD PARTIES. Should Borrower or any Grantor default
under any loan, extension of credit, security agreement, purchase or sales
agreement, or any other agreement, in favor of any other creditor or person
that may materially affect any of Borrower's property or Borrowers' or any
Grantor's ability to repay the Loans or perform their respective
obligations under this Agreement or any of the Related Documents.
FALSE STATEMENTS. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Borrower or any Grantor under this
Agreement or the Related Documents is false or misleading in any material
respect at the time made or furnished, or becomes false or misleading at
any time thereafter.
DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related
Documents ceases to be in full force and effect (including failure of any
Security Agreement to create a valid and perfected Security Interest) at
any time or for any reason.
INSOLVENCY. The dissolution or termination of Borrower's existence as a
going business, the insolvency of Borrower, the appointment of a receiver
for any part of Borrower's property, any assignment for the benefit of
creditors, any time of creditor workout, or the commencement of any
proceeding under any bankruptcy or insolvency laws by or against Borrower.
CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Borrower, any creditor
of any Grantor against any collateral securing the indebtedness, or by any
governmental agency. This includes a garnishment, attachment, or levy on or
of any of Borrower's deposit accounts with Lender. However, this Event of
<PAGE>
09-29-1998 BUSINESS LOAN AGREEMENT Page 13
Loan No. 0221440309 (Continued)
================================================================================
Default shall not apply if there is a good faith dispute by Borrower or
Grantor, as the case may be, as to the validity or reasonableness of the
claim which is the basis of the creditor or forfeiture proceeding, and if
Borrower or Grantor gives Lender written notice of the creditor or
forfeiture proceeding and furnishes reserves or a surety bond for the
creditor or forfeiture proceeding satisfactory to Lender.
EVENTS AFFECTING GUARANTOR. Any of the proceeding events occurs with
respect to any Guarantor of any of the indebtedness or any Guarantor dies
or becomes incompetent, or revokes or disputes the validity of, or
liability under, any Guaranty of the indebtedness.
CHANGE IN OWNERSHIP. Any change in ownership of twenty-five percent (25%)
or more of the common stock of Borrower.
ADVERSE CHANGE. A material adverse change occurs in Borrower's financial
condition, or Lender believes the prospect of payment or performance of the
indebtedness is impaired.
EVENTS AFFECTING GUARANTOR. Any of the proceeding events occurs with
respect to any Guarantor of any of the indebtedness or any Guarantor dies
or becomes incompetent, or revokes or disputes the validity of, or
liability under, any Guaranty of the indebtedness.
CHANGE IN OWNERSHIP. Any change in ownership of twenty-five percent (25%)
or more of the common stock of Borrower.
ADVERSE CHANGE. A material adverse change occurs in Borrower's financial
condition, or Lender believes the prospect of payment or performance of the
indebtedness is impaired.
INSECURITY. Lender, in good faith, deems itself insecure.
RIGHT TO CURE. If any default, other than a Default on Indebtedness, is
curable and if Borrower or Grantor, as the case may be, has not been given
a notice of a similar default within the preceding twelve (12) months, it
may be cured (and no Event of Default will have occurred) if Borrower or
Grantor, as the case may be, after receiving written notice from Lender
demanding cure of such default: (a) cures the default within fifteen (15)
days; or (b) if the cure requires more than fifteen (15) days, immediately
initiates steps which Lender deems in Lender's sole discretion to be
sufficient to cure the default and thereafter continues and completes all
reasonable and necessary steps sufficient to produce compliance as soon as
reasonably practical.
EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except
where otherwise provided in this Agreement or the Related Documents, all
commitments and obligations of Lender under this Agreement or the Related
Documents or any other agreement immediately will
<PAGE>
09-29-1998 BUSINESS LOAN AGREEMENT Page 14
Loan No. 0221440309 (Continued)
================================================================================
terminate (including any obligation to make Loan Advances or disbursements),
and, at Lender's option, all indebtedness immediately will become due and
payable, all without notice of any kind to Borrower, except that in the case of
an Event of Default of the type described in the "Insolvency" subsection above,
such acceleration shall be automatic and not optional. In addition, Lender shall
have all the rights and remedies provided in the Related Documents or available
at law, in equity, or otherwise. Except as may be prohibited by applicable law,
all of Lender's rights and remedies shall be cumulative and may be exercised
singularly or concurrently. Election by Lender to pursue any remedy shall not
exclude pursuit of any other remedy, and an election to make expenditures or to
take action to perform an obligation of Borrower or of any Grantor shall not
affect Lender's right to declare a default and to exercise its rights and
remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement.
AMENDMENTS. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to the
matters set forth in this Agreement. No alteration of or amendment to this
Agreement shall be effective unless given in writing and signed by the
party or parties sought to be charged or bound by the alteration or
amendment.
APPLICABLE LAW. This Agreement has been delivered to Lender and accepted
by Lender in the State of California. If there is a lawsuit, Borrower
agrees upon Lender's request to submit to the jurisdiction of the courts of
Orange County, the State of California. This Agreement shall be governed
by and construed in accordance with the laws of the State of California.
CAPTION HEADINGS. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the provisions
of this Agreement.
