<PAGE>
As filed with the Securities and Exchange Commission on June 1, 1999
Registration No. 333-72151
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
AMENDMENT NO. 3 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
Litronic Inc.
(Exact name of registrant as specified in its charter)
Delaware 3577 33-0757190
(Primary Standard Industrial Classification Number)
(I.R.S.
(State or other EmployerIdentification
jurisdiction Number)
ofincorporation or
organization)
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
Chie
f 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, Tenzer Greenblatt LLP
PLLC 405 Lexington Avenue
1050 Connecticut Avenue, N.W. New York, New York 10017
Washington, D.C. 20036-5339 Attention: Robert J. Mittman, Esq.
Attention: Gerald P. McCartin, Esq. Telephone No.: (212) 885-5000
Telephone No.: (202) 857-6090 Facsimile No.: (212) 885-5001
Facsimile No.: (202) 857-6395
---------------
Approxima
te 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 t
he 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. [_]
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 June 1, 1999
3,700,000 shares of common stock
This is an initial public offering of the common stock of Litronic Inc. We
expect that the initial public offering price will be between $9.00 and $11.00
per share. 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 9.
------------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public offering price............................... $ $
Underwriting discounts and commissions.............. $ $
Proceeds, before expenses, to Litronic.............. $ $
</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 representation to the contrary is
a criminal offense.
We have granted BlueStone Capital Partners, L.P. and Pacific Crest
Securities Inc., the representatives of the underwriters, a 45-day option to
purchase up to 555,000 additional shares of our common stock to cover any over-
allotments.
------------
BlueStone Capital Partners, L.P. Pacific Crest Securities Inc.
, 1999
<PAGE>
The inside front cover contains a graphic depicting the interface between
applications, Litronic's Maestro product, Litronic's ProFile Manager and
Litronic's Security Tokens to provide a PKI Security solution. Above the graphic
across the top of the page appears Litronic's name and the words "Internet
Security." The graphic itself is comprised of four interlocking circles. The
circle on the upper left corner contains the words "Application Open Standards
Support." The circle in the lower left corner contains the words "Maestro
Integrates Tokens with Multiple Applications." The circle in the upper right
corner contains the words "ProFile Manager PKI Lifestyle Management Solution."
The circle in the lower right corner contains the words "Security Tokens
Personalized and Portable Security." In the space where the four circles
interlock there is a smaller circle containing the words "PKI Security." Under
the graphic appears a textual description of Litronic's ProFile Manager, Maestro
and Security Tokens, which highlights features of each product. The presentation
is set forth in three columns. Above the left column appears the words "ProFile
Manager/tm/." The column contains the following phrases, each separated by a
bullet: Secure archive and recovery of user and certificate information;
Hardware key generation; Certificate authority support; Integrates with existing
database for user input; and Security token initiative. Above the second column
appears the word "Maestro." The column contains the following phrases, each
separated by a bullet: Significantly reduces developer and end-user risks;
Supports multiple APIs, operating systems and security tokens; and Concurrent
support for multiple applications. Above the third column appears the words
"Security Tokens." The column contains the following language, each separated by
a bullet: Supports multiple encryption algorithms and digital signatures;
Certificate and personal data storage; Certified random number generation; Fast
serial interface; and Tamper protection.
The inside back cover contains the names of some of Litronic's strategic
partners, along with their respective logos, appearing in two columns down the
page. To the right of each strategic partner's name appears a word describing
the nature of Litronic's relationship with each vendor. The left column contains
the following company names and descriptive words: Netscape -- Integration,
Microsoft -- Compatibility, VeriSign -- Preferred Partner, DataCard -- Joint
Marketing and Key Tronic Corporation -- Joint Marketing. The left column
contains the following company names and descriptive words: RSA Secure --
Technology License, Atmel --Joint Development, SCM Microsystems -- Hardware
Supplier, Certicom --OEM Readers and Schlumberger -- Joint Marketing. Above the
two captions across the top of the page is Litronic's name and the phrase
"Strategic Partners."
<PAGE>
PROSPECTUS SUMMARY
This is a summary of the information contained in this prospectus. To
understand this offering fully, you should read the entire prospectus,
especially the risk factors and financial statements.
As of the date of this prospectus, the stockholders of Litronic Industries,
Inc. will exchange all of their outstanding common stock for all of the
outstanding common stock of Litronic Inc. Upon the closing of this offering,
the newly reorganized Litronic Inc. will acquire all of the outstanding common
stock of Pulsar Data Systems, Inc.
In this prospectus, unless the context indicates otherwise, the term
"Litronic" refers to Litronic Inc. and its subsidiaries, after giving effect to
its reorganization with Litronic Industries, Inc., and the terms "we" or "our"
refer to Litronic Inc. and its subsidiaries after giving effect to both its
reorganization with Litronic Industries, Inc. and its acquisition of Pulsar.
The historical financials for Litronic 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 those financials,
other than the capital structure, relates solely to Litronic Industries, Inc.
The pro forma financial data in this prospectus has been prepared to illustrate
the effect of the Pulsar acquisition and this offering on data derived from
Litronic's historical financials.
Our business
Litronic provides professional Internet data security services and develops
and markets software and microprocessor-based products needed to secure
electronic commerce business transactions and communications over the Internet
and other communications networks based on Internet protocols. To increase
sales capacity for its proprietary products and to capitalize on opportunities
in the rapidly growing Internet-based information technology security market,
Litronic is acquiring Pulsar, a network integration solutions company that
develops large-scale network solutions for commercial and government
organizations.
Our products
Our primary data security products use an advanced form of computer security
technology referred to as public key infrastructure, or PKI, which is the
standard technology for securing Internet-based commerce and communications.
Our Internet security products can be used with world-wide-web browsers,
including Netscape Communicator and Microsoft Internet Explorer, to facilitate
secure electronic commerce transactions and other data communications, such as
secure e-mail.
Strategic relationships
We have established strategic relationships with other 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 . U.S. National Security Agency
3
<PAGE>
Our customers
Our data security customers come from diverse industries, such as the
finance, healthcare, telecommunications, electronic commerce and government
industries, and include:
. Bank of America, N.A. . VeriSign, Inc.
. Lucent Technologies Inc. . Lockheed Martin Corporation
. Deloitte & Touche LLP . Netscape Communications Corporation
. U.S. Army Corps of Engineers . Schlumberger Limited
. National Security Agency . Nippon Telegraph and
Telecommunications Data Corporation
In addition, our newly acquired Pulsar client base will include over 100
federal agencies, such as the Executive Offices of the President of the United
States, the Federal Bureau of Investigation and the Federal Communications
Commission, as well as over 40 commercial, state and local customers.
Our strategy
The PKI-based Internet security market is forecasted by Datamonitor, an
independent research firm, to grow at an annual rate of 124% from 1997 to 2001.
To capitalize on expanding market opportunities in this market, we intend to
exploit:
. the substantial experience and knowledge of Litronic's existing
management team in the Internet data security, computer networking and
semi-conductor industries; and
. Pulsar's extensive expertise in the sale and implementation of large-
scale networking systems, as well as its significant market access.
----------------
Litronic Inc. was incorporated under the laws of the State of Delaware in
1997 but has conducted no operations todate. Its predecessor, Litronic
Industries, Inc., 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
Common stock offered................
3,700,000 shares
Common stock to be outstanding
after this offering................ 9,740,631 shares, including 2,169,938
shares to be issued in connection with
the Pulsar acquisition. This does not
include:
. 555,000 shares reserved for issuance
upon exercise of the representatives'
over-allotment option;
. 281,419 shares reserved for issuance
upon exercise of options granted under
our 1998 stock option plan;
. an aggregate of 600,000 shares reserved
for issuance upon exercise of options
available for future grant under our
1999 stock option plan; and
. 370,000 shares reserved for issuance
upon exercise of warrants to be issued
upon the closing of this offering to
BlueStone and Pacific Crest for serving
as the representatives of the
underwriters.
Use of proceeds..................... We intend to use the net proceeds of this
offering for reduction of debt, sales and
marketing, product development, vendor
settlements and working capital and
general corporate purposes.
Risk factors........................ Investing in our common stock involves a
high degree of risk and immediate and
substantial dilution.
Proposed Nasdaq National Market
symbol............................. LTNX
5
<PAGE>
Summary Financial Information--Litronic
(dollars in thousands, except per share data)
The following table presents 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 related notes, 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--Litronic," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements of Litronic and related notes included
elsewhere in this pr
ospectus.
Statements of operations information:
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
---------------------------------- ----------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Revenues:
Product............... $ 7,855 $ 8,627 $ 5,214 $ 1,354 $ 885
License and service... 1,541 1,539 1,041 309 156
Research and
development.......... -- -- 398 -- 369
---------- ---------- ---------- ---------- ----------
Total revenue......... 9,396 10,166 6,653 1,663 1,410
---------- ---------- ---------- ---------- ----------
Costs and expenses:
Cost of sales -
product.............. 4,098 3,211 2,821 667 507
Cost of sales -
license and service.. 581 643 950 176 140
Selling, general, and
administrative....... 2,052 3,487 2,631 662 871
Research and
development.......... 725 1,172 1,334 341 765
---------- ---------- ---------- ---------- ----------
Operating income
(loss)................. 1,940 1,653 (1,083) (183) (873)
Interest expense, net... 19 42 418 108 109
---------- ---------- ---------- ---------- ----------
Earnings (loss) from
continuing operations
before income taxes.... 1,921 1,611 (1,501) (291) (982)
Provision for (be
nefit
from) income taxes..... 29 22 (95) (51) (9)
---------- ---------- ---------- ---------- ----------
Earnings (loss) from
continuing operations.. $ 1,892 $ 1,589 $ (1,406) (240) (973)
========== ========== ========== ========== ==========
Net earnings (loss)..... $ 906 $ 15,334 $ (1,406) $ (240) $ (973)
========== ========== ========== ========== ==========
Earnings (loss) from
continuing operations
per share: basic and
diluted................ $ .49 $ .41 $ (.36) $ (.06) $ (.25)
========== ========== ========== ========== ==========
Net earnings (loss) per
share: basic and
diluted................ $ .23 $ 3.96 $ (.36) $ (.06) $ (.25)
========== ========== ========== ========== ==========
Shares used in per share
com
putations: basic and
diluted................ 3,870,693 3,870,693 3,870,693 3,870,693 3,870,693
========== ========== ========== ========== ==========
Balance sheet information:
<CAPTION>
December 31,
---------------------------------- March 31,
1996 1997 1998 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Cash and cash
equivalents............ $ 862 $ 490 $ 898 $ 557
Working capital......... 1,662 385 758 520
Total assets............ 7,409 2,347 2,791 2,895
Short-term debt......... 545 -- 580 424
Long-term debt, less
current installments... 4,997 3,506 5,200 5,950
Total liabilities....... 7,510 5,
148 6,998 8,075
Net stockholders'
deficit................ (101) (2,801) (4,207) (5,180)
</TABLE>
6
<PAGE>
Summary Financial Information--Pulsar
(dollars in thousands, except per share data)
The following table presents 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 related notes, 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 related notes included elsewhere in this
prospectus.
Statements of operations information:
<TABLE>
<CAPTION>
Three Months
Year Ended December 31, Ended March 31,
-------------------------- -----------------
1996 1997 1998 1998 1999
-------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
Service revenue................ $ 10,253 $ 8,818 $ 3,373 $ 1,241 $ 369
Product revenue................ 155,705 142,702 77,159 16,777 9,579
-------- -------- ------- -------- -------
Total revenue.................. 165,958 151,520 80,532 18,018 9,948
-------- -------- ------- -------- -------
Cost of service revenue........ 4,870 4,115 1,553 730 155
Cost of product revenue........ 144,494 138,086 73,417 16,742 9,234
-------- -------- ------- -------- -------
Total cost of revenue.......... 149,364 142,201 74,970 17,472 9,389
-------- -------- ------- -------- -------
Gross margin................... 16,594 9,319 5,562 546 559
Selling, general, and
administrative expenses....... 13,545 17,152 11,665 2,256 1,892
-------- -------- ------- -------- -------
Operating income (loss)........ 3,049 (7,833) (6,103) (1,710) (1,333)
Interest income................ 639 457 61 200 20
Interest expense............... 3,564 3,640 2,099 706 478
-------- -------- ------- -------- -------
Net earnings (loss)............ $ 124 $(11,016) $(8,141) $ (2,216) $(1,791)
======== ======== ======= ======== =======
Net earnings (loss) per share:
basic and diluted............. $ 124 $(11,016) $(8,141) $ (2,216) $(1,791)
======== ======== ======= ======== =======
Weighted average shares
outstanding................... 1,000 1,000 1,000 1,000 1,000
======== ======== ======= ======== =======
Balance sheet information:
<CAPTION>
December 31,
-------------------------- March
1996 1997 1998 31, 1999
-------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents...... $ 2,451 $ 2,236 $ 352 $ 441
Working capital (deficit)...... 1,553 (2,436) (8,168) (10,067)
Total assets................... 59,785 40,871 12,730 8,539
Short-term debt................ 41,352 28,982 14,435 11,744
Long-term debt, less current
installments.................. 53 4,203 3,241 3,085
Total liabilities.............. 52,077 42,681 22,681 20,281
Net stockholders' equity
(deficit)..................... 7,708 (1,810) (9,951) (11,742)
</TABLE>
7
<PAGE>
Summary Pro Forma Financial Information
(dollars in thousands, except per share data)
The following table presents unaudited summary pro forma financial
information for the periods, and as of the dates, indicated. This information
is based on data derived from the historical financial statements of Litronic
and Pulsar and has been prepared to illustrate the effects of the Pulsar
acquisition and this offering on that data, as if they had occurred as of
January 1, 1998, with respect to the statements of operations information, and
as of March 31, 1999, with respect to the balance sheet information. This
financial information is provided for comparative purposes only and is not
intended to reflect the results that act
ually 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 Financial Data--
Litronic," "Selected Financial Data--Pulsar," "Management's Discussion and
Analysis of Financial Condition and Result of Operations" and the financial
statements and related notes included elsewhere in this prospectus.
Pro forma statements of operations information:
<TABLE>
<CAPTION>
Three Months
Year Ended Ended
December 31, March 31,
1998 1999
------------ ------------
<S> <C> <C
>
Revenues:
Product........................................... $ 82,373 $ 10,464
License and service............................... 4,414 525
Research and development.......................... 398 369
---------- ----------
Total revenue....................................... 87,185 11,358
---------- ----------
Costs and expenses:
Cost of sales - product........................... 76,238 9,741
Cost of sales - license and service............... 2,503 295
Selling, general, and administrative.............. 14,296 2,763
Research and development.......................... 1,334 765
Amortization of goodwill and other intangibles.... 2,601 651
---------- ----------
Operating loss.........................
............. (9,787) (2,857)
Interest expense.................................... 1,723 253
Interest income..................................... 61 20
---------- ----------
Loss from continuing operations before income
taxes.............................................. (11,449) (3,090)
Benefit from income taxes........................... -- --
---------- ----------
Loss from continuing operations..................... $ (11,449) $ (3,090)
========== ==========
Net loss............................................ $ (11,449) $ (3,090)
========== ==========
Loss per share from continuing operations: basic and
diluted............................................ $ (1.18) $ (.32)
========== ==========
Net loss per share: basic and diluted............... $ (1.18) $ (.32)
========== ==========
Shares used in per share computations: basic and
diluted............................................ 9,740,631 9,740,631
========== ==========
Pro forma balance sheet information:
<CAPTION>
March 31,
1999
------------
<S> <C>
Cash and cash equivalents........................... $16,198
Working capital..................................... 13,470
Total assets........................................ 60,075
Short-term debt..................................... 5,451
Long-
term debt, less current installments........... 452
Total liabilities................................... 11,956
Net stockholders' equity............................ 48,119
</TABLE>
8
<PAGE>
RISK FACTORS
An investment in 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 before making an investment
decision.
We have a history of losses and may incur future losses.
Even with the proceeds of this offering, we may not become profitable or
significantly increase our revenue. Litronic incurred net losses of $1.4
million for the year ended December 31, 1998 and $973,000 for the three months
ended March 31, 1999. Pulsar incurred net losses of $8.1 million for the year
ended December 31, 1998 and $1.8 million for the three months ended March 31,
1999. Our pro forma combined statements of operations reflect net losses of
$11.4 million for the year ended December 31, 1998 and $3.1 million for the
three months ended March 31, 1999.
Our inability to integrate, or implement our plans for, the operations of
Pulsar may adversely affect our business.
Our failure to successfully integrate, or implement our plans for, the
operations of Pulsar would significantly diminish the value of the Pulsar
acquisition and adversely affect our future operations. Moreover, integration
of the Pulsar acquisition may place strain on our managerial and financial
resources, which could, in turn, adversely affect our business. To achieve the
full benefits of the Pulsar acquisition, we will need to:
. integrate our administrative, financial and engineering resources and
coordinate our marketing and sales efforts;
. roll out our 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.
We may not be able to successfully implement any of these plans.
The goodwill and other intangibles acquired in the Pulsar acquisition may have
an adverse impact on our operating results and the market price of our common
stock.
Approximately $33.4 million, or 56%, of our pro forma combined, as adjusted,
assets as of March 31, 1999, consisted of intangible assets, including
goodwill, arising from the acquisition of Pulsar. This amount, the components
of which will be amortized over 10 to 15 years, constitutes a non-cash, non-tax
deductible expense in each amortization period that will reduce net income or
increase net loss for that period. The reduction in our net earnings or an
increase in our net loss resulting from the amortization of goodwill and other
intangibles may have an adverse impact on our operating results and the market
price of our common stock. There is also a risk that we may never realize the
value of our intangible assets.
A default under our secured credit arrangements could result in a foreclosure
of our assets by our creditors.
All of our assets are pledged as collateral to secure portions of our debt.
This means that if we default on our secured debt obligations our indebtedness
could become immediately due and payable
9
<PAGE>
and the lenders could foreclose on our assets. From time to time we have been
in violation of financial covenants under our existing credit arrangements and
have had to negotiate with our lenders for waivers or forbearance agreements
for these violations.
The terms of our loan agreements could limit our ability to implement our
business strategy.
The terms of our loan agreements with our credit providers could limit our
ability to implement our strategy. In addition to substantially prohibiting us
from incurring additional indebtedness, our loan agreements with these
creditors limit or prohibit us 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.
We derive a substantial portion of our revenue from a small number of customers
and, therefore, the loss of even one of these customers could significantly and
negatively impact our operating results.
We depend on a limited number of customers for a substantial portion of our
revenue and many of our contracts with our significant customers are short-term
contracts. The nonrenewal of any significant contract upon expiration, or a
substantial reduction in sales to any of our significant customers, would
adversely affect our business unless we were able to replace the revenue we
received from these customers. For the year ended December 31, 1998, Litronic
derived 81% of its revenue from three customers and Pulsar derived 23% of its
revenue from one customer. For the three months ended March 31, 1999, Litronic
derived 71% of its revenue from three customers and Pulsar derived 18% of its
revenue from one customer.
Doing business with the U.S. government entails many risks which could
adversely affect us.
Sales to U.S. government agencies accounted for 90% of our pro forma
combined revenue for the year ended December 31, 1998 and 86% of our pro forma
combined revenue for the three months ended March 31, 1999. Our sales to these
agencies are subject to risks, including:
. early termination of our contracts;
. disallowance of costs upon audit; and
. the necessity to participate in competitive bidding and proposal
processes, which is costly, time consuming and may result in unprofitable
contracts.
In addition, 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, as well as our suspension from future
government contracts for a significant period of time, any of which could
adversely affect our business.
10
<PAGE>
If use of the Internet and other communications networks based on Internet
protocols does not continue to grow, demand for our products may not increase.
Increased demand for our products depends in large part on the continued
growth of the Internet and Internet protocol-based networks and the widespread
acceptance and use of these mediums for electronic commerce and communications.
Because electronic commerce and communications over these networks are
evolving, we cannot predict the size of the market and its sustainable growth
rate. A number of factors may affect market size and growth rate, including:
. the use of electronic commerce and communications may not increase, or
may increase more slowly than we expect;
. the Internet infrastructure and communications services to support
electronic commerce may not be able to continue to support the demands
placed on it by continued growth; and
. 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.
If PKI technology is compromised, our business would be adversely affected.
Many of our products are based on PKI technology. The security afforded by
this technology depends on the integrity of a user's private key, which depends
in part on the application of algorithms, or advanced mathematical factoring
equations. The occurrence of any of the following could result in a decline in
demand for our data security products:
. any significant advance in techniques for attacking PKI systems,
including the development of an easy factoring method or faster, more
powerful computers;
. publicity of the successful decoding of cryptographic messages or the
misappropriation of private keys; and
. government regulation limiting the use, scope or strength of PKI.
If we do not respond to rapid technological changes, our products and service
offerings could become obsolete.
If we are unable to modify existing products and develop new products that
are responsive to changing technology and standards and meet customer needs in
a timely and cost effective manner, our business could be adversely affected.
The markets we serve are characterized by rapidly changing technology, emerging
industry standards and frequent introduction of new products. The introduction
of products embodying new technologies and the emergence of new industry
standards may render our products obsolete or less marketable. The process of
developing our products and services is extremely complex and requires
significant continuing development efforts.
If we fail to establish and maintain strategic relationships, our ability to
develop and market our products would be adversely affected.
The loss of any of our existing strategic relationships, or the inability to
create new strategic relationships in the future, could adversely affect our
ability to develop and market our products. We depend upon our partners to
develop and market products and to fund and perform their obligations as
contemplated by our agreements with them. We do not control the time and
resources devoted by our partners to these activities. These relationships may
not continue or may require us to spend
11
<PAGE>
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. Further, our products and
services may 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.
We depend 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 us. We have not
entered into employment agreements with any employees other than Messrs. Shah
and Davis. Even with these agreements, there is a risk that these individuals
will not continue to serve for any particular period of time. While we have
obtained key person life insurance policies on the lives of Messrs. Shah and
Davis, each in the amount of $3.0 million, these amounts may not be sufficient
to offset the loss of their services.
There is significant competition in our industry for highly skilled employees
and our failure to attract and retain technical personnel would adversely
affect our business.
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 service our software and
hardware systems, customers and potential customers or efficiently conduct our
operations, all of which may adversely affect our business. The data security
and networking solution industries are characterized by a high level of
employee mobility, and the market for highly qualified individuals in the
computer-related fields is intense. This competition means there are fewer
highly qualified employees available to hire and the costs of hiring and
retaining these individuals are high. Even if we are able to hire these
individuals, we may be unable to retain them. Furthermore, there is increasing
pressure to provide technical employees with stock options and other equity
interests, which may dilute earnings per share.
Potential product defects could subject us to claims from customers.
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
product defects or 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 us, or could cause us to incur
additional costs, any of which could adversely affect our business.
We may be exposed to potential liability for actual or perceived failure to
provide required products or services.
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 our business reputation.
12
<PAGE>
Furthermore, 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, regardless of our responsibility for the failure, could:
. result in a claim for substantial damages against us by the customer;
. discourage customers from engaging us for these services; and
. 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 for actions taken by
our employees while on assignment.
Problems relating to the year 2000 issue could adversely affect our business.
We are in the process of surveying our major vendors regarding year 2000
compliance. Until we complete our survey we cannot fully assess the year 2000
status of any of our vendors or suppliers. The failure of our significant
vendors and customers to make their products and systems year 2000 compliant
may adversely affect the performance of our products, which may in turn
adversely affect our business. Customers or third parties might seek
indemnification or damages from us as a result of year 2000 issue-related
errors caused by or not prevented by our products or services. We cannot
predict the extent to which we might be liable for these costs, but it is
conceivable in general that year 2000 errors could result in substantial
judgments against us or other providers of information technology. If we were
to suffer an adverse judgment as a result of prior year 2000 noncompliance of
our products, it may have an adverse impact on our business.
Customers' purchasing decisions could be affected by the year 2000 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.
The extent of the potential impact of the year 2000 issue generally is not
known, and we cannot predict the likelihood that the year 2000 issue will cause
a significant disruption in the economy as a whole.
We face intense competition from a number of sources.
The markets for our products and services are intensely competitive and, as
a result, we face significant competition from a number of different sources.
We may be unable to compete successfully as 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.
Third parties could obtain access to our proprietary information or
independently develop similar technologies because of the limited protection
for our intellectual property.
Our business, financial condition and operating results could be adversely
affected if we are unable to protect our intellectual property rights.
Notwithstanding the precautions we take, third
13
<PAGE>
parties may copy or obtain and use our proprietary technologies, ideas, know-
how and other proprietary information without authorization or independently
develop technologies similar or superior to our technologies. In addition, the
confidentiality and non-competition agreements between us and our employees,
distributors, and clients may not provide meaningful protection of our
proprietary technologies or other intellectual property in the event of
unauthorized use or disclosure. Policing unauthorized use of our technologies
and other intellectual property is difficult, particularly because the global
nature of the Internet makes it difficult to control the ultimate destination
or security of software or other data transmitted. Furthermore, the laws of
other jurisdictions may afford little or no effective protection of our
intellectual property rights.
We may face claims of infringement of proprietary rights.
There is a risk that our products infringe the proprietary rights of third
parties. In addition, whether or not our products infringe on proprietary
rights of third parties, infringement or invalidity claims may be asserted or
prosecuted against us and we could incur significant expense in defending them.
If any claims or actions are asserted against us, we may be required to modify
our products or seek licenses for these intellectual property rights. We may
not be able to modify our products or obtain licenses on commercially
reasonable terms, in a timely manner or at all. Our failure to do so could
adversely affect our business.
Our efforts to expand international operations are subject to a number of
risks.
We are currently seeking to increase our international sales. Our inability
to maintain or to obtain federal or foreign regulatory approvals relating to
the import or export of our products on a timely basis could adversely affect
our ability to expand our international business. Additionally, our
international operations could be subject to a number of risks, any of which
could adversely affect our future international sales, including:
. increased collection risks;
. trade restrictions;
. export duties and tariffs; and
. uncertain political, regulatory and economic developments.
Our ability to produce the Forte PKIcard on a timely and cost-effective basis
depends on the availability of a computer chip from a third-party supplier,
with whom we do not expect to maintain a supply agreement.
Any inability to receive adequate supplies of Atmel Corporation's specially
designed Forte microprocessor would adversely affect our ability to complete
and sell the Forte PKIcard. We do not anticipate maintaining a supply agreement
with Atmel Corporation for the Forte microprocessor. If Atmel were unable to
deliver the Forte microprocessor for a lengthy period of time or terminated its
relationship with us, we would be unable to produce the Forte PKIcard until we
could design a replacement computer chip for the Forte microprocessor. We
anticipate this would take substantial time and resources to complete.
After this offering, a small number of stockholders, including our officers and
directors, will have the ability to control stockholder votes.
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 62.0% of our outstanding common stock. These
stockholders, if acting together, would have the ability to elect our directors
14
<PAGE>
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.
A significant portion of the proceeds of this offering will be used to repay
indebtedness and thus will be unavailable to fund future growth.
We have allocated $16.0 million, or 50.6% of the net proceeds of this
offering to reduce outstanding indebtedness, including approximately $9.0
million of indebtedness assumed in connection with the acquisition of Pulsar,
and $1.1 million, or 3.5%, of the net proceeds to fund settlements with several
of Pulsar's trade vendors. Consequently, these funds will not be available to
fund future growth. The $16.0 million of indebtedness being repaid is
personally guaranteed by, and/or secured by pledges of assets of, Kris Shah,
William Davis or Lillian Davis. These persons will receive a benefit from the
release of these guarantees and security pledges.
There are lawsuits pending against Pulsar which could adversely affect our
business if they are resolved against Pulsar.
Lawsuits are pending against Pulsar which, if resolved against Pulsar, could
materially and adversely affect our business and financial condition. These
lawsuits claim: (a) damages of approximately $10.3 million resulting from
Pulsar's alleged breach of a contract for government contract bid preparation
services and (b) unspecified damages resulting from alleged race and age
discrimination in connection with the termination of a Pulsar employee. See
"Business--Legal Proceedings."
Our stock price could be extremely volatile.
The trading price of our common stock may be highly volatile as a result of
factors specific to us or applicable to our market and industry in general.
These factors, include:
. 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
their judicial or administrative interpretations, 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 significantly affected 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.
We have anti-takeover defenses that could delay or prevent an acquisition and
could adversely affect the price of our common stock.
Our certificate of incorporation and bylaws contain provisions that may
deter a takeover or a change in control or prevent an acquisition not approved
by our board of directors, or that may adversely affect the price of our common
stock. See "Description of Securities."
15
<PAGE>
The number of shares eligible for future sale and the existence of registration
rights could depress the market for our common stock.
The possibility that a substantial number of additional shares of common
stock may become tradeable in the public market following this offering may
adversely affect prevailing market prices for our common stock and could impair
our ability to raise capital through the sale of equity securities. An
aggregate of 3,870,693 of the 6,040,631 shares currently restricted from
trading in the public market will become eligible for sale 90 days following
the date of this prospectus, subject to agreements with BlueStone restricting
their sale for periods of at least six months. We cannot predict the effect, if
any, that sales of these additional securities or the availability of these
additional securities for sale will have on the market prices prevailing from
time to time. In addition, the representatives of the underwriters have also
been granted registration rights commencing one year from the date of this
prospectus providing for the registration under the Securities Act of the
securities issuable upon exercise of the representatives' warrants. The
exercise of these rights could result in substantial expense to us.
Furthermore, if the representatives exercise their registration rights, they
will be unable to make a market in our securities for up to nine days before
the initial sales of the warrants until the discontinuation of sales. If the
representatives cease 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.
FORWARD-LOOKING STATEMENTS
You should not rely on forward-looking statements in this prospectus. This
prospectus contains forward-looking statements that involve risks and
uncertainties. These statements relate to our future plans, objectives,
expectations and intentions and may be identified by the use of words such as
expects, anticipates, intends, and plans and other similar expressions. Our
actual results will differ from those discussed in these statements and you may
consider these differences important to your investment decision. Factors that
could contribute to these differences include those discussed in the "Risk
Factors" section and elsewhere in this prospectus. This prospectus also
contains forward-looking statements attributed to third parties relating to
their estimates regarding market growth. You should not place undue reliance on
the forward-looking statements in this prospectus, which speak only as of the
date the statement is made.
16
<PAGE>
USE OF PROCEEDS
The net proceeds we will receive from the sale of common stock in this
offering are estimated to be approximately $31.6 million or $36.7 million if
the representatives' over-allotment option is exercised in full. These amounts
assume we receive an initial public offering price of $10.00 per share, which
is the midpoint of the currently anticipated range of the initial public
offering price, and include deductions for 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.................................. $16,000,000 50.6%
Sales and marketing................................ 5,000,000 15.8%
Product development................................ 5,000,000 15.8%
Vendor settlements................................. 1,100,000 3.5%
Working capital and general corporate purposes..... 4,500,000 14.3%
----------- -----
Total............................................ $31,600,000 100.0%
=========== =====
</TABLE>
Reduction of debt
We expect to use proceeds to reduce debt as follows:
. $6.6 million to repay BYL Bank Group for anticipated borrowings through
the date of this prospectus. This debt bears interest at the annual rate
of 6.6% and matures on July 31, 2000, except that it is required to be
repaid upon a change of control of our wholly-owned subsidiary, Litronic
Industries. It is guaranteed by Kris Shah, our chief executive officer
and chairman of the board, and is secured by personal assets pledged by
Mr. Shah.
. $3.6 million to repay in full the principal amount of notes to Wilmington
Trust Company. The Wilmington Trust Company debt bears interest at the
prime rate as in effect from time to time and matures in December 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, and is secured by property pledged by a
family member of Mr. Davis.
. $3.3 million to repay in full six promissory notes payable to various
vendors, which bear interest at annual rates ranging from 10% to 18% and
are due in May and June 1999.
. $1.4 million to IBM Global Finance Corporation to reduce the amount
outstanding under an asset-based inventory and working capital financing
agreement. The financing line bears interest at an annual rate of prime
plus 2.375% and is guaranteed by Mr. Davis and Ms. Davis and secured by
substantially all of the assets of Pulsar as well as by assets pledged by
Mr. Davis and Ms. Davis. This $1.4 million payment will eliminate the
pledge of assets by Mr. Davis and Ms. Davis.
. $650,000 to pay IBM Global under its forbearance agreement with Pulsar
which becomes payable upon closing of this offering. The obligations
under the forbearance agreement are guaranteed by Mr. Davis and Ms. Davis
and secured by assets pledged by Mr. Davis.
. $450,000 to repay in full a line of credit from Fidelity Funding, Inc.
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.
17
<PAGE>
Sales and marketing
We expect to use the proceeds allocated to sales and marketing as follows:
. to expand our sales and marketing efforts, primarily to commercial
markets, including hiring approximately 20 additional sales and marketing
personnel;
. to open additional sales and support offices;
. to expand our Internet and other advertising efforts;
. to improve our web site; and
. to expand strategic alliances.
Product development
We expect to use the proceeds allocated to product development to pay our
estimated costs of software and product development, including compensation and
benefits payable to additional software and hardware engineers and developers.
Vendor settlements
We expect to use the proceeds allocated to vendor settlements to pay amounts
owed under litigation settlements with various Pulsar trade vendors, as well as
anticipated amounts to pay as-yet-unsettled claims filed against Pulsar by
other trade vendors.
Working capital and general corporate purposes
If our cash from operations proves to be insufficient to fund our
outstanding trade payables, including up to approximately $3.1 million of
accounts payable more than 90 days overdue, we may use a portion of the
proceeds to fund these obligations. In addition, we may use a portion of the
proceeds for potential acquisitions of technologies, product lines and
businesses and to upgrade our existing management information systems and
supporting information technology equipment. We currently have no commitments,
understandings or arrangements with respect to any future acquisitions.
If the representatives of the underwriters exercise their over-allotment
option in full, we will realize additional net proceeds of approximately $5.1
million. We would use these proceeds for working capital and general corporate
purposes. Pending the uses described above, we intend to invest the net
proceeds of this offering in U.S. government securities, certificates of
deposit or other investment grade, interest-bearing securities.
The allocations described above represent our best estimate of the
anticipated use of the offering proceeds. Our estimate is based upon our
operating plans and our assumptions about research and development progress,
general economic conditions and industry factors. If any of these factors
change, we may find it necessary or advisable to reallocate our use of
proceeds.
In addition to the proceeds of this offering, we expect to obtain a new
$20.0 million revolving line of credit facility with Fidelity Funding, Inc. and
to borrow under this facility as needed to finance our operations and working
capital requirements. We have entered into a letter of intent with Fidelity
relating to this new facility and expect to enter into a definitive agreement
permitting us to borrow under this facility commencing with the closing of this
offering. The letter of intent contemplates a three-year term, subject to one-
year renewals at Fidelity's option, an annual interest rate of prime plus .625%
and a pledge of substantially all of our personal and real property as
collateral.
18
<PAGE>
We believe that the net proceeds of this offering, together with anticipated
cash flow from operations, availability under our new $20.0 million credit
facility 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 $1.0 million and an
anticipated increase in rent expense for our California operations of $400,000
per year following our anticipated relocation of our California headquarters.
We could be required to seek additional financing, however, 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;
. our assumptions change or prove to be inaccurate; or
. the net proceeds of this offering or our cash flows prove to be
insufficient to finance our growth strategy.
DIVIDEND POLICY
Before the date of this prospectus, Litronic Industries was an S corporation
for federal and California state income tax purposes. As an S corporation,
Litronic Industries 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. 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 financing
agreements we have with our lenders and is likely to continue to be restricted.
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 new investors. Our net tangible book value
per share is calculated by dividing the difference between our total tangible
assets and our total liabilities by the number of shares of our common stock
outstanding.
At March 31, 1999, the net tangible book value (deficit) of Litronic was
$(5.2 million), or $(1.34) per share. After giving retroactive effect to (a)
the Pulsar acquisition and (b) Litronic's receipt and anticipated application
of the net proceeds from the sale of the 3,700,000 shares of our common stock
in this offering, at an assumed price of $10.00 per share, Litronic's as
adjusted net tangible book value at March 31, 1999 would have been $14.7
million or $1.51 per share. This represents an immediate increase in net
tangible book value of $2.85 per share to existing stockholders and an
immediate dilution of $8.49 per share to new investors.
The following table illustrates this per share dilution to new investors:
<TABLE>
<S> <C> <C>
Assumed initial public offering price....................... $10.00
Net tangible book value (deficit) before the offering...... $(1.34)
Increase attributable to the Pulsar acquisition and this
offering.................................................. 2.85
------
Adjusted net tangible book value after this offering........ 1.51
------
Dilution to new investors................................... $ 8.49
======
</TABLE>
19
<PAGE>
The following table summarizes, on a pro forma basis, as of March 31, 1999,
and giving retroactive effect to the Pulsar acquisition, the differences
between the number of shares of common stock purchased from us, the total
consideration paid, and the average price per share paid by existing
stockholders and new investors purchasing common stock in this offering. In
summarizing this information, we have:
. calculated the total consideration paid by existing stockholders based on
the historical value of Litronic's common stock and the fair value of the
common stock issued in connection with the Pulsar acquisition; and
. assumed an average price per share of $10.00 for new investors and for
the fair value of the common stock issued in connection with the Pulsar
acquisition.
<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 62.0% $33,402,000 47.4% $ 5.53
New investors................... 3,700,000 38.0 37,000,000 52.6 $10.00
--------- ----- ----------- -----
9,740,631 100.0% $70,402,000 100.0%
========= ===== =========== =====
</TABLE>
The table above assumes the representatives of the underwriters have not
exercised their over-allotment option. If this option is exercised in full, the
new investors will have paid $42.6 million, based on an assumed offering price
of $10.00 per share, for 4,255,000 shares of common stock, representing
approximately 56.0% of the total consideration for 41.3% of the total number of
shares outstanding. In making the computations in the table, we excluded:
. 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;
. 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
. 370,000 shares of common stock reserved for issuance upon the exercise of
warrants to be issued to the representatives of the underwriters in
connection with this offering.
20
<PAGE>
CAPITALIZATION
(dollars in thousands, except share data)
The following table presents Litronic's short-term debt and capitalization,
as of March 31, 1999, on (a) an historical basis, (b) a pro forma combined
basis to reflect the Pulsar acquisition, and (c) a pro forma combined, as
adjusted, basis to reflect the anticipated application of the proceeds of sale
of 3,700,000 shares of our common stock at an assumed price of $10.00 per
share. This table should be read in conjunction with "Use of Proceeds," "Pro
Forma Financial Data" and the financial statements, including the related
notes, appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
March 31, 1999
-----------------------------
Pro Forma
Pro Combined,
Forma As
Historical Combined Adjusted
---------- -------- ---------
<S> <C> <C> <C>
Short-term debt:
Financing arrangement--IBM Global.............. $ -- $ 7,201 $ 5,175
Notes payable--vendors......................... -- 3,361 61
Current installments of debt................... 424 1,606 215
------ ------- -------
Total short-term debt.......................... $ 424 $12,168 $ 5,451
====== ======= =======
Long-term debt:
Long-term debt................................. $5,950 $ 5,950 $ --
Notes payable, net of current installments..... -- 3,085 452
------ ------- -------
Total long-term debt........................... 5,950 9,035 452
------ ------- -------
Stockholders' equity:
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: 25,000,000 shares
authorized; 3,870,693 shares issued and
outstanding (historical), 6,040,631 shares
issued and outstanding (pro forma combined),
and 9,740,631 shares issued and outstanding
(pro forma combined, as adjusted)............. 39 61 98
Additional paid-in capital..................... -- 16,458 48,021
Accumulated deficit............................ (5,219) -- --
------ ------- -------
Total stockholders' equity (deficit)........ (5,180) 16,519 48,119
------ ------- -------
Total capitalization..................... $ 770 $25,554 $48,571
====== ======= =======
</TABLE>
The above table excludes the following shares:
. 281,419 shares of common stock reserved for issuance upon exercise of
options granted under our 1998 stock option plan;
. 600,000 shares of common stock reserved for issuance upon exercise of
options available for future grant under our 1999 stock option plan; and
. 370,000 shares of common stock reserved for issuance upon exercise of the
representatives' warrants.
21
<PAGE>
SELECTED FINANCIAL DATA--LITRONIC
(dollars in thousands, except per share data)
The following table presents selected financial data as of and for each of
the years in the five-year period ended December 31, 1998, derived from the
consolidated financial statements of Litronic. The consolidated financial
statements of Litronic as of December 31, 1997 and 1998 and for each of the
years in the three-year period ended December 31, 1998 have been audited by
KPMG LLP, independent certified public accountants. The consolidated financial
statements of Litronic as of December 31, 1997 and 1998, and for each of the
years in the three-year period ended December 31, 1998, and the related report,
are included in this prospectus.
The selected data presented below for the three month periods ended March
31, 1998 and 1999, and as of March 31, 1999, 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,
1998, the related notes and the independent auditors' report, appearing
elsewhere in this prospectus.
Selected Statements of Operations Data:
<TABLE>
<CAPTION>
Three Months
Ended
Years Ended December 31, March 31,
------------------------------------------------- --------------------
1994 1995 1996 1997 1998 1998 1999
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Product............... $ 1,447 $ 1,525 $ 7,855 $ 8,627 $ 5,214 $ 1,354 $ 885
License and service... 487 1,181 1,541 1,539 1,041 309 156
Research and develop-
ment -- -- -- -- 398 -- 369
--------- --------- --------- --------- --------- --------- ---------
Total revenue......... 1,934 2,706 9,396 10,166 6,653 1,663 1,410
--------- --------- --------- --------- --------- --------- ---------
Costs and expenses:
Cost of sales - prod-
uct.................... 486 793 4,098 3,211 2,821 667 507
Cost of sales -
license and service.. 169 465 581 643 950 176 140
Selling, general, and
administrative....... 773 977 2,052 3,487 2,631 662 871
Research and
development.......... 226 341 725 1,172 1,334 341 765
--------- --------- --------- --------- --------- --------- ---------
Operating income
(loss)................. 280 130 1,940 1,653 (1,083) (183) (873)
Interest expense, net... 12 38 19 42 418 108 109
--------- --------- --------- --------- --------- --------- ---------
Earnings (loss) from
continuing operations
before income taxes.... 268 92 1,921 1,611 (1,501) (291) (982)
Provision for (benefit
from) income taxes..... 4 1 29 22 (95) (51) (9)
--------- --------- --------- --------- --------- --------- ---------
Earnings (loss) from
continuing operations.. $ 264 $ 91 $ 1,892 $ 1,589 $(1,406) $ (240) $ (973)
========= ========= ========= ========= ========= ========= =========
Net earnings (loss)..... $ 48 $ 210 $ 906 $ 15,334 $(1,406) $ (240) $ (973)
========= ========= ========= ========= ========= ========= =========
Earnings (loss) from
continuing operations
per share: basic and
diluted................ $ .07 $ .02 $ .49 $ .41 $ (.36) $ (.06) $ (.25)
========= ========= ========= ========= ========= ========= =========
Net earnings (loss) per
share: basic and dilut-
ed..................... $ .01 $ .05 $ .23 $ 3.96 $ (.36) $ (.06) $ (.25)
========= ========= ========= ========= ========= ========= =========
Shares used in per share
computations: basic and
diluted................ 3,870,693 3,870,693 3,870,693 3,870,693 3,870,693 3,870,693 3,870,693
========= ========= ========= ========= ========= ========= =========
</TABLE>
22
<PAGE>
Selected Balance Sheet Data:
<TABLE>
<CAPTION>
December 31,
------------------------------------------ March 31,
1994 1995 1996 1997 1998 1999
------- ------- ------ ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents............. $ 6 $ 95 $ 862 $ 490 $ 898 $ 557
Working capital....................... 87 (372) 1,662 385 758 520
Total assets.......................... 3,827 5,476 7,409 2,347 2,791 2,895
Short-term debt....................... 421 472 545 -- 580 424
Long-term debt, less current install-
ments................................ 3,718 4,313 4,997 3,506 5,200 5,950
Total liabilities..................... 5,045 6,483 7,510 5,148 6,998 8,075
Net stockholders' deficit............. (1,218) (1,007) (101) (2,801) (4,207) (5,180)
</TABLE>
During the year ended December 31, 1997, Litronic paid a cash dividend of
$9.5 million to its shareholders. No other dividends have been paid during the
periods presented.