MULTIPLE PARTIES; CORPORATE AUTHORITY. All obligations of Borrower under
this Agreement shall be joint and several, and all references to Borrower
shall mean each and every Borrower. This means that each of the Borrowers
signing below is responsible for all obligations of this Agreement.
CONSENT TO LOAN PARTICIPATION. Borrower agrees and consents to Lender's
sale or transfer, whether now or later, of one or more participation
interests in the Loans to one or more purchasers, whether related or
unrelated to Lender. Lender may provide, without any limitation
whatsoever, to any one or more purchasers, or potential purchasers, any
information or knowledge Lender may have about Borrower or about any other
matter relating to the Loan, and Borrower hereby waives any rights to
privacy it may have with respect to such matters. Borrower additionally
waives any and all notices of sale of participation interests, as well as
all notices of any repurchase of such participation interests. Borrower
also agrees that the purchasers of any such participation interests will be
<PAGE>
09-29-1998 BUSINESS LOAN AGREEMENT Page 15
Loan No. 0221440309 (Continued)
================================================================================
considered as the absolute owners of such interests in the Loans and will
have all the rights granted under the participation agreement or agreements
governing the sale of such participation interests. Borrower further
waives all rights of offset or counterclaim that it may have now or later
against Lender or against any purchaser of such participation interest and
unconditionally agrees that either Lender or such purchaser may enforce
Borrower's obligation under the Loans irrespective of the failure or
insolvency of any holder of any interest in the Loans. Borrower further
agrees that the purchaser of any such participation interests may enforce
its interests irrespective of any personal claims or defenses that Borrower
may have against Lender.
COSTS AND EXPENSES. Borrower agrees to pay upon demand all of Lender's
expenses, including without limitation reasonable attorneys' fees, incurred
in connection with the preparation , execution, enforcement, modification
and collection of this Agreement or in connection with the Loans made
pursuant to this Agreement. Lender may pay someone else to help collect
the Loans and to enforce this Agreement, and Borrower will pay that amount.
This includes, subject to any limits under applicable law, Lender's
reasonable attorneys' fees and Lender's legal expenses, whether or not
there is a lawsuit, including reasonable attorneys' fees for bankruptcy
proceedings (including efforts to modify or vacate any automatic stay or
injunction), appeals, and any anticipated post-judgment collection
services. Borrower also will pay any court costs, in addition to all other
sums provided by law.
NOTICES. All notices required to be given under this Agreement shall be
given in writing, may be sent by telefacsimille (unless otherwise required
by law), and shall be effective when actually delivered or when deposited
with a nationally recognized overnight courier or deposited in the United
States mail, first class, postage prepaid, addressed to the party to whom
the notice is to be given at the address shown above. Any party may change
its address for notices under this Agreement by giving formal written
notice to the other parties, specifying that the purpose of the notice is
to change the party's address. To the extent permitted by applicable law,
if there is more than one Borrower, notice to any Borrower will constitute
notice to all Borrowers. For notice purposes, Borrower agrees to keep
Lender informed at all times of Borrower's current address(es).
SEVERABILITY. If a court of competent jurisdiction finds any provision of
this Agreement to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible, any
such offending provision shall be deemed to be modified to be within the
limits of enforceability or validity; however, if the offending provision
cannot be so modified, it shall be stricken and all other provisions of
this Agreement in all other respects shall remain valid and enforceable.
<PAGE>
09-29-1998 BUSINESS LOAN AGREEMENT Page 16
Loan No. 0221440309 (Continued)
================================================================================
SUBSIDIARIES AND AFFILIATES OF BORROWER. To the extent the context of any
provisions of this Agreement makes it appropriate, including without
limitation any representation, warranty or covenant, the word "Borrower" as
used herein shall include all subsidiaries and affiliates of Borrower.
Notwithstanding the foregoing however, under no circumstances shall this
Agreement be construed to require Lender to make any Loan or other
financial accommodation to any subsidiary or affiliate of Borrower.
SUCCESSORS AND ASSIGNS. All covenants and agreements contained by or on
behalf of Borrower shall bind its successors and assigns and shall inure to
the benefit of Lender, its successors and assigns. Borrower shall not,
however, have the right to assign its rights under this Agreement or any
interest therein, without the prior written consent of Lender.
SURVIVAL. All warranties, representations, and covenants made by Borrower
in this Agreement or in any certificate or other instrument delivered by
Borrower to Lender under this Agreement shall be considered to have been
relied upon by Lender and will survive the making of the Loan and delivery
to Lender of the Related Documents, regardless of any investigation made by
Lender or on Lender's behalf.
TIME IS OF THE ESSENCE. Time is of the essence in the performance of this
Agreement.
WAIVER. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender. No
delay or omission on the part of Lender in exercising any right shall
operate as a waiver of such right or any other right. A waiver by Lender
of a provision of this Agreement shall not prejudice or constitute a waiver
of Lender's right otherwise to demand strict compliance with that provision
or any other provisions of this Agreement. No prior waiver by Lender, nor
any course of dealing between Lender and Borrower, or between Lender and
any Grantor, shall constitute a waiver of any of Lender's rights or of any
obligations of Borrower or of any Grantor as to any future transactions.