23
<PAGE>
SELECTED FINANCIAL DATA--PULSAR
(dollars in thousands, except per share data)
The following table presents selected financial data as of and for each of
the years in the four-year period ended December 31, 1997, derived from the
financial statements of Pulsar, which have been audited by Keller Bruner &
Company, L.L.C., independent certified public accountants. The selected
financial data as of and for the year ended December 31, 1998 is derived from
the financial statements of Pulsar which have been audited by KPMG LLP,
independent certified public accountants. The financial statements of Pulsar as
of December 31, 1997 and 1998, and for each of the years in the three-year
period ended December 31, 1998, and the related reports are included elsewhere
in this prospectus.
The selected data presented below for the three month periods ended March
31, 1998 and 1999, and as of March 31, 1999, are derived from the unaudited
condensed 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 ended December 31, 1998, the
related notes and the independent auditors' reports, which contain explanatory
paragraphs that state that Pulsar's recurring losses from operations, violation
of 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.
Selected Statement of Operations Data:
<TABLE>
<CAPTION>
Three Months Ended
Years Ended December 31, March 31,
----------------------------------------- --------------------
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- -------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Service revenue......... $ * $ * $10,253 $ 8,818 $ 3,373 $ 1,241 $ 369
Product revenue......... * * 155,705 142,702 77,159 16,777 9,579
------- ------- ------- -------- ------- --------- ---------
Total revenue........... 118,739 163,991 165,958 151,520 80,532 18,018 9,948
------- ------- ------- -------- ------- --------- ---------
Cost of service reve-
nue.................... * * 4,870 4,115 1,553 730 155
Cost of product reve-
nue.................... * * 144,494 138,086 73,417 16,742 9,234
------- ------- ------- -------- ------- --------- ---------
Total cost of revenue... 104,416 146,682 149,364 142,201 74,970 17,472 9,389
------- ------- ------- -------- ------- --------- ---------
Gross margin............ 14,323 17,309 16,594 9,319 5,562 546 559
Selling, general, and
administrative ex-
penses................. 8,580 10,410 13,545 17,152 11,665 2,256 1,892
------- ------- ------- -------- ------- --------- ---------
Operating income
(loss)................. 5,743 6,899 3,049 (7,833) (6,103) (1,710) (1,333)
Other income............ 325 -- -- -- -- -- --
Interest income......... 276 392 639 457 61 200 20
Interest expense........ 1,377 2,412 3,564 3,640 2,099 706 478
------- ------- ------- -------- ------- --------- ---------
Net earnings (loss)..... $ 4,967 $ 4,879 $ 124 $(11,016) $(8,141) $ (2,216) $ (1,791)
======= ======= ======= ======== ======= ========= =========
Net earnings (loss) per
share:
basic and diluted...... $ 4,967 $ 4,879 $ 124 $(11,016) $(8,141) $ (2,216) $ (1,791)
======= ======= ======= ======== ======= ========= =========
Weighted average shares
outstanding............ 1,000 1,000 1,000 1,000 1,000 1,000 1,000
======= ======= ======= ======== ======= ========= =========
</TABLE>
24
<PAGE>
- --------
* The breakdown of revenue and cost of revenue between services and products is
not available for the years ended December 31, 1994 and 1995 because, before
1996, Pulsar's accounting system did not track product and service revenue
separately. In 1996, Pulsar installed a new accounting system and has since
been able to break out product and service revenue.
Selected Balance Sheet Data:
<TABLE>
<CAPTION>
December 31,
---------------------------------------- March 31,
1994 1995 1996 1997 1998 1999
------- ------- ------- ------- ------- ----
- -----
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents............. $ 2,895 $ 2,144 $ 2,451 $ 2,236 $ 352 $ 441
Working capital (deficit)............. 8,145 8,090 1,553 (2,436) (8,168) (10,067)
Total assets.......................... 60,820 82,930 59,785 40,871 12,730 8,539
Short-term debt....................... 35,139 61,970 41,352 28,982 14,435 11,744
Long-term debt, less current install-
ments................................ 41 84 53 4,203 3,241 3,085
Total liabilities..................... 52,070 73,862 52,077 42,681 22,681 20,281
Net stockholders' equity (deficit).... 8,750 9,068 7,708 (1,810) (9,951) (11,742)
</TABLE>
25
<PAGE>
PRO FORMA FINANCIAL DATA
The following pro forma financial data is based upon data derived from
Litronic's and Pulsar's historical consolidated financial statements and has
been prepared to illustrate the effects on this data of the Pulsar acquisition
and this offering. The unaudited pro forma statements of operations for the
year ended December 31, 1998 and the three months ended March 31, 1999 give
effect to the acquisition and the closing of this offering as if these
transactions had occurred as of January 1, 1998. The unaudited pro forma
balance sheet as of March 31, 1999 gives effect to the acquisition and this
offering as if these transactions had occurred as of March 31, 1999. The Pulsar
acquisition will become effective 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 assumptions that management deems appropriate. We
have assumed for the purpose of determining the purchase price of the Pulsar
acquisition that our common stock issued to the Pulsar stockholders is valued
at the initial public offering price. The preliminary estimates regarding
allocation of the purchase price are subject to uncertainties, including 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
are not necessarily indicative of the results we would have obtained had these
events occurred at the beginning of the period, as assumed, or of our future
results as a combined entity.
26
<PAGE>
UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31, 1998
----------------------------------------------------------------------------
Pro Forma
Acquisition Offering Combined,
Adjustments Pro Forma Proceeds As
Litronic Pulsar (AA) Combined Adjustments Adjusted
---------
------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Product............... $ 5,214 $77,159 $ $ 82,373 $ $ 82,373
License and service... 1,041 3,373 4,414 4,414
Research and
development ......... 398 -- 398 398
--------- ------- ---------- ---------- ---------- ----------
Total revenue......... 6,653 80,532 87,185 87,185
--------- ------- ---------- ---------- ---------- ----------
Costs and expenses:
Cost of sales-
product.............. 2,821 73,417 76,238 76,238
Cost of sales-license
and
service ............. 950 1,
553 2,503 2,503
Selling, general, and
administrative....... 2,631 11,665 14,296 14,296
Research and
development ......... 1,334 -- 1,334 1,334
Amortization of
goodwill and other
intangibles.......... -- -- 2,601(BB) 2,601 2,601
--------- ------- ---------- ---------- ---------- ----------
Operating loss.......... (1,083) (6,103) (2,601) (9,787) (9,787)
Interest expense........ 418 2,099 2,517 (794)(CC) 1,723
Interest income......... -- 61 61 61
--------- ------- ---------- ---------- ---------- ----------
Loss from continuing
operations before
income taxes
........... (1,501) (8,141) (2,601) (12,243) 794 (11,449)
Benefit from income
taxes.................. (95) -- 95(DD) -- --
--------- ------- ---------- ---------- ---------- ----------
Loss from continuing
operations............. $ (1,406) $(8,141) $ (2,696) $ (12,243) $ 794 $ (11,449)
========= ======= ========== ========== ========== ==========
Loss per share from
continuing operations:
basic and diluted...... $ (.36) $(8,141) $ (2.03) $ (1.18)
========= ======= ========== ==========
Shares used in per share
computations: basic and
diluted................ 3,870,693 1,000 (1,000)(EE) 6,040,631 3,700,000 (FF) 9,740,631
2,169,938 (EE)
========= ======= ========== ========== ========== ==========
</TABLE>
- --------
(AA)Includes adjustments directly attributable to the Pulsar acquisition.
(BB) Reflects the amortization of goodwill and other intangibles of $33.4
million attributable to the acquisition, amortized on a straight line
basis over 10- to 15-year periods.
(CC) Reflects the reduction of interest expense which would result from the
repayment of $16.0 million of debt as described in "Use of Proceeds."
(DD) Reflects the income tax effect of the change from an S corporation to a C
corporation.
(EE) Reflects the exchange of all of Pulsar's outstanding common stock for
2,169,938 shares of our common stock in connection with the Pulsar
acquisition.
(FF) Reflects the sale of 3,700,000 shares of our common stock in this
offering.
27
<PAGE>
UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended March 31, 1999
---------------------------------------------------------------------------
Acquisition Offering Pro Forma
Adjustments Pro Forma Proceeds Combined,
Litronic Pulsar (AA) Combined Adjustments As Adjusted
--------- ------- ----------- --------- ----------- -----------
<S> <C>
<C> <C> <C> <C> <C>
Revenues:
Product............... $ 885 $ 9,579 $ $ 10,464 $ $ 10,464
License and service... 156 369 525 525
Research and
development.......... 369 -- 369 369
--------- ------- --------- --------- ---------- -----------
Total revenue......... 1,410 9,948 11,358 11,358
--------- ------- --------- --------- ---------- -----------
Costs and expenses:
Cost of sales-
product.............. 507 9,234 9,741 9,741
Cost of sales-license
and service.......... 140 155 295 295
Selling, general, and
administrative.......
871 1,892 2,763 2,763
Research and
development.......... 765 -- 765 765
Amortization of
goodwill and other
intangibles.......... -- -- 651 (BB) 651 651
--------- ------- --------- --------- ---------- -----------
Operating loss.......... (873) (1,333) (651) (2,857) (2,857)
Interest expense........ 109 478 587 (334)(CC) 253
Interest income......... -- 20 20 20
--------- ------- --------- --------- ---------- -----------
Loss from continuing
operations before
income taxes........... (982) (1,791) (651) (3,424) 334 (3,090)
Provision for (benefit
from) incom
e taxes..... (9) -- 9 (DD) -- --
--------- ------- --------- --------- ---------- -----------
Loss from continuing
operations............. $ (973) $(1,791) $ (660) $ (3,424) $ 334 $ (3,090)
========= ======= ========= ========= ========== ===========
Loss per share from
continuing operations:
basic and diluted...... $ (.25) $(1,791) $ (.57) $ (.32)
========= ======= ========= ===========
Shares used in per share
computations: basic
and diluted............ 3,870,693 1,000 (1,000)(EE) 6,040,631 3,700,000(FF) 9,740,631
2,169,938 (EE)
========= ======= ========= ========= ========== ===========
</TABLE>
- --------
(AA) Includes adj
ustments directly attributable to the Pulsar acquisition.
(BB) Reflects the amortization of goodwill and other intangibles of $33.4
million attributable to the acquisition, amortized on a straight line
basis over 10- to 15-year periods.
(CC) Reflects the reduction of interest expense which would result from the
repayment of $16.0 million of debt as described in "Use of Proceeds."
(DD) Reflects the income tax effect of the change from an S corporation to a C
corporation.
(EE) Reflects the exchange of all of Pulsar's outstanding common stock for
2,169,938 shares of our common stock in connection with the Pulsar
acquisition.
(FF) Reflects the sale of 3,700,000 shares of our common stock in this
offering.
28
<PAGE>
UNAUDITED PRO FORMA BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
March 31, 1999
---------------------------------------------------------------------
Acquisition Offering Pro Forma
Adjustments Pro Forma Proceeds Combined,
Litronic Pulsar (AA) Combined Adjustments(D) As Adjusted
-------- ------- ----------- --------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Cash and cash
equivalents............ $ 557 $ 441 $ $ 998 $15,200(C) $16,198
Accounts receivable,
net.................... 652 5,798 6,450 6,450
Inventories............. 452 890 1,342 1,342
Other current assets.... 984 -- 984 984
------ ------- ------- ------- ------- -------
Total current assets.... 2,645 7,129 9,774 15,200 24,974
Property and equipment,
net.................... 250 525 775 775
Goodwill and other
intangibles............ -- -- 33,441 (A) 33,441 33,441
Notes receivable--
related parties........ -- 543 543 543
Other assets............ -- 342 342 342
------ ------- ------- ------- ------- -------
Total assets............ $2,895 $ 8,539 $33,441 $44,875 $15,200 $60,075
====== ======= ======= ======= ======= =======
Liabilities and
Stockholders' Equity
(Deficit):
Financing arrangement--
IBM Global............. $ -- $ 7,201 $ $ 7,201 $(2,026)(C) $ 5,175
Current installments of
long-term debt......... 424 967 1,391 (1,391)(C) --
Notes payable--vendors.. -- 3,361 3,361 (3,300)(C) 61
Accounts payable........ 911 3,829 4,740 (1,100)(C) 3,640
Accrued liabilities..... 790 1,623 2,413 2,413
Notes payable to
shareholders........... -- 215 215 215
------ ------- ------- ------- ------- -------
Total current
liabilities............ 2,125 17,196 19,321 (7,817) 11,504
Long-term debt.......... 5,950 -- 5,950 (5,950)(C) --
Notes payable, net of
current maturities..... -- 3,085 3,085 (2,633)(C) 452
Stockholders' equity
(deficit):
Common stock............ 39 1 22 (A) 61 37 98
(1)(A)
Additional paid-in
capital................ -- 1,663 21,677 (A) 16,458 31,563 48,021
(1,663)(A)
(5,219)(B)
Accumulated deficit..... (5,219) (13,406) 13,406 (A) -- --
5,219 (B)
------ ------- ------- ------- ------- -------
Net stockholders' equity
(deficit).............. (5,180) (11,742) 33,441 16,519 31,600 48,119
------ ------- ------- ------- ------- -------
Total liabilities and
stockholders' equity
(deficit).............. $2,895 $ 8,539 $33,441 $44,875 $15,200 $60,075
====== ======= ======= ======= ======= =======
</TABLE>
- --------
(A) The adjustment reflects the acquisition of Pulsar under the purchase
method of accounting through the issuance of 2.17 million shares of common
stock with a fair value of $21.7 million and the assumption of net
liabilities of $11.7 million. The allocation of the purchase price to the
fair value of the assets acquired and liabilities assumed is preliminary
and will be finalized following completion of the acquisition of Pulsar.
Included in the amount allocated to goodwill and other intangibles is an
allocation of $11.1 million representing the preliminary estimate of value
of the customer base and strategic relationships.
(B) Reflects the restructuring of Litronic from an S corporation to a C
corporation with a corresponding reclassification of the $5.2 million
accumulated deficit to additional paid-in-capital.
(C) Reflects the repayment of debt including additional borrowings of $700,000
subsequent to March 31, 1999, and payment of vendor settlements from the
proceeds of this offering.
(D) Reflects the net proceeds from the sale of 3,700,000 shares of our common
stock at an assumed price of $10.00 per share.
29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the selected
financial data of Litronic and Pulsar, the pro forma financial data, and the
financial statements and related notes appearing elsewhere in this prospectus.
General
Litronic provides professional Internet data security services and develops
and markets software and microprocessor-based products needed to secure
electronic commerce and communications over the Internet and other
communications networks based on Internet protocols. Litronic's primary
technology offerings use public key infrastructure, which is the standard
technology for securing Internet-based commerce and communications.
Before 1990, Litronic was solely a provider of electronic interconnect
products to government and commercial entities. In 1990, Litronic formed its
data security division, which forms the basis of its operations today. The data
security division was engaged primarily in research and development until 1993
when it began to generate meaningful revenue. In September 1997, Litronic sold
its Intercon division, which consisted of the assets relating to its
interconnect operations, for cash to Allied Signal Inc., a non-related,
publicly-traded company. The gain on sale was $15.0 million, net of tax expense
of $241,000. In addition to the cash proceeds received, the sales agreement
provided for Litronic's right to receive a contingent purchase price. Effective
November 30, 1997, this right was distributed pro rata to the shareholders of
Litronic. Except for senior management, these operations were operated
independently from Litronic's data security operations. Litronic charged direct
costs to the division incurring them. 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 the basis of actual usage and
head count. Litronic's historical consolidated financial statements have been
restated to reflect the sale of the Intercon division as discontinued
operations.
Upon the closing of this offering, Litronic is acquiring Pulsar, a provider
of network-based information technology consulting services to commercial
accounts and federal, state and local government agencies, in exchange for
2,169,938 shares of our common stock valued at $10.00 per share, the
anticipated initial public offering price. In addition to its consulting
services, Pulsar also has an established product reseller business, which
focuses on resales to government agencies, large corporate accounts and state
and local governments.
Results of operations--comparison of the three months ended March 31, 1998 and
1999
Litronic
Total revenue. Total revenue decreased 15% from $1.7 million during the
three months ended March 31, 1998 to $1.4 million during the three months ended
March 31, 1999. The decrease was primarily attributable to decreased sales of
the ARGUS 300 products to the U.S. Army Corps of Engineers and readers to
Lockheed Martin Corporation under the Defense Messaging System contract.
During the three months ended March 31, 1998, Litronic derived 36%, 35% and
16% of its revenue from sales to Lockheed Martin Corporation, U.S. Army Corps
of Engineers and the National Security Agency. During the three months ended
March 31, 1999, Litronic derived 39%, 27%, and
30
<PAGE>
5% of its revenue from sales to Lockheed Martin Corporation, the National
Security Agency and the U.S. Army Corps of Engineers.
Sales to federal government agencies accounted for approximately 51% and 32%
of Litronic's sales during the three months ended March 31, 1998 and 1999.
Product revenue. Product revenue decreased 35% from $1.4 million in the
three months ended March 31, 1998 to $885,000 in the three months ended March
31, 1999. This decrease is primarily attributable to reduced sales of our ARGUS
300 products to the U.S. Army Corps of Engineers as a result of the substantial
completion of the Corps of Engineers Financial Management Services, or CEFMS,
contract and reduced sales of reader/writers to Lockheed Martin Corporation
under the Defense Messaging System contract. We expect that sales of our ARGUS
300 products under the CEFMS contract will continue to diminish; however, we
expect significant additional sales of the ARGUS 300 and other products to the
U.S. Army Corps of Engineers as a result of its recently commenced program to
upgrade its information technology systems periodically. Based on our
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 and expect to
generate revenue from the recently commenced program beginning in the fourth
quarter of 1999.
License and service revenue. License and service revenue decreased from
$309,000 during the three months ended March 31, 1998 to $156,000 during the
three months ended March 31, 1999. This change is primarily due to a decrease
of $246,000 in revenue from the National Security Agency Defense Messaging
System support services.
Research and development revenue. Research and development revenue for the
three months ended March 31, 1999 of $369,000 represents amounts earned under a
contract with the National Security Agency under which we are designing a
microprocessor meeting certain minimum specifications. We have contracted with
others to perform certain aspects of this project. All related project costs
are expensed as research and development as incurred. No other funds received
for research and development projects were recorded during any of the periods
presented. Regardless of the results of the development efforts the amounts
received from the National Security Agency are nonrefundable. The related
research and development costs are not separately identifiable. Therefore, the
corresponding costs of the entire development effort are included in research
and development expenses.
Product gross margin. Product gross margins decreased as a percentage of net
product revenue from 51% during the three months ended March 31, 1998 to 43%
during the three months ended March 31, 1999. The decrease resulted primarily
from decreased sales of ARGUS data encryption products to the U.S. Army Corps
of Engineers.
License and service gross margin. License and service gross margin decreased
as a percentage of its revenue from 43% during the three months ended March 31,
1998 to 10% during the three months ended March 31, 1999. This decrease
resulted primarily from higher compensation costs associated with the reduction
of support services revenue under the Defense Messaging System contract.
31
<PAGE>
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 32% from $662,000 during the three months
ended March 31, 1998 to $871,000 during the three months ended March 31, 1999.
As a percentage of revenue, selling, general and administrative expenses
increased from 40% during the three months ended March 31, 1998 to 62% during
the three months ended March 31, 1999. Selling, general and administrative
expenses increased primarily due to increased staffing to support business
expansion and increased professional fees.
Research and development expenses. Research and development expenses
increased 124% from $341,000 during the three months ended March 31, 1998 to
$765,000 during the three months ended March 31, 1999. The increase was
primarily attributable to increased costs associated with increased new product
development, including expenses associated with the development efforts of the
Forte microprocessor, which we are designing in conjunction with Atmel
Corporation, and increased staffing to support research and development efforts
including the Forte project. As a percentage of revenue, research and
development expenses increased from 21% during the three months ended March 31,
1998 to 54% during the three months ended March 31, 1999. The increase
reflected our continued investment in research and development of future
products and services coupled with the reduction in revenue described above.
Interest expense, net. Interest expense, net increased slightly from
$108,000 during the three months ended March 31, 1998 to $109,000 during the
three months ended March 31, 1999. The average borrowings required for
operations were comparable during the three months ended March 31, 1998 and
1999.
Income taxes. Before this offering, Litronic elected to be treated as an S
corporation under the provisions of Section 1362 of the Internal Revenue Code
of 1986 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 a credit of $51,000 and $9,000 for the
three months ended March 31, 1998 and 1999 as a result of losses from
operations.
Backlog. At March 31, 1999, Litronic had total backlog of $299,000,
including $227,000 attributable to the National Security Agency. Backlog
represents signed purchase orders received but not filled and, in the case of
the $227,000 attributable to the National Security Agency, funding of future
research and development costs. At March 31, 1998, we had total backlog of
$626,000, including $147,000 attributable to the U.S. Army Corps of Engineers
and $388,000 attributable to the National Security Agency.
Pulsar
Total revenue. Total revenue decreased 45%, from $18.0 million during the
three months ended March 31, 1998 to $9.9 million during the three months ended
March 31, 1999. During the three months ended March 31, 1998 and 1999, Pulsar
derived 16% and 18% of its revenue from sales to the U.S. Immigration and
Naturalization Service. Total revenue to federal government agencies declined
33% from $14.1 million during the three months ended March 31, 1998 to $9.4
million during the three months ended March 31, 1999. This decrease is
attributable primarily to the federal government's reallocation of budget
dollars from hardware and software procurements to resolving year 2000 issues.
32
<PAGE>
Product revenue. Product revenue declined 43% from $16.8 million during the
three months ended March 31, 1998 to $9.6 million during the three months ended
March 31, 1999. This decrease is primarily attributable to the following
factors:
. In 1997, Pulsar made a strategic decision to eliminate its high volume,
low margin Federal Systems Integration, or FSI, program activities,
which accounted for 13% of its product revenue during the three months
ended March 31, 1998 and was completely eliminated as of March 31, 1999.
Sales under the FSI program were phased out due to the diminishing
margins produced by these sales.
. Pulsar voluntarily withdrew from the Section 8(a) program in June 1997
in anticipation of its scheduled graduation from the program in November
1997. Section 8(a) contract revenue was $1.2 million during the three
months ended March 31, 1998 and was eliminated during the three months
ended March 31, 1999.
. Commercial, state and local government revenue decreased by 59%, from
$1.4 million during the three months ended March 31, 1998 to $569,000
during the three months ended March 31, 1999. This decrease is primarily
attributable to the loss of a contract with Montgomery County, Maryland,
and the closing of Pulsar's Atlanta sales office.
. Revenue from the General Services Administration, or GSA, schedule
contract and National Institutes of Health, or NIH, schedule contract
declined 25% from $12.0 million during the three months ended March 31,
1998 to $9.0 million during the three months ended March 31, 1999. This
decrease is primarily attributable to the reallocation of government
budget dollars from hardware and software procurements towards resolving
year 2000 issues.
Service revenue. Service revenue declined by 69%, from $1.2 million during
the three months ended March 31, 1998 to $369,000 during the three months ended
March 31, 1999. This decrease is primarily attributable 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.
Total gross margin. Pulsar's total gross margin increased 2%, from $546,000
during the three months ended March 31, 1998 to $559,000 during the three
months ended March 31, 1999.
Product gross margin. Pulsar's product gross margin increased to 4% during
the three months ended March 31, 1999. The increase in gross product margin was
primarily attributable to not filing for rebate income during the three months
ended March 31, 1998. Additional factors attributable to increased gross
product margins include a reduction in FSI sales, which relate to lower margin
product sales, and Pulsar's successful bidding for higher margin product
contracts, partially offset by a $125,000 write-off of expired rebates
receivable.
Service gross margin. Service gross margin increased from 41% during the
three months ended March 31, 1998 to 58% during the three months ended March
31, 1999. This increase is primarily attributable to Pulsar obtaining higher
margin contract work with Prince George's County and the loss of lower margin
contract work with the U.S. Department of Education and the Naval Research Lab
contract.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased 16% from $2.3 million during the three months
ended March 31, 1998 to $1.9 million during the three months ended March 31,
1999. The decrease was primarily attributable to a reduction in administrative
and sales staffing and rent expense partially offset by one-time legal and
accounting fees of approximately $450,000 associated with the acquisition of
Pulsar by Litronic. Bad
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debt expense decreased from $75,000 during the three months ended March 31,
1998 to $40,000 during the three months ended March 31, 1999. The bad debt
expense for the three month periods ended March 31, 1998 and 1999 was related
to a reserve for the allowance for doubtful accounts against accounts
receivable.
Interest expense. Interest expense decreased 32%, from $706,000 during the
three months ended March 31, 1998 to $478,000 during the three months ended
March 31, 1999. This is primarily attributable to a significant decrease in
Pulsar's average daily borrowings during the three months ended March 31, 1998
compared to the three months ended March 31, 1999.
Interest income. Interest income decreased 90% from $200,000 during the
three months ended March 31, 1998 to $20,000 during the three months ended
March 31, 1999. The decrease is primarily attributable to the decrease in
interest recognized on the cash surrender value of life insurance policies.
Results of operations--comparison of years ended December 31, 1996, 1997 and
1998
Litronic
Total revenue. Total revenue increased 8% from $9.4 million during the year
ended December 31, 1996 to $10.2 million during the year ended December 31,
1997 and decreased 35% from 1997 to $6.7 million during the year ended December
31, 1998. The increase from 1996 to 1997 was primarily attributable to
increased sales of the ARGUS 300 products to the U.S. Army Corps of Engineers.
The decrease from 1997 to 1998 was primarily attributable to the decreased
sales of the ARGUS 300 products, as described below.
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. During the year ended December 31, 1998, Litronic derived 44%, 20% and
17% of its revenue from sales to Lockheed Martin Corporation, the National
Security Agency and the U.S. Army Corps of Engineers. Sales to federal
government agencies accounted for approximately 84% and 81% of Litronic's sales
during the years ended December 31, 1997 and 1998.
Product revenue. Product revenue increased 10% from $7.9 million in the year
ended December 31, 1996 to $8.6 million in the year ended December 31, 1997 and
decreased 40% from 1997 to $5.2 million in the year ended December 31, 1998.
The increase from 1996 to 1997 was primarily attributable to increased sales of
our ARGUS 300 products to the U.S. Army Corps of Engineers. The decrease from
1997 to 1998 is primarily attributable to reduced sales of our ARGUS 300
products to the U.S. Army Corps of Engineers as a result of the substantial
completion of the CEFMS contract. The CEFMS contract with the U.S. Army Corps
of Engineers expired September 30, 1998. The Defense Messaging System contract
expires in November 1999, but it may be renewed by Lockheed Martin for up to
four one-year periods.
License and service revenue. License and service revenue was $1.5 million
during the years ended December 31, 1996 and 1997 and declined from 1997 by 32%
to $1.0 million for the year ended December 31, 1998. The decline from 1997 to
1998 was attributable primarily to reduced service revenue from the National
Security Agency as a result of its determination that it will no longer pay for
Litronic-provided support services for the Defense Messaging System and the
subsequent decline in support requests from users of Litronic's support
services.
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Research and development revenue. Research and development revenue for the
year ended December 31, 1998 of $398,000 represents amounts earned under a
contract with the National Security Agency under which we are designing a
microprocessor meeting certain minimum specifications. We have contracted with
others to perform certain aspects of the project. All related project costs are
expensed as research and development as incurred. No other funds received for
research and development projects were recorded during any of the periods
presented. Regardless of the results of the development efforts the amounts
received from the National Security Agency are nonrefundable. The related
research and development costs are not separately identifiable. Therefore, the
corresponding costs of the entire development effort are included in research
and development expenses.
Product gross margin. Product gross margin increased as a percentage of net
product revenue from 48% during the year ended December 31, 1996 to 63% during
the year ended December 31, 1997 and decreased to 46% during the year ended
December 31, 1998. The increase from 1996 to 1997 resulted primarily from
increased sales of ARGUS data encryption products to the U.S. Army Corps of
Engineers. The decrease from 1997 to 1998 is primarily attributable 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. License and service gross margin decreased
as a percentage of its revenue from 62% during the year ended December 31, 1996
to 58% during the year ended December 31, 1997 and decreased from 1997 to 9%
during the year ended December 31, 1998. The decrease from 1996 to 1997 was due
to additional head count and higher per employee costs. The decrease from 1997
to 1998 resulted primarily from higher compensation costs associated with the
reduction of support services revenue under the Defense Messaging System
contract.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 70% from $2.1 million during the year ended
December 31, 1996 to $3.5 million during the year ended December 31, 1997 and
decreased 25% from 1997 to $2.6 million during the year ended December 31,
1998. As a percentage of revenue, selling, general and administrative expenses
increased from 22% during the year ended December 31, 1996 to 34% during the
year ended December 31, 1997 and increased from 1997 to 40% during the year
ended December 31, 1998. Selling, general and administrative expenses during
1997 were higher due to nonrecurring bonuses of $1.0 million paid to
shareholder employees following the sale of the Intercon division. In addition,
selling, general and administrative expenses increased as a percentage of
revenue due to increased staffing to support the anticipated expansion of
Litronic's business.
Research and development expenses. Research and development expenses
increased 62% from $725,000 during the year ended December 31, 1996 to $1.2
million during the year ended December 31, 1997 and increased 14% from 1997 to
$1.3 million during the year ended December 31, 1998. The increases from 1996
to 1998 were primarily attributable to increased costs associated with
increased new product development, including expenses associated with the
development efforts of the Forte microprocessor, which we are designing in
conjunction with Atmel Corporation to be embedded in our Forte PKIcard. As a
percentage of revenue, research and development expenses increased from 8%
during the year ended December 31, 1996 to 12% during the year ended December
31, 1997 and increased from 1997 to 20% during the year ended December 31,
1998. These increases reflected our continued investment in research and
development of future products and services coupled with the reduction in
revenue in 1998 described above.
Interest expense, net. Interest expense, net, increased by 121% from $19,000
during the year ended December 31, 1996 to $42,000 during the year ended
December 31, 1997 and increased almost tenfold from 1997 to $418,000 during the
year ended December 31, 1998. The increases in interest expense from 1996 to
1998 were attributable to increased levels of borrowings required for
operations.
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Income taxes. The provision for state income taxes was $29,000 and $22,000
for the years ended December 31, 1996 and 1997. For the year ended December 31,
1998, Litronic had a benefit of $95,000 as a result of losses from continuing
operations before income taxes of $1.5 million.
Backlog. At December 31, 1998, Litronic had total backlog of $717,000,
including $109,000 attributable to Lockheed Martin Corporation and $596,000
attributable to the National Security Agency. In the case of the $596,000
attributable to the National Security Agency, backlog represents funding of
future research and development. At December 31, 1997, we had total backlog of
$1.1 million, including $466,000 attributable to Lockheed Martin Corporation
and $578,000 attributable to the National Security Agency.
Pulsar
Total 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 and decreased 47% from 1997 to $80.5 million during the year ended
December 31, 1998.
During the years ended December 31, 1997 and 1998, Pulsar derived 23% and
11% of its revenue from sales to the U.S. Immigration and Naturalization
Service. Total revenue to federal government agencies decreased 10% from $101.0
million during the year ended December 31, 1996 to $91.4 million for the year
ended December 31, 1997 and declined 21% from 1997 to $72.5 million during the
year ended December 31, 1998. The decrease was attributable primarily to a
decrease in Pulsar's sales to the U.S. government under its Section 8(a)
contracts, partially offset by an increase in GSA schedule revenue and NIH
contract revenue.
Product revenue. Product revenue declined 8%, from $155.7 million during the
year ended December 31, 1996 to $142.7 million during the year ended December
31, 1997, and declined 46% from 1997 to $77.2 million during the year ended
December 31, 1998. This decrease was primarily attributable to the following
factors:
. In 1997, Pulsar made a strategic decision to eliminate its high volume,
low margin FSI program activities, which accounted for 23% of its
revenue during 1996, 24% of its revenue during 1997 and 4% of its
revenue during 1998. Sales under the FSI program were phased out during
this period due to the diminishing margins produced by these sales. FSI
revenue decreased 4% from $38.1 million in the year ended December 31,
1996 to $36.7 million in the year ended December 31, 1997 and decreased
92% from 1997 to $3.2 million in the year ended December 31, 1998.
. Pulsar voluntarily withdrew from the Section 8(a) program in June 1997
in anticipation of its scheduled graduation from the program in November
1997. Section 8(a) contract revenue decreased by 71% from $50.1 million
during the year ended December 31, 1996 to $14.3 million during the year
ended December 31, 1997 and decreased 78% to $3.1 million during the
year ended December 31, 1998.
. Commercial, state and local government revenue decreased by 8% from
$24.8 million during the year ended December 31, 1996 to $22.9 million
during the year ended December 31, 1997, primarily due to a sales staff
focus on FSI program revenues, and decreased 83% to $3.9 million during
the year ended December 31, 1998 primarily due to the loss of a contract
with Montgomery County, Maryland and the closing of Pulsar's Atlanta
sales office.
. The reductions in revenue were partially offset by an increase in GSA
schedule revenue commencing in 1996 and NIH revenue commencing in 1998.
This revenue increased 61%, from $42.7 million during the year ended
December 31, 1996 to $68.8 million during the
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year ended December 31, 1997, and declined 3% from 1997 to $67.0 million
during the year ended December 31, 1998. The overall increase in GSA and
NIH contract revenue was primarily due to Pulsar's shift in sales focus
in response to the Federal Streamline Act of 1996, which encourages all
agencies to use the GSA or the NIH vehicle to procure products and
services in support of information technology requirements instead of
traditional time-restrictive contracting methods. The decrease in GSA
revenue from 1997 to 1998 was due in part to the government's
reallocation of budget dollars from hardware and software procurements
toward resolving year 2000 issues.
Service revenue. 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 and declined 62% from 1997 to $3.4 million during the year
ended December 31, 1998. The decrease from 1996 to 1997 was attributable
primarily to the completion of a contract with Samsung Electronics. The
decrease from 1997 to 1998 was 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.
Total gross margin. 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 and increased from 1997 to 7% during the year ended
December 31, 1998. 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
and declined from 1997 to $5.6 million for the year ended December 31, 1998.
The overall decrease from 1996 to 1997 was attributable primarily to the
reduction in total revenue combined with a decrease in gross margin
percentage. The decrease from 1997 to 1998 was attributable to a reduction in
total revenue and the $1.6 million write-off of expired rebates receivable
discussed below partially offset by a reduction on the write-off of obsolete
inventory.
Product gross margin. Product gross margin declined as a percentage of
revenue from 7% during the year ended December 31, 1996 to 3% during the year
ended December 31, 1997 and increased from 1997 to 5% during the year ended
December 31, 1998. The decrease in product margin from 1996 to 1997 was
attributable to industry competition and write-off of obsolete inventory.
Consistent with Pulsar's business plan, the increase from 1997 to 1998 was
attributable primarily to reduced FSI sales, which are lower margin product,
and Pulsar's successful bidding for higher margin product contracts, partially
offset by the write-off of obsolete inventory and the write-off of expired
rebates receivable.
Pulsar wrote off approximately $1.6 million of rebate receivables against
cost of product sales during the year ended December 31, 1998. Approximately
$1.3 million of the rebates receivable was written off due to inaccurate or
incomplete filings. These rebates were then resubmitted; however, in many
cases the expiration period for these rebates had expired at the time of
submission, resulting in the rebates becoming uncollectible.
With respect to one program, rebates were filed and two checks aggregating
approximately $300,000 were received by Pulsar from the original equipment
manufacturers, but the checks were never deposited into Pulsar's account, and
therefore became stale. Pulsar has subsequently revised its collection
procedures to provide that all rebate checks are recorded when received and
monitored pending their deposit into Pulsar's account. If a rebate has not
been collected in a timely manner Pulsar contacts the original equipment
manufacturer to resolve any outstanding matters. This procedure is designed to
ensure proper collection and timely deposits of checks.
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Pulsar has initiated new rebate procedures to ensure that accurate rebates
are filed on a timely basis. These procedures include a monthly tickler system
showing all current rebate programs and the status of outstanding rebates
receivable. Pulsar has also implemented a new system which automatically
summarizes the rebates available based on products sold in the current month.
This summary is reviewed by personnel in the contracts department on a
product-by-product basis prior to the preparation of rebate submissions.
Pulsar's contracts department files the rebates, then follows up to ensure
that all rebates are collected, and immediately resolves any discrepancies
with the original equipment manufacturer sponsoring the rebate programs.
Pulsar has also reassigned responsibilities to new personnel and instituted
new review procedures including increased oversight by the vice president of
finance.
Litronic will continue to utilize the newly adopted procedures developed by
Pulsar to ensure that rebate receivables are filed accurately and collected on
a timely basis.
Pulsar was unable to separately quantify the amount of expense for
obsolescence, book to physical inventory adjustments or shrinkage for the
years ended December 31, 1996 and 1997. This was due to Pulsar's former
practice of making one year-end reconciling adjustment to the general ledger
to adjust inventory for obsolescence and shrinkage, and differences between
the physical inventory count and the general ledger inventory balance. The
total year-end adjustment was $495,000 for 1996 and $2.9 million for 1997.
Management believes that the amount of obsolete inventory during these periods
was material. These adjustments were recorded as an increase to cost of sales
during the years ended December 31, 1996 and 1997, thus decreasing gross
margin. Pulsar's historical year-end reconciliation process ensured that
inventory was stated accurately based on physical count at each year-end.
Since January 1, 1998, Pulsar has implemented a monthly physical inventory
reconciliation and a year-end reconciliation procedure to separately account
for obsolete inventory and differences in the physical inventory and the
general ledger inventory balance. The charge for obsolete inventory during the
year ended December 31, 1998 was $344,000.
Service gross margin. Service gross margins remained unchanged at 53%
during the years ended December 31, 1996 and 1997 and increased slightly from
1997 to 54% during the year ended December 31, 1998.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 27% from $13.5 million during the year ended
December 31, 1996 to $17.2 million during the year ended December 31, 1997 and
decreased 32% from 1997 to $11.7 million during the year ended December 31,
1998. The increase from 1996 to 1997 was attributable primarily to bad debt
expense associated with accounts receivable and notes receivable. The decrease
from 1997 to 1998 reflects a reduction in the total amount of bad debt expense
and a reduction in administrative and sales staffing. Selling, general and
administrative expenses increased as a percentage of revenue from 8% during
the year ended December 31, 1996 to 11% during the year ended December 31,
1997 and increased from 1997 to 14% during the year ended December 31, 1998.
Bad debt expense and measures designed to reduce bad debts. Bad debt write-
offs increased from $403,000 during the year ended December 31, 1996 to $4.6
million during the year ended December 31, 1997 and decreased from 1997 to
$1.8 million during the year ended December 31, 1998. Bad debt expense in 1997
was primarily attributable to extending credit to commercial clients who did
not meet their obligations in the amount of $3.9 million and commercial loans
outside of the normal course of business that were deemed uncollectible in the
amount of $702,000. Bad debt
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expense in 1998 was incurred from commercial clients who did not meet their
obligations. Additionally, Pulsar has implemented procedures to reduce the
exposure to commercial bad debts, including:
. performing thorough credit reviews on all new and existing non-
government customers, including verifying references and analyzing
customer's Dun and Bradstreet reports before extending credit; and
. changing its customer profile by significantly reducing FSI reseller
clients from the federal government to Fortune 500 clients, thus
reducing credit risk.
Notes receivable--related parties. Pulsar had previously assigned two notes
receivable from third parties to a related party in the aggregate principal
amount of $623,000. These notes receivable were assigned back to Pulsar in
December 1997. The notes and accrued interest were determined to be
uncollectible after pursuing legal action to collect and written off as bad
debt expense in the year ended December 31, 1997.
The provision for notes receivable-related parties of $655,000 for the year
ended December 31, 1998 relates to a note due from a company owned by a
relative of the shareholders of Pulsar. Under the terms of the note, payment on
the note is not due until commercial real estate owned by the related party is
sold. The related party has advised us that it does not intend to sell the
property, and the value of the property is not in excess of the mortgage. In
addition, any proceeds derived from the sale of the property would be applied
against the mortgage before repayment of the note. During 1998 the related
party experienced financial difficulties as a result of its commercial real
estate operations. Based upon the related party's cash flows and decline in its
financial condition, Pulsar determined that the note had become impaired. The
amount of the impairment was determined in accordance with Statement of
Financial Accounting Standards No. 114, and the note was fully reserved as of
December 31, 1998.
Cost cutting measures designed to reduce selling, general and administrative
expenses. In an effort to reduce selling, general and administrative expenses
in future periods, Pulsar has taken significant cost cutting measures,
including:
. automating administrative job functions through business process
reengineering and other reductions, thus reducing head count by 2
executives and 30 administrative personnel compensated on an hourly
basis from January 30, 1998 to May 1, 1999; and
. relocating to less expensive office space beginning October 1, 1998,
thus decreasing monthly rent expense from $45,000 to $11,500.
Expenses paid during the year ended December 31, 1998 to achieve these cost
reductions included $24,000 in severance fees and $750,000 in lease termination
fees. There were no related expenses accrued for the year ended December 31,
1998 or the three months ended March 31, 1999 or related expenses paid during
the three months ended March 31, 1999.
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, and decreased by 42% from 1997 to $2.1 million during the year ended
December 31, 1998. Pulsar's average daily borrowings decreased during 1996, but
additional interest expense was recognized due to a new agreement Pulsar
entered into with its creditor, IBM Global. Interest expense decreased in 1998
due to a significant decrease in borrowings.
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 and decreased by 87% to $61,000 during the year ended December 31, 1998.
These decreased were attributable primarily to a
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reduction in the outstanding notes receivable balances. Also, during 1998,
Pulsar did not recognize interest income on the related party notes receivable.
Liquidity and capital resources
On a pro forma combined, as adjusted, basis, we had working capital of $13.5
million as of March 31, 1999.
We have entered into a letter of intent with Fidelity Funding relating to a
new $20.0 million secured revolving line of credit facility and expect to enter
into a definitive agreement permitting us to borrow under this facility
commencing upon the closing of this offering. The letter of intent
contemplates:
. a three-year term, subject to one-year renewals at the lender's option;
. an annual interest rate of prime plus .625%;
. a pledge of substantially all of our personal and real property as
collateral; and
. a cap on our borrowings equal to 85% of our eligible accounts receivable
plus the lesser of (a) 50% of the value of our eligible on-hand
inventory or (b) $1.0 million.
We believe that the net proceeds of this offering, together with
availability under our new $20.0 million revolving line of credit 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 and an
anticipated increase in rent expense for our California operation of $400,000
per year following our anticipated relocation of our California headquarters.
We could be required to seek additional financing 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;
. our assumptions change or prove to be inaccurate; or
. the net proceeds of this offering or our cash flows prove to be
insufficient to finance our growth strategy.
Litronic
Historically, Litronic's cash requirements have been financed through a
combination of cash flow from operations, except in the year ended December 31,
1998, bank financing and loans from its principal shareholders and affiliates.
Some of Litronic's borrowings contain covenants and restrictions, including
maintenance of minimum tangible net worth and working capital, and they
prohibit the payment of dividends. Litronic was in compliance with or had
received waivers for these covenants as of December 31, 1998 and March 31,
1999.
During the three months ended March 31, 1999, cash used in operations for
Litronic was $866,000, primarily due to a net loss of $973,000 and an increase
in other current assets of $599,000. These were partially offset by a decrease
in accounts receivable of $88,000 due to improved collections in 1999 and an
increase in accounts payable of $455,000.
During the three months ended March 31, 1999, cash provided by financing
activities was $594,000, consisting primarily of borrowings of $1.1 million
under the revolving note payable to a bank and $750,000 under the long-term
notes payable, partially offset by repayments of $1.3 million under the
revolving note payable to a bank.
Litronic's capital expenditures, including computer equipment, test
equipment and furniture and fixtures, were $69,000 during the three months
ended March 31, 1999. Litronic's capital expenditures were funded through cash
generated from operations and through its secured revolving credit line and
borrowing from its principal shareholders.
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As of May 28, 1999, Litronic had an aggregate of $6.6 million outstanding
under various promissory notes to BYL Bank Group at a fixed annual interest
rate of 6.6%. These notes are due upon the earlier of July 31, 2000 or a change
of control of Litronic Industries and are personally guaranteed by Kris Shah
and secured by personal assets pledged by Mr. Shah. We intend to use proceeds
from this offering to repay the indebtedness under these notes.
In addition, we intend to use proceeds from this offering to repay in full
the outstanding balance under Litronic's $2.5 million line of credit facility
with Fidelity Funding Inc. in the approximate amount of $450,000. This facility
expires in February 2000 and is personally guaranteed by Mr. Shah.
Pulsar
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 losses from operations,
violation of debt covenants and net capital deficiency raise substantial doubt
about Pulsar's ability to continue as a going concern. The debt covenants
violated by Pulsar were contained in its inventory and working capital
financing agreement with IBM Global and in a series of subsequent forbearance
agreements. These covenants required Pulsar to maintain at various times
financial ratios of annualized revenue to working capital, net profit after tax
to revenue and total liabilities to tangible net worth. Pulsar has received a
forbearance from IBM Global through the closing of this offering and expects to
repay IBM Global in full following the closing of this offering.
Total cash provided for the three months ended March 31, 1999 was $89,000.
Pulsar's cash provided from operations for the three months ended March 31,
1999 was $2.9 million. This primarily resulted from collections of accounts
receivable of $4.2 million, and an increase in accrued liabilities of $551,000,
offset by a net loss of $1.8 million. The increase in accrued liabilities was
primarily attributable to accrued professional fees associated with the
acquisition of Pulsar by Litronic. Cash used in financing activities resulted
primarily from repayments of our line of credit for $2.2 million and repayments
of vendor notes payable for $587,000.
Total cash used for the year ended December 31, 1998 was $1.9 million.
Pulsar's cash provided from operations for the year ended December 31, 1998,
was $18.4 million. This primarily resulted from collections of accounts
receivable of $17.7 million, reduction of inventory of $1.6 million and an
increase in accounts payable of $2.6 million, offset by a net loss of $8.1
million, including a non-cash provision for doubtful accounts and notes
receivable of $3.4 million. Inventory decreased as a result of a change in
business practices from carrying inventory to anticipate customer requests to a
just-in-time method of inventory.
Cash used in financing activities for the year ended December 31, 1998, was
$21.5 million, resulting primarily from $18.7 million in payments made to
decrease indebtedness outstanding under its financing arrangement with IBM
Global, a portion of which was funded by borrowings of $1.5 million against the
cash surrender value of life insurance policies.
Pulsar's capital expenditures, including computer equipment, warehouse
equipment, and furniture and fixtures, were $58,000 for the year ended December
31, 1998. Proceeds from loans from cash surrender value of life insurance net
of premium payments were $1.2 million.
During the year ended December 31, 1998 and the three months ended March 31,
1999, Pulsar repaid a total of approximately $1.0 million outstanding under its
term loan from Wilmington Trust
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Company which bears interest at the prime rate in effect from time to time and
matures in December 2002. On May 5, 1999, this loan was reduced by an
additional $543,000, leaving a balance due of approximately $3.5 million. This
debt is personally guaranteed by William W. Davis, Sr. and Lillian A. Davis and
is secured by property pledged by a family member of Mr. Davis. We intend to
use proceeds from this offering to repay the balance of this indebtedness in
full.
During the year ended December 31, 1998 and the three months ended March 31,
1999, Pulsar also converted $5.0 million in accounts payable to notes payable
due to negotiated agreements with vendors. As of March 31, 1999, $3.3 million
of these notes payable remained outstanding. We intend to use proceeds from
this offering to repay this balance.
Following is information regarding lawsuits filed against Pulsar other than
the lawsuits filed by G2 Resources, Inc., Rudolph Menna and A&T Marketing,
Inc., which are described on page 68. During the year ended December 31, 1998,
two lawsuits were filed against Pulsar by trade vendors claiming approximately
$739,000, plus interest, attorney's fees and costs. These lawsuits were settled
as structured payments in the aggregate amount of approximately $785,000 and
the obligations were classified as notes payable. Payments applied against
these notes payable during the year ended December 31, 1998 totalled
approximately $315,000, which included approximately $14,000 of interest
expense. During the first quarter ended March 31, 1999, twelve lawsuits were
filed against Pulsar by trade vendors and a local government agency claiming
approximately $875,000, plus interest, attorney's fees and costs. As of March
31, 1999, these lawsuits were settled for an aggregate amount of approximately
$929,000, including approximately $60,000 of interest, attorney's fees and
costs, and the obligations were classified as accounts payable. Payments
applied against these accounts payable during the quarter ended March 31, 1999
totalled approximately $41,000, which included approximately $2,000 of interest
expense. During the quarter ended March 31, 1999, payments applied against the
notes payable relating to the two lawsuits filed and settled in 1998 totalled
approximately $278,000, which included approximately $8,000 of interest
expense. After March 31, 1999, up to May 28, 1999, four other lawsuits were
filed against Pulsar by trade vendors claiming approximately $215,000, plus
interest, attorney's fees and costs. None of these lawsuits has been settled.
As of May 28, 1999, Pulsar owes approximately $815,000 on the claims that have
been settled and are classified as notes payable or accounts payable, due
during 1999. We have allocated $1.1 million of the net proceeds of this
offering to pay the amounts due under these settlements as well as anticipated
amounts to pay the as-yet-unsettled claims.
Additionally, Pulsar has approximately $3.1 million of accounts payable
balances which are more than 90 days overdue. We expect to use cash from
operations to fund these obligations to the extent we are not able to negotiate
extended payment arrangements. If these funds prove insufficient, we may use a
portion of the proceeds from this offering allocated to working capital to
satisfy these obligations.
Pulsar funded its operations during the year ended December 31, 1998 through
its financing agreement with IBM Global. Under this agreement, Pulsar purchases
hardware and software from authorized suppliers and finances the purchases
through IBM Global. The agreement provided for an initial credit line up to $18
million, which has been increased and decreased over time through amendments to
the forbearance agreement, based on Pulsar's hardware and software procurement
requirements financed through the line of credit, and as a result of defaults
that have occurred related to the forbearance agreements. As of March 31, 1999,
the maximum amount available under the line of credit was $9.0 million, which
was reduced to $8.0 million as of April 30, 1999. As of March 31, 1999, $7.2
million was outstanding under the line. The line of credit allows Pulsar to
finance up to 85% of its eligible accounts receivable and 100% of the value of
its on-hand inventory. The credit
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line is secured by substantially all assets of Pulsar and is personally
guaranteed by, and secured by $1.4 million of the personal assets of, Mr. Davis
and Ms. Davis. We intend to use $1.4 million of the proceeds from this offering
to reduce amounts outstanding under this credit line and eliminate the pledge
of assets by Mr. Davis and Ms. Davis.
IBM Global has agreed to forbear Pulsar's violations of financial covenants
in the IBM Global financing agreement in exchange for Pulsar's agreement to pay
to IBM Global, on or before October 1999, either (a) warrants to purchase for a
nominal amount a fully diluted 4% ownership interest in Pulsar or (b) the
lesser of:
. $650,000,
. 4% of the sale price upon the sale of all or substantially all of
Pulsar's assets, or
. a pro rata share of $650,000 upon the sale of less than substantially
all of Pulsar's assets.
We intend to satisfy this obligation to IBM Global by paying $650,000 to it
upon the closing of this offering.
Pro forma information and future trends
Following this offering, we intend to roll out our enterprise-wide data
security products to Pulsar's significant existing client base. We believe that
Pulsar's custom-designed secure personal computers, or PCs, will provide us
with another type of data security product offering, 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, distribution channels
and partners to expand our marketing of our Internet data security products.
Revenue
During the year ended December 31, 1998 and three months ended March 31,
1999, sales of Internet data security products, including NetSign, Pro File
Manager and CryptOS, accounted for 6% and 8% of our revenue on a pro forma
combined basis.
We are currently experiencing increased demand for our Internet data
security products, including NetSign, ProFile Manager and CryptOS, from
commercial customers. Our recently released Internet-related products such as
NetSign, NetSign Pro, CipherServer, and developer toolkits such as CryptOS SDK,
have also experienced favorable market acceptance. 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, 1998 and three months ended March 31,
1999, on a pro forma combined basis, product reselling accounted for 89% and
84% of our revenue and license and service revenue accounted for 5% of our
revenue in both periods. Research and development revenue accounted for .5 %
and 3% of our revenue on a pro forma combined basis for the year ended December
31, 1998 and the three months ended March 31, 1999. Research and development
revenue represents amounts earned under a contract with the National Security
Agency under which we are designing a microprocessor meeting certain minimim
specifications. As we expand our 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.
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On a pro forma combined basis, only one of our customers, the U.S.
Immigration and Naturalization Service, has accounted for 10% or more of our
revenue, accounting for 21% of combined revenue during the year ended December
31, 1998 and 16% of combined revenue during the three months ended March 31,
1999. Sales to U.S. government agencies accounted for approximately 90% of our
pro forma combined revenue for the year ended December 31, 1998 and 86% during
the three months ended March 31, 1999.
Gross margin
During the year ended December 31, 1998 and three months ended March 31,
1999, Litronic's data security products had a gross margin of 46% and 43% and
Pulsar's product reselling activities had a gross margin of 5% and 4%. Pulsar
recentl
y shifted its product reselling focus toward higher margin computer and
network security products, including intrusion detection software and
firewalls, which are custom designed configurations installed into a network to
prevent unauthorized access from outside the network. We intend to continue to
focus our product reselling efforts toward these products. As a result, we
expect product reselling gross margin to increase as a percentage of
corresponding revenue. Our license and service revenue has a relatively high
gross margin, with a gross margin of 43% for the year ended December 31, 1998
and 44% for the three months ended March 31, 1999 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.
Cost cutting measures
Pulsar has taken several cost cutting measures since the beginning of 199
8
which have significantly reduced the expenses associated with selling, general
and administrative activities, including an overall reduction of staff from 75
persons at December 31, 1997 to 44 persons at April 1, 1999, enhanced credit
procedures and reduced rent expense. In addition, as a combined entity, we
expect to consolidate Litronic's Washington, D.C. area offices into Pulsar's
offices in Lanham, Maryland.
Focused marketing efforts
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 expand the marketing of our Internet data security products, we
anticipate increasing expenditures for sales and marketing, particularly
expenses associated with
. opening additional marketing channel support offices;
. adding commercial sales personnel to focus on sales to commercial markets;
and
. continu
ally introducing and refining products in response to market
demands.
Our sales and marketing expenses are generally incurred in advance of
associated revenue and we expect these expenses to increase both as a
percentage of revenue as well as in amount. These measures could adversely
affect our operating income.
As a result of the cost cutting measures and focused marketing efforts
described above we expect a net reduction in selling, general and
administrative expenses.
Research and development
In an effort to increase our research and development activities, we have
allocated $5.0 million of the net proceeds of this offering to research and
development activities for the next 12 months.
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We expect expenses related to research and development to increase
significantly as a consequence of our increased focus on these activities.
Intangible assets
The Pulsar acquisition will result in a significant increase in our
intangible assets. Approximately $33.4 million, or 56%, of our pro forma
combined, as adjusted, assets as of March 31, 1999, consisted of intangible
assets arising from the acquisition. This amount represents goodwill and other
intangibles, which will be amortized over 10- to 15-year periods 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
and other intangibles amortized in a particular period constitutes a non-cash
expense, which is not tax deductible, that reduces our net earnings or
increases our net loss.
Year 2000 issues
An issue affecting us 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 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
year 2000 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 year 2000 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 year 2000 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 costs incurred to date related
to the year 2000 issue have related primarily to time spent by employees in
year 2000 compliance matters and have not been significant. We do not believe
future costs will be significant. The following is a description of how we have
categorized and are addressing the year 2000 issue.
Internal systems
We have evaluated our internal computer systems in an effort to determine
the actions, if any, necessary to make them year 2000 compliant. Our evaluation
has involved testing our systems to ensure that they are year 2000 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 year 2000 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 these lessors. We have received
letters from our lessors and, as applicable, their agents indicating the year
2000 compliance of the embedded systems. Based upon these responses we do not
believe there are any year 2000 compliance issues with our embedded systems.
Because we believe that our information technology and embedded systems will
be substantially year 2000 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
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embedded systems, we will develop contingency plans if we determine that any
business critical systems will not be year 2000 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 has sent year 2000 issue questionnaires to our significant
vendors, suppliers and customers. Although the responses we have received do
not indicate any significant year 2000 issues, we do not have any assurances
that all of our significant vendors, suppliers and customers will take the
necessary steps to ensure that their respective systems will be protected
against the year 2000 issue or that even if such steps are taken, they will be
successful. As we continue to assess the risk of our significant vendors',
customers' and suppliers' systems, we will develop and implement, if necessary,
curative plans and contingency plans to address any year 2000 compliance
issues.
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 year 2000 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
these 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.
Summary
There can be no assurance that any year 2000 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 year 2000 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
year 2000 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 year 2000 problems experienced by these third parties.
These events, if experienced, could have a material adverse effect on our
business, results of operations, financial condition and liquidity.
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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:
. the length of our customer commitments;
. 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 outside contractors to complete some assignments; and
. general economic conditions.
In addition, the sales and implementation cycles associated with our product
sales and network design and implementation act
ivities can, as a result, be
lengthy, potentially lasting from 45 to 90 days. 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 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, comparisons of quarterly results may not be meaningful and
should not be relied upon, nor will they necessarily reflect on future
performance. Fluctuations in
quarterly operating results may adversely affect
the trading price of our common stock if our operating results are below the
expectations of public market analysts and investors.
New accounting standards
In June 1998, the Financial Accounting Standards Board 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 issued
Statement of Position 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.
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 these 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 paragraphs of
SOP 97-2 to require recognition of revenue using the residual method under some
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 our 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 the Internet and Internet protocol-based 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, 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
billion by 2001, an annual growth rate of 44%. 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, an annual growth rate of 124%. 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 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,
78% of respondents to its 1998 CSI/FBI Computer Crime and Security
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Survey reported that they are connected to the Internet, but 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 Computer Security Institute 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 I
nvestigation, 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.
Requirements for end-to-end data security
Today's client operating systems and Internet protocol-based 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 persona
l
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 and Internet protocol-based 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
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persons. Digital cryptography is performed using a combination of symmetric
ciphers and asymmetric ciphers to achieve each of the basic data security
elements of identification and authentication, confidentiality, integrity and
non-repudiation. Symmetric ciphers are commonly referred to as symmetric-key or
secret-key cryptography and asymmetric ciphers are commonly referred to as
asymmetric-key or public-key cryptography.
Both symmetric-key and asymmetric-key cryptography use an encrypting and a
decrypting key. The decrypting key is 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 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 which consists of token,
password and biometric comparisons, can be implemented.
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.
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We are currently leading a joint effort with Atmel Corporation under a
contract with the National Security Agency to develop Forte, an ultra fast 32-
bit 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 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 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-based 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
these 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
Litronic provides professional Internet data security services and develops
and markets software and microprocessor-based products needed to secure
electronic commerce and communications over the Internet and other
communications networks based on Internet protocols. Litronic's 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.
To increase sales capacity for its proprietary products and to capitalize on
opportunities in the rapidly growing Internet security market, simultaneously
with the closing of this offering, Litronic is acquiring Pulsar, a network
integration solutions company that specializes in deploying large-scale network
solutions to organizations in the commercial and government sectors.
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 the market opportunities and the competitive
advantages we believe will result from the Pulsar acquisition. Key elements of
our business 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-based 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-based 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. Enhanced
versions of ProFile Manager and Maestro are expected to be released in
the third quarter of 1999. We believe that our research and development
capabilities and the combined expertise of our technical staff position
us to respond quickly and effectively to technological change, increased
competition and market demands.
. Expanding professional Internet protocol-based network security
services. We intend to provide our customers with a full range security
services, including security policy assessments and evaluations, custom
software development, integration and maintenance for the Internet and
other Internet protocol based communications network.
. Expanding and leveraging strategic alliances. We intend to maintain and
leverage existing strategic alliances and develop new strategic
alliances with vendors with
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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.
. 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 advan
ced 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 these delays.
. Increasing international sales. We will seek to generate additional
sales in foreign markets by establishing a network of international
distributors and value-added resellers. The U.S. government has recently
relaxed the export restrictions for our ProFile Manager, NetSign and
other high-level encryption products. These products may now be exported
without a license to most countries for use by banks, online merchants,
healthcare, insurance organizations and overseas subsidiaries of U.S.
companies. To capitalize on these opportunities, we are in the process
of building or have built relationships with distributors and resellers
with computer security expertise in these market sectors:
. we have ap
pointed distributors in Japan and Spain;
. we are negotiating with potential distributors and resellers in
Europe, Africa and Asia; and
. we intend to appoint a director of international sales who will be
responsible for the management of our international distributor
network.
In addition, we expect to experience the following 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. W
e believe the combination of Pulsar's service
operations and Litronic's product offerings will distinguish us from
other PKI 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
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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 products 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
can operate independently of:
. algorithms--our security products are designed to use different suites
of algorithms depending upon the application requirements, for example,
military or banking and finance.
. platforms--our security products may be used with many different
computer types and operating systems, for example, Windows, UNIX, and
MacIntosh.
. applications--our security products may be used with various software
applications, for example, e-mail, e-commerce, database systems or word
processors.
. tokens--our security products function with various types of tokens, for
example, software tokens, smartcards and PC cards.
As a result of this open architecture, these 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 industry standard architecture, or ISA, and
peripheral component interconnect, or PCI, bus cards. We are also working with
other companies to implement use of PCMCIA cards, 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
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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 lifecycle
management solution. ProFile Manager provides for token-based security systems
management from initialization to secure archive 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 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 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 such as smartcards,
PCMCIA cards and cryptographic algorithms. Coupled with token reader/writers,
Maestro supports devices over commonly used interfaces, including keyboard,
serial, small computer system interface, or SCSI, parallel port and universal
serial bus. 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.
Security tokens
ISO smartcards. We offer a family of off-the-shelf International Standards
Organization, or 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 an
ultra fast 32-bit microprocessor which is being designed with a high speed
universal serial bus 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.
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Other tokens. Because our products are open-architecture, open-platform,
open-token, algorithm 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.
Token reader/writers
A token reader/writer is a hardware component that electronically reads 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 workstation. 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 personal identification number, or PIN, path. With a protected PIN
path, the password authentication is intercepted by the reader/writer thus
preventing a hacker from implanting an unauthorized 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, or
NIST, the U.S. Treasury Department and General Accounting Office.
PCMCIA client reader/writer. We offer a series of single-and dual-socket
PCMCIA card reader/writers for both internal and external application, that
interface via various ports such as SCSI, ISA bus, PCI bus, Universal Serial
Bus and parallel port. 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
Pulsar has developed and we intend to 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
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be fully erased. This process 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
Through our Pulsar operations, we will offer secure architecture based
firewall and virtual private networks gateway technology using intrusion
detection software for high data capacity and scalable security solutions.
These software and hardware systems provide for multi-user remote
administration, and integrated management of multiple security policies and
firewalls.
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. These 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
Through our Pulsar operations, we will 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. Pulsar develops and implements complete turn-key networks or enhances
or expands existing networks, as the customer requires.
These 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.
Pulsar approaches the design and development of solutions for 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 Pulsar's expertise in designing and implementing systems
providing for robust security, our solutions will 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;
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. secured distributive applications;
. open-systems migration of data;
. information security communication services; and
. artificial intelligence technologies.
Pulsar provides 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.
Pulsar also provides information technology outsourcing services for customers,
including ongoing management of network systems. Pulsar delivers professional
services on either fixed-price delivery or time-based delivery modes through
its data security group, which provides consulting and integration services,
and its enterprise information group, which provides network design,
implementation and management, legacy systems migration, and systems
configuration and evaluation.
Our newly acquired Pulsar staff has specific expertise in the following
areas of networking systems:
. Internet enterprise network consulting: As computer networks become more
complex the assistance of knowledgeable network professionals is
critical for maximum performance. We believe our network consulting
staff will be able to help organizations realize their business goals
and objectives.
. Network management: Today's network managers must cope with a maze of
network protocols, configuration options and computing platforms. We
believe our network management staff will be able to support 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. We
believe our remote computing team will be able to 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 believe we will be able to provide a
complete solution that incorporates training and implementation.
Product reselling
Historically, a substantial portion of Pulsar's product resale revenues was
derived from sales of low-end, low-margin computer and network security
products. Pulsar has, however, increasingly been shifting its 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 these products.
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 the access, within a network. These 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. Pulsar offers high-end firewall
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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. Pulsar offers
components manufactured by leading vendors, including Cisco Systems,
Inc., Bay Networks, Inc., Hewlett-Packard Company, Bell Computers,
International Business Machines 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 point-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 third-party
APIs, device drivers, token reader/writers and tokens, and, following
this offering, those of Litronic.
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 will not be required to make
substantial investments in inventory.
After the offering, we will, where appropriate, also include our own data
security products within our product configuration solutions.
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 and
foreign government agencies. We believe significant cross-marketing
opportunities exist with the integration of Pulsar's customer base of over 100
federal agencies and over 40 commercial and state and local government
customers.
Following the Pulsar acquisition, our combined customer base will include:
. Netscape Communications . Federal National Mortgage
Corporation Association
. Walt Disney Company . S.W.I.F.T.
. Nippon Telephone and . Executive Offices of the
Telecommunications Data President of the United States
Corporation . U.S. Army Corps of Engineers
. American Express Company . Lockheed Martin Corporation
. Bank of America, N.A. . Booz Allen & Hamilton Inc.
. National Security Agency . Schlumberger Limited
. Federal Communications Commission . Federal Bureau of
. Deloitte & Touche LLP Investigation
. Lucent Technologies, Inc.
Customer service and support
We believe that customer service and support is critical to retaining
existing customers and attracting prospective customers. Our combined customer
service and support staff consists of 16
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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 to expand our business to
additional distribution channels.
Direct marketing effort
As of May 1, 1999, on a combined basis, we employed a direct sales and
marketing force of 31 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 use telemarketing
efforts to target commercial accounts and federal government agencies. We seek
to achieve greater vertical market penetration by using direct sales personnel
with significant market expertise, as well as consultants with established
relationships in the commercial marketplace.
Following the closing of this offering, we intend to expand our direct sales
force to increase the number of representatives located in our California,
Georgia and Washington, D.C. offices. We may also open direct sales force
offices in other locations as we determine our clients' needs and our market
opportunities.
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 use these
indirect sales channels to augment the efforts of our direct sales forces.
We also use 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
companies in an effort to:
. incorporate our products into third-parties' products;
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. jointly develop products and services;
. conduct joint research and development efforts;
. jointly conduct proposals and presentations for 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 and act as
VeriSign's recommended PKI card partner.
. Atmel Corporation and the National Security Agency--we have an alliance
with Atmel Corporation and the National Security Agency in which we are
jointly developing Forte, an advanced microprocessor, which we are
embedding in our next generation PKI cards, the Forte PKIcard.
. Keytronic--We and Keytronic sell versions of NetSign bundled with the
Keytronic keyboard, which currently incorporate an integrated PKI
card/smartcard reader and will incorporate our 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 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
these alliances to generate qualified leads for our sales force to contact and
close.
Sales to the government information technology market
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 GSA schedule contracts, blanket purchase agreements 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
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prices of the products to be sold. A blanket purchase agreement, or 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 is 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 a number of factors, including the
best value to the government, which, depending on the bid, can be a combination
of price, technical expertise, past performance on other government contracts.
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, 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 bid solicitations each year. In addition,
our marketing employees actively prepare bids for federal, state and local
government agencies for 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 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 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.
These 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.
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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 customers. To
maintain quality control and enhance working relationships, we generally rely
on multiple vendors for these products. However, some of these products are
produced or sold only by a single supplier, thus presenting a risk that they
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, expanding the suite of tokens supported by Maestro;
. Expanding the capabilities of ProFile Manager to provide certificate
exchange features with additional third-party certificate authorities
and increased capability for the PKI enterprise manager;
. Developing Forte, an advanced 32-bit microprocessor, commonly referred
to as a RISC processor, 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 PKI
cards, due in part to the inclusion of a universal serial bus interface
on-board the microprocessor chip. Given that Forte is an advanced
security chip that will provide advanced security features, 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;
. 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 NIST. The ARGUS 300 is currently an ISA bus
security product that has been validated by the NIST for a security
level approved for digital signature operations. Newer computer designs
now have the PCI architecture. The PCI version of the ARGUS 300 is being
designed to enable the NIST to extend the certification to the new PCI
design without a complete new laboratory validation process.
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.
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As of May 1, 1999, our research and development staff consisted of 29
employees, of whom 26 were engineers. Approximately 90% of these 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 these 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, 1997 and 1998, our net ex
penses
for research and development were $725,000, $1.2 million and $1.3 million. We
have allocated $5.0 million of the proceeds of this offering for research and
development activities.
Competition
We compete in numerous markets, including;
. Internet and intranet electronic security;
. access control;
. token authentication;
. smartcard-based security applications;
. electronic commerce applications;
. systems integration;
. product reselling; and
. 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 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 include:
. International Business Machines Corp.
. Motorola, Inc.
. RSA Data Security, Inc.
. Network Associates, Inc.
. Secure Computing Corporation
. Rainbow Technologies, Inc.
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<PAGE>
Some of our competitors for systems integration and product reselling
include:
. BTG, Inc.
. Inacom Corporation
. 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 standardized license agreements that
are not signed by the end user to license our products and, therefore, may not
always be unenforceable.
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 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 are in the public domain and can be incorporated
into our products at no charge. To the extent that a customer 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 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 government purpose 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
government purpose 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.
We own or 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 our registered trademarks: Cyper
Server and CryptOS. We also own the trade names Litronic, Pulsar, Pulsar Data
and Pulsar Data Systems, Inc. We have applied for the trademarks Pro File
Manager, Netsign, Netsign Pro, Forte PKIcard and Maestro. All other trademarks
or trade names referred to in this prospectus are the property of their owners.
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. The U.S. government has recently
relaxed the export restrictions for our NetSign and ProFile Manager products.
However, the federal government may rescind these approvals at any time. Under
current regulations these products can be exported without a license to most
countries for use by banks, healthcare, insurance organizations and overseas
subsidiaries of U.S. companies.
Additionally, we may apply for export approval, on a specific criteria
basis, for our future products. Government export regulation for security
products is less stringent for products designed for banking and finance, e-
commerce, health, insurance and for use by U.S. subsidiaries. We may not
receive approval to export any future products on a timely basis, on the basis
we request 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 these restrictions.
Employees
As of May 1, 1999, Litronic employed 65 full-time and five part-time people,
including 40 in product management, research, development and support, two in
professional services, 14 in field operations including sales, marketing and
customer management, and 14 in finance, human resources, business development,
legal and administration. As of May 1, 1999, Pulsar employed 60 people,
including four in product management, 17 in professional services, 17 in field
operations including sales, marketing and customer management, and 22 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.
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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. We are currently negotiating and
expect to enter into a lease for a new headquarters facility in California of
approximately 40,000 square feet. This would replace our current headquarters
which we would attempt to sublet. We expect our new facility would have an
annual rent of approximately $600,000 and a lease term ranging from seven to
ten years. In addition, after the closing of this offering, we will conduct a
significant portion of our operations at Pulsar's offices in our 12,700 square
foot Lanham, Maryland facility, which we use as office space for our executive
offices and as warehouse space, under 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, other than the following:
In the course of its business, Pulsar has been extended credit from several
trade vendors for the purchase of supplies, equipment, merchandise and
services. Pulsar's accounts for several of these trade vendors have been past
due for a significant amount of time. As a result, several of these trade
vendors have filed lawsuits against Pulsar seeking to collect the amounts owed
by Pulsar. In addition, a local government agency has filed a claim for back
taxes owed by Pulsar. Following is a summary of these lawsuits:
<TABLE>
<CAPTION>
Name of Plaintiff Date Filed Court
- ------------------------- ---------------------- -----------------------------
<S> <C> <C>
Performance Engineering October 26, 1998 Circuit Court of Fairfax
Corporation County, Virginia
Lynn Runnels January 15, 1999 General District Court of
Loudoun County, Virginia
Signal Corporation February 11, 1999 U.S. District Court,
District of Maryland
AST Research, Inc. February 26, 1999 Superior Court of Orange
County, California
Prince George's County, March 11, 1999 Circuit Court for Prince
Maryland George's County, Maryland
Weisman and Associates, March 15, 1999 Circuit Court for Prince
Inc. George's County, Maryland
Softmart, Inc. March 22, 1999 Chester County Court of
Common Pleas, Pennsylvania
Gates/Arrow Distributing, August 14, 1998 Circuit Court for Prince
Inc. George's County, Maryland
Continuous Graphics, Inc. February 22, 1999 District Court for Baltimore
County, Maryland
Sales and Marketing March 2, 1999 Circuit Court for Prince
Assistance Corp. (filed but not served) George's County, Maryland
Stackig, Inc. March 19, 1999 Circuit Court of Fairfax
County, Virginia
Octave Systems, Inc. March 30, 1999 Superior Court of Santa Clara
County, California
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C>
Systems Solutions Technology, Inc. April 12, 1999 Circuit Court for Prince
George's County, Maryland
Piliero, Mazza and Pargament May, 1999 Circuit Court for Prince
George's County, Maryland
Office Movers, Inc. April 23, 1999 Circuit Court for Prince
George's County, Maryland
</TABLE>
The aggregate amount claimed under these lawsuits was approximately $1.8
million, plus interest, attorney's fees and costs. Pulsar has entered into
settlements including stipulated judgments covering some of the lawsuits. As of
May 5, 1999, Pulsar has paid approximately $760,000 under those settlements. As
of May 5, 1999, the aggregate amount Pulsar owes on claims that have been filed
and settled is approximately $815,000. The aggregate amount of claims,
excluding interest, attorney's fees and costs, that have been filed but not
settled is approximately $288,000.
We intend to use the net proceeds from this offering to resolve and pay
these claims and settlements. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
On January 16, 1998, G2 Resources Inc. filed a complaint against Pulsar in
the Circuit Court, Fifteenth Judicial Circuit, Palm Beach County, Florida. G2
claims that Pulsar breached a contract under which G2 agreed to provide
services related to the monitoring of government contracts available for bid
and the preparation and submission of bids on behalf of Pulsar. The contract
provides that Pulsar pay G2 $500,000 in 30 monthly installments of $16,666 and
an additional fee of 2% of the gross dollar amount generated by awards. In its
complaint, G2 alleged that Pulsar failed to make payments under the contract
and claimed damages in excess of $525,000 plus interest, costs and attorneys
fees. In the course of discovery G2 asserted that its losses/costs arising out
of its claim amount to approximately $10.3 million. Pulsar has asserted that G2
failed to perform the services required under the contract and Pulsar filed a
claim for compensatory damages, interest and attorneys fees against G2.
Classical Financial Services, LLC intervened in the case. Classical claims that
G2 assigned its accounts receivable to Classical under a financing program and
that Pulsar breached its obligations to Classical by failing to make payments
under the contract with G2. Pulsar has asserted defenses to Classical's claim.
Pulsar believes that the claims of G2 and Classical against Pulsar are without
merit and intends to continue to vigorously defend against the claims. If G2 or
Classical were to prevail in this lawsuit, our business and financial condition
could be materially adversely affected.
On July 11, 1997, Rudolph Menna filed a complaint against Pulsar and William
W. Davis, Sr. in the U.S. District Court for Northern District of Georgia,
Atlanta Division. Mr. Menna alleges that he was wrongfully terminated as a
Pulsar employee and that Pulsar and Mr. Davis unlawfully discriminated against
him on the basis of race and age. Mr. Menna's complaint seeks an unspecified
amount of damages including back pay, front pay, benefits, compensatory and
punitive damages, interest and attorneys fees. Pulsar and Mr. Davis have filed
an answer denying the material allegations in the complaint. Pulsar and Mr.
Davis believe that Mr. Menna's lawsuit is without merit and intend to continue
to vigorously defend against it. If Mr. Menna were to prevail in the suit our
business and financial condition could be materially adversely affected.
On April 19, 1999, A&T Marketing Inc. filed a complaint against Pulsar in
the Circuit Court for Prince George's County, Maryland. A&T claims that Pulsar
owes A&T $262,000 plus interest and costs, for software that A&T sold Pulsar in
1998. Pulsar believes it has defenses to A&T's claim and that A&T's claim is
without merit. Pulsar intends to vigorously defend against the claim.
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MANAGEMENT
Executive officers, directors and key employees
The following table contains information concerning our directors, director
nominees, officers, persons who have agreed to serve as executive officers upon
the closing of this offering and other key employees, and their respective ages
as of April 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, Government Marketing and Sales
Robert J. Gray........ 62 Vice President, Product Development
William S. Holmes..... 52 Vice President, Commercial Marketing and Sales
Mark Gembicki......... 33 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. Before 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.
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. Before 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 from 1994 to 1997, Lockheed Martin Corporation and
various industry associations. Mr. Davis earned his B.S. in agronomy from
Southern University in 1972 and completed advanced executive management
programs at Dartmouth University in 1994 and the University of Miami in 1995.
Thomas W. Seykora is our chief financial officer. Mr. Seykora joined
Litronic in July 1995 as its chief financial officer. Before 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. Before 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.
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<PAGE>
Robert J. Brich has agreed to serve as our vice president, government
marketing and sales, upon closing of this offering. 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 and education at Old Dominion
University.
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 Computers 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.
William S. Holmes has agreed to serve as our vice president, commercial
marketing and sales, upon closing of this offering. 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
1971 to June 1984, Mr. Holmes served in project management for International
Computer Limited in England and South Africa. Mr. Holmes attended Watford
College of Technology in England.
Mark Gembicki has agreed to serve as one of our directors commencing as of
June , 1999. Mr. Gembicki is currently chairman and chief technology officer
of WarRoom Research Inc., an Annapolis, Maryland-based company Mr. Gembicki
founded in August 1995. WarRoom Research provides Internet-based technologies
and processes that enable organizations to effectively manage their enterprise-
wide knowledge for corporate advantage. Mr. Gembicki acted as an advisor to the
U.S. government from August 1993 to August 1995, consulting on topics focusing
on computer security applications and cybercrime investigations. Mr. Gembicki
has worked for, or advised, the U.S. government in computer security and
related fields for seventeen years. Mr.
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Gembicki is a co-author of The WarRoom Guide to Competitive Intelligence, which
provides analysis and information on business intelligence and information
security. Mr. Gembicki is cited in over 250 publications as well as television
and radio programs. In January 1999, Mr. Gembicki was the recipient of
Computerworld's Top 20 Visionaires for the Next Decade award.
Matthew Medeiros has agreed to serve as one of our directors commencing as
of June , 1999. Since February 1998, Mr. Medeiros has served as chairman and
chief executive officer of Phillips Flat Display Systems. Before 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 Allied Signal Inc. from January 1996 to
February 1998. Mr. Medeiros served as an executive officer of Radius, Inc.,
including as its vice president and general manager, MacIntosh systems, and as
its vice president operations and information systems, from March 1993 to
January 1996. 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.
Board of directors
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
stockholders. After these 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 elected by the board of directors
to serve until their successors are elected and qualified. Mr. Gembicki will
serve as a Class I director, Mr. Medeiros will serve as a Class II director,
and Messrs. Shah and Davis will serve as Class III directors.
We have agreed that for a period of three years from June , 1999, at
BlueStone's request, we will nominate and use our best efforts to elect two
designees of BlueStone as directors of our company or, at BlueStone's option,
as non-voting advisors to our board of directors. Our officers, directors and
stockholders have agreed to vote their common stock in favor of BlueStone's
designees. BlueStone has not yet exercised its designation right.
Directors compensation
Except for grants of stock options, directors will not receive any cash
compensation for their services as board members although they will be
reimbursed for expenses in attending board and committee meetings.
Committees of the board of directors
The board of directors will establish a compensation committee and an audit
committee to serve commencing as of June , 1999. The initial members of each
of the committees will be Messrs. Medeiros and Gembicki. The compensation
committee will be responsible for receiving and making recommendations to the
board on all compensation and hiring issues relating to officers and senior
staff members and administering the 1999 stock option plan. The audit committee
will be responsible for making recommendations to the board regarding the
selection of our independent accountants, consulting with our independent
accountants and financial and accounting staff and reviewing and reporting to
the board on the scope of audit procedures, accounting practices and internal
accounting and financial controls.
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<PAGE>
Executive compensation
The following table lists the total compensation paid or accrued for the
year ended December 31, 1998 for our chief executive officer, who was the only
executive officer whose compensation was over $100,000 during the fiscal year
ended December 31, 1998.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
Salary and Bonus
---- ---------------------- -----------------------
Name and Principal Position Year Salary ($) Bonus ($) All Other Compensation
- --------------------------- ---- ---------- ---------- -----------------------
<S> <C> <C> <C>
<C>
Kris Shah.................. 1998 $231,998 0 (See below)
Chief Executive Officer
and Chairman of the Board
</TABLE>
Mr. Shah also received other fringe benefits from Litronic in his capacity
as chief executive officer and chairman of the board; however, those benefits
were less than $50,000 during the year ended December 31, 1998.
We anticipate that during the fiscal year ending December 31, 1999 the only
executive officers that will earn $100,000 or more will be Messrs. Shah, Davis
and Gray.
<TABLE>
<CAPTION>
Potential Realizable Value
at Assumed Annual Rates
of Stock Price Appreciation
Individual Grants for Option Term
--------------------
- -------------------------------- ---------------------------
(b) (c)
Number of % Of Total
Securities Options/SARS (d)
Underlying Granted to Exercise (e)
Options/ Employees in or Base Expiration (f) (g)
Name SARs Granted(#) Fiscal Year Price ($/SH) Date 5% ($) 10% ($)
- ---- --------------- ------------ ------------ ---------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Robert Gray............. 77,419 27.5% $0.70 None $ 34,082 $86,370
Thomas Seykora.......... 11,613 4.1% 0.70 12/31/03 5,112 12,956
</TABLE>
Option/SARs Grants in Last Fiscal Year
No other executive of
ficer whose name appears in the table under
"Management-Executive officers, directors and key employees" received stock
options or stock appreciation rights in the year ended December 31, 1998.
Aggregated Option Exercises in Last Fiscal Year and FY-End Option Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at FY-End(#) at FY-End($)
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Robert Gray................. 77,419 -- $410,321 --
Thomas Seykora.............. 2,323 9,310 $ 12,312 $49,343
</TABLE>
The
value of the options described above 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.
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<PAGE>
Employment agreements
General
Kris Shah and William Davis have each entered into a two-year employment
agreement with Litronic, effective as of June , 1999. The agreement provides
that after the initial term it will automatically renew for successive one year
terms unless it is terminated by us or by the employee through written notice
given to the other party 90 days before the expiration of the then current
term. The agreements provide that Messrs. Shah and Davis will each receive an
annual salary of $175,000 for the 12-month period following the date of this
prospectus. Their salaries may be adjusted by our compensation committee. Each
of Messrs. Shah and Davis are also entitled to receive annual bonus awards of
$100,000 if we have earnings of $2.5 million or more and an additional $37,500
for each additional $1.0 million of earnings in excess of $2.5 million.
In making the calculation for the bonuses we will measure earnings before
interest and taxes and will add back the amortization of goodwill and other
intangibles resulting from the Pulsar acquisition.
Termination of employment
Each employment agreement provides that, in addition to being terminated
through the notice features described above, employment may be terminated as
follows:
. by the employee if the employee has good reason to terminate the
agreement. Good reason exists if:
. the employee is relieved of his position as, or is not reappointed
as, an officer of our company;
. the employee's title, office or responsibilities change
substantially;
. the employee's base salary is reduced to an amount that is less than
$175,000 or by more than 10%;
. we fail to maintain our employee benefit plan;
. we sell or transfer our company and fail to obtain the successor's
assumption of the employment agreement; or
. we fail to comply with a material term of the employment agreement
and fail to cure our default after appropriate notice.
. by us if we determine that due cause for termination exists. Due
cause exists if we find that the employee:
. intentionally misapplied our money or property;
. committed an act of dishonesty that harmed our company;
. was convicted of a felony or a crime involving moral turpitude;
. has used a controlled substance, including alcohol, which affects
his ability to perform his job duties; or
. breached the terms of the employee agreement.
. Additionally, we can terminate the agreement upon the employee's:
. death;
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<PAGE>
. disability for more than 180 days after we give 30 days notice of
our intention to terminate the agreement; or
. retirement.
Finally, we can terminate the employment agreement for any other reason, at
any time, but we will be deemed to have constructively terminated the agreement
and will be liable to pay the employee the severance payment described below.
Payment upon termination
We may be obligated to make payments to the employee upon termination of
employment depending on the circumstances surrounding the termination.
Following is a description of situations in which we may or may not be
obligated to make severance payments:
. If the employment agreement is terminated by the employee after giving
notice, by us for cause or by the employee in breach of the agreement,
we will not be obligated to pay any compensation after the termination
date, except:
. employee benefits;
. unpaid base salary the employee has earned which we have not yet
paid; and
. vested stock options.
. If the employment agreement is terminated by the employee for good
reason or by us through a constructive termination, we will be obligated
to pay the employee:
. his annual salary through the latter of the end of the employment
agreement term or a period of two years;
. a pro rata bonus for the fiscal year in which the termination
occurs;
. continuing medical and life employee benefits for six months after
the termination; and
. vested stock options.
Confidentiality and noncompete clauses
Each of the employment agreements also contains noncompete, confidentiality
and nondisclosure clauses designed to protect our intellectual property.
Additionally, each agreement contains a provision designed to preclude the
employee from claiming rights to any products or technologies he developed
while in our employ or for 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 our
interest and our stockholders' interests 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 to our employees and non-qualified stock options
to our employees, officers and directors or to some other individuals as the
board determined. Generally, the board of directors has discretion to amend,
suspend or terminate the plan from time to time. Administration of the plan may
be delegated to a committee appointed by the board of directors. The option
period and
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<PAGE>
provisions for exercise of each option granted are determined by the committee
at the time of each the grant. Unless it is terminated earlier, the plan
terminates 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 these, options to purchase 142,927 shares are vested as of the date
of this prospectus. Of these options,
. options to purchase 77,419 shares have been granted to Mr. Gray, all of
which have vested;
. options to purchase 11,613 shares have been granted to Mr. Seykora, of
which options to purchase 2,323 shares have vested and the remaining
9,073 options will vest at a rate of 2,323 per year.
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 our
interest and our stockholders' interests 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 to our employees and non-qualified stock options
to our employees, officers and directors or to some other individuals as the
board may determine. Generally, the board of directors has discretion to amend,
suspend or terminate the plan from time to time. Administration of the plan may
be delegated to a committee 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 the 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 plan. Unless it is 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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PRINCIPAL STOCKHOLDERS
The following table presents, as of the date of this prospectus, information
we know regarding the beneficial ownership of our common stock by (a) each
person or entity known to us to own beneficially more than 5% of the common
stock, (b) each director, (c) each director nominee, (d) each named executive
officer, and (e) all directors and executive officers as a group. In presenting
this information, we have:
. given effect to the Pulsar acquisition;
. assumed that there are 6,040,631 shares outstanding as of the date of
this prospectus and 9,740,631 shares outstanding immediately after the
consummation of this offering.
The address of each person in the table below is the ad
dress of Litronic.
<TABLE>
<CAPTION>
Percentage of Outstanding
Number of Shares Beneficially Owned
Shares -------------------------
Name and Address of Beneficially Before After
Beneficial Owner Owned Offering Offering
- ------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Kris Shah.................... 3,220,479 53.3% 33.1%
William W. Davis, Sr......... 1,084,969 18.0% 11.1%
Lillian Davis................ 1,084,969 18.0% 11.1%
Ramesh R. Shah
Patricia L. Shah............ 463,657 7.7% 4.8%
Robert J. Gray............... 77,419 1.3% .8%
Matthe
w Medeiros............. 0 0% 0%
Mark Gembicki................ 0 0% 0%
All directors and executive
officers as a group (8
persons).................... 4,367,019 71.3% 44.4%
</TABLE>
In calculating the information in this table, we relied on the following
assumptions:
. all the persons named in the table have sole voting and investment power
over all shares they beneficially own, subject to community property
laws, where applicable;
. a person or entity is considered the beneficial owner of securities that
it can acquire through the exercise of options within 60 days from the
date of this prospectus;
. In calculating each beneficial owner's percentage ownership we assumed
that only options held by that person that are exercisable within 6
0
days from the date of this prospectus have been exercised.
The shares beneficially owned by Kris Shah include: (a) 435,301 shares held
by the Chandra L. Shah Trust, of which Mr. Shah is the trustee, (b) 435,301
shares held by the Leena Shah Trust, of which Mr. Shah is the trustee and (c)
2,349,877 shares held by the Kris and Geraldine Shah Family Trust, of which Mr.
Shah and his wife are the trustees and beneficiaries.
The shares beneficially owned by Ramesh R. Shah and Patricia L. Shah are
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.
The shares beneficially owned by Mr. Gray are shares issuable upon exercise
of his currently exercisable options.