Whenever the consent of Lender is required under this Agreement, the
granting of such consent by Lender in any instance shall not constitute
continuing consent in subsequent instances where such consent is required,
and in all cases such consent may be granted or withheld in the sole
discretion of Lender.
<PAGE>
09-29-1998 BUSINESS LOAN AGREEMENT Page 17
Loan No. 0221440309 (Continued)
================================================================================
BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOAN
AGREEMENT, AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF
SEPTEMBER 29, 1998.
BORROWER:
Litronic Industries, Inc.
By: /s/ Kris Shah
-----------------------
Kris Shah, President
LENDER:
BYL BANK GROUP
By: [AUTHORIZED SIGNATORY]
-----------------------
Authorized Officer
<PAGE>
Exhibit 10.30
PROMISSORY NOTE
<TABLE>
<CAPTION>
Principal Loan Maturity Loan No. Call Collateral Account Other Initials
Date
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$3,800,000.00 09-29-1998 02-28-2000 0221440309 RCC4a CBL31 SG
</TABLE>
Borrower: Litronic Industries, Inc. Lender: BYL BANK GROUP
2030 Main Street #1250 Costa Mesa Office
1700 Adams Ave., Ste. 100
Costa Mesa, CA 92626
Principal Amount: $3,800,000.00 Interest Rate: 6.600% Date of Note:
September 29, 1998
PROMISE TO PAY. Litronic Industries, Inc. ("Borrower") promises to pay to BYL
BANK GROUP ("Lender"), or order, in lawful money of the United States of
America, the principal amount of Three Million Eight Hundred Thousand & 00/100
Dollars ($3,800,000.00), together with interest at the rate of 6.600% on the
unpaid principal balance from September 29, 1998, until paid in full.
PAYMENT. Borrower will pay this loan in one principal payment of $3,800,000.00
plus interest on February 28, 2000. This payment due February 28, 2000, will be
for all principal and accrued interest not yet paid. In addition, Borrower will
pay regular monthly payments of all accrued unpaid interest due as of each
payment date, beginning October 29, 1998, with all subsequent interest payments
to be due on the same day of each month after that. The annual interest rate
for this Note is computed on a 365/360 basis; that is, by applying the ratio of
the annual interest rate over a year of 360 days, multiplied by the outstanding
principal balance, multiplied by the actual number of days the principal balance
is outstanding. Borrower will pay Lender at Lender's address shown above or at
such other place as Lender may designate in writing. Unless otherwise agreed to
required by applicable law, payments will be applied first to accrued unpaid
interest, then to principal, and any remaining amount to any unpaid collection
costs and late charges.
PREPAYMENT; MINIMUM INTEREST CHARGE. Borrower agrees that all loan fees and
other prepaid finance charges are earned fully as of the date of the loan and
will not be subject to refund upon early payment (whether voluntary or as a
result of default), except as otherwise required by law. In any event, even
upon full prepayment of this Note, Borrower understands that Lender is entitled
to a minimum interest charge of $150.00. Other than Borrowers obligation to pay
any minimum interest charge, Borrower may pay without penalty all or a portion
of the amount owed earlier than it is due. Early payments will not, unless
agreed to by Lender in writing, relieve Borrower of Borrower's obligation to
continue to make payments under the payment schedule. Rather, they will reduce
the principal balance due.
LATE CHARGE. If a payment is 10 days or more late, Borrower will be charged
5.000% of the regularly scheduled payment or $5.00, whichever is greater.
<PAGE>
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform when
due any other term, obligation, covenant, or condition contained in this Note or
any agreement related to this Note, or in any other agreement or loan Borrower
has with Lender. (c) Borrower defaults under any loan, extension of credit,
security agreement, purchase or sales agreement, or any other agreement, in
favor of any other creditor or person that may materially affect any of
Borrower's property or Borrower's ability to repay this Note or perform
Borrower's obligations under this Note or any of the Related Documents. (d) Any
representation or statement made or furnished to Lender by Borrower or on
Borrower's behalf is false or misleading in any material respect either now or
at the time made or furnished. (e) Borrower becomes insolvent, a receiver is
appointed for any part of Borrower's property, Borrower makes an assignment for
the benefit of creditors, or any proceeding is commenced either by Borrower or
against Borrower under any bankruptcy or insolvency laws. (f) Any creditor
tries to take any of Borrower's property on or in which Lender has a lien or
security interest. This includes a garnishment of any of Borrower's accounts
with Lender. (g) Any guarantor dies or any of the other events described in
this default section occurs with respect to any guarantor of this Note. (h) A
material adverse change occurs in Borrower's financial condition, or Lender
believes the prospect of payment or performance of the indebtedness is impaired.
(i) Lender in goo faith deems itself insecure.
If any default, other than a default in payment, is curable and if Borrower has
not been given a notice of a breach of the same provision of this Note within
the preceding twelve (12) months, it may be cured (and no event of default will
have occurred) if Borrower, after receiving written notice from Lender demanding
cure of such default: (a) cures the default within fifteen (15) days; or (b) if
the cure required more than fifteen (15) days, immediately initiates steps which
Lender deems in Lender's sole discretion to be sufficient to cure the default
and thereafter continues and completes all reasonable and necessary steps
sufficient to produce compliance as soon as reasonably practical.