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<PAGE>
The shares beneficially owned by all directors and executive officers as a
group include 80,904 shares issuable upon exercise of currently exercisable
options and exclude 69,846 shares issuable upon exercise of options which
become exercisable at various times commencing December 31, 1999. The inclusion
of shares in this table as beneficially owned is not an admission of beneficial
ownership.
RELATED PARTY TRANSACTIONS
The Pulsar acquisition
Litronic entered into a stock acquisition agreement with Pulsar and William
W. Davis, Sr., our president and chief operating officer, and Lillian Davis,
the former stockholders of Pulsar. The agreement provides that Mr. Davis and
Ms. Davis will exchange all of their stock for an aggregate of 2,169,938 shares
of our common stock simultaneously with the closing of this offering. The
shares of our common stock that Mr. Davis and Ms. Davis will receive are valued
at approximately $21.7 million, based on an assumed initial public offering
price of $10.00 per share. As a result of the Pulsar acquisition, Pulsar will
become a wholly-owned subsidiary of Litronic and William Davis and Lillian
Davis will become principal stockholders of Litronic.
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 $252,000 due on the note was repaid.
In 1996 and 1997, in the ordinary course of business, we have financed
equipment for our operations in the aggregate amount of approximately $1.5
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 owned
entirely by 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.
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 $623,000, which were assigned back
to Pulsar in December 1997. The notes were written off as bad debt expense in
the year ended December 31, 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, 1997 and 1998.
A portion of the rent expense incurred under the related party
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<PAGE>
lease was used to offset the notes receivable balance of the related party. The
amount of rent expense used to offset the notes receivables from Davis Holding,
Inc. for the years ended December 31, 1997 and 1998 was $182,000 and $344,000.
In addition, principal and interest under the notes were 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 these loans
was converted into a $543,000 promissory note and a $804,000 promissory note,
each bearing interest at an annual rate of interest of 7.5%, payable monthly,
and maturing upon the sales of the Lanham, Maryland and Atlanta, Georgia
properties. On April 30, 1999, Davis Holding, Inc. sold the Lanham property.
The proceeds from the sale of the building went into an escrow account with
Wilmington Trust Company. On May 5, 1999, Wilmington Trust offset the Davis
Holding, Inc. note of $543,000, plus interest of $13,000 against the
outstanding Pulsar loan balance with Wilmington Trust Company. A determination
was made on the remaining $804,000 note that there were not sufficient assets
within Davis Holding, Inc. to repay the outstanding notes payable in the
future. Therefore, the remaining receivable was completely reserved as of
December 31, 1998.
In May 1996, Pulsar entered into a line of credit with Wilmington Trust
Company 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 $22.0 million secured by a pledge of eligible accounts
receivable, inventory, machinery and 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 $5.2 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 $1.0 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., 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 the line. In March 1998, the $2.5 million revolving credit
facility was extended to February 2000. As of March 31, 1999, $424,000 was
outstanding under this facility. We intend to repay the outstanding
indebtedness under this credit facility out of the proceeds from this offering.
This will release Mr. Shah's guarantee.
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 $1.0 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 real estate. In connection with the
formation of KRDS, Inc. we made a capital contribution in the amount of $8.5
million to KRDS, Inc. Following the acquisition, KRDS leased to us at market a
portion of the property acquired to use in our former Intercon division. In
December
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<PAGE>
1997, we made a cash distribution of $9.5 million to our stockholders.
Subsequently, as discussed below, we distributed the capital stock and net
assets of KRDS to our stockholders. As a result of the KRDS distribution, we
removed the property and the corresponding mortgage and related 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 which provides that Pulsar can finance
purchases of products through IBM Global. 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 of Pulsar's assets and personal assets of William W. Davis,
Sr. and is personally guaranteed by Mr. Davis and Lillian Davis. We intend to
repay a portion of the indebtedness outstanding under this financing agreement
using proceeds from this offering. This will release Mr. Davis' guarantee and
the assets pledged by him.
During the year ended December 31, 1997 we made pro rata 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 and net assets of KRDS
consisting of $8.5 million of cash.
From January 1, 1998 through May 28, 1999, we executed promissory notes
aggregating $6.6 million in favor of BYL Bank Group at a fixed annual rate of
interest of 6.6%. The notes are 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 $95,000 on
January 5, 1999. These loans bear interest at the annual rate of 6% beginning
April 1, 1999.
DESCRIPTION OF SECURITIES
Upon the closing of the offering, our authorized capital stock will consist
of 25,000,000 shares of common stock, $.01 par value per share and 5,000,000
shares of preferred stock, $.01 par value per share. 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 Pulsar acquisition, there
will be 6,040,631 shares of our common stock outstanding held of record by
seven stockholders.
Common stock
Holders of our 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. Therefore, 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 any dividends that are declared by the board of
directors. Upon our liquidation, dissolution or winding up, and after payment
of all debts and other liabilities, holders of our common stock are entitled to
receive our remaining net assets. Holders of common
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<PAGE>
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.
Preferred stock
Our certificate of incorporation authorizes our board of directors to issue
up to 5,000,000 shares of preferred stock with a par value of $.01 per share.
The board may issue the stock in one or more series and may 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 board may authorize the issuance of preferred stock with
voting or conversion rights that could adversely affect the voting power or
other rights of the holders of the common stock. The issuance of preferred
stock, while providing flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of delaying, deferring or
preventing a change in control and may adversely affect the market price of the
common stock and the voting and other rights of the holders of common stock. As
of the date of this prospectus, no shares of preferred stock have been issued.
Registration rights
We have entered into a registration rights agreement with our stockholders
which grants our stockholders the right to include their shares in any
registration of our common stock in an underwritten offering that occurs after
this offering. All of the stockholders have agreed not to exercise this right
for two years following the closing of this offering, without the prior written
consent of BlueStone. We have also granted the representatives of the
underwriters registration rights with respect to their warrants to purchase up
to 370,000 shares of our common stock.
Anti-takeover provisions
Delaware General Corporation Law
Section 203 of the Delaware General Corporation Law generally prohibits us
from engaging in a merger, asset sale and other transaction with an interested
stockholder that results in a financial benefit to the interested stockholder
for a three-year period from the date the person became an interested
stockholder unless (a) before that date, our board of directors approved either
the business combination or the transaction which resulted in the stockholder
becoming an interested stockholder, (b) upon completion of the transaction
which resulted in the stockholder becoming an interested stockholder, the
interested stockholder owned at least 85% of our voting stock outstanding at
the time the transaction commenced, excluding select shares, or (c) on or after
that date, the business combination is approved by our board of directors and
by the affirmative vote of at least 66% of our outstanding voting stock which
is not owned by the interested stockholder. Generally, an interested
stockholder is a person who, together with affiliates and associates, owns, or
within three years did own, 15% or more of our voting stock.
Our certificate of incorporation does not exclude Litronic from the
restrictions imposed under Section 203 of the Delaware General Corporation Law.
We expect the provisions of Section 203 of the Delaware General Corporation Law
may encourage companies interested in acquiring us to negotiate in advance with
the board, since the stockholder approval requirement would be avoided if a
majority of the directors then in office approve, before the time the
stockholder becomes an interested stockholder, either the business combination
or the transaction which results in the stockholder becoming an interested
stockholder.
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<PAGE>
Under 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 bylaws.
Charter and bylaw provisions
Our certificate of incorporation and bylaws divide the board into three
classes as nearly equal in size as possible with staggered three-year terms.
The classification of the board could make it more difficult for a third party
to acquire, or discourage a third party from acquiring, control of us. In
addition, our certificate of incorporation provides that any action required or
permitted to be taken by our stockholders at an annual meeting or a special
meeting may be taken only if it is properly brought before the meeting, and may
not be taken by written action instead of a meeting. Our bylaws provide that
special stockholders' meetings may be called only by the board, 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.
Delaware law and charter and bylaw provisions limiting liability of officers
and directors
Our certificate of incorporation contains provisions limiting the liability
of our directors. Specifically, the provisions eliminate a director's liability
for monetary damages for a breach of fiduciary duty, except in cases 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, our certificate of incorporation contains provisions to indemnify our
directors and officers to the fullest extent permitted by 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 American Stock
Transfer Company, 40 Wall Street, New York, New York 10005.
SHARES ELIGIBLE FOR FUTURE SALE
An aggregate of 3,870,693 of the 6,040,631 shares currently restricted from
trading in the public market will become eligible for sale 90 days following
the date of this prospectus, subject to agreements with BlueStone restricting
their sale for periods of at least six months. We cannot predict the effect, if
any, that sales of these additional securities or the availability of these
additional securities for sale will have on the market prices prevailing from
time to time. In addition, the representatives have been granted registration
rights commencing one year from the date of this prospectus providing for the
registration under the Securities Act of the securities issuable upon exercise
of the representatives' warrants. The exercise of these rights could result in
substantial expense to us. Furthermore, if the representatives exercise their
registration rights, they will be unable to make a market in our securities for
up to nine days before the initial sales of the warrants until the
discontinuation of sales. If the representatives cease 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.
Upon completion of this offering, we will have outstanding an aggregate of
9,740,631 shares of our common stock, assuming no exercise of the
representatives' over-allotment option and no exercise of outstanding options.
Of these shares, all of the shares sold in this offering will be freely
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tradable without restriction or further registration under the Securities Act,
unless these shares are purchased by our affiliates. The remaining 6,040,631
shares of common stock held by existing stockholders are restricted securities
under Rule 144 under the Securities Act. Restricted securities may be sold in
the public market only if registered or if they qualify for an exemption from
registration under Rules 144 or 701 under the Securities Act.
Contractual restrictions on resales
All of our officers, directors and security holders have agreed not to
transfer or dispose of, directly or indirectly, any of their shares of our
common stock, or any securities convertible into or, exchangeable or
exercisable for shares of our common stock, for a period of 24 months from the
date of this prospectus. Transfers or dispositions may be made sooner than 24
months as follows:
. BlueStone may waive the restrictions on transfer or sale at any time
more than six months after the date of this prospectus; or
. beginning twelve months after the date of this prospectus, owners
subject to the restrictions may transfer or dispose of their common
stock, without BlueStone's permission, if aggregate sales by them in any
90-day period are not more than the greater of:
. one percent of our common stock outstanding at the time of the sale;
or
. the average weekly trading volume of our common stock during the
four calendar weeks preceding the holder's sale.
Beginning 12 months after the date of this prospectus, existing optionholders
who have exercised their options may transfer or dispose of in the aggregate
up to 100,000 shares of their common stock registered under a Form S-8
registration statement.
Subject to these contractual restrictions and to the provisions of Rule
144, 3,870,693 shares of common stock will be available for sale in the public
market commencing six months after 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 after the date of this prospectus.
Rule 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year would be entitled to sell, within any
three-month period, a number of those shares that does not exceed the greater
of:
. one percent of the number of common shares then outstanding, which will
equal approximately 97,400 shares immediately after this offering; or
. the average weekly trading volume in the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 for the sale.
Sales under Rule 144 are also subject to restrictions on the manner of sale
and require notice to the Securities and Exchange Commission of the sale.
Sales under Rule 144 are also restricted based on the availability of public
information about us.
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Rule 144(k)
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an affiliate, is
entitled to sell those shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Therefore,
unless otherwise restricted, 144(k) shares may be sold immediately upon the
completion of this offering.
Rule 701
In general, under Rule 701 of the Securities Act as currently in effect, any
of our employees, consultants or advisors who purchases securities, including
options, from us before the date of this prospectus through our stock option
plans or through some other written agreement is eligible to resell those
shares, including shares issued upon the exercise of options, 90 days after the
effective date of this offering in reliance on Rule 144, but without compliance
with the holding period, information and volume restrictions contained in Rule
144.
UNDERWRITING
BlueStone Capital Partners, L.P. and Pacific Crest Securities Inc. are
acting as representatives 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 3,700,000 shares of our common stock. The number of shares of
common stock that each underwriter has agreed to purchase appears opposite its
name below:
<TABLE>
<CAPTION>
Underwriter Number of Shares
----------- ----------------
<S> <C>
BlueStone Capital Partners, L.P.............................
Pacific Crest Securities Inc................................
---------
Total..................................................... 3,700,000
=========
</TABLE>
Other than shares offered through the over-allotment option, the
underwriters are committed to purchase and pay for all of the shares of common
stock offered by this prospectus, if any shares are purchased. The obligations
of the underwriters under the underwriting agreement are subject to approval of
legal matters by counsel and to various other conditions.
The representatives have advised us that the underwriters propose to offer
the shares of common stock to the public at the public offering price listed on
the cover page of this prospectus. The underwriters may allow to dealers who
are members of the National Association of Securities Dealers, Inc.
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 representatives an option, exercisable not later than
45 days after the date of this prospectus, to purchase up to 555,000 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
representatives may exercise this option only to cover over-allotments, if any,
made in connection with the sale of the shares of common stock offered by this
prospectus. If the representatives exercise the over-allotment in full, the
total price to public would be $ , the
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total underwriting discounts and commissions would be $ and the total
proceeds paid to us, before payment of the expenses of this offering, would be
$ . We estimate the expenses of this offering, including those payable to or
on behalf of the representatives and/or the underwriters described below, to be
$2.8 million.
We have agreed to reimburse the representatives for their accountable out-
of-pocket expenses incurred in connection with this offering, up to a maximum
amount equal to 1% of the gross proceeds derived from the sale of the shares
offered by this prospectus, including shares sold, if any, as a result of the
exercise of all or part of the representatives' over-allotment option. We have
also agreed to pay all expenses in connection with qualifying the shares
offered under the laws of the states designated by the representatives,
including expenses of counsel retained for this purpose by the representatives.
At the closing of this offering, we will sell to the representatives and
their designees, for an aggregate of $370, warrants to purchase up to 370,000
shares of our common stock. The representatives' 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,
which is 165% of the public offering price per share. The representatives'
warrants may not be sold, transferred, assigned, pledged or hypothecated during
the one-year period following the date of this prospectus, except to the
officers and partners of the representatives or the underwriters or members of
the selling group. During the exercise period, the holders of the
representatives' warrants will have the opportunity to profit from a rise in
the market price of the common stock, which will dilute the interests of our
stockholders. We expect that the representatives' 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 representatives' warrants. Any
profit realized by the representatives on the sale of their warrants or the
underlying shares of common stock may be deemed additional underwriting
compensation. The representatives' warrants contain a cashless exercise
provision. We have agreed that, upon the request of the holders of a majority
of the representatives' warrants, we will at our own expense, on one occasion
during the exercise period, register the representatives' warrants and the
shares of common stock underlying the representatives' warrants under the
Securities Act. We have also agreed to include the representatives' warrants
and all shares of common stock underlying the warrants in any appropriate
registration statement which we file 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 these services upon
closing of this offering.
All of our officers, directors and securityholders have agreed not to sell,
offer for sale, transfer, pledge or 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 this period, this
restriction can be waived by BlueStone, in its sole discretion, and provided
further that, after the first 12 months of this period, sales may be made,
without BlueStone's consent, as long as the number of shares or share
equivalents sold by any of these holders does not exceed, during any 90-day
period, the greater of (a) 1% of the then outstanding shares of our common
stock and (b) the average weekly trading volume of our common stock during the
four calendar weeks preceding the holder's sale.
The representatives have informed us that they do not expect sales of the
securities offered to discretionary accounts to exceed 3% of the shares offered
by this prospectus.
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We have agreed to indemnify the underwriters against civil liabilities,
including liabilities under the Securities Act.
Before 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 representatives and may not
necessarily be related to our asset value, net worth or other established
criteria of value. Factors to be considered in determining the price include
our financial condition and prospects, an assessment of our management, market
prices of similar securities of comparable publicly-traded companies,
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 Exchange 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
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
representatives 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 or maintain the market price of the common stock,
which may be higher than the price that might have prevailed in the open
market without these activities, and these activities, if commenced, may be
discontinued at any time. These transactions may be effected on Nasdaq or the
over-the-counter market.
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. Tenzer Greenblatt LLP, New York, New York has served as
counsel to the underwriters in connection with this offering.
EXPERTS
The consolidated financial statements of Litronic Inc. as of December 31,
1997 and 1998, and for each of the years in the three-year period ended
December 31, 1998, 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 of Pulsar Data Systems, Inc. as of and for the
year ended December 31, 1998 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 report of KPMG LLP covering
the December 31, 1998 financial statements contains an explanatory paragraph
that states Pulsar Data
85
<PAGE>
Systems, Inc.'s losses from operations and working 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.
The financial statements and schedules of Pulsar Data Systems, Inc. as of
December 31, 1997, and for each of the years in the two-year period ended
December 31, 1997, have been included in this prospectus and in the
registration statement in reliance upon the report of Keller Bruner & Company,
L.L.C., independent certified public accountants, appearing elsewhere in this
prospectus, and upon the authority of Keller Bruner & Company, L.L.C. 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 Pulsar'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.
WHERE YOU CAN FIND MORE 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 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
of these contracts, agreements or other documents, 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 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.
86
<PAGE>
LITRONIC INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report.............................................. F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998, and March
31, 1999 (unaudited) and March 31, 1999 Pro Forma (unaudited)............ F-3
Consolidated Statements of Operations for the years ended December 31,
1996, 1997 and 1998, and the three months ended March 31, 1998 and 1999
(unaudited).............................................................. F-4
Consolidated Statements of Shareholders' Deficit for the years ended
December 31, 1996, 1997 and 1998, and the three months ended March 31,
1999 (unaudited)......................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1997 and 1998, and the three months ended March 31, 1998 and 1999
(unaudited).............................................................. F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
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.)
/s/ 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, 1997 and 1998 and for each of
the years in the three-year period ended December 31, 1998 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, 1997 and 1998 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
Orange County, California
February 26, 1999
F-2
<PAGE>
LITRONIC INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
December 31 March 31
--------------- -----------------------
1999
1997 1998 1999 Pro Forma
------- ------ ----------- -----------
(Unaudited) (Unaudited)
(Note 1)
<S> <C> <C> <C> <C>
ASSETS (NOTE 5)
Cash and cash equivalents............. $ 490 898 557 557
Accounts receivable (note 8).......... 996 740 652 652
Inventories (note 3).................. 405 533 452 452
Other current assets.................. 136 385 984 984
------- ------ ------ ------
Total current assets............ 2,027 2,556 2,645 2,645
Property and equipment, net (note 4).. 320 235 250 250
------- ------ ------ ------
$ 2,347 2,791 2,895 2,895
======= ====== ====== ======
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current installments of long-term debt
(note 5)..........
................... $ -- 580 424 424
Accounts payable...................... 415 456 911 911
Accrued liabilities (note 6).......... 1,227 762 790 790
------- ------ ------ ------
Total current liabilities....... 1,642 1,798 2,125 2,125
Long-term debt, less current
installments (note 5)................ 606 5,200 5,950 5,950
Notes payable to related parties (note
7)................................... 2,900 -- -- --
------- ------ ------ ------
Total liabilities............... 5,148 6,998 8,075 8,075
Shareholders' deficiency (note 10):
Preferred stock, no par value.
Authorized 5,000,000 shares; no
shares issued or outstanding..... -- -- -- --
Common stock, $0.01 par value.
Authorized 25,000,000 shares;
issued and outstanding 3,870,693
shares........................... 39 39 39 39
Additional paid-in capital.......... -- -- -- (5,219)
Accumulated deficit................. (2,840) (4,246) (5,219) --
------- ------ ------ ------
Net shareholders' deficit............. (2,801) (4,207) (5,180) (5,180)
------- ------ ------ ------
Commitments and contingencies (note 9)
$ 2,347 2,791 2,895 2,895
======= ====== ====== ======
</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>
Three Months
Year Ended December 31, Ended March 31,
------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Product (note 8)....... $ 7,855 8,627 5,214 1,354 885
License and service
(note 8).............. 1,541 1,539 1,041 309 156
Research and
development........... -- -- 398 -- 369
--------- --------- --------- --------- ---------
Total revenue....... 9,396 10,166 6,653 1,663 1,410
--------- --------- --------- --------- ---------
Costs and expenses:
Cost of sales -
product............... 4,098 3,211 2,821 667 507
Cost of sales - license
and service .......... 581 643 950 176 140
Selling, general and
administrative ....... 2,052 3,487 2,631 662 871
Research and
development .......... 725 1,172 1,334 341 765
--------- --------- --------- --------- ---------
Operating income
(loss)............. 1,940 1,653 (1,083) (183) (873)
Interest expense, net
(notes 5 and 7)........ 19 42 418 108 109
--------- --------- --------- --------- ---------
Earnings (loss) from
continuing operations
before income taxes.... 1,921 1,611 (1,501) (291) (982)
Provision for (benefit
from) income taxes..... 29 22 (95) (51) (9)
--------- --------- --------- --------- ---------
Earnings (loss) from
continuing operations.. 1,892 1,589 (1,406) (240) (973)
Discontinued operations
(note 2):
Loss from discontinued
operations, net of
applicable income tax
benefit of $13 in
1996 and $23 in
1997................. (986) (1,278) -- -- --
Gain on disposal of
discontinued
operations, net of
income tax expense of
$241................. -- 15,023 -- -- --
--------- --------- --------- --------- ---------
Net earnings (loss)..... $ 906 15,334 (1,406) (240) (973)
========= ========= ========= ========= =========
Pro forma net earnings
(loss) (unaudited):
Historical earnings
(loss) from
continuing operations
before income taxes.. $ 1,921 1,611 (1,501) (291) (982)
Pro forma provision
for (benefit from)
income taxes......... 672 547 (510) (99) (333)
--------- --------- --------- --------- ---------
Pro forma earnings
(loss) from
continuing
operations........... 1,249 1,064 (991) (192) (649)
Discontinued
operations, net of
applicable pro forma
income tax effect.... (599) 8,377 -- -- --
--------- --------- --------- --------- ---------
Pro forma net earnings
(loss)............... $ 650 9,441 (991) (192) (649)
========= ========= ========= ========= =========
Earnings (loss) from
continuing operations
per share--basic and
diluted................ $ .49 .41 (.36) (.06) (.25)
Discontinued operations,
net of applicable
income tax effect, per
share--basic and
diluted................ (.26) 3.55 -- -- --
--------- --------- --------- --------- ---------
Net earnings (loss) per
share--basic and
diluted................ $ .23 3.96 (.36) (.06) (.25)
========= ========= ========= ========= =========
Pro forma earnings
(loss) from continuing
operations per share--
basic and diluted...... $ .32 .28 (.26) (.05) (.17)
Discontinued operations,
net of applicable pro
forma income tax
effect, per share--
basic and diluted...... (.15) 2.16 -- -- --
--------- --------- --------- --------- ---------
Pro forma net earnings
(loss) per share--basic
and diluted............ $ .17 2.44 (.26) (.05) (.17)
========= ========= ========= ========= =========
Shares used in per share
computations--basic and
diluted................ 3,870,693 3,870,693 3,870,693 3,870,693 3,870,693
========= ========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
LITRONIC INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
(in thousands)
<TABLE>
<CAPTION>
Common Stock Net
------------- Accumulated Shareholders'
Shares Amount Deficit Deficit
------ ------ ----------- -------------
<S> <C> <C> <C> <C>
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)
Distribution of KRDS, Inc. stock to
shareholders (note 7)................ -- -- (8,500) (8,500)
----- ---- ------ ------
Balance, December 31, 1997............ 3,871 39 (2,840) (2,801)
Net loss.............................. -- -- (1,406) (1,406)
----- ---- ------ ------
Balance, December 31, 1998............ 3,871 39 (4,246) (4,207)
Net loss (unaudited).................. -- -- (973) (973)
----- ---- ------ ------
Balance, March 31, 1999 (unaudited)... 3,871 $ 39 (5,219) (5,180)
===== ==== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
LITRONIC INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three Months
Year Ended December 31, March 31,
------------------------- --------------
1996 1997 1998 1998 1999
-------- ------- ------ ------ ------
(unaudited)
<S> <C> <C> <C> <C>
<C>
Cash flows from operating
activities:
Net earnings (loss)................ $ 906 15,334 (1,406) (240) (973)
Adjustments to reconcile net
earnings (loss) to net cash
provided by (used in) operating
activities:
Depreciation and amortization...... 61 129 203 54 54
Gains on disposal of discontinued
operations, net of tax............ -- (15,023) -- -- --
Cash payments related to
discontinued operations........... 942 152 -- -- --
Changes in assets and liabilities:
Accounts receivable............... (896) 1,048 256 (442) 88
Inventories....................... (586) 715 (128) 23 81
Other current assets.............. (126) 13 (249) 93 (599)
Accounts payable.................. (305) (418) 41 (71) 455
Accrued liabilities............... 574 92 (465) (441) 28
--------
------- ------ ------ ------
Net cash provided by (used in)
operating activities............ 570 2,042 (1,748) (1,024) (866)
-------- ------- ------ ------ ------
Cash flows from investing
activities:
Purchases of property and
equipment......................... (560) (4,919) (118) (30) (69)
Proceeds from disposal of
discontinued operations........... -- 20,567 -- -- --
-------- ------- ------ ------ ------
Net cash provided by (used in)
investing activities............ (560) 15,648 (118) (30) (69)
-------- ------- ------ ------ ------
Cash flows from financing
activities:
Discontinued operations financing
activities........................ -- (698) -- -- --
Proceeds from revolving note
payable to bank................... 11,049 18,649 6,496 1,100 1,142
Proceeds from related party
revolving line of credit.......... 190 -- -- -- --
Proceeds from related party note
payable........................... -- 2,900 600 600 --
Proceeds from long-term debt....... 4,645 3,038 5,200 -- 750
Principal payments on revolving
notes payable to bank............. (11,122) (18,445) -- -- --
Repayment of related party
revolving line of credit.......... (944) -- -- -- --
Repayment of related party note
payable........................... -- (248) (3,500) -- --
Principal payments on long-term
debt.............................. (3,061) (5,224) (6,522) (931) (1,298)
Cash dividends to shareholders...... -- (9,534) -- -- --
Cash distribution to shareholders... -- (8,500) -- -- --
-------- ------- ------ ------ ------
Net cash provided by (used in)
financing activities............ 757 (18,062) 2,274 769 594
-------- ------- ------ ------ ------
Net increase (decrease) in cash.. 767 (372) 408 (285) (341)
-------- ------- ------ ------ ------
Cash and cash equivalents at
beginning of year.................. 95 862 490 490 898
-------- ------- ------ ------ ------
Cash and cash equivalents at end of
year............................... $ 862 490 898 205 557
======== ======= ====== ====== ======
Supplemental disclosures of cash
flow information:
Cash paid during the year for:
Interest........................... $ 589 119 418 31 103
Income taxes....................... 1 204 -- -- 2
======== ======= ====== ====
== ======
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) -- -- --
======== ======= ====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
LITRONIC INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1998
(in thousands, except per share data)
(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
March 31, 1999, and the consolidated statements of operations, shareholders'
deficiency and cash flows for the three months ended March 31, 1998 and 1999.
The results of operations for the three months ended March 31, 1999 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. and will be
accounted for as an "as if pooling of interests" for entities under common
control. The Company has also entered into a stock acquisition agreement with
Pulsar Data Systems, Inc. to be effected simultaneously with the Offering. This
acquisition is contingent upon the successful completion of the Offering.
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 balance
sheet reflects this change from an S corporation to a C corporation. The
accompanying pro forma
F-7
<PAGE>
LITRONIC INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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, 1996,
1997 and 1998, and for the three months ended March 31, 1998 and 1999, 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 34%.
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. Customers do not have the right of return
except for product defects, and product sales are not contingent upon customer
testing, approval and/or acceptance. The costs of providing postcontract
customer support are not significant. Revenue under service and development
contracts is recorded as services are rendered. The Company's revenue
recognition policies are in compliance with the American Institute of Certified
Public Accountants Statement of Position 97-2, Software Revenue Recognition.
Revenue under research arrangements with government agencies is recorded as
revenue as services are rendered or products are shipped.
Included in research and development revenue for the year ended December 31,
1998 and the three months ended March 31, 1999 is $398 and $369 (unaudited),
respectively, related to a contract with the National Security Agency (NSA).
The Company is designing a microprocessor meeting certain minimum
specifications under a contract with the NSA. The Company has contracted with
others to perform certain aspects of the project. All related project costs are
expensed as research and development as incurred. No other funds received for
research and development projects were recorded during any of the periods
presented. The amounts received from the NSA are not refundable regardless of
the results of the development efforts. The related research and development
costs are not separately identifiable, therefore the corresponding costs of the
entire development effort are included in research and development expenses.
F-8
<PAGE>
LITRONIC INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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 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.
Business Segments
As of January 1, 1998, the Company adopted Statement 131, "Disclosure about
Segments of an Enterprise and Related Information," which requires entities to
report financial and descriptive information about its reportable operating
segments. The Company historically operated in two business segments,
information security solutions and electronic interconnect products. On
September 30, 1997, the Company sold its Intercon division, which produced
electronic interconnect products. Accordingly, the Intercon division operations
have been accounted for as discontinued operations (note 2). The Company's
remaining operations pertain only to its information security solutions
segment.
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, 1997 and 1998
and March 31, 1999 (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
F-9
<PAGE>
LITRONIC INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 $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 benefit for state income taxes was $95 for continuing operations for the
year ended December 31, 1998. The provision (benefit) for state income taxes
was ($51) and ($9) for continuing operations for the three months ended March
31, 1998 and 1999, respectively (unaudited).
Comprehensive Income
As of January 1, 1998, the Company adopted Statement 130, "Reporting
Comprehensive Income." Statement 130 establishes new rules for the reporting
and display of comprehensive income and its components; however, the adoption
of Statement 130 had no impact on the Company's consolidated financial
statements as the Company had no transactions that would be considered other
comprehensive income.
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 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 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 to
AlliedSignal Inc., a non-related publicly-traded company. 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 year ended December 31, 1996, Intercon revenues
were $8,175. 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 not
to exceed $45,400 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 pro rata 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.'s revenues were $380.
F-10
<PAGE>
LITRONIC INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(3) Inventories
A summary of inventories follows:
<TABLE>
<CAPTION>
December 31,
------------- March 31,
1997 1998 1999
------ ------ -----------
(unaudited)
<S> <C> <C> <C>
Raw materials...................................... $ 230 $
239 $278
Work-in-process.................................... 45 25 65
Finished goods..................................... 130 269 109
------ ------ ----
$ 405 $ 533 $452
====== ====== ====
</TABLE>
(4) Property and Equipment
A summary of property and equipment follows:
<TABLE>
<CAPTION>
December 31,
-------------
1997 1998 March 31, 1999
------ ------ ---------------
(unaudited)
<S> <C> <C> <C>
Machinery and equipment...................... $ 68 $ 68 $ 68
Furnit
ure and fixtures....................... 458 576 645
------ ------ ----
526 644 713
Less accumulated depreciation and
amortization................................ 206 409 463
------ ------ ----
$ 320 $ 235 $250
====== ====== ====
</TABLE>
(5) Long-Term Debt
A summary of long-term debt follows:
<TABLE>
<CAPTION>
December 31,
-------------
1997 1998 March 31, 1999
------------- ---------------
(unaudited)
<S>
<C> <C> <C>
Notes payable to bank secured by
substantially all assets of the Company and
personal assets of, and a guarantee by, the
Company's president and
majority shareholder, bearing interest at
6.6% payable monthly, maturing July 31,
2000........................................ $ -- $5,200 $5,950
Revolving note payable to bank (the Revolver)
bearing interest at prime plus 1.5% (9.75%
at December 31, 1998) payable in monthly
interest-only payments through maturity on
July 31, 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................. 606 580 424
----- ------- ------
606 5,780 6,374
Less current installments....
................ -- 580 424
----- ------- ------
606 5,200 5,950
===== ======= ======
</TABLE>
F-11
<PAGE>
LITRONIC INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Principal maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
December 31, 1998 March 31, 1999
----------------- --------------
(unaudited)
<S> <C> <C>
1999........................................ $ 580 $ 424
2000........................................ 5,200 5,950
2001 and thereafter...............
.......... -- --
------ ------
$5,780 $6,374
====== ======
</TABLE>
The Revolver contains certain covenants and restrictions, including
maintenance of certain financial ratios and a restriction on future borrowings.
As of December 31, 1998 and March 31, 1999 (unaudited), the Company was not in
compliance with certain of these covenants, and has received a waiver of these
covenants until April 1, 1999. In addition, the Revolver was amended through
the earlier of the closing of the Offering or May 31, 1999.
As of December 31, 1998 and March 31, 1999, the Company had available
borrowings of $1,920 and $2,076 (unaudited), respectively, under the Revolver.
(6) Accrued Liabilities
A summary of accrued liabilities follows:
<TABLE>
<CAPTION>
December 31,
--------------
1997 1998 March 31, 1999
------- ---------------------
(unaudited)
<S> <C> <C> <C>
Professional fees.............................. $ 395 $ 350 $390
Deferred revenue............................... 165 107 55
Accrued vacation............................... 145 127 149
Accrued compensation........................... 346 93 143
Other.......................................... 176 85 53
------- ----- ----
$ 1,227 $ 762 $790
======= ===== ====
</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 bearing interest at 8%,
which were 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 and $18 in
1996 and 1997, respectively.
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 $30 in 1996. 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.
T
he 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
F-12
<PAGE>
LITRONIC INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 shareholders. As the operations of
KRDS, Inc. were 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, the
Company distributed $9,534 in cash dividends and distributed the common stock
of KRDS, Inc., to the shareholders of Litronic on a pro rata basis in 1997. The
net assets of KRDS, Inc. consisted of $8,500 in cash at the time of the
distribution.
On December 31, 1997, the Company entered into two unsecured notes payable
with KRDS, Inc., it is 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. The Company incurred $252 of interest expense on
these notes in 1998.
(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, 1997 and 1998,
accounts receivable included $447 and $308, respectively, due from the U.S.
Government and related agencies.
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%, 17% and 20% of 1998
total revenues, respectively. The Company had sales to two customers which
represented 39% (unaudited) and 27% (unaudited), respectively, of total revenue
for the three months ended March 31, 1999. No other customers accounted for
more than 10% of net revenues in 1996, 1997 or 1998. Trade accounts receivable
aggregated $709, $493 and $388 (unaudited) from the aforementioned major
customers as of December 31, 1997 and 1998, and March 31, 1999, respectively.
(9) Commitments and Contingencies
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:
<TABLE>
<CAPTION>
Year ending December 31,
------------------------
<S> <C>
1999.................................................................. $290
2000.................................................................. 243
2001.................................................................. 162
----
$695
====
</TABLE>
F-13
<PAGE>
LITRONIC INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Rental expense under noncancelable operating leases was $206, $215 and $310
for the years ended December 31, 1996, 1997 and 1998.
As the Company provides engineering and other services to various government
agencies, it is subject to retrospective audits which may result in adjustments
to amounts recognized as revenues, and the Company may be subject to
investigation by governmental entities. Failure to comply with the terms of any
governmental contracts could result in civil and criminal fines and penalties,
as well as suspension from future government contracts. The Company is not
aware of any adjustments, fines or penalties which could have a material
adverse effect on its financial position or results of operations.
(10) Stock Option Plans
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. All stock options granted have 10 year terms. Unless otherwise
provided by the Board of Directors or a committee of the Board administering
the Plan, each option granted under the Plan vested 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.
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 December 31, 1998............... 281 0.70
===
</TABLE>
As of December 31, 1998, the number of options exercisable was 143.
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.
Had the Company determined compensation cost based on the fair value at the
grant date for its stock options under Statement 123, the Company's net loss
would have been increased to the pro forma amount indicated below.
<TABLE>
<CAPTION>
Year Ended
December 31,
1998
------------
<S> <C>
Net loss as reported............................................ $(1,406)
Assumed stock compensation cost................................. 16
-------
Pro forma net loss.............................................. $(1,422)
=======
</TABLE>
The fair value of each option grant was estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions: risk-
free interest rate of 5%; dividend yield of 0.0%; average expected lives of 6
years; and volatility of 0%. The weighted-average fair value per option granted
in 1998 was
F-14
<PAGE>
LITRONIC INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
$0.70. The Black-Scholes model, as well as other currently accepted option
valuation models, was developed to estimate the fair value of freely-tradable,
fully-transferable options without vesting restrictions, which significantly
differ from the Company's stock option plans. These models also require highly
subjective assumptions, including future stock price volatility and expected
time until exercise, which greatly affect the calculated fair value on the
grant date.
(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. During 1998, the Company
made contributions of $40 to this plan.
F-15
<PAGE>
PULSAR DATA SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Reports......................................... F-17-F-18
Balance sheets........................................................ F-19
Statements of operations.............................................. F-20
Statements of stockholders' equity (deficit).......................... F-21
Statements of cash flows.............................................. F-22
Notes to financial statements......................................... F-23
Schedule II--Valuation and qualifying accounts........................ S-1
</TABLE>
F-16
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Pulsar Data Systems, Inc.
We have audited the accompanying balance sheet of Pulsar Data Systems, Inc.
as of December 31, 1998 and the related statements of operations, stockholders'
equity (deficit) and cash flows for the year then ended. In connection with our
audit of the financial statements, we also have audited the financial statement
schedule for the year ended December 31, 1998 as listed in the accompanying
index. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Pulsar Data Systems, Inc.
as of December 31, 1998, and the results of its operations and its cash flow
for the year ended December 31, 1998, in conformity with generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements take as
a whole, presents fairly, in all materials respects, the information set forth
therein.
The accompanying financial statements and financial statement schedule have
been prepared assuming that the Company will continue as a going concern. As
discussed in Note 14 to the financial statements, the Company has suffered a
net loss of $8,141,000 in 1998 and has a net capital deficiency of $9,951,000
that raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 14.
The financial statements and financial statement schedule do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ KPMG LLP
McLean, Virginia
March 31, 1999
except for the third
paragraph of Note 5
which is as of
May 5, 1999
F-17
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Pulsar Data Systems, Inc.
Lanham, Maryland
We have audited the accompanying balance sheet of Pulsar Data Systems, Inc.
as of December 31, 1997, and the related statements of operations,
stockholders' equity (deficit), and cash flows for each of the years in the two
year period ended December 31, 1997 and the financial statement schedule for
each of the years in the two year period ended December 31, 1997. These
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule 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, 1997, and the results of its operations and its cash flows
for each of the years in the two year period ended December 31, 1997 in
conformity with generally accepted accounting principles. Also in our opinion
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, present fairly in all material
respects, the information set forth therein.
The accompanying financial statements and financial statement schedule have
been prepared assuming that the Company will continue as a going concern. As
discussed in Note 14 to the financial statements, the Company incurred a net
loss of approximately $11,016,000 during the year ended December 31, 1997 and
has a net capital deficiency of approximately $1,810,000 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 14 to the financial statements, raise substantial doubt about the
Company's ability to continue as a going concern. The financial statements and
financial statement schedule do not include any adjustments that might result
from the outcome of this uncertainty.
/s/ Keller Bruner & Company, L.L.C.
Bethesda, Maryland
April 27, 1998
F-18
<PAGE>
PULSAR DATA SYSTEMS, INC.
BALANCE SHEETS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
December 31,
---------------- March 31,
1997 1998 1999
------- ------- -----------
(unaudited)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents........................ $ 2,236 $ 352 $ 441
Accounts receivable...
........................... 31,213 10,145 5,798
Inventory........................................ 2,348 775 890
Other current assets............................. 245 -- --
------- ------- --------
Total current assets......................... 36,042 11,272 7,129
------- ------- --------
Property and equipment........................... 1,100 581 525
Notes receivable--related parties................ 2,218 543 543
Cash surrender value of life insurance........... 1,416 216 224
Deposits and other assets........................ 95 118 118
------- ------- --------
4,829 1,458 1,410
------- ------- --------
$40,871 $12,730 $ 8,539
======= ======= ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Financing arrangement--IBM....................... $28,067 $ 9,403 $ 7,201
Current installments of long-term debt........... 915 964 967
Notes payable--vendors........................... -- 3,948 3,361
Accounts payable................................. 7,267 3,933 3,829
Accrued liabilities.............................. 2,229 1,072 1,623
Notes payable to shareholder..................... -- 120 215
------- ------- --------
Total current liabilities.................... 38,478 19,440 17,196
Notes payable, net of current maturities......... 4,203 3,241 3,085
------- ------- --------
Total liabilities............................ 42,681 22,681
20,281
------- ------- --------
Commitments and Contingencies
Stockholders' Deficit
Common stock; par value $1; authorized, issued
and outstanding 1,000 shares.................. 1 1 1
Additional paid-in capital..................... 1,663 1,663 1,663
Accumulated deficit............................ (3,474) (11,615) (13,406)
------- ------- --------
Net stockholders' deficit.................... (1,810) (9,951) (11,742)
------- ------- --------
$40,871 $12,730 $ 8,539
======= ======= ========
</TABLE>
See accompanying notes to financial statements
F-19
<PAGE>
PULSAR DATA SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months
Year Ended December 31, Ended March 31,
--------------------------- ----------------
1996 1997 1998 1998 1999
-------- -------- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues....................... $165,958 $151,520 $80,532 $18,018 $ 9,948
Cost of revenues............... 149,364 142,201 74,970 17,472 9,389
-------- -------- ------- ------- -------
Gross margin............... 16,594 9,319 5,562 546 559
Selling, general and adminis-
trative expenses.............. 13,545 17,152 11,665 2,256 1,892
-------- -------- ------- ------- -------
Operating income (loss).... 3,049 (7,833) (6,103) (1,710) (1,333)
-------- -------- ------- ------- -------
Other income (expense)
Interest expense............. (3,564) (3,640) (2,099) (706) (478)
Interest income.............. 639 457 61 200 20
-------- -------- ------- ------- -------
(2,925) (3,183) (2,038) (506) (458)
-------- -------- ------- ------- -------
Net earnings (loss)........ $ 124 $(11,016) $(8,141) $(2,216) $(1,791)
======== ======== ======= ======= =======
Earnings (loss) per share: ba-
sic and diluted............... $ 124 $(11,016) $(8,141) $(2,216) $(1,791)
======== ======== ======= ======= =======
Weighted average shares out-
standing...................... 1,000 1,000 1,000 1,000 1,000
======== ======== ======= ======= =======
</TABLE>
See accompanying notes to financial statements
F-20
<PAGE>
PULSAR DATA SYSTEMS, INC.
STATEMENTS 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, 1996.... 1 $ 1 $ 21 $ 9,045 $ 9,067
Net earnings.............. -- -- -- 124 124
Distributions to
stockholders............. --
-- -- (1,483) (1,483)
--- --- ------ -------- --------
Balance, December 31, 1996.. 1 1 21 7,686 7,708
Additional paid-in capital
contributed by
stockholders............. -- -- 291 -- 291
Forgiveness of
stockholder's deferred
compensation............. -- -- 1,351 -- 1,351
Net loss.................. -- -- -- (11,016) (11,016)
Distributions to
stockholders............. -- -- -- (144) (144)
--- --- ------ -------- --------
Balance, December 31, 1997.. 1 1 1,663 (3,474) (1,810)
Net loss.................. -- -- -- (8,141) (8,141)
--- --- ------ -------- --------
Balance, December 31, 1998.. 1 1 1,663 (11,615) (9,951)
Net loss (unaudited)......
-- -- -- (1,791) (1,791)
--- --- ------ -------- --------
Balance, March 31, 1999
(unaudited)................ 1 $ 1 $1,663 $(13,406) $(11,742)
=== === ====== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-21
<PAGE>
PULSAR DATA SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Three Months
Year Ended December 31, Ended March 31,
-------------------------- ----------------
1996 1997 1998 1998 1999
------- -------- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating
Activities:
Ne
t earnings (loss)............. $ 124 $(11,016) $(8,141) $(2,216) $(1,791)
Adjustments to reconcile net
earnings (loss) to net cash
provided by operating
activities:
Depreciation and amortization... 467 585 415 103 61
Loss on disposal of assets...... 63 -- 162 -- --
Deferred compensation........... 364 -- -- -- --
Provisions for doubtful accounts
and notes receivable........... 403 4,621 3,370 75 164
Provision for notes receivable-
related parties................ -- 682 655 -- --
Deferred rent................... (28) -- -- -- --
Changes in assets and
liabilities:
Accounts receivable............ 11,743 10,236 17,698 13,050 4,183
Inventories.................... 11,789 1,312 1,573 555 (115)
Other assets................... 33 (11) 222 (80) --
Deferred governmenta
l agency
contract costs................ 1,833 817 -- -- --
Accounts payable............... (2,184) 2,761 2,550 (615) (104)
Accrued liabilities............ 310 842 (137) (813) 551
Customer deposit............... 2,098 (2,098) -- -- --
Deferred governmental agency
contract revenue.............. (1,697) (1,327) -- -- --
------- -------- ------- ------- -------
Net cash provided by operating
activities...................... 25,318 7,404 18,367 10,059 2,949
------- -------- ------- ------- -------
Cash Flows from Investing
Activities:
Increase in cash surrender value
of life insurance.............. (355) (65) (294) (140) (8)
Net collections (issuance) of
notes receivable............... 392 (291) -- -- --
Net collections (issuance) of
notes receiva
ble -- related
parties........................ (1,975) 1,175 -- 60 --
Proceeds from loans on cash
surrender value of life
insurance...................... -- -- 1,494 -- --
Purchase of equipment........... (942) (364) (58) (36) (5)
------- -------- ------- ------- -------
Net cash provided by (used in)
investing activities............ (2,880) 455 1,142 (116) (13)
------- -------- ------- ------- -------
Cash Flows from Financing
Activities:
Net repayments on line of
credit......................... (7,600) (2,000) -- -- --
Net repayments on financing
arrangement -- IBM............. (13,023) (6,058) (18,664) (11,090) (2,202)
Proceeds from notes payable to
stockholder.................... -- -- 120 -- 95
Repayments of long term
borrowing...................... (25)
(163) (913) (215) (153)
Repayment of vendors notes
payable........................ -- -- (1,936) -- (587)
Additional paid-in capital from
stockholders................... -- 291 -- -- --
Distributions to stockholders... (1,483) (144) -- -- --
------- -------- ------- ------- -------
Net cash used in financing
activities...................... (22,131) (8,074) (21,393) (11,305) (2,847)
------- -------- ------- ------- -------
Net increase (decrease) in cash.. 307 (215) (1,884) (1,362) 89
Cash and cash equivalents at
beginning of period............. 2,144 2,451 2,236 2,236 352
------- -------- ------- ------- -------
Cash and cash equivalents at end
of period....................... $ 2,451 $ 2,236 $ 352 $ 874 $ 441
======= ======== ======= ======= =======
Supplemental Schedule of Non-cash
Investing and Financing
Activities:
Conversion of line of credit to
term note payable.............. $ -- $ 5,200 $ -- $ -- $ --
======= ======== ======= ======= =======
Forgiveness of deferred
compensation recorded as
capital contribution........... $ -- $ 1,351 $ -- $ -- $ --
======= ======== ======= ======= =======
Conversion of accounts payable
to vendors notes payable....... $ -- $ -- $ 5,884 $ -- $ --
======= ======== ======= ======= =======
Distribution of assets and
related notes to stockholders.. $ -- $ -- $ 28 $ -- $ --
======= ======== ======= ======= =======
Rent expense offset against
related party notes
receivable..................... $ -- $ 182 $ 1,069 $ 1
3 $ 71
======= ======== ======= ======= =======
Accrued interest on related
party notes receivable......... $ 153 $ 175 $ 39 $ 10 $ 0
======= ======== ======= ======= =======
Supplemental Disclosures of Cash
Flow Information:
Cash paid during the year for:
Interest........................ $ 3,649 $ 2,812 $ 2,502 $ 1,177 $ 362
======= ======== ======= ======= =======
</TABLE>
See accompanying notes to financial statements.
F-22
<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 from the 8(a)
program in June 1997 in anticipation of graduation.
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 transfer of title, generally upon delivery. The Company also
has time and material contracts. Revenue from time and material contracts is
recognized on the basis of man-hours provided plus other reimbursable contract
costs incurred during the period.
Deferred governmental agency contract costs and revenue: Deferred costs and
revenue from contracts with governmental agencies represent costs 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. General and administrative
expenses related to other costs that were deferred were included as a component
of deferred costs. All equipment subject to the acceptance period at December
31, 1996 was subsequently accepted by the government. Substantially all
contracts with acceptance periods terminated during the year ended December 31,
1997.
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 purchased 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. Cost consists of
the direct cost of purchased inventory.
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.
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.
F-23
<PAGE>
PULSAR DATA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Earnings (loss) per share: The computations of basic and diluted earnings
(loss) per common share are based upon the weighted average number of common
shares outstanding during the year. There were no potentially dilutive
securities for any period presented.
Unaudited condensed interim information: The accompanying unaudited
condensed financial statements contain all adjustments, which are normal
recurring accruals, necessary to present fairly the financial position as of
March 31, 1999 and the statements of operations, stockholders' equity
(deficit) and cash flows for the three months ended March 31, 1998 and 1999.
The results of
operations for the three months ended March 31, 1999 are not
necessarily indicative of the results to be expected for the entire fiscal
year.
Note 2. Accounts Receivable
Accounts receivable consist of the following as of December 31, 1997 and
1998 and March 31, 1999:
<TABLE>
<CAPTION>
December 31,
---------------- March 31,
1997 1998 1999
------- ------- -----------
(unaudited)
(in thousands)
<S> <C> <C> <C>
8(a) government receivables.................. $ 2,095 $ -- $ --
Government receivables....................... 16,483 9,135 5,517
Commercial receivables....................... 10,902
1,382 342
Recoverable costs and accrued profit on
progress completed-not billed............... 497 -- --
Other receivables............................ 2,489 628 272
------- ------- ------
32,466 11,145 6,131
Less allowance for doubtful accounts......... (1,253) (1,000) (333)
------- ------- ------
$31,213 $10,145 $5,798
======= ======= ======
</TABLE>
Note 3. Property and Equipment
Property and equipment consist of the following as of December 31, 1997 and
1998 and March 31, 1999:
<TABLE>
<CAPTION>
Estimated December 31,
Useful Life ---------------- March 31,
(in years) 1997 1998 1999
----------- ------- ------- -----------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C>
Furniture and fixtures........... 7 $ 628 $ 407 $ 407
Office equipment................. 5-7 511 508 508
Computer equipment............... 5 706 756 761
Software......................... 5 545 553 553
Vehicles......................... 5 273 17 17
Leasehold improvements........... 7 162 78 78
Warehouse equipment.............. 5-7 23 26 26
------- ------- -------
2,848 2,345 2,350
Less accumulated depreciation and
amortization.................... (1,748) (1,764) (1,825)
------- ------- -------
$ 1,100 $ 581 $ 525
======= ======= =======
</TABLE>
F-24
<PAGE>
PULSAR DATA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 4. Deferred Compensation and Life Insurance
Through December 31, 1996 the Company had a deferred compensation agreement
with its President, which was funded through Company-owned life insurance
policies. The cash surrender value of these policies as of December 31, 1997
and 1998 and March 31, 1999, was $1,416,000, $216,000 and $224,000 (unaudited),
respectively.
On 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 a contribution to 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 5. Notes Receivable--Related Parties
Between July 1995 and June 1996, the Company made a series of eight loans
aggregating $2.8 million to a related party. These loans bear interest at
annual rates varying from 7.5% to 10.0% and were due on demand. Two of these
loans were in the form of assignment of notes receivable to the Company from
third parties in the aggregate principal amount of $623,000, which were
assigned back to Pulsar in December 1997. At that time these notes were deemed
uncollectible and written off to bad debt expense. The outstanding balance of
these notes as of December 31, 1997 was $2,218,000.
In October 1995, a related party purchased the building to be occupied by
the Company. This purchase was financed through a loan to the related party
from a lending institution in the amount of $2.8 million, which was guaranteed
by the Company and personally guaranteed by the shareholders of the Company.
Following the acquisition of the building, the related party leased a portion
of the property to the Company at fair market rents. Payments of rent under the
lease were $1,042,000, $955,500 and $409,500 during the years ended December
31, 1996, 1997 and 1998, respectively. A portion of the rent expense incurred
under the related party lease was used to offset the related party notes
receivable balance. The amount of rent expense used to offset the notes
receivable and interest receivable from the related party for the years ended
December 31, 1996, 1997 and 1998 was $0, $182,000 and $344,000, respectively.
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, outstanding loans of $1,347,000 were converted into two
promissory notes of $543,000 and $804,000, bearing interest at the rate of 7.5%
per annum, payable monthly, and maturing upon the sales of each individual
property. During 1998, the related party experienced financial difficulties as
a result of its commercial real estate operations. Based upon the related
party's cash flows and decline in its financial condition the Company
determined that one of the notes had become impaired and recorded a bad debt
expense of $655,000 and reversed $149,000 of interest income recorded on the
note in 1998. Payment on the note is not due until the property is sold. The
related party has advised the Company that it does not intend to sell the
property and the value of the property is not in excess of the mortgage. In
addition, any proceeds derived from the sale of the property would be applied
against the mortgage before repayment of the note.
On April 1, 1999, the related party defaulted on both notes by not making
the scheduled interest payments in accordance with the note agreements. As of
April 30, 1999, the related party sold one of the properties. The note for
$543,000 was repaid on May 5, 1999 through the reduction of the note payable-
financial institution. In connection with the payment of a portion of the note
payable-financial institution, the financial institution released the Company
from its guarantee obligation on the related party's remaining liabilities
(unaudited).
Pulsar issued a note receivable to a shareholder accruing interest at 5% per
annum due on demand in the amount of $1,175,000 in 1996. The note was repaid in
full in 1997.
F-25
<PAGE>
PULSAR DATA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 6. 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 accrued 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. In October 1997, the line of credit was converted to
a term loan of $5,200,000. (See Note 8)
Note 7. 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 on the line of credit was 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%. The
effective interest rate at December 31, 1998 and March 31, 1999 (unaudited) was
10.125%. For any amount that the outstanding advances exceed the formula
borrowing base, interest was 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, 1998 the Company was in violation of these covenants.
In August 1997, the Company was in violation of the related debt covenants
and entered into a forbearance agreement with IBM. Subsequently the Company
violated the forbearance agreement and received several amendments to the
agreement. Pursuant to amendments of the forbearance agreement the Company is
currently obligated to pay, at the Company's option, the lesser of: (i)
warrants representing 4% of the Company on a fully diluted to basis, or (ii)
pay $650,000, or (iii) pay a pro rata portion of the $650,000 is less than
substantially all of the assets are sold. As the Company intends to pay
$650,000, the Company has accrued this amount as of December 31, 1997. In
further consideration of the forbearance agreement and the related amendments,
the Company was obligated to pay $50,000 or issue warrants representing 0.5% of
the Company on a fully diluted basis, per month from February through May,
1998. The Company has paid an aggregate of $200,000 which has been recorded as
additional interest expense in 1998. These payments were made in lieu of the
issuance of warrants to IBM.
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 was further reduced to $15,000,000. The financing arrangement has a
termination date of October 30, 1999.
A February 1999 amendment to the forbearance agreement decreased the credit
line to $8,000,000 until further amended. A March 1999 amendment to the
forbearance agreement increased the credit line to $9,000,000 for the period
through April 30, 1999, at which time the line was reduced to $8,000,000. The
forbearance agreement expires on the date of the anticipated acquisition and
initial public offering (Note 14).
F-26
<PAGE>
PULSAR DATA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 8. Notes Payable
Long-term debt consists of the following notes payable as of December 31,
1997 and 1998 and March 31, 1999:
<TABLE>
<CAPTION>
December 31,
-------------- March 31,
1997 1998 1999
------ ------ -----------
(unaudited)
(in thousands)
<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. On December 31, 1998 the
note and related automobile were transferred
to the shareholders of the Company............ $ 17 $ -- $ --
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. On December 31, 1998, the
note and related automobile were transferred
to the shareholders of the Company............ 39 -- --
Note payable--financial institution;
collateralized by inventory, accounts
receivable, machinery and equipment, 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, 7.75% at December 31, 1998
and March 31, 1999 (unaudited) liquidated by
monthly principal and interest payments of
$104,000; due to mature December 2002......... 5,062 4,205 4,052
------ ------ ------
$5,118 $4,205 $4,052
Less current maturities........................ (915) (964) (967)
------ ------ ------
$4,203 $3,241 $3,085
====== ====== ======
</TABLE>
Maturities on the notes payable as of December 31, 1998 due in future years
are as follows:
<TABLE>
<CAPTION>
Year ending December 31, (in thousands)
------------------------ --------------
<S>
<C>
1999........................................................ $ 964
2000........................................................ 1,041
2001........................................................ 1,125
2002........................................................ 1,075
------
$4,205
======
</TABLE>
Note 9. Notes Payable--Vendors
Notes payable--vendors consist of notes payable to nine vendors which were
entered into in August to December 1998 for a total of $5,884,000. The notes
accrue interest at rates ranging from 10% to 18%, and are due in full during
1999. The balance at March 31, 1999 was approximately $3,361,000 (unaudited).
As of March 31, 1999, the Company had defaulted on substantially all of these
notes.
F-27
<PAGE>
PULSAR DATA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 10. 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, 1997, and 1998, and the three
months ended March 31, 1998 and 1999:
<TABLE>
<CAPTION>
Year ended December 31, March 31,
------------------------- ------------------
1996 1997 1998 1998 1999
-------- -------- ------- ------- ------
(in thousands) (unaudited)
<S>
<C> <C> <C> <C> <C>
Revenue:
Service revenue............... $ 10,253 $ 8,818 $ 3,373 $ 1,241 $ 369
Product revenue............... 155,705 142,702 77,159 16,777 9,579
-------- -------- ------- ------- ------
Total revenue............... $165,958 $151,520 $80,532 $18,018 $9,948
======== ======== ======= ======= ======
Cost of revenue
Cost of service revenue....... $ 4,870 $ 4,115 $ 1,553 $ 730 $ 155
Cost of product revenue....... 144,494 138,086 73,417 16,742 9,234
-------- -------- ------- ------- ------
Total cost of revenue....... $149,364 $142,201 $74,970 $17,472 $9,389
======== ======== ======= ======= ======
</TABLE>
Note 11. Leasing Arrangements
In January 1996, the Company entered into a lease with a related party for
office space, which was d
ue to expire in December 2000. In September 1998 this
lease was terminated and the Company paid a $750,000 termination fee to the
related party. The fee was offset against notes receivable owed from the
related party. 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 $1,690,000, $811,000, $1,252,000 and $51,000 (unaudited)
for the years ended December 31, 1996, 1997 and 1998 and for the three months
ended March 31, 1999, respectively. Lease payments for the year ended December
31, 1998 were offset against interest receivable and notes receivable from the
related party (see Note 5).
Future minimum rental payments required under these leasing arrangements as
of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Year ending December 31, (in thousands)
----------
- -------------- --------------
<S> <C>
1999....................................................... $144
2000....................................................... 125
2001....................................................... 112
2002....................................................... 115
2003....................................................... 88
----
$584
====
</TABLE>
Note 12. Employee Retirement Plan
The Company has adopted a retirement plan under Section 401(k) of the
Internal Revenue Code. The plan provides benefits to all employees who meet
certain age and service eligibility requirements. Under the terms of the plan,
the Compan
y will match 50% of the first 6% of an employee's elective
contribution. Company contributions for the years ended December 31, 1996, 1997
and 1998 were $71,000, $66,000, and $28,000, respectively. The contribution for
the three months ended March 31, 1999 was $5,000 (unaudited).
Note 13. Major Customers
During the years ended December 31, 1996, 1997, and 1998 and the three
months ended March 31, 1999, 61%, 60%, 90% and 94% (unaudited), respectively,
of the Company's revenue was derived from contracts with
F-28
<PAGE>
PULSAR DATA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
the Federal Government. The receivable balance for these contracts at December
31, 1997 and 1998 and March 31, 1999 was $19,075,000, $9,135,000 and $5,517,000
(unaudited), respectively.
Note 14. Going Concern
As shown in the accompanying financial statements, the Company incurred a
net operating loss of $11,016,000 and $8,141,000 for the years ended December
31, 1997, and 1998, respectively, and has a net capital deficiency of
$1,810,000 and $9,951,000 at December 31, 1997 and 1998, respectively. At
December 31, 1998, the Company is in violation of the financial covenants
related to its financing agreement. These factors create a substantial doubt
about the Company's ability to continue as a going concern. 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 success of the pending
acquisition and initial public offering. The financial statements do not
include any adjustments that might be necessary if the Company is unable to
continue as a going concern.
Note 15. Contingent Liabilities
The Company had 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.
During the year ended December 31, 1998, two lawsuits were filed against the
Company by trade vendors claiming approximately $739,000, plus interest,
attorney's fees and costs. These lawsuits were settled as structured payments
in the aggregate amount of approximately $785,000 and the obligations were
classified as notes payable. Payments applied against these notes payable
during the year ended December 31, 1998 totalled approximately $315,000, which
included approximately $14,000 of interest expense. During the quarter ended
March 31, 1999, nine lawsuits were filed against the Company by trade vendors
and a local government agency claiming approximately $875,000, plus interest,
attorney's fees and costs. As of March 31, 1999, these lawsuits were settled
for an aggregate amount of approximately $929,000, including approximately
$60,000 of interest, attorney's fees and costs, and the obligations were
classified as accounts payable. Payments applied against these accounts payable
during the quarter ended March 31, 1999 totaled approximately $41,000, which
included approximately $2,000 of interest expense. During the quarter ended
March 31, 1999, payments applied against the notes payable relating to the two
lawsuits filed and settled in 1998 totalled approximately $278,000, which
included approximately $8,000 of interest expense.
The Company has been named as a defendant in a lawsuit which claims breach
of contract under which the Company was required to pay $500,000 over a thirty
month period plus a commission on contracts awarded as a result of the
contract. The plaintiff claims damages in an amount in excess of $10 million.
Based upon discussions with counsel, the Company believes that the case is
without merit and intends to vigorously defend against the claim; however, the
outcome of this matter cannot currently be determined. No amounts have been
accrued in the financial statements relating to this matter.
F-29
<PAGE>
The Company is also 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.
As of March 31, 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. The Company has reserved $50,000 which represents the
Company's estimate of the maximum amount of penalties that could be assessed.
F-30
<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
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 9
Forward-Looking Statements............................................... 16
Use of Proceeds.......................................................... 17
Dividend Policy.......................................................... 19
Dilution................................................................. 19
Capitalization........................................................... 21
Selected Financial Data--Litronic........................................ 22
Selected Financial Data--Pulsar.......................................... 24
Pro Forma Financial Data................................................. 26
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 30
Industry Information..................................................... 48
Business................................................................. 52
Management............................................................... 69
Principal Stockholders................................................... 76
Related Party Transactions............................................... 77
Description of Securities................................................ 79
Shares Eligible for Future Sale.......................................... 81
Underwriting............................................................. 83
Legal Matters............................................................ 85
Experts.................................................................. 85
Where You Can Find More Information...................................... 86
Index to Consolidated Financial Statements
--Litronic Inc. ....................................................... F-1
Index to Financial Statements--Pulsar Data Systems, Inc. ................ F-16
</TABLE>
Until , 1999, all dealers that effect transactions in the registered
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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
3,700,000 SHARES
[Logo of Litronic, Inc.]
COMMON STOCK
----------------
PROSPECTUS
----------------
Bluestone Capital Partners, L.P.
Pacific Crest Securities Inc.
, 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 and expenses. 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.............. $ 13,012
National Association of Securities Dealers, Inc. filing fee...... 5,181
NASDAQ/NMS quotation fee......................................... 75,625
Printing and engraving expenses.................................. 225,000
Legal fees and expenses.......................................... 835,000
Accounting fees and expenses..................................... 675,000
Transfer Agent and Registrar fees and expenses................... 4,000
Blue Sky fees and expenses (including legal fees)................ 10,000
Miscellaneous.................................................... 57,182
----------
Total.......................................................... $1,900,000
==========
</TABLE>
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law 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 he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
Section 107(b)(7) of the Delaware General Corporation Law 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.
II-1
<PAGE>
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.
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 shareholders 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.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
1 Form of Underwriting Agreement among the Registrant and the
Underwriter*
2 Stock Acquisition Agreement and Reorganization Agreement*
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*
4.3 Stock Certificate*
5 Form of Opinion of Arent Fox Kintner Plotkin & Kahn, PLLC re
validity
10.01 Employment Agreement with Kris Shah*
10.02 Employment Agreement with William Davis*
10.03 Promissory Note from Dril-Tron, Inc. (Litronic Industries, Inc.)
To Kris Shah dated December 12, 1994 in the principal amount of
$210,822*
10.04 Commercial Guaranty from Pulsar Data Systems, Inc. to Wilmington
Trust Company dated June 23, 1995*
10.05 Business Loan Agreement between Pulsar Data Systems, Inc. and
Wilmington Trust Company dated July 24, 1995*
10.06 Commercial Security Agreement between Pulsar Data Systems, Inc.
and Wilmington Trust Company dated July 24, 1995*
10.07 Commercial Guaranty from Pulsar Data Systems, Inc. to Wilmington
Trust Company dated October 23, 1995*
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
10.08 Purchase Order between Loral Federal Systems Company and Litronic
Industries, Inc. dated November 17, 1995*
10.09 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 20, 1997+
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 6, 1999*
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 February 3, 1999 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*
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
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 8, 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*
10.36 Third Amendment to Loan and Security Agreement dated March 31,
1999*
10.37 Dallas Semiconductor Standard Consulting Agreement dated February
2, 1999 between Litronic and Dallas Semiconductor Corporation*
10.38 Basic Ordering Agreement dated April 16, 1998 between the United
States of America and Litronic*
10.39 Nonexclusive Distributor Agreement dated April 27, 1999 among
Litronic and Itochu Techno-Science Corporation and Itochu
Corporation
10.40 Equipment Purchase, Software License and Maintenance Agreement
dated April 20, 1999 between Bank of America and Litronic*
10.41 Nonexclusive reseller agreement dated as of April 1, 1999 between
Litronic and South African Certification Agency*
10.42 Loan and Security Agreement dated as of May 10, 1999 between
Litronic and Fidelity Funds
10.43 Promissory Note from Litronic Industries, Inc. to BYL Bank Group
dated May 13, 1999 in the principal amount of $750,000.
10.44 Promissory Note from Litronic Industries, Inc. to BYL Bank Group
dated March 10, 1999 in the principal amount of $750,000.
23.1 Form of Consent of KPMG LLP+
23.2 Form of Consent of KPMG LLP+
23.3 Form of Consent of Keller Bruner & Company, LLC+
27 Financial Data Schedule*
99.1 Consent of Mark Gembicki*
99.2 Consent of Matthew Medeiros*
</TABLE>
(b) Financial Statement Schedules.
The following financial statement schedules are filed herewith:
Report of Independent Public Accountants
Schedule II--Valuation and qualifying accounts
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.
- --------
* Previously filed.
+ Supercedes previously filed exhibit.
II-4
<PAGE>
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 amendment to the registration statement to be signed on
its behalf by the undersigned, hereunto duly authorized, in the State of
California on the 1st day of June, 1999.
Litronic Inc.
/s/ Kris Shah
By: _________________________________
Kris Shah Chief Executive Officer
and Chairman of the Board
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed by the following persons in the
capacities and on the dates indicated:
Signature Title Date
/s/ Kris Shah Director, Chairman
- ------------------------------------- of the Board and June 1, 1999
Kris Shah Chief Executive
Officer
* Chief Financial
- ------------------------------------- Officer and June 1, 1999
Thomas W. Seykora principal
accounting officer
* Director, President
- ------------------------------------- and Chief Operating June 1, 1999
William W. Davis, Sr. Officer
/s/ Kris Shah
* By: ____________
___________________
Attorney-in-Fact
II-6
<PAGE>
PULSAR DATA SYSTEMS, INC.
SCHEDULE II
Valuation and Qualifying Accounts and Reserves
Years ended December 31, 1996, 1997 and 1998
(Amounts in thousands)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-------- ---------- ---------- ----------- -------------
Additions
Balance at Charged to
Beginning Costs and Amounts Balance at
Classification of Period Expenses Written Off End of Period
-------------- ---------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
Year Ended December 31, 1996
Allowance for doubtful
accounts.................... 450 403 33 820
===== ===== ===== =====
Allowance for notes
receivable.................. -- -- -- --
===== ===== ===== =====
Allowance for notes
receivable-related party.... -- -- -- --
===== ===== ===== =====
Year Ended December 31, 1997
Allowance for doubtful
accounts.................... 820 3,460 3,027 1,253
===== ===== ===== =====
Allowance for notes
receivable.................. -- 1,220 1,220 --
===== ===== ===== =====
Allowance for notes
receivable-related party.... -- 623 623 --
===== ===== ===== =====
Year Ended December 31, 1998
Allowance for doubtful
accounts.................... 1,253 3,370* 3,623 1,000
===== ===== ===== =====
Allowance for notes
receivable.................. -- -- -- --
===== ===== ===== =====
Allowance for notes
receivable-related party.... -- 655 -- 655
===== ===== ===== =====
</TABLE>
- --------
* Includes $1,599 classified as cost of product revenue.
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
1 Form of Underwriting Agreement among the Registrant and the
Underwriters*
2 Stock Acquisition Agreement and Reorganization Agreement*
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*
4.3 Stock Certificate*
5 Form of Opinion of Arent Fox Kintner Plotkin & Kahn, PLLC re
validity
10.01 Employment Agreement with Kris Shah*
10.02 Employment Agreement with William Davis*
10.03 Promissory Note from Dril-Tron, Inc. (Litronic Industries, Inc.)
To Kris Shah dated December 12, 1994 in the principal amount of
$210,822*
10.04 Commercial Guaranty from Pulsar Data Systems, Inc. to Wilmington
Trust Company dated June 23, 1995*
10.05 Business Loan Agreement between Pulsar Data Systems, Inc. and
Wilmington Trust Company dated July 24, 1995*
10.06 Commercial Security Agreement between Pulsar Data Systems, Inc.
and Wilmington Trust Company dated July 24, 1995*
10.07 Commercial Guaranty from Pulsar Data Systems, Inc. to Wilmington
Trust Company dated October 23, 1995*
10.08 Purchase Order between Loral Federal Systems Company and Litronic
Industries, Inc. dated November 17, 1995*
10.09 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 20, 1997+
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 6, 1999*
10.17 Lease Agreement between Airport Industrial Complex and Litronic
Industries, Inc. dated December 4, 1997*
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
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 February 3, 1999 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 8, 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*
10.36 Third Amendment to Loan and Security Agreement dated March 31,
1999*
10.37 Dallas Semiconductor Standard Consulting Agreement dated February
2, 1999 between Litronic and Dallas Semiconductor Corporation*
10.38 Basic Ordering Agreement dated April 16, 1998 between the United
States of America and Litronic*
10.39 Nonexclusive Distributor Agreement dated April 27, 1999 among
Litronic and Itochu Techno-Science Corporation and Itochu
Corporation
10.40 Equipment Purchase, Software License and Maintenance Agreement
dated April 20, 1999 between Bank of America and Litronic*
10.41 Nonexclusive reseller agreement dated as of April 1, 1999 between
Litronic and South African Certification Agency*
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
10.42 Loan and Security Agreement dated as of May 10, 1999 between
Litronic and Fidelity Funds
10.43 Promissory Note from Litronic Industries, Inc. to BYL Bank Group
dated May 13, 1999 in the principal amount of $750,000.
10.44 Promissory Note from Litronic Industries, Inc. to BYL Bank Group
dated March 10, 1999 in the principal amount of $750,000.
23.1 Form of Consent of KPMG LLP+
23.2 Form of Consent of KPMG LLP+
23.3 Form of Consent of Keller Bruner & Company, LLC+
27 Financial Data Schedule*
99.1 Consent of Mark Gembicki*
99.2 Consent of Matthew Medeiros*
</TABLE>
- --------
* Previously filed.
+ Supercedes previously filed exhibit.
3
<PAGE>
Exhibit 5
[Logo of Arent Fox Appears Here]
May 28, 1999
Litronic Inc.
2030 Main Street, Suite 1250
Irvine, California 92614
Ladies and Gentlemen:
We have acted as counsel for Litronic Inc., a Delaware corporation (the
Company), in connection with the filing of a Registration Statement (No.
333-72151) (the Registration Statement) by the Company under the Securities Act
of 1933, as amended (the Act), relating to the shares of its common stock, $0.01
par value per share (the Shares).
On the basis of such investigation as we have deemed necessary, we are of the
opinion that assuming effectiveness of the Registration Statement under the Act,
4,255,000 Shares to the extent sold as contemplated in the Registration
Statement, including 555,000 Shares if and to the extent the underwriters
exercise an over-allotment option granted by the Company, will be legally
issued, fully paid and nonassessable.
We consent to the filing of this opinion as an exhibit to the Registration
Statement and the reference to our firm under the heading "Legal Matters." In
giving this consent, we do not admit that we come within the category of persons
whose consent is required under Section 7 of the Act.
Very truly yours,
/s/ ARENT FOX KINTNER PLOTKIN & KAHN, PLLC
<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 on the terms and conditions set forth in
this Sublease the following portions of the Master Premises ("Premises"):
approximately 11.912 rentable square feet as identified as Exhibit One to the
sublease and further identified as 2030 SE Main Street, Suite 1250, Irvine,
California.
4. WARRANTY BY SUBLESSOR.
Sublessor warrants and represents 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.
<PAGE>
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 may give 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 before 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 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. Sublessee 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 [illegible text] shall be
payable as and [illegible text] 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
2
<PAGE>
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.
Sublessee shall deposit with Sublessor upon execution of this Sublease the sum
of Twenty Thousand Two Hundred Fifty and 40/100ths Dollars ($20,250.40) 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 not 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
3
<PAGE>
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 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
exercise 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 suit 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
4
<PAGE>
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.
To Sublessee: 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 Industries, 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 forth
in the foregoing Sublease.
Lessor: Koll Tower Four Associates, Lessee: LG & E Energy Systems, Inc.
5
<PAGE>
a California limited partnership a Kentucky corporation
By: __________________________________ By: _________________________________
Title: ________________________________ Title: ______________________________
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 10.14
EXHIBIT ONE
[Description of twelfth floor of
building with shaded area and
non-shaded area. Non-shaded area
is labeled as "subject property."
The words "Exhibit One" appear
at the bottom of the page]
<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
TENANT IMPROVEMENTS: 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 term. 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: Lintronic 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
Lintronic'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 directory
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: /S/ AUTHORIZED SIGNATORY By: /S/ KRIS SHAH
------------------------------------ --------------------------------
Title: Manager, Corporate Real Estate Title: President
-------------------------------- -----------------------------
By: /S/ NANCY J. McDANIEL By:________________________________
------------------------------------
Title: Properties Manager Title:_____________________________
--------------------------------
Date: 10/28/97 Date: Oct. 24, 1997
---------------------------------- ------------------------------
Lessor: Koll Tower Four Associates, Lessee: LG & E Energy Systems, Inc.
a California limited a Kentucky corporation
partnership
By: Koll Management Services, Inc., By: a Delaware Corporation As Agent
------------------------------------ --------------------------------
Title: ________________________________ Title: ____________________________
By: /S/ AUTHORIZED SIGNATORY BY:________________________________
------------------------------------
Title: Portfolio Manager Title:_____________________________
---------------------------------
Date: 11/7/97 Date:______________________________
----------------------------------
10
<PAGE>
1
EXHIBIT 10.26
Solicitation No. FCIS-JB-980001B
FEDERAL SUPPLY SCHEDULE FOR
GENERAL PURPOSE COMMERCIAL INFORMATION TECHNOLOGY
EQUIPMENT, SOFTWARE, AND SERVICES
FSC GROUP 70
NOTE: AMENDMENT #1 THROUGH AMENDMENT #2 HAS BEEN INCORPORATED INTO THE
SOLICITATION.
NOTE: SALES AND MAINTENANCE SERVICE MUST BE PROVIDED TO, AT A
MINIMUM, THE 48 CONTIGUOUS STATES AND THE DISTRICT OF COLUMBIA
CONTRACT PERIOD: Contracts awarded under this standing solicitation will
commence on the DATE OF AWARD and end five years from that
date (unless contract is canceled/terminated or extended).
ANY INFORMATION THAT MAY BE DESIRED ON THIS PARTICULAR SOLICITATION CAN BE
OBTAINED FROM THE ISSUING OFFICE ADDRESS SHOWN HEREIN. THE OFFER SHOULD BE
SUBMITTED, IN DUPLICATE, TO THE FOLLOWING ADDRESS:
GENERAL SERVICES ADMINISTRATION
SOLICITATION NO. FCIS-JB-980001B
FSS BID ROOM (Room L-108)
1941 JEFFERSON DAVIS HIGHWAY
ARLINGTON, VA 22202
OFFERS MUST BE SIGNED IN BLOCK 30a OF THE STANDARD FORM 1449
Many of the provisions and clauses cited in this solicitation are incorporated
by reference to the appropriate section of the Federal Acquisition Regulation
(FAR) or the General Services Administration Acquisition Regulation (GSAR). A
review of these clauses and provisions will be necessary for you to understand
all aspects of the solicitation. The full text of any FAR and GSAR clauses which
are incorporated by reference in this solicitation may be found on the Federal
Supply Service Home Page at http://www.fss.gsa.gov; then click on "Products"; at
the next page, click on "Information Technology." This brings you to the IT
Acquisition Center's homepage.
<PAGE>
2
Copies of FAR may be purchased from:
Superintendent of Documents
Government Printing Office (GPO)
Washington, DC 20402
The Federal Acquisition Regulation (FAR) may also be accessed via the Internet
at http://www.arnet.gov/far/.
NOTICE TO OFFERORS OF SUBCONTRACTING PLAN REQUIREMENTS
(GSAR 552.219-72) (DEC 1995)
The General Services Administration (GSA) is committed to assuring that maximum
practicable opportunity is provided to small, small disadvantaged, and women-
owned small business concerns to participate in the performance of this contract
consistent with its efficient performance. GSA expects any subcontracting plan
submitted pursuant to FAR 52.219-9, Small, Small Disadvantaged and Women-Owned
Small Business Subcontracting Plan, to reflect this commitment. Consequently,
an Offeror, other than a small business concern, before being awarded a contract
exceeding $500,000 ($1,000,000 for construction) will be required to demonstrate
that its subcontracting plan represents a creative and innovative program for
involving small, small disadvantaged, and women-owned small business concerns as
subcontractors in the performance of this contract.
In order to assist you in the preparation of your subcontracting plan,
guidelines for the submission of a subcontracting plan may be obtained by
calling (703)305-3038.
SIGNIFICANT CHANGES (CP-FSS-2) (OCT 1988)
The attention of Offeror is invited to the following changes made since the
issuance of the last solicitation for the supplies/services covered herein:
1. CONSOLIDATION OF ADP AND TELECOMMUNICATIONS SCHEDULES. In order to reflect
the current convergence of ADP and telecommunications technologies, to provide
our customers with a single Federal Supply Schedule source for the procurement
of such technologies, and to eliminate redundant schedule contracting efforts by
both industry and the Government, the ADP Acquisition Center has merged the
following Federal Supply Schedules into a single Schedule, to be known as the
Federal Supply Service Information Technology Schedule, FSC Group 70:
<PAGE>
3
FSC Group 70, Part I, Section A
-------------------------------
General Purpose Commercial Automatic Data Processing
Equipment (Used Primarily On-Line), Software, and Services
FSC Group 70, Part I, Sections B & C
------------------------------------
General Purpose Commercial Automatic Data Processing
Equipment, End User Computers (Normally Microcomputers) and
Equipment Used Primarily Off-Line, Software, and Services
FSC Class 70, Part I, Section D
-------------------------------
Used or Refurbished General Purpose Commercial Automatic
Data Processing Equipment
FSC Group 70, Part I, Section E
-------------------------------
Electronic Commerce, Electronic Data Interchange, Automated
Procurement Systems, Internet Access, and Services
FSC Group 58, Parts VI & VII
----------------------------
Commercial Telecommunications Equipment
2. RECEIPT OF OFFERS/SCHEDULE CONTRACT PERIOD. This standing solicitation
will remain in effect until replaced by an updated solicitation. There will be
no closing date for receipt of offers. Therefore, offers may be submitted for
consideration at any time. There is no prescribed contract beginning and ending
date. Contracts awarded under this Information Technology Solicitation will
have variable contract periods; i.e., contracts will be in effect for an initial
period of five years from the date of award, with an option to extend the
contracts for an additional period of five years. See A-FSS-11 CONSIDERATION OF
OFFERS UNDER STANDING SOLICITATION and I-FSS-164-A OPTION TO EXTEND THE TERM OF
THE CONTRACT.
3. SOLICITATION FORMAT/CONTENTS. This solicitation has been prepared in
accordance with FAR Part 12, Acquisition of Commercial Items, which implements
Title VIII of the Federal Acquisition Streamlining Act (FASA) of 1994 (Public
Law 103-355), the Clinger-Cohen Act of 1996 (Public Law 104-106), and the final
rule, published as General Services Administration Acquisition Regulation (GSAR)
Change 76, regarding commercial item acquisitions under the Multiple Award
Schedules Program. The contract format and data requirements in this
solicitation differ somewhat from previous solicitations. Offerors are strongly
advised to carefully review the entire solicitation document.
<PAGE>
4
4. MANDATORY ACCEPTANCE OF GOVERNMENT PURCHASE CARD. 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. Contractors are
encouraged to accept the Government purchase card for orders above the micro-
purchase threshold. See GSAR 552.232-80 PAYMENT BY PURCHASE CARD, VARIATION I.
5. ELECTRONIC COMMERCE. Currently, the GSA Advantage! electronic information
and ordering system does not encompass all of the products and services under
this schedule. Contractors will be required, when product classifications are
added to GSA Advantage!, to display product and pricing information on GSA
Advantage!.
6. YEAR 2000 (Y2K) COMPLIANCE. Information technology products offered under
this solicitation must be "Year 2000 compliant." See I-FSS-550-B YEAR 2000
WARRANTY--COMMERCIAL SUPPLY ITEMS.
7. PAST PERFORMANCE. In order to assist the Government in assessing an
Offeror's past performance, each company responding to this solicitation will be
required to have Dun & Bradstreet (D&B) complete a Past Performance Evaluation
Report on that firm. The request to D&B must be made prior to the submission of
a proposal. Each Offeror must submit, with its proposal, a completed copy of
the past performance evaluation form sent, by the Offeror, to Dun & Bradstreet.
Any charges associated with the Past Performance Evaluation Report will be paid
by the Offeror. See F.2 PAST PERFORMANCE and ATTACHMENT II - PAST PERFORMANCE
EVALUATION REPORT BY DUN & BRADSTREET.
8. NEW REPORTING REQUIREMENTS FOR CONTRACTOR'S REPORT OF SALES AND THE
INDUSTRIAL FUNDING FEE (IFF). This solicitation contains the following two new
GSAR clauses: 552.238-72 CONTRACTOR'S REPORT OF SALES, which requires sales
reports to be submitted on electronic GSA Forms 72A via the Internet, and
552.238-77 INDUSTRIAL FUNDING FEE, which specifies that payment is due on a
calendar quarter schedule.
REVISION - AMENDMENTS #1 AND #2
<PAGE>
5
9. REVISED TERMS AND CONDITIONS FOR INFORMATION TECHNOLOGY (IT) PROFESSIONAL
SERVICES (SIN 132-51) AND ELECTRONIC COMMERCE (EC) SERVICES (SIN 132-52).
Revised ordering procedures have been established for IT/EC services, including
BPAs, for services based on hourly rates. Organizational Conflict of Interest
Provisions have also been included under the services terms and conditions.
10. CONTRACT SALES CRITERIA (I-FSS-639). This clause states that a contract
will not be awarded if anticipated sales are not expected to exceed $25,000.
Contracts will also be canceled unless reported sales for each 12-month period
from date of award are $25,000.
11. FINANCIAL MANAGEMENT SOFTWARE. The solicitation has been modified to accept
offers for financial management software and ancillary financial software under
Special Item Numbers 132-32 and 132-33. Financial management system software
must be certified by the Joint Financial Management Improvement Program (JFMIP)
Core Financial System prior to award. Offerors are encouraged to include
software maintenance (Special Item Number 132-34), Training (Special Item Number
132-50), and technical assistance, project management, integration, operation,
and related professional support services (Special Item Number 132-51) in their
offer. JFMIP testing procedures and requirements may be accessed from the
Internet at http://www.financenet.gov/financenet/fed/jfmip/pmo.htm/.
-------------------------------------------------------
NOTICE: REQUESTS FOR EXPLANATION, INFORMATION AND SOLICITATION COPIES
(a) To reduce Government costs, this solicitation is available for downloading
from the Internet. Please check the Federal Supply Service (FSS) Home Page at
http://www.fss.gsa.gov and click on "PRODUCTS" then click on "INFORMATION
TECHNOLOGY." This brings you to the IT Acquisition Center's homepage.
Alternatively, one copy of the solicitation (either paper copy or diskette) will
be provided to addresses on our bidders' mailing list. You may reproduce
additional paper copies yourself, provided they are complete in every respect,
or you may obtain them from the addresses specified in paragraph (c) below.
REVISION - AMENDMENT #2
<PAGE>
6
(b) Offerors are strongly urged to use two-sided copying of offers for
submission to GSA.
(c) Oral or written requests for explanation or information regarding this
solicitation should be directed to:
Hand Carried Address: General Services Administration
Federal Supply Service
IT Acquisition Center (FCI)
Crystal Mall Building #4, Room 1017
1941 Jefferson Davis Highway
Arlington, VA 22202
Mailing Address: General Services Administration
Federal Supply Service
IT Acquisition Center (FCI)
Crystal Mall Building #4
Washington, DC 20406
<PAGE>
7
Telephone Number: (703)305-3038
Facsimile Numbers: (703)305-7006, -5588, or -5586
IMPORTANT: DO NOT ADDRESS OFFERS, MODIFICATIONS, OR WITHDRAWALS TO ABOVE
ADDRESS. USE THE "ADDRESS OFFER TO" ADDRESS IN A.2 OF THIS SOLICITATION.
Solicitation copies may also be obtained from the following address:
General Services Administration
FSS Bid Room (Room L-108)
1941 Jefferson Davis Highway
Arlington, VA 22202
SECURITY EXAMINATION OF OFFERS (CP-FSS-20) (JAN 1988)
(a) Offerors are advised that an offer in response to this solicitation is
subject to physical examination, x-ray, or other inspection prior to acceptance
at the location designated for receipt of offers. Inspection may be conducted by
Government personnel or others acting on behalf of the Government.
(b) For any hand carried offer, whether delivered by the Offeror or a courier
service, the Offeror must allow sufficient time to accommodate inspection by
designated security personnel. To facilitate this security inspection, initial
delivery to an
<PAGE>
8
alternate office may be required prior to final delivery by the Offeror to the
address designated for receipt of offers. (CAUTION: Delivery to the security
inspection point does not constitute timely delivery for receipt of offers.)
(c) The office providing security inspection is located at the following
address:
Building Security Office
X-Ray Screening Room
Crystal Mall Building 3, Loading Dock
1931 Jefferson Davis Highway
Arlington, VA 22202
<PAGE>
9
ELECTRONIC DATA INTERCHANGE (EDI) ORDERING (CP-FSS-6) (JAN 1994)
Offerors are advised that the Federal Supply Service is expanding use of
electronic communications to exchange business documents. The Placement of
Orders clause contained in this contract provides that orders may be placed
using Electronic Data Interchange (EDI) procedures.