LENDER's RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid interest immediately due, without
notice, and then Borrower will pay that amount. Upon Borrower' failure to pay
all amounts declared due pursuant to this section, including failure to pay upon
final maturity, Lender, at its option, may also, if permitted under applicable
law, do one or both of the following: (a) increase the interest rate on this
Note 5.000 percentage points, and (b) add any unpaid accrued interest to
principal and such sum will bear interest therefrom until paid at the rate
provided in this Note (including any increased rate). Lender may hire or pay
someone else to help collect this Note if Borrower does not pay. Borrower also
will pay Lender that amount. This includes, subject to any limits under
applicable law, Lender's attorneys' fees and Lender's legal expenses whether or
not there is a lawsuit, including attorneys' fees and legal expenses for
bankruptcy proceedings (including efforts to modify or vacate any automatic stay
or inunction), appeals, and any anticipated post-judgment collection services.
Borrower also will pay any court costs, in addition to all other sums provided
by law. This Note has been delivered to Lender and accepted by Lender in the
State of California. If there is a lawsuit, Borrower agrees upon Lender's
request to submit to the jurisdiction of the courts of Orange County, the State
of California. This Note shall be governed by and construed in accordance with
the laws of the State of California.
DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $15.00 if Borrower
makes a payment on Borrower's loan and the check or preauthorized charge with
which Borrower pays is later dishonored.
<PAGE>
RIGHT OF SETOFF. Borrower grants to Lender a contractual security interest in,
and hereby assigns, conveys, delivers, pledges, and transfers to Lender all
Borrower's right, title and interest in and to, Borrower's accounts with Lender
(whether checking, savings, or some other account), including without limitation
all accounts held jointly with someone else and all accounts Borrower may open
in the future, excluding however all IRA and Keogh accounts, and all trust
accounts for which the grant of a security interest would be prohibited by law.
Borrower authorizes Lender, to the extent permitted by applicable law, to charge
or setoff all sums owing on this Note against any and all such documents.
GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or
remedies under this note without losing them. Borrower and any other person who
signs, guarantees or endorses this Note, to the extent allowed by law, waive any
applicable statute of limitations, presentment, demand for payment, protest and
notice of dishonor. Upon any change in the terms of this Note, and unless
otherwise expressly stated in writing, no party who signs this Note, whether as
maker, guarantor, accommodation maker or endorser, shall be released from
liability. All such parties agree that Lender may renew or extend (repeatedly
and for any length of time) this loan, or release any party or guarantor or
collateral; or impair, fail to realize upon or perfect Lender's security
interest in the collateral; and take any other action deemed necessary by Lender
without the consent of or notice to anyone. All such parties also agree that
Lender may modify this loan without the consent of or notice to anyone other
than the party with whom the modification is made.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE. BORROWER AGREES TO THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF
A COMPLETED COPY OF THE NOTE.
BORROWER:
Litronic Industries, Inc.
By: /S/ KRIS SHAH
------------------------------------
Kris, Shah, President
<PAGE>
Exhibit 10.31
PROMISSORY NOTE
Principal
$1,400,000.00
Loan date
09-29-1998
Maturity
02-28-2000
Loan No.
0221440308
Call
RCC4a
Collateral
CBL31
Account
Officer
SG
Initials
Borrower: Litronic Industries, Inc. Lender: BYL BANK GROUP
2030 Main Street #1250 Costa Mesa Office
Irvine, CA 92614 1700 Adams Ave. Ste. 100
Costa Mesa, CA 92626
Principal Amount:
$1,400,000.00
<PAGE>
Interest Rate:
6.600%
Date of Note:
September 29, 1998
PROMISE TO PAY. Litronic Industries, Inc. ("Borrower") promises to pay to BYL
BANK GROUP ("Lender"), or order, in lawful money of the United States of
America, the principal amount of One Million Four Hundred Thousand & 00/100
Dollars ($1,400,000.00), together with interest at the rate of 6.600% on the
unpaid principal balance from September 29, 1998, until paid in full.
PAYMENT. Borrower will pay this loan in one principal payment of $1,400,000.00
plus interest on February 28, 2000, will be for all principal and accrued
interest not yet paid. In addition, Borrower will pay regular monthly payments
of all accrued unpaid interest due as of each payment date, beginning October
29, 1998, with all subsequent interest payments to be due on the same day of
each month after that. The annual interest rate for this Note is computed on a
365/360 basis; that is, by applying the ratio of the annual interest rate over a
year of 360 days, multiplied by the outstanding principal balance, multiplied by
the actual number of days the principal balance is outstanding. Borrower will
pay Lender at Lender's address shown above or at such other place as Lender may
designate in writing. Unless otherwise agreed or required by applicable law,
payments will be applied first to accrued unpaid interest, then to principal,
and any remaining amount to any unpaid collection costs and late charges.