PLEASE REMOVE THIS COVER PAGE(S) BEFORE SUBMITTING OFFER TO GSA. (CP-FSS-30)
(APR 1993)
<PAGE>
10
<TABLE>
<S> <C> <C> <C> <C>
SOLICITATION/CONTRACT/ORDER FOR COMMERCIAL ITEMS | 1. REQUISITION NUMBER |
PAGE 1 OF
OFFEROR TO COMPLETE BLOCKS 12, 17, 23, 24, & 30 | |
----------------------------------------------- - -----
159
- ---
2. CONTRACT NO. | 3. AWARD/EFFECTIVE | 4. ORDER NUMBER | 5. SOLICITATION NUMBER | 6.
SOLICITATION ISSUE
| DATE | | |
DATE
GS-35F- | | | FCIS-JB-980001B |
- ------- -- -- -------------------- -------
3/23/98
- -------
7. FOR SOLICITATION | a. NAME | b. TELEPHONE NUMBER (NO COLLECT CALLS) | 8.
OFFER DUE DATE/
INFORMATION CALL: | | |
LOCAL TIME
| CONTRACT SPECIALIST | 703/305-3038 |
| | | N/A
---- ---- -----------
9. ISSUED BY CODE |________ | 10. THIS ACQUISITION IS
|11. DELIVERY FOR FOB | 12. DISCOUNT TERMS
| | DESTINATION UNLESS |
GSA/FSS/FCI | [ X ] UNRESTRICTED | BLOCK IS MARKED |
ADP Acquisition Center, Rm. 1017 | [ ] SET ASIDE: % FOR | [ ] SEE SCHEDULE |
-------------------- -
1941 Jefferson Davis Highway | [ ] SMALL BUSINESS | [ ] 13a. THIS CONTRACT
IS A RATED ORDER
Arlington, VA 22202 | [ ] SMALL DISADV. BUSINESS | UNDER
-------------------------
DPAS (15 CFR 700)
- -----------------
| [ ] 8(a) | 13b. RATING
ADDRESS OFFERS TO: SEE A.2 | |
| SIC: SEE A.3 | 14. METHOD OF
SOLICITATION
| SIZE STANDARD: | [ ] RFQ [ ] IFB
------------------ -------------------------------------
[XX] RFP
- --------
15. DELIVER TO CODE |______ | 16. ADMINISTERED BY
CODE |______
|
Ordering Agency | See Block 9.
|
--
17a. CONTRACTOR / CODE |_______ | FACILITY |_______
| 18a. PAYMENT WILL BE MADE BY CODE |_______
OFFEROR |
|
|
|
|
| Ordering Agency
|
|
TELEPHONE NO. |
- ------------- ------------
[ ] 17b. CHECK IF REMITTANCE IS DIFFERENT AND PUT | 18b. SUBMIT INVOICES TO ADDRESS SHOWN IN
BLOCK 18a UNLESS
SUCH ADDRESS IN OFFER | BLOCK BELOW IS CHECKED [ ]
- ---------------------- ------------------------- --------
SEE ADDENDUM
- ------------
19. | 20. | 21. | 22. | 23. |
24.
ITEM NO. | SCHEDULE OF SUPPLIES/SERVICES | QUANTITY | UNIT | UNIT PRICE |
- -------- - ----------------------------- - -------- - ---- - ---------- -
AMOUNT
- ------
| | | | |
| | | | |
| | | | |
| (Attach Additional Sheets as Necessary | | | |
--------------------------------------------------- - - -
25. ACCOUNTING AND APPROPRIATION DATA | 26. TOTAL AWARD AMOUNT (For
Govt. Use Only)
|
[X] 27A. SOLICITATION INCORPORATES BY REFERENCE FAR 52.212-1. FAR 52.212-3, 52.212-4 AND 52.215-5
ARE ATTACHED.
ADDENDA [XX] ARE [ ] ARE NOT ATTACHED.
[ ] 27b. CONTRACT/PURCHASE ORDER INCORPORATES BY REFERENCE FAR 52.212-4. FAR 52.212-5 IS ATTACHED.
ADDENDA [ ] ARE [ ] ARE NOT ATTACHED.
--------------------------------------------------------------
28. CONTRACTOR IS REQUIRED TO SIGN THIS DOCUMENT AND RETURN | 29. AWARD OF CONTRACT: REFERENCE
_________ OFFER
__2__ COPIES TO ISSUING OFFICE. CONTRACTOR AGREES TO FURNISH | DATED _______________________.
YOUR OFFER ON
[XX] AND DELIVER ALL ITEMS SET FORTH OR OTHERWISE IDENTIFIED | [ ] SOLICITATION (BLOCK 5),
INCLUDING ANY
</TABLE>
<PAGE>
11
<TABLE>
<S> <C> <C>
ABOVE AND ON ANY ADDITIONAL SHEETS SUBJECT TO THE TERMS | ADDITIONS OR CHANGES WHICH
ARE SET FORTH
AND CONDITIONS SPECIFIED HEREIN. | HEREIN, IS ACCEPTED AS TO
------------------------------- - -------------------------
ITEMS:
- -----
30a. SIGNATURE OF OFFEROR/CONTRACTOR | 31a. UNITED STATES OF AMERICA
| (SIGNATURE OF CONTRACTING OFFICER)
|
|
-
30b. NAME AND TITLE OF SIGNER | 30c. DATE SIGNED | 31b. NAME OF CONTRACTING OFFICER |
31c. DATE SIGNED
(TYPE OR PRINT) | | (TYPE OR PRINT) |
| | |
| | |
- - -
32a. QUANTITY IN COLUMN 21 HAS BEEN | 33. SHIP NUMBER | 34. VOUCHER NUMBER |35.
AMOUNT VERIFIED
| | |
CORRECT FOR
[] RECEIVED [ ] ACCEPTED, AND CONFORMS TO THE |___________________________| |
[ ]INSPECTED CONTRACT, EXCEPT AS NOTED | | PARTIAL | | FINAL | |
- ------------- ------------------------- ----------------------------- -
32b. SIGNATURE OF AUTHORIZED GOVT. | 32c. DATE | 36. PAYMENT |
37. CHECK NUMBER
REPRESENTATIVE | | [ ] COMPLETE [ ] PARTIAL [ ] FINAL |
----------------------------------------------------------- -
| | 38. S/R ACCOUNT NUMBER | 39. S/R VOUCHER
NUMBER |40. PAID BY
| | |
- - -
|
-
41a. I CERTIFY THIS ACCOUNT IS CORRECT AND PROPER FOR | 42a. RECEIVED BY (Print)
|
PAYMENT |
|
-
|
-
41b. SIGNATURE AND TITLE OF CERTIFYING OFFICER | 41c. DATE | 42b. RECEIVED AT (Location)
|
| |
|
| | 42c. DATE REC'D (YY/MM/DD) | 42d.
TOTAL |
| | |
|
| | |
- - -
CONTAINERS |
- ---------- -
AUTHORIZED FOR LOCAL REPRODUCTION SEE REVERSE FOR OMB CONTROL NUMBER AND PAPERWORK STANDARD
FORM 1449 (10-95)
BURDEN STATEMENT PRESCRIBED BY GSA - FAR
(48 CFR) 53.212
</TABLE>
<PAGE>
12
<TABLE>
<S> <C>
Public reporting burden for this collection of information is estimated to average |
* minutes per response, including the time for reviewing instructions, searching | OMB N.: 9000-013
- ---
existing data sources, gathering and maintaining the data needed, and completing and |
reviewing the collection of information. Send comments regarding this burden estimate | Expires: 09/30/98
or any other aspect of this collection of information, including suggestions for |
reduction this burden to the FAR Secretariat (VRS), Officer of Federal Acquisition |
Policy, GSA, Washington, DC 20405. |
- ----------------------------------- -
</TABLE>
* The reporting burden for this solicitation varies with the size and complexity
of the offer and Offerors' record system. It is estimated that the time required
will be from 20 hours to 80 hours.
ACKNOWLEDGEMENT OF AMENDMENTS
Amendment #1 issued June 17, 1998 has been incorporated herein.
Amendment #2 issued February 23, 1999 has been incorporated herein.
STANDARD FORM 1449 (10-95) BACK
<PAGE>
13
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PARA. TITLE/DATE PAGE
- ----- ---------- ----
<S> <C>
STANDARD FORM 1449 - SOLICITATION/CONTRACT/ORDER FOR
COMMERCIAL ITEMS 1
A. CONTINUATION OF STANDARD FORM 1449
A.1 INFORMATION COLLECTION REQUIREMENTS
(A-FSS-40) (OCT 1988) 8
A.2 ADDRESS OFFERS TO: (BLOCK 9, STANDARD FORM 1449) 8
A.3 STANDARD INDUSTRIAL CLASSIFICATION (SIC) CODE
AND SMALL BUSINESS SIZE STANDARD
(BLOCK 10, STANDARD FORM 1449) 8
B. SCHEDULE OF ITEMS
B.1 ESTIMATED SALES 11
B.2 PRODUCTS AND SERVICES OFFERED/SCHEDULE OF ITEMS
(BLOCKS 19 & 20, STANDARD FORM 1449) 11
C. CONTRACT CLAUSES
C.1 CONTRACT TERMS AND CONDITIONS--COMMERCIAL ITEMS
(FAR 52.212-4) (MAY 1997) (TAILORED) 21
ADDENDUM TO FAR 52.212-4 (C.1)
C.2 CLAUSES INCORPORATED BY REFERENCE
(FAR 52.252-2) (JUN 1988) 25
C.3 CONTRACT TERMS AND CONDITIONS APPLICABLE TO GSA
ACQUISITION OF COMMERCIAL ITEMS
(GSAR 552.212-71) (AUG 1997) 26
C.4 SCOPE OF CONTRACT (I-FCI-102-D) (DEC 1997) 26
C.5 GUARANTEED MINIMUM (I-FSS-106) (JAN 1999) 27
C.6 ORDERING (FAR 52.216-18) (DEVIATION--JAN 1994)
(FCI DEVIATION--DEC 1997) 28
C.7 PLACEMENT OF ORDERS (GSAR 552.216-73) (JUN 1994)
(ALTERNATE II--FEB 1999) 28
C.8 ORDER ACKNOWLEDGEMENT (G-FSS-907) (APR 1984) 29
</TABLE>
REVISION - AMENDMENT #2
<PAGE>
14
TABLE OF CONTENTS - CONTINUED
<TABLE>
<CAPTION>
PARA. TITLE/DATE PAGE
- ----- ---------- ----
<S> <C> <C>
C.9 BLANKET PURCHASE AGREEMENTS
(I-FCI-646-A) (DEC 1998) 29
C.10 ORDER LIMITATIONS (FAR 52.216-19) (OCT 1995)
(VARIATION II--OCT 1995) (FCI DEVIATION--DEC 1997) 30
C.11 REQUIREMENTS EXCEEDING THE MAXIMUM ORDER
(I-FSS-125) (OCT 1997) 31
C.12 DELIVERY PRICES (F-FCI-202-G) (DEC 1997) 31
C.13 COMMERCIAL DELIVERY SCHEDULE (MULTIPLE AWARD SCHEDULE)
(GSAR 552.211-78) (FEB 1996) 32
C.14 URGENT REQUIREMENTS (I-FSS-140-B) (JAN 1994) 33
C.15 DELIVERIES TO THE U.S. POSTAL SERVICE
(F-FSS-230) (JAN 1994) 34
C.16 CONTRACTOR'S BILLING RESPONSIBILITIES
(G-FCI-913) (DEC 1997) 34
C.17 PAYMENT BY PURCHASE CARD (GSAR 552.232-80) (DEC 1989)
(VARIATION I) (MAR 1998) 35
C.18 IMPREST FUNDS (PETTY CASH) (I-FSS-918) (APR 1984) 36
C.19 ELECTRONIC COMMERCE--FACNET (I-FSS-599) (APR 1997) 36
C.20 ANSI STANDARDS (C-FSS-427) (JUL 1991) 39
C.21 ASSIGNMENT OF CLAIMS (GSAR 552.232-23) (MAY 1989)
(FCI DEVIATION--DEC 1997) 39
C.22 CONTRACTOR'S REPORT OF SALES (GSAR 552.238-72)
(FEB 1999) 39
C.23 INDUSTRIAL FUNDING FEE (GSAR 552.238-77)
(FEB 1998) (FCI DEVIATION--DEC 1997) 41
C.24 OPTION TO EXTEND THE TERM OF THE CONTRACT
(I-FSS-164-A) (AUG 1995) 42
C.25 NOTICE REGARDING OPTION(S)
(GSAR 552.217-71) (NOV 1992) 43
C.26 EXAMINATION OF RECORDS BY GSA (MULTIPLE AWARD
SCHEDULE) (GSAR 552.215-71) (AUG 1997) 43
C.27 ECONOMIC PRICE ADJUSTMENT (GSAR 552.216-71) (FEB 1996)
(ALTERNATE I--JAN 1989) (FCI DEVIATION--JUN 1998) 43
C.28 PRICE REDUCTIONS (GSAR 552.238-76) (FEB 1999) 45
C.29 MODIFICATIONS (MULTIPLE AWARD SCHEDULE)
(GSAR 552.243-72)(FEB 1999)(FCI DEVIATION--FEB 1999) 46
C.30 SUBMISSION AND DISTRIBUTION OF AUTHORIZED FSS
SCHEDULE PRICELIST (GSAR 552.238-74) (FEB 1998) 48
C.31 SUBMISSION AND DISTRIBUTION OF AUTHORIZED FEDERAL
SUPPLY SERVICE (FSS) INFORMATION TECHNOLOGY
SCHEDULE PRICELISTS (I-FCI-600) (JAN 1999) 49
</TABLE>
REVISION - AMENDMENT #1 AND #2
<PAGE>
15
TABLE OF CONTENTS - CONTINUED
<TABLE>
<CAPTION>
PARA. TITLE/DATE PAGE
- ----- ---------- ----
<S> <C> <C>
C.32 WARRANTY--MULTIPLE AWARD SCHEDULE
(GSAR 552.246-73) (FEB 1996) 51
C.33 YEAR 2000 WARRANTY--COMMERCIAL SUPPLY ITEMS
(I-FSS-550-B) (JAN 1999) 52
C.34 TERMINATION (I-FCI-249-B) (DEC 1997) 53
C.35 CANCELLATION (I-FSS-690-B) (JAN 1994) 53
C.36 LOGISTICAL SUPPORT PRIVILEGES (X-FCI-XXX) (DEC 1997) 53
C.37 DISSEMINATION OF INFORMATION BY CONTRACTOR
(I-FCI-680) (DEC 1997) 54
C.38 SERVICE OF PROTEST (FAR 52.233-2) (AUG 1996) 54
C.39 PROTESTS FILED DIRECTLY WITH THE GENERAL SERVICES
ADMINISTRATION 55
C.40 INDEFINITE QUANITY (FAR 52.216-22) (OCT 1995)
(VARIATION--OCT 1995) 57
C.41 CONTRACT SALES CRITERIA (I-FSS-639) (MAR 1998) 57
C.42 INVOICE PAYMENTS (GSAR 552.232-70) ( MAR 1998) 57
C.43 CENTRAL CONTRACTOR REGISTRATION (CCR)
(I-FCI-598)(DEC 1998) 66
C.44 VENDOR MANAGED INVENTORY (VMI) PROGRAM (MAS)
(G-FSS-906) (JAN 1999) 66
D.1 CONTRACT TERMS AND CONDITIONS REQUIRED TO
IMPLEMENT STATUTES OR EXECUTIVE ORDERS--COMMERCIAL
ITEMS (FAR 52.212-5) (AUG 1996)
(DEVIATION--MAY 1996) (TAILORED) 60
E. SOLICITATION PROVISIONS
E.1 INSTRUCTIONS TO OFFERORS--COMMERCIAL ITEMS
(FAR 52.212-1)(JUN 1997)[INCORPORATED BY REFERENCE] 63
ADDENDUM TO FAR 52.212-1 (E.1)
E.2 PERIOD FOR ACCEPTANCE OF OFFERS
(A-FSS-12-C) (NOV 1997) 63
E.3 CONSIDERATION OF OFFERS UNDER STANDING
SOLICITATION (A-FSS-11) (NOV 1997) 63
E.4 SUBMISSION OF OFFERS--ADDITIONAL INSTRUCTIONS
(CI-FCI-2) (DEC 1997) 64
E.5 PREPARATION OF OFFER (MULTIPLE AWARD SCHEDULE)
(GSAR 552.212-70) (AUG 1997) 65
E.6 REQUIREMENTS FOR COST OR PRICING DATA OR
INFORMATION OTHER THAN COST OR PRICING DATA
(FAR 52.215-20) (OCT 1997) (ALTERNATE IV--OCT 1997)
(VARIATION I--AUG 1997) 67
</TABLE>
REVISION - AMENDMENT #1 AND #2
<PAGE>
16
TABLE OF CONTENTS - CONTINUED
<TABLE>
<CAPTION>
PARA. TITLE/DATE PAGE
- ----- ---------- ----
<S> <C> <C>
E.7 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) 67
E.8 IDENTIFICATION OF ENERGY-EFFICIENT OFFICE
EQUIPMENT AND SUPPLIES CONTAINING RECOVERED
MATERIALS OR OTHER ENVIRONMENTAL ATTRIBUTES
(GSAR 552.238-75) (SEP 1994) 68
E.9 ENERGY EFFICIENT COMPUTER EQUIPMENT 69
F. EVALUATION
F.1 EVALUATION--COMMERCIAL ITEMS (MULTIPLE AWARD SCHEDULE)
(GSAR 552.212-73) (AUG 1997) 70
F.2 PAST PERFORMANCE 70
F.3 DEALERS AND SUPPLIERS (I-FCI-644) (OCT 1988) 71
F.4 SALES AND SERVICE REQUIREMENTS 71
F.5 INFORMATION TECHNOLOGY PROFESSIONAL SERVICES--PAST
PERFORMANCE/RESPONSIBILITY DETERMINATION 71
F.6 GOALS FOR SUBCONTRACTING PLAN (GSAR 552.219-74)
(DEC 1995) (ALTERNATE I--DEC 1995) 72
F.7 PREAWARD ON-SITE EQUAL OPPORTUNITY COMPLIANCE REVIEW
(FAR 52.222-24) (APR 1984) (FCI DEVIATION-DEC 1997) 73
G. OFFEROR SUPPIED INFORMATION
G.1 OFFEROR REPRESENTATIONS AND CERTIFICATIONS--
COMMERCIAL ITEMS (FAR 52.212-3) (JAN 1997)
(FCI DEVIATION--DEC 1997) 74
G.2 TRADE AGREEMENTS ACT (GSAR 552.225-9) (DEC 1994)
(DEVIATION FAR 52.225-9) 78
G.3 TRADE AGREEMENTS ACT CERTIFICATE (GSAR 552.225-8)
(JAN 1994)(DEVIATION FAR 52.225-8) 80
G.4 COMMERCIAL SALES PRACTICES FORMAT (CSP-1) 81
G.5 AUTHORIZED NEGOTIATORS 85
G.6 CONTACT FOR CONTRACT ADMINISTRATION
(G-FCI-900-A) (DEC 1997) 86
</TABLE>
<PAGE>
17
TABLE OF CONTENTS - CONTINUED
<TABLE>
<CAPTION>
PARA. TITLE/DATE PAGE
- ----- ---------- ----
<S> <C> <C>
G.7 ORDERING INFORMATION (GSAR 552.216-74) (JUN 1994)
(ALTERNATE II--JUN 1994) 87
G.8 CONTRACTOR'S REMITTANCE (PAYMENT) ADDRESS
(G-FSS-914-A) (SEP 1996) 88
G.9 PLACE OF PERFORMANCE (FAR 52.215-6) (APR 1984) 88
G.10 CONTRACTOR IDENTIFICATION NUMBER--DATA UNIVERSAL
NUMBERING SYSTEM (DUNS) NUMBER
(FAR 52.204-6) (DEC 1996) (FCI DEVIATION--DEC 1997) 89
G.11 ELECTRONIC FORMAT 90
G.12 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
(FAR 52.222-48) (AUG 1996) 90
G.13 COMPLIANCE WITH VETERANS EMPLOYMENT REPORTING
REQUIREMENTS 91
ATTACHMENT I - GUIDELINES FOR FORMAT AND CONTENT OF
FEDERAL SUPPLY SERVICE INFORMATION
TECHNOLOGY SCHEDULE PRICELIST 92
ATTACHMENT II - PAST PERFORMANCE EVALUATION REPORT BY
DUN & BRADSTREET 155
</TABLE>
REVISION - AMENDMENT #2
<PAGE>
18
A. CONTINUATION OF STANDARD FORM 1449
A.1 INFORMATION COLLECTION REQUIREMENTS (A-FSS-40) (OCT 1988)
The information collection requirements contained in this
solicitation/contract that are not required by regulation have
been approved by the Office of Management and Budget pursuant to
the Paperwork Reduction Act and assigned OMB Control No.
3090-0163.
A.2 ADDRESS OFFERS TO: (BLOCK 9, STANDARD FORM 1449)
Offerors shall return the complete solicitation package to the
following address:
General Services Administration
Solicitation No. FCIS-JB-980001B
FSS Bid Room (Room L-108)
1941 Jefferson Davis Highway
Arlington, VA 22202
A.3 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
<PAGE>
19
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
COMMUNICATIONS EQUIPMENT 750
3669 OTHER COMMUNICATIONS EQUIPMENT, N.E.C. 750
DIVISION E - TRANSPORTATION, COMMUNICATIONS, ELECTRIC, GAS, AND
- ---------------------------------------------------------------
SANITARY SERVICES
-----------------
MAJOR GROUP 48 - COMMUNICATIONS
4812 RADIOTELEPHONE COMMUNICATIONS 1,500
4813 TELEPHONE COMMUNICATIONS, EXCEPT
RADIOTELEPHONE 1,500
4822 TELEGRAPH AND OTHER MESSAGE COMMUNICATIONS $ 5.0
4899 COMMUNICATIONS 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
7359 EQUIPMENT RENTAL AND LEASING, N.E.C. $ 5.0
7371 COMPUTER PROGRAMMING SERVICES $18.0
7372 PREPACKAGED SOFTWARE $18.0
7373 COMPUTER INTEGRATED SYSTEMS DESIGN $18.0
7374 COMPUTER 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.
<PAGE>
20
(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.1(c) for any proposed SIN, indicate
below the SIC code and the business size.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
Special Item Number Standard Industry Business Size
(SIN) Classification (SIC)
- -------------------------------------------------------------------------
<S> <C> <C>
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
- -------------------------------------------------------------------------
</TABLE>
<PAGE>
21
B. SCHEDULE OF ITEMS
B.1 ESTIMATED SALES
The figures shown below reflect the previous purchases made by
Special Item Number (SIN), in dollars, for the period
October 1, 1996 through September 30, 1997, as reported by
previous Contractors, based upon total sales under the ADP and
Telecommunications Schedules. The dollar amounts shown are based
upon the new, consolidated Special Item Numbers under the
combined Information Technology Schedule.
<TABLE>
<CAPTION>
<S> <C> <C>
Special Item No. 132-3 Leasing of Equipment $ 20,165,231
Special Item No. 132-8 Purchase of Equipment $1,880,709,380
Special Item No. 132-12 Maintenance of Equipment,
Repair Service, and
Repair Parts/Spare Parts $ 156,990,112
Special Item No. 132-32 Term Software Licenses $ 110,614,818
Special Item No. 132-33 Perpetual Software
Licenses $ 372,944,072
Special Item No. 132-34 Maintenance of Software $ 142,782,865
Special Item No. 132-50 Training Courses $ 21,953,252
Special Item No. 132-51 Information Technology
Professional Services $ 96,489,995
Special Item No. 132-52 Electronic Commerce
Services $ New SIN
-------- --------------
Total Estimated Sales (All Special Item Numbers) $2,802,649,725
</TABLE>
B.2 PRODUCTS AND SERVICES OFFERED/SCHEDULE OF ITEMS
(BLOCKS 19 & 20, STANDARD FORM 1449)
Insert an "X" on the applicable line for each Special Item
Number/FSC Class/FPDS Code offered.
SPECIAL ITEM NO. 132-3 LEASING OF EQUIPMENT (FPDS Code W070)
SPECIAL ITEM NO. 132-8 PURCHASE OF EQUIPMENT
FSC CLASS 7010 - SYSTEM CONFIGURATION
-------------------------------------
End User Computers/Desktop Computers
Professional Workstations
<PAGE>
22
Servers
Laptop/Portable/Notebook Computers
Large Scale Computers
Optical and Imaging Systems
Other System Configuration Equipment Not Elsewhere
Classified. Provide specific information:
FSC CLASS 7025 - INPUT/OUTPUT AND STORAGE DEVICES
-------------------------------------------------
Printers
Displays
Graphics, including Video Graphics, Light Pens, Digitizers,
Scanners, and Touch Screens
Network Equipment
Other Communications Equipment
Optical Recognition Input/Output Devices
Storage Devices, including Magnetic Storage, Magnetic Tape
Storage and Optical Disk Storage
Other Input/Output and Storage Devices Not Elsewhere
Classified. Provide specific information:
FSC CLASS 7035 - ADP SUPPORT EQUIPMENT
--------------------------------------
ADP Support Equipment
FSC CLASS 7042 - MINI AND MICRO COMPUTER CONTROL DEVICES
--------------------------------------------------------
Microcomputer Control Devices
Telephone Answering and Voice Messaging Systems
<PAGE>
23
FSC CLASS 7050 - ADP COMPONENTS
--------------------------------
ADP Boards
FSC CLASS 5995 - CABLE, CORD, AND WIRE ASSEMBLIES:
-----------------------------------------------------
COMMUNICATIONS EQUIPMENT
------------------------
Communications Equipment Cables
FSC CLASS 6015 - FIBER OPTIC CABLES
-----------------------------------
Fiber Optic Cables
FSC CLASS 6020 - FIBER OPTIC CABLE ASSEMBLIES AND HARNESSES
-----------------------------------------------------------
Fiber Optic Cable Assemblies and Harnesses
FSC CLASS 6145 - WIRE AND CABLE, ELECTRICAL
-------------------------------------------
Coaxial Cables
FSC CLASS 5805 - TELEPHONE AND TELEGRAPH EQUIPMENT
--------------------------------------------------
Telephone Equipment
Audio and Video Teleconferencing Equipment
FSC CLASS 5810 - COMMUNICATIONS SECURITY EQUIPMENT AND COMPONENTS
-----------------------------------------------------------------
Communications Security Equipment
FSC CLASS 5815 - TELETYPE AND FACSIMILE EQUIPMENT
-------------------------------------------------
Facsimile Equipment (FAX)
<PAGE>
24
FSC CLASS 5820 - RADIO AND TELEVISION COMMUNICATION EQUIPMENT, EXCEPT
---------------------------------------------------------------------
AIRBORNE
--------
Two-Way Radio Transmitters/Receivers/Antennas
Broadcast Band Radio Transmitters/Receivers/Antennas
Microwave Radio Equipment/Antennas and Waveguides
Satellite Communications Equipment
FSC CLASS 5821 - RADIO AND TELEVISION COMMUNICATION EQUIPMENT, AIRBORNE
------------------------------------------------------------------------
Airborne Radio Transmitters/Receivers
FSC CLASS 5825 - RADIO NAVIGATION EQUIPMENT, EXCEPT AIRBORNE
------------------------------------------------------------
Radio Navigation Equipment/Antennas
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 Transmission Services are excluded from this solicitation.)
FSC CLASS 5841 - RADAR EQUIPMENT, AIRBORNE
------------------------------------------
Airborne Radar Equipment
FSC CLASS 5895 - MISCELLANEOUS COMMUNICATION EQUIPMENT
------------------------------------------------------
Miscellaneous Communications Equipment
<PAGE>
25
Provide the following information, as applicable, for the products offered under
Special Item Number 132-8:
Special Physical, Visual, Speech, and Hearing Aid Equipment
Provide specific information:
Used Equipment
Provide specific information:
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.
NOTE: VENDORS OFFERING PURCHASE OF EQUIPMENT ARE REQUIRED TO PROVIDE MAINTENANCE
SERVICE AND/OR REPAIR SERVICE AND REPAIR PARTS, IN ACCORDANCE WITH NORMAL
INDUSTRY PRACTICES, FOR THE TYPE OF EQUIPMENT OFFERED, FOR THE SCOPE OF THE
CONTRACT (i.e., AT A MINIMUM, THE 48 CONTIGUOUS STATES AND THE DISTRICT OF
COLUMBIA).
SPECIAL ITEM NO. 132-12 MAINTENANCE OF EQUIPMENT, REPAIR SERVICE, AND REPAIR
PARTS/SPARE PARTS (FPDS Code for Maintenance and Repair Service - J070; FSC
Class for Repair Parts/Spare Parts - See FSC Class for basic equipment)
Specify what is being offered:
Maintenance
Repair Service
Repair Parts/Spare Parts
Third Party Maintenance
<PAGE>
26
SPECIAL ITEM NO. 132-32 TERM SOFTWARE LICENSES
FSC CLASS 7030 - INFORMATION TECHNOLOGY SOFTWARE
------------------------------------------------
Large Scale Computers
Operating System Software
Application Software
Electronic Commerce (EC) Software
Utility Software
Communications Software
Core Financial Management Software
Ancillary Financial Systems Software
Special Physical, Visual, Speech, and Hearing Aid Software
Provide specific information:
Microcomputers
Operating System Software
Application Software
Electronic Commerce (EC) Software
Utility Software
Communications Software
Core Financial Management Software
Ancillary Financial Systems Software
Special Physical, Visual, Speech, and Hearing Aid Software
Provide specific information:
REVISION - AMENDMENT #2
- -----------------------
<PAGE>
27
SPECIAL ITEM NO. 132-33 PERPETUAL SOFTWARE LICENSES
FSC CLASS 7030 - INFORMATION TECHNOLOGY SOFTWARE
------------------------------------------------
Large Scale Computers
Operating System Software
Application Software
Electronic Commerce (EC) Software
Utility Software
Communications Software
Core Financial Management Software
Ancillary Financial Systems Software
Special Physical, Visual, Speech, and Hearing Aid Software
Provide specific information:
Microcomputers
Operating System Software
Application Software
Electronic Commerce (EC) Software
Utility Software
Communications Software
Core Financial Management Software
Ancillary Financial Systems Software
Special Physical, Visual, Speech, and Hearing Aid Software
Provide specific information:
<PAGE>
28
Note: Contractors are encouraged to offer Special Item No. 132-34 Maintenance
of Software in conjunction with Special Item Nos. 132-32 Term Software Licenses
and/or 132-33 Perpetual Software Licenses.
SPECIAL ITEM NO. 132-34 MAINTENANCE OF SOFTWARE
REVISION -- AMENDMENT #2
<PAGE>
29
SPECIAL ITEM NO. 132-50 TRAINING COURSES FOR INFORMATION TECHNOLOGY
EQUIPMENT AND SOFTWARE (FPDS Code U012)
SPECIAL ITEM NO. 132-51 INFORMATION TECHNOLOGY PROFESSIONAL SERVICES
IT Facility Operation and Maintenance (FPDS CODE D301)
IT Systems Development Services (FPDS CODE D302)
IT Systems Analysis Services (FPDS Code D306)
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)
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.
<PAGE>
30
SPECIAL ITEM NO. 132-52 ELECTRONIC COMMERCE SERVICES
(except "Voice" and Pager Transmission Services)
FPDS CODE D304 - ADP AND TELECOMUNICATIONS TRANSMISSION SERVICES
----------------------------------------------------------------
Value Added Network Services (VANS)
E-Mail Services
Internet Access Services
Navigation Services
FPDS CODE D399 - OTHER DATA TRANSMISSION SERVICES, NOT ELSEWHERE CLASSIFIED
(except "Voice" and Pager Transmission Services)
Note: Electronic Commerce Services are not intended to supersede or be
substituted for any requirements of FTS2000.
*****************************************************************
NOTE TO DEALERS: For products and/or services proposed under each Special Item
Number, list on an attachment to B.2, the names of the manufacturers of the
products/services being offered, in the format indicated below. (Failure to
provide this information could result in no further consideration being given to
any unlisted manufacturers/products and/or services.)
EXAMPLE:
MANUFACTURER FSC CLASS/FPDS CODE
- ------------ -------------------
Special Item Number 132-8 Purchase of Equipment
-----------------------------------------------
ABC Corporation 7010
7025
XYZ Inc. 5820
Special Item Number 132-33 Perpetual Software Licenses
------------------------------------------------------
DEF Inc. 7030
*****************************************************************
<PAGE>
31
NOTE: The following ARE EXCLUDED from the Information Technology Schedule:
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. RESERVED.
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 52.202-1(c).
REVISION -- AMENDMENT #2
<PAGE>
32
C. CONTRACT CLAUSES
C.1 CONTRACT TERMS AND CONDITIONS--COMMERCIAL ITEMS
(FAR 52.212-4) (MAY 1997) (TAILORED)
(a) Inspection/Acceptance. The Contractor shall only tender for acceptance
those items that conform to the requirements of this contract. The Government
reserves the right to inspect or test any supplies or services that have been
tendered for acceptance. The Government may require repair or replacement of
nonconforming supplies or reperformance of nonconforming services at no increase
in contract price. The Government must exercise its postacceptance rights--
(1) Within a reasonable time after the defect was discovered or should have
been discovered; and
(2) Before any substantial change occurs in the condition of the item,
unless the change is due to the defect in the item.
(b) Assignment. The Contractor or its assignee's rights to be paid amounts due
as a result of performance of this contract, may be assigned to a bank, trust
company, or other financing institution, including any Federal lending agency in
accordance with the Assignment of Claims Act (31 U.S.C. 3727).
(c) Changes. Changes in the terms and conditions of this contract may be made
only by written agreement of the parties.
(d) Disputes. This contract is subject to the Contract Disputes Act of 1978, as
amended (41 U.S.C. 601-613). Failure of the parties to this contract to reach
agreement on any request for equitable adjustment, claim, appeal or action
arising under or relating to this contract shall be a dispute to be resolved in
accordance with the clause at FAR 52.233-1, Disputes [OCT 1995], which is
incorporated herein by reference. The Contractor shall proceed diligently with
performance of this contract, pending final resolution of any dispute arising
under the contract.
(e) Definitions. The clause at FAR 52.202-1, Definitions [OCT 1995], is
incorporated herein by reference.
(f) Excusable delays. The Contractor shall be liable for default unless
nonperformance is caused by an occurrence beyond the reasonable control of the
Contractor and without its fault or negligence such as, acts of God or the
public enemy, acts of the Government in either its sovereign or contractual
capacity,
<PAGE>
33
fires, floods, epidemics, quarantine restrictions, strikes, unusually severe
weather, and delays of common carriers. The Contractor shall notify the
Contracting Officer in writing as soon as it is reasonably possible after the
commencement of any excusable delay, setting forth the full particulars in
connection therewith, shall remedy such occurrence with all reasonable dispatch,
and shall promptly give written notice to the Contracting Officer of the
cessation of such occurrence.
(g) Invoice. The Contractor shall submit an original invoice and three copies
(or electronic invoice, if authorized,) to the address designated in 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;
(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.
(h) Patent indemnity. The Contractor shall indemnify the Government and its
officers, employees and agents against liability, including costs, for actual or
alleged direct or contributory infringement of, or inducement to infringe, any
United States or foreign patent, trademark or copyright, arising out of the
performance of this contract, provided the Contractor is reasonably notified of
such claims and proceedings.
(i) Payment. Payment shall be made for items accepted by the Government that
have been delivered to the delivery destinations set forth in this contract. The
Government will make payment in accordance with the Prompt Payment Act (31
U.S.C. 3903) and Office of Management and Budget (OMB) Circular A-125, Prompt
Payment. Unless otherwise provided by an addendum to this contract, the
Government shall make payment in accordance with
<PAGE>
34
the clause at FAR 52.232-33, Mandatory Information for Electronic Funds Transfer
Payment [AUG 1996], which is incorporated herein by reference. In connection
with any discount offered for early payment, time shall be computed from the
date of the invoice. For the purpose of computing the discount earned, payment
shall be considered to have been made on the date which appears on the payment
check or the specified payment date if an electronic funds transfer payment is
made.
(j) Risk of loss. Risk of loss or damage to the supplies provided under this
contract shall remain with the Contractor until, and shall pass to the
Government upon acceptance.
(k) Taxes. The contract price excludes all State and local taxes levied on or
measured by the contract or sales price of the services or completed supplies
furnished under this contract. The Contractor shall state separately on its
invoices taxes excluded from the contract price, and the Government agrees
either to pay the amount of the taxes to the Contractor or provide evidence
necessary to sustain an exemption. See FAR clauses 52.229-1 State and Local
Taxes; 52.229-3 Federal, State, and Local Taxes; and 52.229-5 Taxes--Contracts
Performed in U.S. Possessions or Puerto Rico which are incorporated by
reference.
(l) Termination for the Government's convenience. The Government reserves the
right to terminate this contract, or any part hereof, for its sole convenience.
In the event of such termination, the Contractor shall immediately stop all work
hereunder and shall immediately cause any and all of its suppliers and
subcontractors to cease work. Subject to the terms of this contract, the
Contractor shall be paid a percentage of the contract price reflecting the
percentage of the work performed prior to the notice of termination, plus
reasonable charges the Contractor can demonstrate to the satisfaction of the
Government using its standard record keeping system, have resulted from the
termination. The Contractor shall not be required to comply with the cost
accounting standards or contract cost principles for this purpose. This
paragraph does not give the Government any right to audit the Contractor's
records. The Contractor shall not be paid for any work performed or costs
incurred which reasonably could have been avoided.
(m) Termination for cause. The Government may terminate this contract, or any
part hereof, for cause in the event of any default by the Contractor, or if the
Contractor fails to comply with any contract terms and conditions, or fails to
provide the Government, upon request, with adequate assurances of future
performance. In the event of termination for cause, the Government shall not be
liable to the Contractor for any amount
<PAGE>
35
for supplies or services not accepted, and the Contractor shall be liable to the
Government for any and all rights and remedies provided by law. If it is
determined that the Government improperly terminated this contract for default,
such termination shall be deemed a termination for convenience.
(n) Title. Unless specified elsewhere in this contract, title to items
furnished under this contract shall pass to the Government upon acceptance,
regardless of when or where the Government takes physical possession.
(o) Warranty. The Contractor warrants and implies that the items delivered
hereunder are merchantable and fit for use for the particular purpose described
in this contract.
(p) Limitation of liability. Except as otherwise provided by an express or
implied warranty, the Contractor will not be liable to the Government for
consequential damages resulting from any defect or deficiencies in accepted
items.
(q) Other compliance. The Contractor shall comply with all applicable Federal,
State and local laws, executive orders, rules and regulations applicable to its
performance under this contract.
(r) Compliance with laws unique to Government contracts. The Contractor agrees
to comply with 31 U.S.C. 1352 relating to limitations on the use of appropriated
funds to influence certain Federal contracts; 18 U.S.C. 431 relating to
officials not to benefit; 40 U.S.C 327, et seq., Contract Work Hours and Safety
Standards Act; 41 U.S.C. 51-58, Anti-Kickback Act of 1986; 41 U.S.C. 251 related
to whistle blower protections; and 49 U.S.C. 40118, Fly American.
(s) Order of precedence. Any inconsistencies in this solicitation or contract
shall be resolved by giving precedence in the following order:
(1) The schedule of supplies/services.
(2) The Assignments, Disputes, Payments, Invoice, Other Compliance, and
Compliance with Laws Unique to Government Contracts paragraphs of this clause.
(3) The clause at 52.212-5.
(4) Addenda to this solicitation or contract, including any license
agreements for computer software.
(5) Solicitation provisions if this is a solicitation.
(6) Other paragraphs of this clause.
(7) The Standard Form 1449.
(8) Other documents, exhibits, and attachments.
(9) The specification.
<PAGE>
36
********************************************************************************
ADDENDUM TO FAR 52.212-4 (C.1)
********************************************************************************
C.2 CLAUSES INCORPORATED BY REFERENCE (FAR 52.252-2) (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.
52.203-3 GRATUITIES (APR 1984)
52.204-4 PRINTING/COPYING DOUBLE-SIDED ON RECYCLED PAPER (JUN 1996)
52.209-6 PROTECTING THE GOVERNMENT'S INTEREST WHEN SUBCONTRACTING WITH
CONTRACTORS DEBARRED, SUSPENDED, OR PROPOSED FOR DEBARMENT (JUL
1995)
52.214-34 SUBMISSION OF OFFERS IN THE ENGLISH LANGUAGE (APR 1991)
52.214-35 SUBMISSION OF OFFERS IN U.S. CURRENCY (APR 1991)
52.219-9 SMALL, SMALL DISADVANTAGED AND WOMEN-OWNED SMALL BUSINESS
SUBCONTRACTING PLAN (AUG 1996)
52.219-16 LIQUIDATED DAMAGES--SUBCONTRACTING PLAN (OCT 1995)
52.222-1 NOTICE TO THE GOVERNMENT OF LABOR DISPUTES (FEB 1997)
52.222-46 EVALUATION OF COMPENSATION FOR PROFESSIONAL EMPLOYEES (FEB 1993)
52.224-1 ACT NOTIFICATION (APR 1984)
52.224-2 PRIVACY ACT (APR 1984)
52.225-11 RESTRICTIONS ON CERTAIN FOREIGN PURCHASES (OCT 1996)
52.229-1 STATE AND LOCAL TAXES (APR 1984)
52.229-3 FEDERAL, STATE, AND LOCAL TAXES (JAN 1991)
52.229-5 TAXES--CONTRACTS PERFORMED IN U.S. POSSESSIONS OR PUERTO RICO (APR
1984)
52.232-17 INTEREST (JUN 1996)
52.237-1 SITE VISIT (APR 1984)
52.237-2 PROTECTION OF GOVERNMENT BUILDINGS, EQUIPMENT, AND VEGETATION (APR
1984)
52.246-4 INSPECTION OF SERVICES--FIXED-PRICE (AUG 1996)
52.247-34 F.O.B. DESTINATION (NOV 1991)
<PAGE>
37
c.3 CONTRACT TERMS AND CONDITIONS APPLICABLE TO GSA ACQUISITION OF COMMERCIAL
ITEMS (GSAR 552.212-71) (AUG 1997)
(FCI DEVIATION--DEC 1997)
The Contractor agrees to comply with any provisions or clause that is
incorporated by reference to implement agency policy applicable to acquisition
of commercial items or components. The provision or clause in effect based on
the applicable regulation cited on the date the solicitation is issued applies
unless otherwise stated herein. The following provisions and clauses are
incorporated by reference:
552.203-70 RESTRICTION ON ADVERTISING (DEC 1990)
552.211-75 PRESERVATION, PACKAGING, AND PACKING (FEB 1996)
552.211-77 PACKING LIST (FEB 1996)
552.215-72 PRICE ADJUSTMENT--FAILURE TO PROVIDE ACCURATE INFORMATION (AUG 1997)
552.232-8 DISCOUNTS FOR PROMPT PAYMENT (APR 1989)
(DEVIATION FAR 52.232-8)
552.238-70 IDENTIFICATION OF ELECTRONIC OFFICE EQUIPMENT PROVIDING
ACCESSIBILITY FOR THE HANDICAPPED (SEP 1991)
C.4 SCOPE OF CONTRACT (I-FCI-102-D) (DEC 1997)
This solicitation is issued to establish contracts which may be used on a
nonmandatory basis by the agencies and activities named below, as a source of
supply for the supplies or services described herein, for delivery within the 48
contiguous states and Washington, D.C. Resultant contracts may also be used for
delivery to Alaska, Hawaii, the Commonwealth of Puerto Rico, and such overseas
locations as specified in each contract.
(1) All Federal agencies and activities in the executive, legislative, and
judicial branches;
(2) Government Contractors authorized in writing by a Federal agency
pursuant to 48 CFR 51.1;
(3) Mixed ownership Government corporations (as defined in the Government
Corporation Control Act);
(4) The Government of the District of Columbia;
(5) Other activities and organizations authorized by statute or regulation
to use GSA as a source of supply. (Questions regarding activities authorized to
use this schedule should be directed to the Contracting Officer.)
<PAGE>
38
Articles or services may be ordered from time to time in such quantities as may
be needed to fill any requirement, subject to the Order Limitations thresholds
which will be specified in resultant contracts. Overseas activities may place
orders directly with Schedule Contractors for delivery to CONUS port, a
consolidation point, or as specified in each contract.
For orders received from activities within the Executive Branch of the
Government, each Contractor is obligated to deliver all articles or services
contracted for that may be ordered during the contract term, except as otherwise
provided herein.
The Contractor is not obligated to accept orders received from activities
outside the Executive Branch; however, the Contractor is encouraged to accept
such orders. If the Contractor is unwilling to accept such an order, the
contractor shall return it by mailing it or delivering it to the ordering office
within 5 workdays from receipt. Failure to return an order shall constitute
acceptance whereupon all provisions of the contract shall apply.
The Government is obligated to purchase under each resultant contract a
guaranteed minimum of one hundred dollars during the contract term.
C.5 GUARANTEED MINIMUM (I-FSS-106) (JAN 1999)
The minimum quantity of supplies that the Government agrees to order during the
period of this contract is $100. If the Contractor receives total orders for
less than $100 during the term of the contract, the Government will pay the
difference between the amount ordered and $100.
(a) Payment of any amount due under this clause shall be contingent upon
the Contractor's timely submission of GSA Form 72A reports (see GSAR 552.238-72
"Contractor's Report of Sales") during the period of the contract and receipt of
the close-out sales report pursuant to GSAR 552.238-72.
(b) The guaranteed minimum applies only if the contract expires or contract
cancellation is initiated by the Government. The guaranteed minimum does not
apply if the contract is terminated for cause or if the contract is canceled at
the request of the Contractor.
REVISION-AMENDMENT #2
<PAGE>
39
C.6 ORDERING (FAR 52.216-18) (DEVIATION--JAN 1994)
(FCI DEVIATION--DEC 1997)
(a) Any supplies and services to be furnished under this contract shall be
ordered by issuance of delivery orders or task orders by the individuals or
activities designated in the Schedule. Such orders may be issued during
the contract term.
(b) All delivery orders or task orders are subject to the terms and conditions
of this contract. In the event of conflict between a delivery order or
task order and this contract, the contract shall control.
(c) If mailed, a delivery order or task order is considered "issued" when the
Government deposits the order in the mail. Orders may be issued orally or
by written telecommunications only if authorized in the Schedule.
C.7 PLACEMENT OF ORDERS (552.216-73)(JUN 1994)
(ALTERNATE II--FEB 1999)
(a) The organizations listed below may place orders under this contract.
Questions regarding organizations authorized to use this schedule should be
directed to the Contracting Officer.
(1) Executive agencies.
(2) Other Federal Agencies.
(3) Mixed-ownership Government corporations.
(4) The District of Columbia.
(5) Government Contractors authorized in writing by a Federal agency
pursuant to 48 CFR 51.1.
(6) Other activities and organizations autorized by statute or regulation
to use GSA as a source of supply.
(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 Standard for Electronic Data Interchange
(EDI) format.
(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
REVISION -- AMENDMENT #2
<PAGE>
40
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 provider(s) 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
<PAGE>
41
C.8 ORDER ACKNOWLEDGEMENT (G-FSS-907) (APR 1984)
Contractors shall acknowledge only those orders which state "Order
Acknowledgment Required." These orders shall be acknowledged within 10 days
after receipt. Such acknowledgment shall be sent to the activity placing the
order and contain information pertinent to the order, including the anticipated
delivery date.
C.9 BLANKET PURCHASE AGREEMENTS (I-FCI-646-A) (DEC 1997)
Blanket Purchase Agreements (BPAs) can reduce costs and save time because
individual purchase orders and invoices are not required for each procurement
but can instead be documented on a consolidated basis. The Contractor agrees to
enter into BPAs with ordering activities provided that:
(a) The period of time covered by such agreements shall not exceed the period
of the contract;
(b) Orders placed under such agreements shall be issued in accordance with all
applicable regulations and the terms and conditions of the contract; and
REVISION -- AMENDMENT #2
<PAGE>
42
(c) BPAs may be established to obtain the maximum discount (lowest net price)
available in those schedule contracts containing volume or quantity discount
arrangements.
C.10 ORDER LIMITATIONS (FAR 52.216-19) (OCT 1995) (VARIATION II-OCT 1995)
(DEVIATION)
(a) Minimum order. When the Government requires supplies or services covered by
this contract in an amount of less than $100, the Government is not obligated to
purchase, nor is the Contractor obligated to furnish, those supplies or services
under the contract. However, Offerors may, if willing to accept smaller orders,
specify a smaller amount in their offers. If a smaller amount is offered, it is
mutually agreed that the Contractor will accept such orders and specify the
smaller minimum order limitation in the applicable catalog/pricelist. If the
Offeror fails to specify a smaller amount, the Government may place orders for a
smaller amount. Such orders shall be deemed to be accepted by the Contractor,
unless returned to the ordering office within 5 workdays after receipt by the
Contractor.
(b) Maximum order. The maximum order will be negotiated individually for each
contract. The limits will be established based on the concessions granted by the
Contractor. The Contractor is not obligated to honor any order when the dollar
value of any single item ordered, whether ordered separately or in combination
with other items, exceeds the dollar amounts set forth below for the items
indicated.
ITEM NUMBER/SIN MAXIMUM ORDER
132-3 $500,000 per order
132-8 $500,000 per order
132-12(repair/spare parts only) $ 10,000 per order
132-32 $ 50,000 or $500,000 per order
132-33 $ 50,000 or $500,000 per order
132-50 $ 25,000 per order
132-51 $500,000 per order
132-52 $500,000 per order
(c) Notwithstanding paragraph (b) above, the Contractor shall honor any order
exceeding the maximum orders in paragraph (b), unless that order (or orders) is
returned to the ordering office within 5 workdays after receipt, with written
notice stating the Contractor's intent not to ship the item (or items) called
for or to provide the services ordered and the reasons. Upon receiving this
notice, the Government may acquire the supplies or services from another source.
<PAGE>
43
C.11 REQUIREMENTS EXCEEDING THE MAXIMUM ORDER
(I-FSS-125) (OCT 1997)
(a) In accordance with FAR 8.404, before placing an order that exceeds the
maximum order threshold, ordering offices shall--
(1) Review additional schedule Contractors' catalogs/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 (see FAR 8.404(a)). If further price reductions are not
offered, an order may still be placed, if the ordering office determines that it
is appropriate.
(b) Vendors 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).
(c) A delivery order that exceeds the maximum order may be placed with the
Contractor selected in accordance with FAR 8.404. The order will be placed under
the contract.
(d) Sales for orders that exceed the Maximum Order shall be reported in
accordance with GSAR 552.238-72.
C.12 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.
<PAGE>
44
(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 ___ __
Hawaii ___ __
Puerto Rico ___ __
Overseas Locations ___ __
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.
C.13 COMMERCIAL DELIVERY SCHEDULE (MULTIPLE AWARD SCHEDULE)
(GSAR 552.211-78) (FEB 1996)
(a) Time of Delivery. The Contractor shall deliver to destination within the
number of calendar days after receipt of order (ARO) in the case of F.O.B.
Destination prices, or to place
<PAGE>
45
of shipment in transit in the case of F.O.B. Origin prices, as set forth below.
Offerors shall insert in the "Time of Delivery (days ARO)" column in the
Schedule of Items a definite number of calendar days within which delivery will
be made. In no case shall the offered delivery time exceed the Contractor's
normal commercial practice. The Government requires the Contractor's normal
commercial delivery time, as long as it is less than the "stated" delivery
time(s) shown below. If the Offeror does not insert a delivery time in the
Schedule of Items, the Offeror will be deemed to offer delivery in accordance
with the Government's stated delivery time, as stated below:
<TABLE>
<CAPTION>
ITEMS OR GROUP OF GOVERNMENT'S CONTRACTOR'S NORMAL
ITEMS(Special Item No. STATED DELIVERY COMMERCIAL DELIVERY
or Nomenclature) TIME (DAYS ARO) TIME
<S> <C> <C>
132-3 30
132-8 30
132-32 30
132-33 30
</TABLE>
(b) Expedited Delivery Times. For those items that can be delivered quicker than
the delivery times in paragraph (a), above, the Offeror is requested to insert
below, a time (hours/days ARO) that delivery can be made when expedited delivery
is requested.
ITEMS OR GROUP OF ITEMS EXPEDITED DELIVERY TIME
(Special Item No. or Nomenclature) (HOURS/DAYS ARO)
132-3
132-8
132-32
132-33
(c) Overnight and 2-Day Delivery Times. Ordering activities may require
overnight or 2-day delivery. The Offeror is requested to annotate its pricelist
or by separate attachment identify the items that can be delivered overnight or
within 2 days. Contractors offering such delivery services will be required to
state in the cover sheet to its FSS pricelist details concerning this service.
C.14 URGENT REQUIREMENTS (I-FSS-140-B) (JAN 1994)
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
<PAGE>
46
contact the Contractor for the purpose of obtaining accelerated delivery. The
Contractor shall reply 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.
C.15 DELIVERIES TO THE U.S. POSTAL SERVICE (F-FSS-230) (JAN 1994)
(a) Applicability. This clause applies to orders placed for the U.S. Postal
-------------
Service (USPS) and accepted by the Contractor for the delivery of supplies
to a USPS facility (consignee).
(b) Mode/Method of Transportation. Unless the Contracting Officer grants a
-----------------------------
waiver of this requirement, any shipment that meets the USPS requirements for
mailability (i.e., 70 pounds or less, combined length and girth not more than
108 inches, etc.) delivery shall be accomplished via the use of the USPS. Other
commercial services shall not be used, but this does not preclude the Contractor
from making delivery by the use of the Contractor's own vehicles.
(c) Time of Delivery. Notwithstanding the required time for delivery to
----------------
destination as may be specified elsewhere in this contract, if shipments under
this clause are mailed not later than five (5) calendar days before the required
delivery date, delivery shall be deemed to have been made timely.
C.16 CONTRACTOR'S BILLING RESPONSIBILITIES (G-FCI-913) (DEC 1997)
The Contractor is required to perform all billings made pursuant to this
contract. However, if the Contractor has dealers which participate on the
contract, and the billing/payment process by the Contractor for sales made by
the dealer is a significant administrative burden, the following alternative
procedures may be used:
Where dealers are allowed by the Contractor to bill Government agencies and
accept payment in the Contractor's name, the Contractor agrees to obtain from
all dealers participating in the performance of the contract a written agreement
which will require dealers to:
<PAGE>
47
(1) Comply with the same terms and conditions regarding prices as the
Contractor, for sales made under the contract;
(2) Maintain a system of reporting sales under the contract to the
manufacturer which includes:
(a) the date of sale,
(b) the agency to which the sale was made,
(c) the product/model sold,
(d) the quantity of each product/model sold,
(e) the price at which it was sold, including discounts, and
(f) all other significant sales data;
(3) Be subject to audit by the Government, with respect to sales made under
the contract; and
(4) Place orders and accept payment in the name of the Contractor, in care
of the dealer.
An agreement between a Contractor and its dealers pursuant to this procedure
will not establish privity of contract between dealers and the Government.
By signing this offer, the Offeror attests to the fact that all dealers
participating in the performance of this contract have or will be required to
agree that their performance will be in accordance with all terms and conditions
regarding prices of the contract including the provisions listed above.
C.17 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
<PAGE>
48
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.
C.18 IMPREST FUNDS (PETTY CASH) (I-FSS-918) (APR 1984)
The Contractor agrees to accept cash payment for purchases made under the terms
of the contract in conformance with Federal Acquisition Regulation (FAR) 13.404.
C.19 ELECTRONIC COMMERCE--FACNET (I-FSS-599) (APR 1997)
(a) General Background.
------------------
The Federal Acquisition Streamlining Act (FASA) of 1994 establishes the Federal
Acquisition Computer Network (FACNET) requiring the Government to evolve its
acquisition process from one driven by paperwork into an expedited process based
on electronic commerce/electronic data interchange (EC/EDI). EC/EDI means more
than merely automating manual processes and eliminating paper transactions. It
can and will help to move business processes (e.g., procurement, finance,
logistics, etc.) into a fully electronic environment and fundamentally change
the way organizations operate.
(b) Trading Partners and Value-Added Networks (VANs).
------------------------------------------------
Within the FACNET architecture, electronic documents (e.g., orders, invoices,
etc.) are carried between the Federal Government's procuring office and
Contractors (now known as "trading partners"). These transactions are carried
by commercial telecommunications companies called Value-Added Networks (VANs).
Federal Government transactions are provided only to those VANs that have been
certified by DOD and connected to FACNET.
<PAGE>
49
EDI can be done using commercially available hardware, software, and
telecommunications. The selection of a VAN is a business decision Contractors
must make. There are many different VANs which provide a variety of electronic
services and different pricing strategies. If your VAN only provides
communications services, you may also need a software translation package.
(c) Registration Instructions.
-------------------------
DOD will require Contractors to register as trading partners to do business with
the Government. This policy can be reviewed via the INTERNET at
http://acq.osd.mil/ec/nwsltr.html.
To do EDI with the Government, Contractors must register as a trading partner.
Contractors will provide regular business information, banking information, and
EDI capabilities to all agencies in this single registration. A central
repository of all trading partners, called the Central Contractor Registration
(CCR), has been developed. All Government procuring offices and other
interested parties will have access to this central repository. The database is
structured to identify the types of data elements which are public information
and those which are confidential and not releasable.
To register, Contractors must provide their Dun and Bradstreet (DUNS) number.
The DUNS number is available by calling 1(800)333-0505. It is provided and
maintained free of charge and only takes a few minutes to obtain. Contractors
will need to provide their Tax Identification Number (TIN). The TIN is assigned
by the Internal Revenue Service by calling 1(800)829-1040. Contractors will
also be required to provide information about company bank or financial
institution for electronic funds transfer (EFT).
Contractors may register through their Value Added Network (VAN) using an
American National Standards Institute (ANSI) ASC X12 838 transaction set, called
a "Trading Partner Profile." A transaction set is a standard format for moving
electronic data. VANs will be able to assist Contractors with registration. A
list of certified VANs and software providers is available from the Department
of Defense (DOD) by calling 1(800)EDI-3414, or from the world wide web at
http://www.acq.osd.mil/ec/van_list.html. Contractors who wish to register
without going through a VAN may do so via the INTERNET at
http://ccr.edi.disa.mil.
<PAGE>
50
(d) Implementation Conventions.
--------------------------
All EDI transactions must comply with the Federal Implementation Conventions
(ICs). Many VANs and software providers have already built the IC requirements
into their products. If you need to see the ICs, they are available on a
registry maintained by the National Institute of Standards and Technology
(NIST). It is accessible via the INTERNET at
http://snad.ncsl.nist.gov/dartg/edi/fededi.html. ICs are available for common
business documents such as Purchase Order, Price Sales Catalog, Invoice, Request
for Quotes, etc.
(e) Additional Information.
----------------------
GSA has additional information available for vendors who are interested in
starting to use EC/EDI. Contact the Contracting Officer for a copy of the
latest handbook. Several resources are available to vendors to assist in
implementing EC/EDI; specific addresses are available in the handbook or from
the Contracting Officer:
(1) Electronic Commerce Resource Centers (ECRCs) are a network of U.S.
Government-sponsored centers that provide EC/EDI training and support to the
Contractor community. They are found in over a dozen locations around the
country.
(2) Procurement Technical Assistance Centers (PTACs) and Small Business
Development Centers (SBDCs) provide management assistance to small business
owners. Each state has several locations.
(3) Most major US cities have an EDI user group of companies who meet
periodically to share information on EDI-related subjects.
(f) GSA Advantage!(TM).
------------------
(1) GSA Advantage!(TM) will use this FACNET system to receive catalogs,
invoices and text messages; and to send purchase orders, application advice, and
functional acknowledgments. GSA Advantage!(TM) enables customers to:
(i) Perform database searches across all contracts by manufacturer;
manufacturer's model/part number; vendor; and generic product categories.
<PAGE>
51
(ii) Generate their own EDI delivery orders to Contractors, generate
EDI delivery orders from the Federal Supply Service to Contractors, or download
files to create their own delivery orders.
(iii) Use the Federal IMPAC VISA.
(2) GSA Advantage!(TM) may be accessed via the GSA Home Page. The INTERNET
address is: http://www.gsa.gov, or http://www.fss.gsa.gov.
C.20 ANSI STANDARDS (C-FSS-427) (JUL 1991)
ANSI Standards cited in this solicitation may be obtained from the American
National Standards Institute, Inc., 11 West 42nd Street, 13th Floor, New York,
NY 10036 (Tel: (212) 642-4900).
C.21 ASSIGNMENT OF CLAIMS (GSAR 552.232-23) (MAY 1989)
(FCI DEVIATION--DEC 1997)
In order to prevent confusion and delay in making payment, no claim(s) for
amounts due or to become due under this contract, shall be assigned by the
Contractor; but it shall be permissible for the Contractor to assign separately
to a bank, trust company, or other financial institution, including any Federal
lending agency, under the provisions of the Assignment of Claims Act, as
amended, 31 U.S.C. 3727, 41 U.S.C. 15 (hereinafter referred to as "the Act"),
all amounts due or to become due under any delivery order amounting to $1,000 or
more issued by any Government agency under this contract. Any such assignment
shall be effective only if and when the assignee files written notice of the
assignment together with a true copy of the instrument of assignment with the
Contracting Officer issuing the delivery order and the finance office designated
in the delivery order to make payment. Unless otherwise stated in the delivery
order, payments to an assignee of any amounts due or to become due under any
delivery order assigned may, to the extent specified in the Act, be subject to
reduction or set-off.
C.22 CONTRACTOR'S REPORT OF SALES (552.238-72) (FEB 1999)
(a) The Contractor must report the quarterly dollar value (in U.S. dollars and
rounded to the nearest whole dollar) of all
REVISION -- AMENDMENT #2
<PAGE>
52
sales under this 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).
(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. The Contractor must report
sales separately for each National Stock Number (NSN), Special Item Number
(SIN), or subitem. If no sales occur, the Contractor must show zero on the
report for each separate NSN, SIN, or subitem.
(c) The Contractor must register with the VSC before using the automated
reporting system. To register, the Contractor (or its 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 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 calendar quarter. The report is available from:
Department of the Treasury
Financial Management Service
International Funds Branch
3700 East-West Highway
PGCII, Room 5A19
Hyattsville, MD 20782
Telephone: (202) 874-7994
Internet: http://www.fms.treas.gov/intn.html
(e) The report is due 30 days following the completion of the reporting period.
The Contractor must also provide a close-out report within 120 days after the
expiration of the contract. The contract expires upon physical completion of the
last, outstanding task or delivery order of the contract. This
REVISION -- AMENDMENT #2
<PAGE>
53
close-out report must cover all sales not shown in the final quarterly report
and reconcile all errors and credits. If the Contractor reported all contract
sales and reconciled all errors and credits on the final quarterly report, then
show zero sales in the close-out report.
<PAGE>
54
C.23 INDUSTRIAL FUNDING FEE (GSAR 552.238-77) (FEB 1998)
(FCI 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); 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:
REVISION - AMENDMENT #2
<PAGE>
55
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.
C.24 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).
<PAGE>
56
C.25 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.
C.26 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.
C.27 ECONOMIC PRICE ADJUSTMENT (GSAR 552.216-71) (FEB 1996)
(ALTERNATE I--JAN 1989) (FCI DEVIATION--JUN 1998)
Price adjustments include price increases and price decreases. Adjustments will
be considered as follows:
(a) Contractors shall submit price decreases anytime during the contract period
in which they occur. Price decreases will be handled in accordance with the
provisions of the Price Reductions Clause.
(b) Contractors may request price increases to be effective on or after the
first 12-months of the contract period providing all of the following conditions
are met:
(1) Increases result from a reissue or other modification of the
Contractor's commercial catalog/pricelist that was used as the basis for the
contract award or from a change in the Contracator's market prices that were the
Basis of Negotiation.
REVISION - AMENDMENT #1
<PAGE>
57
(2) No more than three increases will be considered during each succeeding
12-month period of the contract. (For succeeding contract periods of less than
12 months, up to three increases will be considered subject to the other
conditions of this subparagraph (b).)
(3) Increases are requested before the last 60 days of the contract period.
(4) At least 30 days elapse between requested increases.
(c) In any contract period during which price increases will be considered, the
aggregate of the increases during any 12-month period shall not exceed ten
percent (10%) of the contract unit price in effect at the end of the preceding
12-month period. The Government reserves the right to raise the ceiling when
market conditions during the contract period support such a change.
(d) The following material shall be submitted with the request for a price
increase:
(1) A copy of the commercial catalog/pricelist showing the price increase
and the effective date for commercial customers or evidence that the
Contractor's market prices that were the Basis of Negotiation have increased.
(2) Commercial Sales Practice format regarding the Contractor's commercial
pricing practice relating to the reissued or modified catalog/pricelist, or a
certification that no change has occurred in the data since completion of the
initial negotiation or a subsequent submission.
(3) Documentation supporting the reasonableness of the price increase.
(e) The Government reserves the right to exercise one of the following options:
(1) Accept the Contractor's price increases as requested when all
conditions of (b), (c), and (d) of this clause are satisfied;
(2) Negotiate more favorable discounts from the new commercial prices when
the total increase requested is not supported; or,
(3) Remove the product(s) from contract involved pursuant to the
Cancellation Clause of this contract, when the increase requested is not
supported.
REVISION - AMENDMENT #1
<PAGE>
58
(f) The contract modification reflecting the price adjustment shall be
effective upon approval by the Contracting Officer, or on the effective date of
the commercial pricelist, whichever is later. The increased contract prices
shall apply to delivery orders issued to the Contractor on or after the
effective date of the contract modification.
C.28 PRICE REDUCTIONS (552.238-76) (FEB 1999)
(a) Before award of a contract, the Contracting Officer and the Offeror will
agree upon (1) the customer (or category of customers) which will be the basis
of award, and (2) the Government's price or discount relationship to the
identified customer (or category of customers). This relationship shall be
maintained throughout the contract period. Any change in the Contractor's
commercial pricing or discount arrangement applicable to the identified customer
(or category of customers) which disturbs this relationship shall constitute a
price reduction.
(b) During the contract period, the Contractor shall report to the Contracting
Officer all price reductions to the customer (or category of customers) that was
the basis of award. The Contractor's report shall include an explanation of the
conditions under which the reductions were made.
(c) (1) A price reduction shall apply to purchases under this contract if,
after the date negotiations conclude, the Contractor--
(i) Revises the commercial catalog, pricelist, schedule or other
document upon which contract award was predicated to reduce prices;
(ii) Grants more favorable discounts or terms and conditions than
those contained in the commercial catalog, pricelist, schedule or other
documents upon which contract award was predicated; or
(iii) Grants special discounts to the customer (or category of
customers) that was the basis of award, and the change disturbs the
price/discount relationship of the Government to the customer (or category of
customers) that was the basis of award.
(2) The Contractor shall offer the price reduction to the Government with
the same effective date, and for the same time period, as extended to the
commercial customer (or category of customers).
(d) There shall be no price reduction for sales--
REVISION - AMENDMENT #2
<PAGE>
59
(1) To commercial customers under firm, fixed-price definite quantity
contracts with specified delivery in excess of the maximum order threshold
specified in this contract;
(2) To Federal agencies; or
(3) Caused by an error in quotation or billing, provided adequate
documentation is furnished by the Contractor to the Contracting Officer.
(e) The Contractor may offer the Contracting Officer a voluntary Governmentwide
price reduction at any time during the contract period.
(f) The Contractor shall notify the Contracting Officer of any price reduction
subject to this clause as soon as possible, but not later than 15 calendar days
after its effective date.
(g) The contract will be modified to reflect any price reduction which becomes
applicable in accordance with this clause.
C.29 MODIFICATIONS (MULTIPLE AWARD SCHEDULE)
(GSAR 552.243-72) (FEB 1999) (FCI DEVIATION--FEB 1999)
(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 SIN's. 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 SIN's.
(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.
(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.
(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).
(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.
REVISION - AMENDMENT #2
<PAGE>
60
(vi) Any information requested by 52.212-3(d), Offerors
Representations and Certifications - Commercial Items, that may be necessary to
assure compliance with 552.225-9, Trade Agreements Act.
(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 paragraph (c)(1) of the
Price Reductions clause at 552.238-76. If the Price reduction falls under item
(i), the Contractor shall submit a copy of the dated commercial price list. If
the price reduction falls under item (ii) or (iii), the Contractor shall submit
a copy of the applicable price list(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 in the Price
Reductions clause at 552.238-76.
(d) Electronic File Updates. The Contractor shall update electronic file
submissions to reflect all modifications. For additional items or SINs, the
Contractor shall obtain the Contracting Officer's approval before transmitting
changes. Contract modifications will not be made effective until the Government
receives the electronic file updates. The Contractor may transmit price
reductions, item deletions, and corrections without prior approval. However, the
Contractor shall notify the Contracting Officer as set forth in the Price
Reductions clause at 552.238-76.
(e) Amendments to Paper Federal Supply Schedule Price Lists.
(1) The Contractor must provide supplements to its paper price lists,
reflecting the most current changes. The Contractor may either:
(i) Distribute a supplemental paper Federal Supply Schedule Price
List within 15 days after the effective date of each modification.
(ii) Distribute cumulative supplements. The period covered by a
accumulative supplement is at the discretion of the Contractor, but may not
exceed three months from the effective
REVISION - AMENDMENT #2
<PAGE>
61
date of the earliest modification. The Contractor must distribute each
cumulative supplement within 15 days from the date of the latest modification
covered.
(2) At a minimum, the Contractor shall distribute each supplement to those
ordering activities that previously received the basic document. In addition,
the Contractor shall submit two copies of each supplement to the contracting
officer and one copy to the FSS Schedule Information Center.
<PAGE>
62
C.30 SUBMISSION AND DISTRIBUTION OF AUTHORIZED FSS SCHEDULE PRICELISTS
(GSAR 552.238-74)(FEB 1996) (DEVIATION-FEB 1998)
(a) Definition. For the purposes of this clause, the Mailing List is the
Contractor's listing of its Federal Government Customers.
(b) The Contracting Officer will return one copy of the Authorized FSS Schedule
Pricelist to the Contractor with the notification of contract award.
The Contractor may print and distribute the awarded pricelist without
written approval from the Contracting Officer. The pricelist must include all
applicable terms and conditions of the cited contract. NOTE: It shall not
absolve the Contractor from responsibility for the accuracy of the pricelist.
Consequently, the Contractor would be required to revise the pricelist to
correct any significant errors subsequently found by the Contracting Officer and
reprint and distribute at the Contractor's expense. If significant pricing
errors are found, the Government may cancel the contract and the Contractor may
be liable for any price adjustments for overpricing.
(c) (1) The Contractor shall provide to the GSA Contracting Officer:
(i) Two paper copies of the Authorized FSS Schedule pricelist; and
(ii) The Authorized FSS Schedule pricelist on a common-use electronic
medium.
The Contracting Officer will provide detailed instructions for the
electronic submission with the award notification. Some structured data entry
in a prescribed format may be required.
REVISION - AMENDMENT #2
<PAGE>
63
(2) The Contractor shall provide to each addressee on the mailing list
either:
(i) One paper copy of the Authorized FSS Schedule pricelist; or
(ii) A self-addressed, pastage-paid envelope or postcard to be
returned by addressees that want to receive a paper copy of the pricelist. The
Contractor shall distribute pricelists within 20 calendar days after receipt of
returned requests.
(3) The Contractor shall advise each addressee of the availability of
pricelist information through GSA Advantage!.
(d) During the period of the contract, the Contractor shall provide one copy of
its Authorized FSS Schedule pricelist to any authorized schedule user, upon
request. Use of the mailing list for any other purpose is not authorized.
C.31 SUBMISSION AND DISTRIBUTION OF AUTHORIZED FEDERAL SUPPLY SERVICE (FSS)
INFORMATION TECHNOLOGY SCHEDULE PRICELISTS
(I-FCI-600)(FEB 1999)
(a) Electronic Contract Data
------------------------
(1) The Contracting Officer will provide a vendor start-up kit with
instructions for submitting electronic contract data in a prescribed electronic
format as required by GSAR clause 552.238-74, Submission and Distribution of
Authorized FSS Schedule pricelists [DEVIATION--FEB 1998].
(2) The Contractor will have a choice to transmit its file submissions
electronically through Electronic Data Interchange (EDI) in accordance with the
Federal Implementation Convention (IC) or use the application provided on a
diskette. The Contractor's electronic files shall be complete; correct;
readable; virus-free; and contain only those products, prices, and terms and
conditions that were accepted by the Government. They will be added to GSA's
electronic ordering system known as GSA Advantage!(TM), a menu-driven database
system that provides on-line access to contract ordering information, terms and
conditions, up-to-date pricing, and the option to create an electronic delivery
order. The Contractor's electronic files must be received no later than 45 days
after receipt of the vendor start-up kit.
REVISION - AMENDMENT #2
<PAGE>
64
(3) Further details on EDI, IC's, and GSA Advantage!(TM) can be found in I-
FSS-599, Electronic Commerce-FACNET.
(b) Paper Federal Supply Schedule pricelists
----------------------------------------
(1) The Contractor shall prepare a paper FSS Information Technology
Schedule pricelist in accordance with Attachment I, Guidelines For Format and
Content of Authorized Federal Supply Service Information Technology Schedule
pricelist. Two (2) copies of the FSS Information Technology Schedule pricelist
shall be submitted with the Offeror's proposal.
(2) The Contracting Officer will return one copy of the Authorized FSS
Information Technology Schedule pricelist to the Contractor with the
notification of contract award. In accordance with GSAR clause 552.238-74 (see
C.30), the Contractor may print and distribute the awarded pricelist without
written approval from the Contracting Officer. The pricelist must include all
applicable terms and conditions of the cited contract. The Contractor will be
responsible for the accuracy of the pricelist.
(3) Modifications to FSS Information Technology Schedule pricelists shall
include on the cover page the same information as the basic document plus the
title "Modification No." and the effective date(s) of such modifications.
(4) The Contractor may provide two (2) copies (including cover letter) of
the Federal Supply Schedule pricelist to the Contracting Officer for review.
Accuracy of information and computation of prices is the responsibility of the
Contractor.
(5) An address list of customers who are interested in the FSS Information
Technology Schedule will only be furnished upon request from the Contractor. The
list of customer addresses is available in one of the following formats (as
specified by the Contractor):
Cheshire Label
Gummed Label
Diskette--Mailing lists on diskette are
available in ASCII and in the following record format only:
REVISION - AMENDMENT #2
<PAGE>
65
<TABLE>
<CAPTION>
Field Name Field Size
<S> <C>
1. Customer ID No. 12
2. Agency Name 35
3. Address Line 1 35
4. Address Line 2 35
5. City 20
6. State 2
7. Zip Code 9
</TABLE>
Use of the mailing list for any purpose other than the distribution of the
Authorized FSS Information Technology Schedule pricelist is not authorized.
(6) The Contractor may formally print and distribute a Federal Supply
Schedule pricelist. Inclusion of incorrect information will cause the Contractor
to reprint and redistribute the Federal Supply Schedule pricelist, and may
constitute sufficient cause for Cancellation, applying the provisions of 52.212-
4, Contract Terms and Conditions (paragraph (m), Termination for Cause), and
application of any other remedies as provided by law--including monetary
recovery.
(7) Distribution to the customer mailing list shall be made as set forth
GSAR clause 552.238-74, Submission and Distribution of Authorized FSS Schedule
pricelists (See C.30). In addition, two (2) copies of the Federal Supply
Schedule pricelist shall be submitted to the FSS Information Center at the
address listed below. The Contractor may also send Federal Supply Schedule
pricelists to agencies not on the GSA listing when there is reasonable
expectation that sales to these agencies will be made.
General Services Administration
Federal Supply Service
FSS Information Center (FMLI)
Crystal Mall Building 4, Room L-104
Washington, DC 20406
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66
C.32 WARRANTY--MULTIPLE AWARD SCHEDULE
(GSAR 552.246-73) (FEB 1996)
Unless specified otherwise in this contract, the Contractor's standard
commercial warranty as stated in the Contractor's commercial pricelist will
apply to this contract.
[Note: In addition to the Contractor's standard commercial warranty, the
following warranties apply to this contract:
REVISION - AMENDMENT #2
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67
1) FAR 52.212-4, paragraph (o) WARRANTY: "The Contractor warrants and
implies that the items delivered hereunder are merchantable and fit for use for
the particular purpose described in this contract," and paragraph (p) LIMITATION
OF LIABILITY: "Except as otherwise provided by an express or implied warranty,
the Contractor will not be liable to the Government for consequential damages
resulting from any defect or deficiencies in accepted items;"
2) the Year 2000 Warranty; and
3) any warranties made under the CONTRACTOR COMMITMENTS, WARRANTIES AND
REPRESENTATIONS provision in the Contractor's Authorized FSS Information
Technology Schedule Pricelist.]
C.33 YEAR 2000 WARRANTY--COMMERCIAL SUPPLY ITEMS
(I-FSS-550-B)(JAN 1999)
(a) As used in this clause, "Year 2000 compliant" means, with respect to
information technology, that the information technology 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, to the extent that
other information technology used in combination with the information technology
being acquired, properly exchanges date/time data with it.
(b) The Contractor shall warrant that each hardware, software, and firmware
product delivered under this contract shall be able to accurately process date
time 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 products (e.g.
hardware, software, firmware) used in combination with products properly
exchange date time 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 products as a system. The duration of
this warranty and the remedies available under this warranty shall include
repair or replacement of any product whose non-compliance is discovered and made
known to the Contractor in writing within ninety (90) days after acceptance
(installation is considered acceptance). The Contractor may offer an extended
warranty to the Government to include repair or replacement of any product whose
non-compliance is discovered and made known to the Contractor in writing at any
time prior to June 1, 2000, or
REVISION - AMENDMENT #1 AND #2
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68
for a period of 6 months following acceptance (installation is considered
acceptance) whichever is later. 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.
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69
C.34 TERMINATION (I-FCI-249-B) (DEC 1997)
In addition to any other clause contained herein related to termination, the
following is applicable to orders placed under Federal Supply Schedule
contracts.
Any ordering office may, with respect to any one or more delivery orders placed
by it under the contract, exercise the same right of termination, acceptance of
inferior articles or services, and assessment of excess costs as might the
Contracting Officer, except that when failure to deliver articles or services is
alleged by the Contractor to be excusable, the determination of whether the
failure is excusable shall be made only by the Contracting Officer of the
General Services Administration, to whom such allegation shall be referred by
the ordering office and from whose determination appeal may be taken as provided
in paragraph C.1, FAR 52.212-4(d), Disputes.
C.35 CANCELLATION (I-FSS-690-B) (JAN 1994)
Resultant contracts may be canceled in whole or in part by either party upon 30
calendar days written notice. If the contract is canceled by the Contractor the
one hundred dollar minimum guarantee will not be reimbursed by the Government.
C.36 LOGISTICAL SUPPORT PRIVILEGES (X-FCI-XXX) (DEC 1997)
Where the Contractor may require Logistical Support in overseas areas in order
to meet contract obligations, the ordering activities should obtain the required
support in accordance with their applicable regulations prior to issuance of any
delivery orders under this GSA contract. The Contractors will provide all the
necessary information required of them by the applicable regulations in order to
assist the ordering activity in obtaining the Logistical Support Privileges.
The ordering agency, in all cases, will make the decision as to whether the
Contractor will be granted the requested support. The General Services
Administration will neither assist in the decision nor arbitrate any dispute
pertaining to logistical support. Logistical support which may be furnished by
the Government hereunder includes, but is not limited to, use of the following:
REVISION - AMENDMENT #2
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70
(a) Military or other U.S. Government Clubs, exchanges, other non-appropriated
fund organizations.
(b) Military or other U.S. Government commissary stores.
(c) Military or other U.S. Government postal facilities.
(d) Utilities and services in accordance with priorities, rates or tariffs
established by military or other U.S. Government agencies.
(e) Military Payment Certificate (MPC), where applicable.
(f) Military or other U.S. Government banking facilities.
(g) Military or other U.S. Government provided telephones, lines, and services
with direct dialing capability and access to the Defense Switched Network (DSN),
(formerly AUTOVON). The precedence of usage shall be coincident with the urgency
of the requirement and in accordance with Government/Military regulations.
C.37 DISSEMINATION OF INFORMATION BY CONTRACTOR
(I-FCI-680) (DEC 1997)
It is the responsibility of the Contractor to furnish all sales outlets
authorized to participate in the performance of the contract with the terms,
conditions, pricing schedule, and other appropriate information.
C.38 SERVICE OF PROTEST (FAR 52.233-2) (AUG 1996)
(a) Protests, as defined in section 33.101 of the Federal Acquisition
Regulation, that are filed directly with an agency, and copies of any protests
that are filed with the General Accounting Office (GAO), shall be served on the
Contracting Officer (addressed as follows) by obtaining written and dated
acknowledgment of receipt from:
General Services Administration
FSS/ADP Acquisition Center (FCI)
Crystal Mall #4, Room 1017
1941 Jefferson Davis Highway
Arlington, VA 22202
Attn.: Contracting Officer
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71
(b) The copy of any protest shall be received in the office designated above
within one day of filing a protest with the GAO.
C.39 PROTESTS FILED DIRECTLY WITH THE GENERAL SERVICES ADMINISTRATION
(a) The following definitions apply in this provision:
(1) "Agency Protest Official for GSA" means the official in the Office of
Acquisition Policy designated to review and decide procurement protests filed
with GSA.
(2) "Deciding official" means the person chosen by the protester to decide
the agency protest,; it may be either the Contracting Officer or the Agency
Protest Official for GSA.
(b) A protest filed directly with the General Services Administration (GSA)
must:
(1) Indicate that it is a protest to the agency.
(2) Be filed in writing with the Contracting Officer.
(3) State whether the protester chooses to have the Contracting Officer or
the Agency Protest Official for GSA decide the protest. If the protest is
silent on this matter, the Contracting Officer will decide the protest.
(4) Indicate whether the protester prefers to make an oral or written
presentation of arguments in support of the protest to the deciding official.
(5) Include the information required by FAR 33.103(d)(2).
(i) Name, address, fax number, and telephone number of the
protester.
(ii) Solicitation or contract number.
(iii) Detailed statement of the legal and factual grounds for the
protest, to include a description of resulting prejudice to the protester.
(iv) Copies of relevant documents.
(v) Request for a ruling by the agency.
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72
(vi) Statement as to the form of relief requested.
(vii) All information establishing that the protester is an interested
party for the purpose of filing a protest.
(viii) All information establishing the timeliness of the protest.
(c) An interested party filing a protest with GSA has the choice of requesting
either that the Contracting Officer or the Agency Protest Official for GSA
decide the protest.
(d) The decision by the Agency Protest Official for GSA is an alternative to a
decision by the Contracting Officer. The Agency Protest Official for GSA will
not consider appeals from the Contracting Officer's decision on an agency
protest.
(e) The deciding official must conduct a scheduling conference with the
protester within three (3) days after the protest is filed. The scheduling
conference will establish deadlines for oral or written arguments in support of
the agency protest at the same time as the scheduling conference, depending on
availability of the necessary parties.
(f) Oral conferences may take place either by telephone or in person. Other
parties (e.g., representatives of the program office) may attend at the
discretion of the deciding official.
(g) The protester has only one opportunity to support or explain the substance
of its protest. GSA procedures do not provide for any discovery. The deciding
official may request additional information from either the protester or the
agency. The deciding official will resolve the protest through informal
presentations or meetings to the maximum extent practicable.
(h) An interested party may represent itself or be represented by legal
counsel. GSA will not reimburse the party for any legal fees related to the
agency protest.
(i) GSA will stay award or suspend contract performance in accordance with FAR
33.103(f). The stay or suspension, unless over-ridden, remains in effect until
the protest is decided, dismissed, or withdrawn.
(j) The deciding official will make a best effort to issue a decision on the
protest within twenty (20) days after the filing time. The decision may be oral
or written.
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73
(k) GSA may dismiss or stay proceedings on an agency protest if a protest on
the same or similar basis is filed with a protest forum outside of GSA.
C.40 INDEFINITE QUANTITY (FAR 52.216-22) (OCT 1995) (VARIATION-OCT 1995)
(a) This is an indefinite-quantity contract for the supplies or services
specified, and effective for the period stated. The quantities of supplies and
services specified in the contract are estimates only and are not purchased by
this contract.
(b) Delivery or performance shall be made only as authorized by orders issued
in accordance with the Ordering clause. The Contractor shall furnish to the
Government, when and if ordered, the supplies or services specified in the
contract. The Government shall order at least the quantity of supplies or
services designated in the contract as the "minimum."
(c) Except for any limitations on quantities in the Guaranteed Minimum clause
or Order Limitations clause, there is no limit on the number of orders that may
be issued. The Government may issue orders requiring delivery to multiple
destinations or performance at multiple locations.
(d) Any order issued during the effective period of this contract and not
completed within that period shall be completed by the Contractor within the
time specified in the order. The contract shall govern the Contractor's and
Government's rights and obligations with respect to that order to the same
extent as if the order were completed during the contract's effective period.
C.41 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 (I-FSS-690-B) unless reported sales are $25,000 for
each 12 month period from date of award and every 12 month period thereafter.
C.42 INVOICE PAYMENTS (GSAR 552.232-70) (MAR 1998)
(a) The due date for making invoice payments by the designated payment office
is:
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74
(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 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.
(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).
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75
(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.
C.43 CENTRAL CONTRACTOR REGISTRATION (CCR) (I-FCI-598) (DEC 1998)
To receive orders from the Department of Defense (DoD) contractors must be
registered in the DoD CCR database (registration information is available at
http://ccr.edi.disa.mil). The CCR database is DoD's primary repository for
- ------------------------
contractor information required for the conduct of business with DoD. This
requirement does not apply to purchases made with a Governmentwide commercial
purchase card. (Refer to clause I-FCI-600, SUBMISSION AND DISTRIBUTION OF
AUTHORIZED FEDERAL SUPPLY SERVICE (FSS) INFORMATION TECHNOLOGY SCHEDULE
PRICELISTS, for additional information regarding CCR.)
C.44 VENDOR MANAGED INVENTORY (VMI) PROGRAM (MAS)
(G-FSS-906) (JAN 1999)
(a) The term "Vendor Managed Inventory" describes a system in which the
Contractor monitors and maintains specified inventory levels for selected items
at designated stocking points. VMI enables the Contractor to plan production and
shipping more efficiently. Stocking points benefit from reduced inventory but
steady stock levels.
(b) Contractors that commercially provide a VMI-type system may enter into
similar partnerships with customers under a Blanket Purchase Agreement.
REVISION - AMENDMENT #2
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76
D.1 CONTRACT TERMS AND CONDITIONS REQUIRED TO IMPLEMENT STATUTES OR
EXECUTIVE ORDERS--COMMERCIAL ITEMS (FAR 52.212-5) (AUG 1996) (DEVIATION--
MAY 1996) (TAILORED)
(a) The Contractor agrees to comply with the following FAR clauses, which are
incorporated in this contract by reference, to implement provisions of law
or executive orders applicable to acquisitions of commercial items:
(1) 52.222-3, Convict Labor [AUG 1996] (E.O. 11755); and
(2) 52.233-3, Protest After Award [AUG 1996]
(31 U.S.C 3553).
(b) The Contractor agrees to comply with the FAR clauses in this paragraph (b)
which the Contracting Officer has indicated as being incorporated in this
contract by reference to implement provisions of law or executive orders
applicable to acquisitions of commercial items or components:
(1) 52.203-6, Restrictions on Subcontractor Sales to the Government [JUL
1995], with Alternate I [OCT 1995] (41 U.S.C. 253g and 10 U.S.C.
2402).
(2) 52.203-10, Price or Fee Adjustment for Illegal or Improper Activity
[JAN 1997] (41 U.S.C. 423).
(3) 52.219-8, Utilization of Small, Small Disadvantaged and Women-Owned
Small Business Concerns [JUN 1997] (15 U.S.C. 637 (d)(2) and (3)).
(4) 52.219-9, Small, Small Disadvantaged and Women-Owned Small Business
Subcontracting Plan [AUG 1996] (15 U.S.C. 637 (d)(4)).
(5) 52.222-26, Equal Opportunity [APR 1984] (E.O. 11246).
(6) 52.222-35, Affirmative Action for Special Disabled and Vietnam Era
Veterans [APR 1984] (38 U.S.C. 4212).
(7) 52.222-36, Affirmative Action for Handicapped Workers [APR 1984] (29
U.S.C. 793).
(8) 52.222-37, Employment Reports on Special Disabled Veterans and
Veterans of the Vietnam Era [JAN 1999] (38 U.S.C. 4212).
REVISION - AMENDMENT #2
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2
(9) 52.239-1, Privacy or Security Safeguards [AUG 1996] (5 U.S.C. 552a).
(10) 52.247-64, Preference for Privately Owned U.S.-Flag Commercial Vessels
[JUN 1997] (46 U.S.C. 1241).
(c) Comptroller General Examination of Record. The Contractor agrees to comply
with the provisions of this paragraph (d) if this contract was awarded using
other than sealed bid, is in excess of the simplified acquisition threshold, and
does not contain the clause at 52.215-2, Audit and Records--Negotiation.
(1) The Comptroller General of the United States, or an authorized
representative of the Comptroller General, shall have access to and right to
examine any of the Contractor's directly pertinent records involving
transactions related to this contract.
(2) The Contractor shall make available at its offices at all reasonable
times the records, materials, and other evidence for examination, audit, or
reproduction, until 3 years after final payment under this contract or for any
shorter period specified in FAR Subpart 4.7, Contractor Records Retention, of
the other clauses of this contract. If this contract is completely or partially
terminated, the records relating to the work terminated shall be made available
for 3 years after any resulting final termination settlement. Records relating
to appeals under the disputes clause or to litigation or the settlement of
claims arising under or relating to this contract shall be made available until
such appeals, litigation, or claims are finally resolved.
(3) As used in this clause, records include books, documents, accounting
procedures and practices, and other data, regardless of type and regardless of
form. This does not require the Contractor to create or maintain any record
that the Contractor does not maintain in the ordinary course of business or
pursuant to a provision of law.