PREPAYMENT; MINIMUM INTEREST CHARGE. Borrower agrees that all loan fees and
other prepaid finance charges are earned fully as of the date of the loan and
will not be subject to refund upon early payment (whether voluntary or as a
result of default), except as otherwise required by law. In any event, even
upon full prepayment of this Note, Borrower understands that Lender is entitled
to a minimum interest charge of $150.00. Other than Borrower's obligation to
pay any minimum interest charge, Borrower may pay without penalty all or a
portion of the amount owed earlier than it is due. Early payments will not,
unless agreed to by Lender in writing, relieve Borrower of Borrower's obligation
to continue to make payments under the payment schedule. Rather, they will
reduce the principal balance due.
LATE CHARGE. If a payment is 10 days or more late, Borrower will be charged
5.000% of the regularly scheduled payment of $5.00, whichever is greater.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform when
due any other term, obligation, covenant, or condition contained in this Note or
any agreement related to this Note, or in any other agreement or loan Borrower
has with Lender. (c) Borrower defaults under any loan, extension of credit,
security agreement, purchase or sales agreement, or any other agreement, in
favor of any other creditor or
<PAGE>
person that any materially affect any of Borrower's property or Borrower's
ability to repay this Note or perform Borrower's obligations under this Note or
any of the Dated Documents. (d) Any representation or statement made or
furnished to Lender by Borrower or on Borrower's behalf is false or misleading
in any material respect either now or at the time made or furnished. (e)
Borrower becomes insolvent, a receiver is appointed for any part of Borrower's
property, Borrower makes an assignment for the benefit of creditors, or any
proceeding is commenced either by Borrower or against Borrower under any
bankruptcy or insolvency laws. (f) Any creditor tries to take any of Borrower's
property on or in which Lender has a lien or security interest. This includes a
garnishment of any of Borrower's accounts with Lender. (g) Any guarantor dies or
any of the other events described in this default section occurs with respect to
any guarantor of this Note. (h) A material adverse change occurs in Borrower's
financial condition, or Lender believes the prospect of payment or performance
of the Indebtedness is impaired. (i) Lender in good faith deems itself insecure.
If any default, other than a default in payment, is curable and if Borrower has
not been given a notice of a breach of the same provision of this Note within
the preceding twelve (12) months, it may be cured (and no event of default will
have occurred) if Borrower, after receiving written notice from Lender demanding
cure of such default: (a) cures the default within fifteen (15) days; or (b) if
the cure requires more than fifteen (15) days, immediately initiates steps which
Lender deems in Lender's sole discretion to be sufficient to cure the default
and thereafter continues and completes all reasonable and necessary steps
sufficient to produce compliance as soon as reasonably practical.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid interest immediately due, without
notice, and then Borrower will pay that amount. Upon Borrower's failure to pay
all amounts declared due pursuant to this section, including failure to pay upon
final maturity, Lender, at its option, may also, if permitted under applicable
law, do one or both of the following: (a) increase the interest rate on this
Note 5,000 percentage points, and (b) add any unpaid accrued interest to
principal and such sum will bear interest therefrom until paid at the rate
provided in this Note (including any increased rate). Lender may hire or pay
someone else to help collect this Note if Borrower does not pay. Borrower also
will pay Lender that amount. This includes, subject to any limits under
applicable law, Lender's attorneys' fees and Lender's legal expenses whether or
not there is a lawsuit, including attorneys' fees and legal expenses for
bankruptcy proceedings (including efforts to modify or vacate any automatic stay
or injunction), appeals, and any anticipated post-judgment collection services.
Borrower also will pay any court costs, in addition to all other sums provided
by law. This Note has been delivered to Lender and accepted by Lender in the
State of California. If there is a lawsuit, Borrower agrees upon Lender's
request to submit to the jurisdiction of the courts of Orange County, the State
of California. This Note shall be governed by and construed in accordance with
the laws of the State of California.
DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $15.00 if Borrower
makes a payment on Borrowers' loan and the clerk or preauthorized charge with
which Borrower pays is later dishonored.
<PAGE>
RIGHT OF SETOFF. Borrower grants to Lender a contractual security interest in,
and hereby assigns, conveys, delivers, pledges, and transfers to Lender all
Borrower's right, title and interest in and to, Borrower's accounts with Lender
(whether checking, savings, or some other account), including without limitation
all accounts held jointly with someone else and all accounts Borrower may open
in the future, excluding however all IRA and Keogh accounts, and all trust
accounts for which the grant of a security interest would be prohibited by law.
Borrower authorizes Lender, to the extent permitted by applicable law, to charge
or setoff all sums owing on this Note against any and all such accounts.
GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or
remedies under this Note without losing them. Borrower and any other person who
signs, guarantees or endorses this Note, to the extent allowed by law, waive any
applicable statute of limitations, presentment, demand for payment, protest and
notice of dishonor. Upon any change in the terms of this Note, and unless
otherwise expressly stated in writing, no party who signs this Note, whether as
maker, guarantor, accommodation maker or endorser, shall be released from
liability. All such parties agree that Lender may renew or extend (repeatedly
and for any length of time) this loan, or release any party or guarantor or
collateral; or impair, fail to realize upon or perfect Lender's security
interest in the collateral; and take any other action deemed necessary by Lender
without the consent of or notice to anyone. All such parties also agree that
Lender may modify this loan without the consent of or notice to anyone other
than the party with whom the modification is made.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE. BORROWER AGREES TO THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF
A COMPLETED COPY OF THE NOTE.
BORROWER:
Litronic Industries, Inc.
By: /s/ Kris shah
---------------------------------
Kris Shah, President
<PAGE>
Exhibit 10.32
AMENDMENT TO FORBEARANCE AGREEMENT
This AMENDMENT ("Amendment") TO FORBEARANCE AGREEMENT is made as of October
9, 1998 by and between PULSAR DATA SYSTEMS, INCORPORATED ("Pulsar") and IBM
CREDIT CORPORATION ("IBM Credit").
RECITALS:
WHEREAS, Pulsar and IBM Credit have entered into that certain Forbearance
Agreement dated as of August 21, 1998 (as amended, supplemented or otherwise
modified from time to time, the "Agreement") and that certain Inventory And
Working Capital Financing Agreement dated as of October 30, 1997 ("IWCF"); and;
WHEREAS, Pulsar has requested that IBM Credit make certain changes its
Credit Line and Borrowing Base as more fully set forth on Attachment A as of
this date to the IWCF; and
WHEREAS, IBM Credit is willing to consent to the requested changes subject
to the conditions set forth below.
AGREEMENT
NOW THEREFORE, in consideration of the premises set forth herein, and for
other good and valuable consideration, the value and sufficiency of which is
hereby acknowledged, the parties hereto agree that the Agreement is amended as
follows:
SECTION 1. DEFINITIONS. All capitalized terms not otherwise defined herein
shall have the respective meanings set forth in the Agreement.
SECTION 2. AMENDMENTS.
A. The Attachment A to the IWCF is hereby amended as follows:
For the period October 8, 1998 through and including January 6, 1999 the
Credit Line shall be $18,000,000.00 and thereafter the Credit Line shall be
$15,000,000.00.
B. Section 10(b) of the Agreement is hereby amended by adding to the
conclusion thereof the following:
"provided, however that Pulsar demonstrate compliance to the foregoing Financial
Covenant on a monthly basis for each calendar month from September 1998 through
December 1998 for Pulsar's fiscal year ending December 31, 1998 and for each and
every reporting period thereafter."
Page 1 of 1
<PAGE>
SECTION 3. ADDITIONAL REQUIREMENTS.
A. The Agreement is hereby amended by inserting therein the following new
section:
"IBM Credit has earned stock representing a four percent (4%) ownership interest
in Pulsar (the "IBM Credit Interest") on a fully diluted basis. At the option
William W. Davis Sr. in lieu of a distribution of such Pulsar stock to IBM
Credit, Pulsar shall pay to IBM Credit the lesser of (i) four percent (4%) of
the sale price upon the sale of all or substantially all of Pulsar's asset; or
(ii) $650,000.00 or (iii) a pro-rata share of $650,000.00 upon sale of less than
all or substantially all of Pulsar's assets. For the purpose of example only
should Pulsar sell twenty-five percent (25%) of its assets, pursuant to
provision (iii) above, Pulsar would pay IBM Credit $162,500.00, it being an
amount equal to twenty-five percent of $650,000.00."
B. IBM Credit's consent to the amendment set forth in Section 2 A of this
Amendment shall immediately cease upon the occurrence of an Event of Default and
all obligations of Pulsar to IBM Credit under the IWCF, the Agreement and
otherwise shall, without notice or demand, become immediately due and payable.
SECTION 4. CONDITIONS PRECEDENT. The effectiveness of this Amendment is
subject to the receipt by IBM Credit, on or before the close of business on
October 15, 1998, of the following conditions precedent:
A. Copies of all Merrill Lynch Stock Account Statements for those stock
accounts assigned to IBM Credit through and including statements for the month
of August 1998; and
B. Copies of all payment workout agreement letters with unsecured creditors;
and
C. A list of all suppliers currently providing open account terms to Pulsar;
and
D. This Amendment, executed and delivered by Pulsar.
SECTION 5. REPRESENTATIONS AND WARRANTIES. Pulsar makes to IBM Credit the
following representations and warranties all of which are material and are made
to induce IBM Credit to enter into this Amendment.
SECTION 5.1 ACCURACY AND COMPLETENESS OF WARRANTIES AND REPRESENTATIONS. All
representations made by Pulsar in the Agreement were true and accurate and
complete in every respect as of the date made, and, as amended by this
Amendment, all representations made by Pulsar in the Agreement are true,
accurate and complete in every material respect as of the date hereof, and do
not fail to disclose any material fact necessary to make such warranties and
representations not misleading.
Page 2 of 2
<PAGE>
SECTION 5.2 VIOLATION OF OTHER AGREEMENTS. The execution and delivery of
this Amendment and the performance and observance of the covenants to be
performed and observed hereunder do not violate or cause Pulsar not to be in
compliance with the terms of any agreement to which Pulsar is a party.
SECTION 5.3 LITIGATION. Except as has been disclosed by Pulsar to IBM Credit
in writing, there is no litigation, proceeding, investigation or labor dispute
pending or threatened against Pulsar, which if adversely determined, would
materially adversely affect Pulsar's ability to perform Pulsar's obligations
under the Agreement and the other documents, instruments and agreements executed
in connection therewith or pursuant hereto.
SECTION 5.4 ENFORCEABILITY OF AMENDMENT. This Amendment has been duly
authorized, executed and delivered by Pulsar and is enforceable against Pulsar
in accordance with its terms.
SECTION 6. RAMIFICATION OF AGREEMENT. Except as specifically amended
hereby, all of the provisions of the Agreement shall remain unamended and in
full force and effect. Pulsar hereby ratifies, confirms and agrees that the
Agreement, as amended hereby, represents a valid and enforceable obligation of
Pulsar's and is not subject to any claims, offsets or defense.
SECTION 7. GOVERNING LAW. This Amendment shall be governed by and
interpreted in accordance with the laws of the State of New York.
SECTION 8. COUNTERPARTS. This Amendment may be executed in any number of
counterparts, each of which shall be an original and all of which shall
constitute one agreement.
Page 3 of 3
<PAGE>
IN WITNESS WHEREOF, this Amendment has been duly executed by the authorized
officers of the undersigned as of the day and year first above written.
IBM CREDIT CORPORATION PULSAR DATA SYSTEMS, INCORPORATED
By:_____________________________ By: /S/ WILLIAM W. DAVIS, SR.
----------------------------------------
Print Name:_____________________ Print Name: William W. Davis, Sr.
Title:__________________________ Title: President/CEO
Date:___________________________ Date: 10/9/98
<PAGE>
Exhibit 10.33
PROMISSORY NOTE
$804,342.08 LANHAM, MARYLAND January 1, 1999
FOR VALUE RECEIVED, DAVIS HOLDING COMPANY, a Delaware corporation,
------------------
(hereinafter referred to as "Borrower") hereby promise to pay to the order of
PULSAR DATA SYSTEM, INC., a Delaware corporation, (hereinafter referred to as
"Lender") the principal sum of $804,342.08, to be paid monthly on the first day
of each month, beginning with April 1, 199, with interest only at the rate of
seven and one-half percent (7 1/2%) per annum, principal due on the sale of the
property known as 3039 Peachtree Road, Atlanta, GA. Prepayment may be made in
whole or in part without penalty.
If the installments payable monthly are not received by the 15/th/ day of
the month in which same are due, the maker shall be liable to the holder for the
late payment penalty of 5% of the installment then due, which amount shall be
deemed part of the principal balance due.
This Note shall be deemed in default if the installment due under the terms
herein is more than THIRTY (30) days past due. The undersigned does hereby
authorize and empower any Justice of the Peace, any Clerk, Prothonotary, or
Attorney of any Court of Record in the State of Maryland, or elsewhere, without
process, to enter judgment on the above Obligation, with legal interest,
together with 5% of the amount of the debt and interest as counsel fees, without
process against him, his successors or assigns, at the suit of the holder of
this Note, its successors or assigns, at any time, with stay of execution until
the date of payment; and he does waive the benefit of any and all exemption laws
of the State of Maryland, or elsewhere. AND the maker hereby waives demand,
protest and notice of nonpayment hereof.
This Agreement supersedes all other agreements or representations and all
prior agreements or representations and all prior agreements made by Borrower
and Lender. This Agreement constitutes the entire agreement between the parties
hereto and the parties are not bound by any agreements, understandings, or
conditions otherwise than are expressly set forth and stipulated herein.
These presents shall be binding, both jointly and severally, upon the
heirs, executors, administrators, successors and assigns of the undersigned.
WITNESS the execution of this Note effective the day and year aforesaid.
SIGNED, SEALED AND DELIVERED
IN THE PRESENCE OF: DAVIS HOLDING COMPANY
[AUTHORIZED SIGNATORY] BY:[AUTHORIZED SIGNATORY]
- ---------------------- ----------------------
WITNESS President
ATTEST:__________________
Secretary
<PAGE>
Exhibit 10.34
PROMISSORY NOTE
$543,017.40 LANHAM, MARYLAND January 1, 1999
FOR VALUE RECEIVED, DAVIS HOLDING COMPANY, a Delaware corporation,
------------------
(hereinafter referred to as "Borrower") hereby promises to pay to the order of
PULSAR DATA SYSTEM, INC., a Delaware corporation, (hereinafter referred to as
"Lender") the principal sum of $543,017.40, to be paid monthly on the first day
of each month, beginning with April 1, 1999, with interest only at the rate of
seven and one-half percent (7 1/2%) per annum, principal due on the sale of the
property known as 4500 Forbes Boulevard, Lanham, MD. Prepayment may be made in
whole or in part without penalty.
If the installments payable monthly are not received by the 15th day of the
month in which same are due, the maker shall be liable to the holder for a late
payment penalty of 5% of the installment then due, which amount shall be deemed
part of the principal balance due.
This Note shall be deemed in default if the installment due under the terms
herein is more than THIRTY (30) days past due. The undersigned does hereby
authorize and empower any Justice of the Peace, any Clerk, Prothonotary, or
Attorney of any Court of Record in the State of Maryland, or elsewhere, without
process, to enter judgment on the above Obligation, with legal interest,
together with 5% of the amount of the debt and interest as counsel fees, without
process against him, his successors or assigns, at the suit of the holder of
this Note, its successors or assigns, at any time, with stay of execution until
the date of payment; and he does waive the benefit of any and all exemption laws
of the State of Maryland, or elsewhere. AND the maker hereby waives demand,
protest and notice of nonpayment hereof.
This Agreement supersedes all other agreements or representations and all
prior agreements or representations and all prior agreements made by Borrower
and Lender. This Agreement constitutes the entire agreement between the parties
hereto and the parties are not bound by any agreements, understandings, or
conditions otherwise than are expressly set forth and stipulated herein.
These presents shall be binding, both jointly and severally, upon the
heirs, executors, administrators, successors and assigns of the undersigned.
WITNESS the execution of this Note effective the day and year aforesaid.
SIGNED, SEALED AND DELIVERED
IN THE PRESENCE OF: DAVIS HOLDING COMPANY
[AUTHORIZED SIGNATORY] BY: [AUTHORIZED SIGNATORY]
- ---------------------- ----------------------
WITNESS President
ATTEST: ________________________
Secretary
<PAGE>
Exhibit 10.35
Personal Direct Dial
(302) 651-1412
June 20, 1997
William W. Davis, Sr.
President
Pulsar Data Systems, Inc.
4500 Forbes Boulevard
Atlanta, Maryland 20706
Re: $5.2MM Financing
Dear Mr. Davis:
Confirming our prior discussions and to memorialize the terms and
conditions under which Wilmington Trust Company (the "Bank") has agreed to make
funding available to Pulsar Data Systems, Inc. (The "Borrower"), I set forth
below a basic outline of the funding proposal.
1. The loan amount will be capped at $5.2MM, the current principal amount
outstanding on the $22MM Line of Credit which terminates at the end of the
month.
2. The loan will be interest only for a period of six months; thereafter the
outstanding principal amount will be converted to a five year term loan.
3. The loan will be guaranteed by Palmer III Limited Partnership and Davis
Holding Company. To provide additional support for this credit, you have
offered, and we accept, your personal guarantee and that of your wife
Lillian Davis. The guarantee of Palmer III Limited Partnership will be
collateralized with a second mortgage position on the property generally
known as 4500 Forbes Boulevard, Lanham, MD 20706. The Davis Holding
Company guarantee will be collateralized by a second mortgage on the parcel
commonly known as 3029-3035 Peachtree Road, Atlanta, GA 30326. The
guarantee of you and your wife will be collateralized by a second mortgage
on your residence located at 3309 Shortridge Lane, Mitchellville, MD 20721.
<PAGE>
William W. Davis, Sr.
June 20, 1997
Page 2 of 3
To the extent not inconsistent with the foregoing and with the new
documentation contemplated herein, the existing loan documents executed in
conjunction with the original $22MM Line of Credit, as renewed in 1996, and the
collateral and security therefor, will remain in full force and effect.
Sincerely,
WILMINGTON TRUST COMPANY
/s/ WILLIAM H. MAJOR
------------------------------
William H. Major
Vice President
The above terms and conditions are hereby agreed to and accepted this 20/th/ day
------
of June, 1997.
PULSAR DATA SYSTEMS, INC.
By: /s/ WILLIAM W. DAVIS, SR.
-------------------------
Title: President/CEO
----------------------
GUARANTORS:
/s/ WILLIAM W. DAVIS, SR.
---------------------------------
William W. Davis, Sr.
/s/ LILLIAN A. DAVIS
---------------------------------------
Lillian A. Davis
PALMER III, LIMITED PARTNERSHIP
By: [AUTHORIZED SIGNATORY]
----------------------
<PAGE>
William W. Davis, Sr.
June 20, 1997
Page 3 of 3
DAVIS HOLDING COMPANY
By: [AUTHORIZED SIGNATORY]
----------------------
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
(When the Reorganization as described in note 1 of the consolidated financial
statements referenced below has been consummated, we will be in a position to
provide the following consent)
/s/ KPMG LLP
The Board of Directors
Litronic Inc.:
We consent to the use of our report dated March 20, 1998 except as to the first
paragraph of note 5, which is as of March 31, 1998, related to the consolidated
balance sheets of Litronic Inc. and subsidiary as of December 31, 1996 and 1997
and the consolidated statements of operations, shareholders' deficiency and cash
flows for each of the years in the three year period ended December 31, 1997,
and to the reference to our firm under the headings "Selected Financial Data
Litronic" and "Experts" in the prospectus.
Orange County, California
February 10, 1999
<PAGE>
EXHIBIT 23.2
KELLER BRUNER & COMPANY, LLP
Certified Public Accountants - Management Consultants
To The Board of Directors
Pulsar Data Systems, Inc.
Lanham, Maryland
The audits referred to in our report dated April 27, 1998, except for note 13
and the last paragraph in Note 9 as to which date is October 9, 1998, and Note
16 and the fourth paragraph of Note 17, as to which the date is January 15,
1999, which contains an explanatory paragraph that states that the Company
incurred a loss, has a working capital deficit and was in violation of certain
debt covenants, among other factors, raise substantial doubt about the Company's
ability to continue as a going concern.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental Schedule V, Valuation
and Qualifying Accounts and Reserves is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not a part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
We consent to the use of our reports included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
/s/ Keller Bruner & Company, LLP
- ---------------------------------
Bethesda, Maryland
February 10, 1999