(d) Notwithstanding the requirements of the clauses in paragraphs (a), (b), (c)
or (d) of this clause, the Contractor is not required to include any FAR clause,
other than those listed below (and as may be required by an addenda to this
paragraph to establish the reasonableness of prices under Part 15), in a
subcontract for commercial items or commercial components--
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3
(1) 52.222-26, Equal Opportunity (E.O. 11246);
(2) 52.222-35, Affirmative Action for Special Disabled and Vietnam Era
Veterans (38 U.S.C. 2012(a));
(3) 52.222-36, Affirmative Action for Handicapped Workers (29 U.S.C. 793);
and
(4) 52.247-64, Preference for Privately Owned U.S.-Flag Commercial Vessels
(46 U.S.C. 1241) (flow down not required for subcontracts awarded beginning May
1, 1996).
<PAGE>
4
E. SOLICITATION PROVISIONS
E.1 INSTRUCTIONS TO OFFERORS--COMMERCIAL ITEMS (FAR 52.212-1) (JUN 1997) is
incorporated herein by reference.
*****************************************************************
ADDENDUM TO FAR 52.212-1 (E.1)
*****************************************************************
E.2 PERIOD FOR ACCEPTANCE OF OFFERS (A-FSS-12-C) (NOV 1997)
Paragraph (c) of the provision 52.212-1, Instructions to Offerors--Commercial
Items, is revised to read as follows: The Offeror agrees to hold the prices in
its offer firm for 180 calendar days from the date of the offer, within which
offer may be accepted.
E.3 CONSIDERATION OF OFFERS UNDER STANDING SOLICITATION (A-FSS-11) (NOV 1997)
(a) This solicitation is a standing solicitation from which the Government
contemplates award of contracts for supplies/services listed in the Schedule of
Items. This solicitation will remain in effect unless replaced by an updated
solicitation.
(b) There is no closing date for receipt of offers; therefore, offers may be
submitted for consideration at any time.
(c) An offer may be rejected if an Offeror fails to meet time frames
established by the Contracting Officer either to address deficiencies in the
offer or to submit a best and final offer. Resubmissions are permitted, however,
they may be rejected immediately if they are still deficient in the area(s) that
caused the initial rejection.
(d) Contracts awarded under this solicitation will be in effect for five years
from the date of award, unless further extended pursuant to clause I-FSS-164,
Option to Extend the Term of the Contract, canceled pursuant to the Cancellation
clause (I-FSS-690), or terminated pursuant to the termination provisions of the
contract.
<PAGE>
5
E.4 SUBMISSION OF OFFERS--ADDITIONAL INSTRUCTIONS
(CI-FCI-2) (DEC 1997)
Offerors are requested to submit:
(a) An original and one (1) copy of Standard Form 1449, together with all
addenda and attachments, complete in every respect, in hard copy (printed)
format. Both copies must be signed and dated.
(b) Two complete copies of the proposed FSS Information Technology Schedule
Pricelist, including all applicable Terms and Conditions. (See Attachment I
for format and content of proposed pricelist.)
(c) Two copies of the information required by paragraph (c) of GSAR clause
552.212-70 PREPARATION OF OFFER (MULTIPLE AWARD SCHEDULE), for each Special
Item Number (SIN) offered.
(d) REPAIR PARTS/SPARE PARTS PRICELIST
(1) Separate pricelists covering repair parts/spare parts for equipment
offered will not be submitted with offers, and no general distribution will be
made to ordering agencies. The Contractor, however, shall furnish his parts
pricelist for any equipment included in the contract if requested by the
Contracting Officer.
(2) Each Offeror shall submit a statement in his pricelist, under the
applicable Special Item Number for Repair Parts/Spare Parts, indicating the
effective date of the parts pricelist for billing under this contract, and the
discounts offered therefrom. The date of the parts pricelist specified in the
pricelist statement shall be no later than the beginning date of the contract
period, unless the contract has been modified in accordance with the clause
entitled "Economic Price Adjustment." Repair parts/spare parts shall be billed
in accordance with the above pricelist, or at any lower prices which have been
established. Any applicable discount shall be shown as a separate item on
invoices.
(e) Commercial Sales Practices. See clause CSP-1 COMMERCIAL SALES PRACTICES
FORMAT (paragraph G.4).
(f) If the Offeror is other than the manufacturer, (1) one signed copy of a
letter of commitment from the manufacturer which will assure the Offeror of
a source of supply sufficient to satisfy the Government's requirements for
the contract period, OR
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6
(2) other evidence that the Offeror will have an uninterrupted source of
supply from which to satisfy the Government's requirements for the contract
period. (See paragraph F.3 DEALERS AND SUPPLIERS.)
(g) One copy of a plan indicating how the Offeror intends to perform the sales
and after sales maintenance service within the minimum geographic scope of
the solicitation (the 48 contiguous States and the District of Columbia).
(h) A completed copy of the past performance evaluation form sent, by the
Offeror, to Dun & Bradstreet. See Attachment II.
(i) One copy of the information required by paragraph F.5 INFORMATION TECHNOLOGY
PROFESSIONAL SERVICES RESPONSIBLITY DETERMINATION, if applicable.
(j) Identification of and rationale for any and all exceptions and
clarifications taken from either the solicitation or the standard format
for the FSS Information Technology Schedule Pricelist (Attachment I).
(k) Small, Small Disadvantaged and Woman-Owned Small Business Subcontracting
Plan, if applicable.
E.5 PREPARATION OF OFFER (MULTIPLE AWARD SCHEDULE) (GSAR 552.212-70) (AUG 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
<PAGE>
7
SIN, if the information disclosed is the same for all products 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:
(1) 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.
<PAGE>
8
E.6 REQUIREMENTS FOR COST OR PRICING DATA OR INFORMATION OTHER THAN COST OR
PRICING DATA (FAR 52.215-20) (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) An offer prepared and submitted in accordance with the clause at
552.212-70, Preparation of Offer (Multiple Award Schedule);
(2) Commercial sales practices. The Offeror shall submit information in
the format provided in this solicitation in accordance with the instructions at
Table 515-1 of the GSA Acquisition Regulation; or submit information in the
Offeror's own format.
(3) 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.
(4) By submission of an offer in response to this solicitation, the Offeror
grants the Contracting Officer or an authorized representative the right to
examine, at any time before initial award, 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 Offeror's cost or profit
information or other data relevant solely to the Offeror's determination of the
prices to be offered in the catalog or marketplace.
E.7 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);
<PAGE>
9
(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.
E.8 IDENTIFICATION OF ENERGY-EFFICIENT OFFICE EQUIPMENT AND SUPPLIES CONTAINING
RECOVERED MATERIALS OR OTHER ENVIRONMENTAL ATTRIBUTES (GSAR 552.238-75)
(SEP 1994)
(a) Definitions. "Energy-efficient office equipment," as used in this clause,
-----------
means office equipment that, in representative use, provides equivalent or
better performance and value to users, but uses significantly less energy
than most functionally equivalent models.
"Recovered materials," as used in this clause, means waste material and by-
products which have been recovered or diverted from solid waste, but such term
does not include those materials and by-products generated from, and commonly
reused, within an original manufacturing process (42 U.S.C. 6903(19)). For
paper, it also includes postconsumer materials, and manufacturing and certain
other wastes. (42 U.S.C. 6962(h)).
"Remanufactured products," as used in this clause, means equipment or parts that
have been factory remanufactured or rebuilt to meet new equipment or part
performance specifications and have had no use subsequent to their
remanufacture.
(b) The Offeror shall identify in its offer and include in any commercial
catalogs and pricelists and any resultant Government catalogs or pricelists
submitted to the Contracting Officer, energy-efficient office equipment and
supplies that contain recovered material, remanufactured products, or other
environmental attributes. Examples of energy-efficient office equipment are
microcomputers and associated equipment that meet
<PAGE>
10
the requirements of the Environmental Protection Agency's (EPA's) Energy Star
Computers Program. Supplies that contain recovered materials and other
environmental attributes include, but are not limited to, products identified in
EPA procurement guidelines (40 CFR Subchapter I) and products that are either
degradable, ozone safe, recyclable, contain low volatile organic content
compounds, contribute to source reduction, or otherwise are designed or
manufactured to achieve environmental improvement. For example, an Offeror can
identify products that are safe or safer alternatives for more toxic or
hazardous products and products that can be substituted for ones manufactured
with toxic or hazardous materials. Such supplies shall satisfy the guidance
contained in 16 CFR Part 260, Guides for the Use of Environmental Marketing
Claims.
(c) An Offeror, in identifying an item with an environmental attribute, shall
possess evidence or rely upon a reasonable basis to substantiate the claim
(see 16 CFR 260.5). The Government will accept an Offeror's claim of an
item's environmental attribute on the basis of--
(1) Participation in a Federal agency sponsored program, e.g., EPA's Energy
Star Computers Program;
(2) Verification by an independent organization that specializes in
certifying such claims; or
(3) Possession of competent and reliable evidence. For any test, analysis,
research, study or other evidence to be "competent and reliable," it must have
been conducted and evaluated in an objective manner by persons qualified to do
so, using procedures generally accepted in the profession to yield accurate and
reliable results.
E.9 ENERGY EFFICIENT COMPUTER EQUIPMENT
All questions concerning the requirements and product qualifications under the
EPA's Energy Star Computers Program should be directed to:
EPA Energy Star Computers Program Manager
U.S. Environmental Protection Agency
Global Change Division (6202J)
401 M Street, SW
Washington, D.C. 20460
(202)233-9114 phone
(202)233-9578 fax
<PAGE>
11
F. EVALUATION
F.1 EVALUATION--COMMERCIAL ITEMS (MULTIPLE AWARD SCHEDULE)
(GSAR 552.212-73) (AUG 1997)
(a) The Government may make multiple awards for the supplies or services
offered in response to this solicitation that meet the definition of a
"commercial item" in FAR 52.202-1. Awards may be made to those responsible
Offerors that offer reasonable pricing, conforming to the solicitation, and will
be most advantageous to the Government, taking into consideration the
multiplicity and complexity of items of various manufacturers and the
differences in performance required to accomplish or produce required end
results, production and distribution facilities, price, compliance with delivery
requirements, and other pertinent factors. By providing a selection of
comparable supplies or services, ordering activities are afforded the
opportunity to fulfill their requirements with the item(s) that constitute the
best value and that meet their needs at the lowest overall cost.
(b) A written notice of award or acceptance of an offer, mailed or otherwise
furnished to the Offeror within the time for acceptance specified in the offer,
shall result in a binding contract without further action by either party.
Before the offer's specified expiration time, the Government may accept an offer
(or part of an offer), whether or not there are negotiations after its receipt,
unless a written notice of withdrawal is received before award.
F.2 PAST PERFORMANCE
In order to assist the Government in assessing an Offeror's past performance,
each company responding to this solicitation will be required to have Dun &
Bradstreet (D&B) complete a Past Performance Evaluation Report on that firm.
The request to D&B must be made prior to the submission of a proposal. Each
Offeror must submit, with its proposal, a completed copy of the past performance
evaluation form sent, by the Offeror, to Dun & Bradstreet. Any charges
associated with the Past Performance Evaluation Report will be paid by the
Offeror. See Attachment II.
<PAGE>
12
F.3 DEALERS AND SUPPLIERS (I-FCI-644) (OCT 1988)
If other than the manufacturer, the Offeror must submit prior to award of a
contract, either (1) a letter of commitment from the manufacturer which will
assure the Offeror of a source of supply sufficient to satisfy the Government's
requirements for the contract period, OR (2) evidence that the Offeror will have
an uninterrupted source of supply from which to satisfy the Government's
requirements for the contract period.
F.4 SALES AND SERVICE REQUIREMENTS
Sales and after-sales maintenance/repair service must be provided to, at a
minimum, the 48 contiguous States and the District of Columbia. The Offeror
must provide maintenance/repair service normally provided in the industry for
the type of products offered. The Offeror must provide (with its offer) a plan
as to how the Offeror will provide sales and after-sales service for the scope
of the contract.
F.5 INFORMATION TECHNOLOGY (IT) PROFESSIONAL SERVICES--PAST
PERFORMANCE/RESPONSIBILITY DETERMINATION
In addition to the Dun & Bradstreet requirement (see paragraph F.2), in order
for the Government to determine if the Offeror is responsible, the following
information is required:
(a) PAST PERFORMANCE
The Offeror must describe its corporate experience in IT Professional Services
over the past three (3) years. Describe three (3) projects, similar in size and
complexity to the effort of services categories offered in this contract. At
least two of the three examples shall have been completed in the last two years
and all three examples must have been completed in the last three years. All
three examples of IT Professional Services must have been found to be acceptable
by the client. At a minimum, the Offeror shall provide the following
information:
(1) Project/Contract Name;
(2) Project Description;
(3) Dollar Amount of Contract;
(4) Project Duration, which includes the original estimated completion
date and the actual completion date; and
(5) Point of Contact and Telephone Number.
<PAGE>
13
(b) ORGANIZATIONAL STRUCTURE
The Offeror shall describe the management and organization of the company with
respect to the IT Professional Services offered. The Offeror shall address the
following:
(1) History and overview of the organization;
(2) All organizational elements within the company which shall participate
in providing IT Professional Services (include a chart); and
(3) Financial Statement/Annual Report.
F.6 GOALS FOR SUBCONTRACTING PLAN (GSAR 552.219-74) (DEC 1995) (ALTERNATE I--
DEC 1995)
(a) Maximum practicable utilization of small, small disadvantaged, and women-
owned small business concerns as subcontractors is a matter of national
interest with both social and economic benefits.
(1) The General Services Administration's (GSA's) commitment to ensuring
that maximum practicable opportunity is provided to small, small disadvantaged,
and women-owned small business concerns to participate as subcontractors in the
performance of this contract, consistent with its efficient performance, must be
reflected in the Offeror's subcontracting plan submitted pursuant to the clause
of this contract at FAR 52.219-9, Small, Small Disadvantaged and Women-Owned
Small Business Subcontracting Plan.
(2) In addressing the eleven elements described at FAR 52.219-9(d), the
Offeror shall demonstrate that its subcontracting plan represents a creative and
innovative program for involving small, small disadvantaged, and women-owned
small business concerns in performing this contract. An Offeror submitting a
commercial products plan can demonstrate its commitment in providing maximum
practicable opportunities through subcontracting opportunities it provides to
small, small disadvantaged, and women-owned small business concerns that relate
to the Offeror's production generally; i.e., for both its commercial and
Government business.
(3) The subcontracting plan shall include a description of the Offeror's
subcontracting strategies used in previous contracts and significant
achievements, with an explanation of
<PAGE>
14
how this plan will build upon those earlier achievements. Additionally, the
Offeror shall demonstrate through its plan that it understands the small
business subcontracting program's objectives, GSA's expectations, and is
committed to taking those actions necessary to meet these goals or objectives.
(b) In determining the acceptability of any subcontracting plan, the
Contracting Officer will--
(1) Review the plan to verify that the Offeror has demonstrated an
understanding of the small business subcontracting program's objectives and
GSA's expectations with respect to the programs and has included all the
information, goals, and assurances required by FAR 52.219-9;
(2) Consider previous goals and achievements of Contractors in the same
industry;
(3) Consider information and potential sources obtained from agencies
administering national and local preference programs and other advocacy groups
in evaluating whether the goals stated in the plan adequately reflect the
anticipated potential for subcontracting to small, small disadvantaged, and
women-owned small business concerns; and
(4) Review the Offeror's description of its strategies, historical
performance and significant achievements in placing subcontracts for the same or
similar products or services with small, small disadvantaged, and women-owned
small business concerns. The Offeror's description can apply to commercial as
well as previous Government contracts.
(c) Failure to submit an acceptable subcontracting plan and/or correct
deficiencies in a plan within the time specified by the Contracting Officer
shall make the Offeror ineligible for award.
F.7 PREAWARD ON-SITE EQUAL OPPORTUNITY COMPLIANCE REVIEW
(FAR 52.222-24) (APR 1984) (FCI DEVIATION--DEC 1997)
An award in the amount of $10 million or more will not be made under this
solicitation unless the Offeror and each of its known first-tier subcontractors
(to whom it intends to award a subcontract of $10 million or more) are found, on
the basis of a compliance review, to be able to comply with the provisions of
the Equal Opportunity clause of this solicitation.
<PAGE>
15
G. OFFEROR SUPPIED INFORMATION
G.1 OFFEROR REPRESENTATIONS AND CERTIFICATIONS--COMMERCIAL ITEMS (FAR 52.212-
3) (JAN 1997) (FCI DEVIATION--DEC 1997)
(a) Definitions. As used in this provision:
"Small business concern" means a concern, including its affiliates, that is
independently owned and operated, not dominant in the field of operation in
which it is bidding on Government contracts, and qualified as a small business
under the criteria in 13 CFR Part 121 and size standards in this solicitation.
"Small disadvantaged business concern" means a small business concern that--
(1) Is at least 51 percent unconditionally owned by one or more individuals
who are both socially and economically disadvantaged, or a publicly owned
business, having at least 51 percent of its stock unconditionally owned by one
or more socially and economically disadvantaged individuals, and
(2) Has its management and daily business controlled by one or more such
individuals. This term also means a small business concern that is at least 51
percent unconditionally owned by an economically disadvantaged Indian tribe or
Native Hawaiian organization, or a publicly owned business having at least 51
percent of its stock unconditionally owned by one or more of these entities,
which has its management and daily business controlled by members of an
economically disadvantaged Indian tribe or Native Hawaiian organization and
which meets the requirements of 13 CFR Part 124.
"Women-owned small business concern" means a small business concern--
(1) Which is at least 51 percent owned by one or more women or, in the
case of any publicly owned business, at least 51 percent of the stock of which
is owned by one or more women; and
(2) Whose management and daily business operations are controlled by one
or more women.
<PAGE>
16
"Women-owned business concern" means a concern which is at least 51 percent
owned by one or more women; or in the case of any publicly owned business, at
least 51 percent of the stock of which is owned by one or more women; and whose
management and daily business operations are controlled by one or more women.
(b) Taxpayer identification number (TIN) (26 U.S.C. 6050M).
(1) Taxpayer Identification Number (TIN).
[ ] TIN: ______________________.
[ ] TIN has been applied for.
[ ] TIN is not required because:
[ ] Offeror is a nonresident alien, foreign corporation, or
foreign partnership that does not have income effectively connected with the
conduct of a trade or business in the U.S. and does not have an office or place
of business or a fiscal paying agent in the U.S.;
[ ] Offeror is an agency or instrumentality of a foreign
government;
[ ] Offeror is an agency or instrumentality of a Federal,
state, or local government;
[ ] Other. State basis. _____________________.
(2) Corporate Status.
[ ] Corporation providing medical and health care services, or
engaged in the billing and collecting of payments for such services;
[ ] Other corporate entity;
[ ] Not a corporate entity:
[ ] Sole proprietorship
[ ] Partnership
[ ] Hospital or extended care facility described in 26 CFR
501(c)(3) that is exempt from taxation under 26 CFR 501(a).
<PAGE>
17
(3) Common Parent.
[ ] Offeror is not owned or controlled by a common parent;
[ ] Name and TIN of common parent:
Name ________________________
TIN ________________________
(c) Offerors must complete the following representations when the resulting
contract is to be performed inside the United States, its territories or
possessions, Puerto Rico, the Trust Territory of the Pacific Islands, or the
District of Columbia. Check all that apply.
(1) Small business concern. The Offeror represents as part of its offer
that it [ ] is, [ ] is not a small business concern.
(2) Small disadvantaged business concern. The Offeror represents that it
[ ] is, [ ] is not a small disadvantaged business concern.
(3) Women-owned small business concern. The Offeror represents that it [ ]
is, [ ] is not a women-owned small business concern.
(d) Certifications and representations required to implement provisions of
Executive Order 11246--
(1) Certification of non-segregated facilities. (Applies only if the
contract amount is expected to exceed $10,000)--
By submission of this offer, the Offeror certifies that it does not and will not
maintain or provide for its employees, any facilities that are segregated on the
basis of race, color, religion, or national origin because of habit, local
custom, or otherwise and that it does not and will not permit its employees to
perform their services at any location where segregated facilities are
maintained. The Offeror agrees that a breach of this certification is a
violation of the Equal Opportunity clause in the contract.
<PAGE>
18
(2) Previous Contracts and Compliance. The Offeror represents that--
(i) It [ ] has, [ ] has not, participated in a previous contract or
subcontract subject to the Equal Opportunity clause of this solicitation, the
clause originally contained in Section 310 of Executive Order 10925, or the
clause contained in Section 201 of Executive Order 11114; and
(ii) It [ ] has, [ ] has not, filed all required compliance reports.
(3) Affirmative Action Compliance. The Offeror represents that--
(i) It [ ] has developed and has on file, [ ] has not developed and
does not have on file, at each establishment, affirmative action programs
required by rules and regulations of the Secretary of Labor (41 CFR Subparts 60-
1 and 60-2), or
(ii) It [ ] has not previously had contracts subject to the written
affirmative action programs requirement of the rules and regulations of the
Secretary of Labor.
(e) Certification Regarding Payments to Influence Federal Transactions (31
U.S.C. 1352). (Applies only if the contract is expected to exceed $100,000).
By submission of its offer, the Offeror certifies, to the best of its knowledge
and belief that no Federal appropriated funds have been paid or will be paid to
any person for influencing or attempting to influence an officer or employee of
any agency, a Member of Congress, an officer or employee of Congress or an
employee of a Member of Congress on his or her behalf in connection with the
award of any resultant contract.
(f) Certification Regarding Debarment, Suspension or Ineligibility for Award
(Executive Order 12549). The Offeror certifies, to the best of its knowledge
and belief, that--
(1) The Offeror and/or any of its principals [ ] are, [ ] are not
presently debarred, suspended, proposed for debarment, or declared ineligible
for the award of contracts by any Federal agency, and
<PAGE>
19
(2) [ ] Have, [ ] have not, within a three-year period preceding this
offer, been convicted of or had a civil judgment rendered against them for:
commission of fraud or a criminal offense in connection with obtaining,
attempting to obtain, or performing a Federal, state, or local government
contract or subcontract; violation of Federal or state antitrust statutes
relating to the submission of offers; or commission of embezzlement, theft,
forgery, bribery, falsification or destruction of records, making false
statements, tax evasion, or receiving stolen property; and [ ] are, [ ] are
not presently indicted for, or otherwise criminally or civilly charged by a
Government entity with, commission of any of these offenses.
G.2 TRADE AGREEMENTS ACT (GSAR 552.225-9) (DEC 1994)
(DEVIATION FAR 52.225-9)
(a) This clause implements the Trade Agreements Act of 1979 (19 U.S.C. 2501-
2582) by providing a preference for U.S. made end products, designated country
end products, Caribbean Basin country end products, Canadian end products or
Mexican end products over other products.
"Caribbean Basin country end products," as used in this clause, means an article
that: (1) is wholly the growth, product, or manufacture of a Caribbean Basin
country (as defined in section 25.401 of the Federal Acquisition Regulation
(FAR)), or (2) in the case of an article which consists in whole or in part of
materials from another country or instrumentality, has been substantially
transformed into a new and different article of commerce with a name, character,
or use distinct from that of the article or articles from which it was so
transformed. The term includes services (except transportation services)
incidental to its supply; provided that the value of those incidental services
does not exceed that of the product itself. It does not include service
contracts as such. The term excludes products that are excluded from duty free
treatment from Caribbean countries under the Caribbean Basin Economic Recovery
Act (19 U.S.C. 2703(b)). These exclusions presently consist of (i) textiles and
apparel articles that are subject to textile agreements; (ii) footwear,
handbags, luggage, flat goods, work gloves, and leather wearing apparel not
designated as eligible articles for the purpose of the Generalized System of
Preference under title V of the Trade Act of 1974; (iii) tuna, prepared or
preserved in any manner in airtight containers, (iv) petroleum, or any product
derived from petroleum; and (v) watches and watch parts (including cases,
bracelets and straps) of whatever type including, but not limited
<PAGE>
20
to, mechanical, quartz digital or quartz analog, if such watches or watch parts
contain any material that is the product of any country to which the Tariff
Schedule of the United States (TSUS) column 2 rates of duty apply.
"Designated country end product," as used in this clause, means an article that
(1) is wholly the growth, product, or manufacture of the designated country (as
defined in section 25.401 of the Federal Acquisition Regulation (FAR)), or (2)
in the case of an article which consists in whole or in part of materials from
another country or instrumentality, has been substantially transformed into a
new and different article of commerce with a name, character, or use distinct
from that of the article or articles from which it was so transformed. The term
includes services (except transportation services) incidental to its supply,
provided that the value of those incidental services does not exceed that of the
product itself. It does not include service contracts as such.
"Canadian end product," as used in this clause, means an article that (1) is
wholly the growth, product, or manufacture of Canada, or (2) in the case of an
article which consists in whole or in part of materials from another country or
instrumentality, has been substantially transformed in Canada into a new and
different article of commerce with a name, character, or use distinct from that
of the article or articles from which it was transformed. The term includes
services (except transportation services) incidental to its supply; provided,
that the value of those incidental services does not exceed that of the product
itself. It does not include service contracts as such.
"Mexican end product," as used in this clause, means an article that (1) is
wholly the growth, product, or manufacture of Mexico, or (2) in the case of an
article which consists in whole or in part of materials from another country or
instrumentality, has been substantially transformed in Mexico into a new and
different article of commerce with a name, character, or use distinct from that
of the article or articles from which it was so transformed. The term includes
services (except transportation services) incidental to its supply, provided
that the value of those incidental services does not exceed that of the product
itself. It does not include service contracts as such.
"End products," as used in this clause, means those articles, materials, and
supplies to be acquired under this contract for public use.
<PAGE>
21
"U.S. made end product," as used in this clause, means an article which (1) is
wholly the growth, product, or manufacture of the United States, or (2) in the
case of an article which consists in whole or in part of materials from another
country or instrumentality, has been substantially transformed in the United
States into a new and different article of commerce with a name, character, or
use distinct from that of the article or articles from which it was so
transformed.
"Nondesignated country end products," as used in this clause, means any end
product which is not a U.S. made end product, designated country end product,
Caribbean Basin Country end product, Canadian end product or Mexican end
product.
"United States," as used in this clause, means the United States, its
possessions, Puerto Rico, and any other place which is subject to its
jurisdiction, but does not include leased bases or trust territories.
(b) The Contractor agrees to deliver under this contract only U.S. made end
products, designated country end products, Caribbean Basin country end products,
Canadian end products or Mexican end products or, if a national interest waiver
is granted under section 302 of the Trade Agreements Act of 1979, nondesignated
country end products. Only if such waiver is granted may a nondesignated
country end product be delivered under this contract(s).
(c) Offers will be evaluated in accordance with the policies and procedures of
Part 25 of the FAR except that offers of U.S. made end products, designated
country end products, Caribbean Basin end products, Canadian end products or
Mexican end products shall be evaluated without the restrictions of the Buy
American Act or the Balance of Payments Program.
G.3 TRADE AGREEMENTS ACT CERTIFICATE (GSAR 552.225-8)
(JAN 1994)(DEVIATION FAR 52.225-8)
(a) The Offeror by signing this offer, certifies that each end product to be
delivered under this contract is a U.S. made end product, a designated
country end product, a Caribbean Basin country end product, a Canadian end
product, or a Mexican end product as defined in the clause entitled "Trade
Agreements Act" at 48 CFR 552.225-9.
(b) Offers will be evaluated in accordance with Subpart 25.4 of the Federal
Acquisition Regulation except that offers of U.S. made end products,
designated country end products, Caribbean
<PAGE>
22
Basin country end products, Canadian end products, or Mexican end products shall
be evaluated without the restrictions of the Buy American Act or the Balance of
Payments Program.
G.4 COMMERCIAL SALES PRACTICES FORMAT (CSP-1)
Name of Offeror:
SIN(s):
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. $_____________. State beginning and ending of the 12
month period. Beginning ______________ Ending ______________. 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 ____________ $___________; SIN_____________
$______________; SIN_______________ $_________________
(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 ______ 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
<PAGE>
23
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.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Column 1 Column 2 Column 3 Column 4 Column 5
Customer Discount Quantity/Volume FOB Term Concessions
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(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 $500,000. 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 manufacturer's name, address,
the manufacturer's 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
<PAGE>
24
(e) Manufacturer's List Price
(f) Dealer's/Reseller's percentage discount from List Price or net prices
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 faculty 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
<PAGE>
25
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.)
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 the 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 the FOB delivery term for each identified customer. (See FAR
47.3 for an explanation of FOB delivery terms.)
Column 5--Indicate concessions 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
<PAGE>
26
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 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.5 AUTHORIZED NEGOTIATORS
The Offeror represents that the following persons are authorized to negotiate on
its behalf with the Government in connection with this request for proposals:
[list names, titles, telephone numbers, FAX number, and (if applicable), E-Mail
address of the authorized negotiators].
The above may [ ], may not [ ] commit the company.
<PAGE>
27
G.6 CONTACT FOR CONTRACT ADMINISTRATION (G-FCI-900-A)
(DEC 1997)
(a) Offerors are required to designate a person to be contacted for prompt
contract administration.
NAME:
TITLE:
ADDRESS:
ZIP CODE:
TELEPHONE NO.: ( ) FAX NO.: ( )
------ ------
E-MAIL ADDRESS:
(b) 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:
ADDRESS:
ZIP CODE:
TELEPHONE NO.: ( ) FAX NO.: ( )
------ ------
E-MAIL ADDRESS:
INDUSTRIAL FUNDING FEE:
- -----------------------
NAME:
ADDRESS:
ZIP CODE:
TELEPHONE NO.: ( ) FAX NO.: ( )
------ ------
E-MAIL ADDRESS:
<PAGE>
28
G.7 ORDERING INFORMATION (GSAR 552.216-74)
(JUN 1994) (ALTERNATE II--JUN 1994)
(a) In accordance with the Placement of Orders clause of this solicitation, the
Offeror elects to receive orders placed by GSA's Federal Supply Service (FSS) by
either [ ] facsimile transmission or [ ] computer-to-computer Electronic Data
Interchange (EDI).
(b) An Offeror electing to receive computer-to-computer EDI is requested to
indicate below the name, address, and telephone number of the representative to
be contacted regarding establishment of an EDI interface.
(c) An Offeror electing to receive orders by facsimile transmission is
requested to indicate below the telephone number(s) for facsimile transmission
equipment where orders should be forwarded.
(d) For mailed orders, the Offeror is requested to include the postal mailing
address(es) where paper form orders should be mailed.
(e) Offerors marketing through dealers are requested to indicate below whether
those dealers will be participating in the proposed contract.
YES [ ] NO [ ]
If "yes" is checked, ordering information to be inserted above shall reflect
that in addition to Offeror's name, address, and facsimile transmission
telephone number, orders can be addressed to the Offeror's name, c/o nearest
local dealer. In this event, two copies of a list of participating dealers
shall accompany this offer, and shall also be included in Contractor's Federal
Supply Schedule Pricelist.
<PAGE>
29
G.8 CONTRACTOR'S REMITTANCE (PAYMENT) ADDRESS
(G-FSS-914-A) (SEP 1996)
Payment by electronic funds transfer (EFT) is the Government's preferred method
of payment. However, under certain conditions, the Government may elect to make
payment by check. The Offeror shall indicate below, the payment (remittance)
address to which Government checks should be mailed for payment of proper
invoices submitted under a resultant contract.
PAYMENT ADDRESS:
Offeror shall furnish by attachment to this solicitation, the payment addresses
of all authorized participating dealers placing orders and accepting payment by
check in the name of the Contractor in care of the dealer, if different from
their ordering addresses specified elsewhere in this solicitation. If a
dealer's ordering and remittance address differ, both must be furnished and
identified as such.
All Offerors are cautioned that if the remittance (payment) address shown on an
actual invoice differs from that shown above or on the attachment, the
remittance address(es) above or attached will govern. Payment to any other
address, except as provided for through (EFT) payment methods, will require an
administrative change to the contract.
PLEASE NOTE: All delivery orders placed against a Federal Supply Schedule
Contract are to be paid by the individual agency placing the order. Each
delivery order will cite the appropriate agency payment address, and proper
invoices should be sent to that address. Proper invoices should be sent to GSA
only for orders placed by GSA. Any other agency's invoices sent to GSA will
only delay your payment.
G.9 PLACE OF PERFORMANCE (FAR 52.215-6) (OCT 1997)
(a) The Offeror or respondent, in the performance of any contract resulting
from this solicitation, [ ] intends, [ ] does not intend [check applicable
block] to use one or more plants or facilities located at a different address
from the address of the Offeror or respondent as indicated in this proposal or
response to request for information.
<PAGE>
30
(b) If the Offeror or respondent checks "intends" in paragraph (a) of this
provision, it shall insert in the following spaces the required information:
NAME AND ADDRESS OF OWNER
PLACE OF PERFORMANCE (Street AND OPERATOR OF THE PLANT
Address, City, State, County, OR FACILITY IF OTHER THAN
Zip Code) OFFEROR OR RESPONDENT
G.10 Contractor Identification Number--Data Universal
Numbering System (DUNS) Number (FAR 52.204-6) (DEC 1996) (FCI DEVIATION--
DEC 1997)
(a) "contractor Identification Number," as used in this provision, means "Data
Universal Numbering System (DUNS) number," which is a nine-digit number
assigned by Dun and Bradstreet Information Services.
(b) Contractor identification is essential for the Government complying with
statutory contract reporting requirements. Therefore, the Offeror is requested
to enter below, the DUNS number which identifies the Offeror's name and address
exactly as stated in the offer.
(c) If the Offeror does not have a DUNS number, it should contact Dun and
Bradstreet directly to obtain one. A DUNS number will be provided immediately by
telephone at no charge to the Offeror.
For information on obtaining a DUNS number, the Offeror should call Dun and
Bradstreet at 1-800-333-0505. The Offeror should be prepared to provide the
following information:
(1) Company name.
(2) Company address.
(3) Company telephone number.
(4) Line of business.
(5) Chief executive officer/key manager.
<PAGE>
31
(6) Date the company was started.
(7) Number of people employed by the company.
(8) Company affiliation.
(d) Offerors located outside the United States may obtain the location and phone
number of the local Dun and Bradstreet Information services office from the
Internet Home Page at http://www.dbisna.com/dbis/customer/custlist.htm. If an
Offeror is unable to locate a local service center, it may send an e-mail to Dun
and Bradstreet at [email protected].
DUNS Number:
G.11 ELECTRONIC FORMAT
By signing its offer, the Offeror attests to the fact that there have been no
changes to the text of this solicitation, except as noted in the cover letter.
G.12 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 (FAR 52.222-48) (AUG 1996)
(a) The following certification shall be checked:
CERTIFICATION
The Offeror certifies [ ], does not certify [ ] that:
(1) The items of equipment to be serviced under this contract are
commercial items which are used regularly for other than Government purposes,
and are sold or traded by the Contractor in substantial quantities to the
general public in the course of normal business operations;
(2) The contract services are furnished at prices which are, or are based
on, established catalog or market prices for the maintenance, calibration,
and/or repair of certain information technology, scientific and medical and/or
office and business equipment. An "established catalog price" is a price
(including discount price) recorded in a catalog, pricelist, schedule, or
<PAGE>
32
other verifiable and established record that is regularly maintained by the
manufacturer or the Contractor and is either published or otherwise available
for inspection by customers. An "established market price" is a current price,
established in the course of ordinary and usual trade between buyers and sellers
free to bargain, which can be substantiated by data from sources independent of
the manufacturer or Contractor; and
(3) The Contractor utilizes the same compensation (wage and fringe
benefits) plan for all service employees performing work under the contract as
the Contractor uses for equivalent employees servicing the same equipment of
commercial customers.
(b) If a negative certification is made and a Service Contract Act wage
determination is not attached to the solicitation, the Contractor shall notify
the Contracting Officer as soon as possible.
(c) Failure to execute the certification in paragraph (a) of this clause or to
contact the Contracting Officer as required in paragraph (b) of this clause may
render the bid or offer nonresponsive.
G.13 COMPLIANCE WITH VETERANS EMPLOYMENT REPORTING REQUIREMENTS
(a) The Offeror represents that, if it is subject to the reporting requirements
of 38 U.S.C. 4212(d) (i.e. the VETS-100 report required by the Federal
Acquisition Regulation clause 52.222-37, Employment Reports on Disabled Veterans
and Veterans of the Vietnam Era), it has [ ], has not [ ] submitted the most
recent report required by 38 U.S.C. 4212(d).
(b) An Offeror who checks "has not" may not be awarded a contract until the
required reports are filed (31 U.S.C. 1354).
REVISION - AMENDMENT #2
<PAGE>
1
ATTACHMENT I
__________________
GUIDELINES FOR FORMAT AND CONTENT
OF
FEDERAL SUPPLY SERVICE
INFORMATION TECHNOLOGY SCHEDULE PRICELIST
The following pages contain information, instructions, and guidelines for
preparing the proposed hard copy Information Technology Schedule Pricelist. Two
copies of the proposed Information Technology Schedule Pricelist must be
submitted with your offer. Please Note: The proposed Information Technology
Schedule Pricelist should be submitted as a document separate from this
--------
Attachment.
These guidelines prescribe the format and content to be used to create the
Information Technology Schedule Pricelist. Offerors are advised to include only
----
those terms and conditions applicable to the Special Item Numbers (SINs) being
proposed.
NOTE: Instructions To Offerors, which are proceeded and followed by a double
asterisk (**), should NOT be included in the schedule pricelist.
---
The proposed Information Technology Schedule Pricelist must contain the
following information, as applicable to your proposal:
1. Pricelist Cover Page
2. Table of Contents
3. Information For Ordering Offices
4. Terms and Conditions Applicable to Leasing of General Purpose Commercial
Information Technology Equipment (Special Item Number 132-3)
5. Terms and Conditions Applicable to Purchase of General Purpose Commercial
Information Technology Equipment (Special Item Number 132-8)
6. Terms and Conditions Applicable to Maintenance, Repair Service and Repair
Parts/Spare Parts for Government-Owned General Purpose Commercial
Information Technology Equipment,
<PAGE>
2
(After Expiration of Guarantee/Warranty Provisions and/or When Required
Service is not Covered by Guarantee/Warranty Provisions) and for Leased
Equipment (Special Item Number 132-12)
7. Terms and Conditions Applicable to Term Software Licenses (Special Item
132-32), Perpetual Software Licenses (Special Item Number 132-33) and
Maintenance of Software (Special Item Number 132-34) for General Purpose
Commercial Information Technology Software
8. Terms and Conditions Applicable to Training Courses for General Purpose
Commercial Information Technology Equipment and Software (Special Item
Number 132-50)
9. 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)
10. Any descriptive information relating to the equipment and/or software
offered (subject to the approval of the Contracting Officer)
11. Products and Services Pricelist - should include, at a minimum, the
following:
a. Brand Name, Model and/or Catalog Number (as applicable)
b. Brief description of item
c. Government unit price (NET PRICE) for the product or service.
NOTE: Contractors should indicate if the equipment and/or software is
Energy Star compliant.
12. Blanket Purchase Agreements (BPAs).
13. Contractor Team Arrangements.
14. List of Service and Distribution Points, as applicable.
15. List of Participating Dealers, as applicable.
<PAGE>
3
**PRICELIST COVER PAGE**
AUTHORIZED FEDERAL SUPPLY SERVICE
INFORMATION TECHNOLOGY SCHEDULE PRICELIST
GENERAL PURPOSE COMMERCIAL INFORMATION TECHNOLOGY
EQUIPMENT, SOFTWARE AND SERVICES
**Provide a general description of the commodity offered, if desired.**
**List all applicable Special Item Numbers, FSC Classes and FPDS Codes from the
following lists:**
Special Item No. 132-3 Leasing of Equipment
Special Item No. 132-8 Purchase of Equipment
Special Item No. 132-12 Maintenance, Repair Service and Repair Parts/Spare
Parts
Special Item No. 132-32 Term Software Licenses
Special Item No. 132-33 Perpetual Software Licenses
Special Item No. 132-34 Maintenance of Software
Special Item No. 132-50 Training Courses
Special Item No. 132-51 Information Technology Professional Services
Special Item No. 132-52 Electronic Commerce Services
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 132-3 LEASING OF EQUIPMENT
- ------------------------------
SIN 132-8 PURCHASE OF EQUIPMENT
- -------------------------------
FSC CLASS 7010 - SYSTEM CONFIGURATION
- -------------------------------------
End User Computers/Desktop Computers
Professional Workstations
Servers
Laptop/Portable/Notebook Computers
Large Scale Computers
Optical and Imaging Systems
Other Systems Configuration Equipment, Not Elsewhere Classified
FSC CLASS 7025 - INPUT/OUTPUT AND STORAGE DEVICES
- -------------------------------------------------
Printers
Display
Graphics, including Video Graphics, Light Pens, Digitizers, Scanners, and
Touch Screens
<PAGE>
4
Network Equipment
Other Communications Equipment
Optical Recognition Input/Output Devices
Storage Devices including Magnetic Storage, Magnetic Tape Storage and
Optical Disk Storage
Other Input/Output and Storage Devices, Not Elsewhere Classified
FSC CLASS 7035 - ADP SUPPORT EQUIPMENT
- --------------------------------------
ADP Support Equipment
FSC Class 7042 - MINI AND MICRO COMPUTER CONTROL DEVICES
- --------------------------------------------------------
Microcomputer Control Devices
Telephone Answering and Voice Messaging Systems
FSC CLASS 7050 - ADP COMPONENTS
- -------------------------------
ADP Boards
FSC CLASS 5995 - CABLE, CORD, AND WIRE ASSEMBLIES: COMMUNICATIONS EQUIPMENT
- ---------------------------------------------------------------------------
Communications Equipment Cables
FSC CLASS 6015 - FIBER OPTIC CABLES
- -----------------------------------
Fiber Optic Cables
FSC CLASS 6020 - FIBER OPTIC CABLE ASSEMBLES AND HARNESSES
- ----------------------------------------------------------
Fiber Optic Cable Assemblies and Harnesses
FSC CLASS 6145 - WIRE AND CABLE, ELECTRICAL
- -------------------------------------------
Coaxial Cables
FSC Class 5805 - TELEPHONE AND TELEGRAPH EQUIPMENT
- --------------------------------------------------
Telephone Equipment
Audio and Video Teleconferencing Equipment
FSC CLASS 5810 - COMMUNICATIONS SECURITY EQUIPMENT AND COMPONENTS
- -----------------------------------------------------------------
Communications Security Equipment
FSC CLASS 5815 - TELETYPE AND FACSIMILE EQUIPMENT
- -------------------------------------------------
Facsimile Equipment (FAX)
FSC CLASS 5820 - RADIO AND TELEVISION COMMUNICATION EQUIPMENT, EXCEPT AIRBORNE
- ------------------------------------------------------------------------------
Two-Way Radio Transmitters/Receivers/Antennas
Broadcast Band Radio Transmitters/Receivers/Antennas
Microwave Radio Equipment/Antennas and Waveguides
Satellite Communications Equipment
<PAGE>
5
FSC CLASS 5821 - RADIO AND TELEVISION COMMUNICATION EQUIPMENT, AIRBORNE
- -------------------------------------------------------------- --------
Airborne Radio Transmitters/Receivers
FSC CLASS 5825 - RADIO NAVIGATION EQUIPMENT, EXCEPT AIRBORNE
- ------------------------------------------------------------
Radio Navigation Equipment/Antennas
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 transmissions,
including background music systems)
(NOTE: Pager Transmission 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 any of the following are offered under Special Item Number 132-
8.**
- - Special Physical, Visual, Speech, and Hearing Aid Equipment
- - Used Equipment
- - Installation (FPDS Code N070) for Equipment Offered
- - Deinstallation (FPDS N070)
- - Reinstallation (FPDS N070)
SIN 132-12 - MAINTENANCE OF EQUIPMENT, REPAIR SERVICE, AND REPAIR PARTS/SPARE
PARTS (FPDS Code J070 - Maintenance and Repair Service)(Repair Parts/Spare Parts
- - See FSC Class for basic equipment)
** Indicate if any of the following are offered.**
- - Maintenance
- - Repair Service
- - Repair Parts/Spare Parts
- - Third Party Maintenance
<PAGE>
6
SIN 132-32 - TERM SOFTWARE LICENSES
FSC CLASS 7030 - INFORMATION TECHNOLOGY SOFTWARE
- ------------------------------------------------
Large Scale Computers
Operating System Software
Application Software
Electronic Commerce (EC) Software
Utility Software
Communications Software
Core Financial Management Software
Ancillary Financial Systems Software
Special Physical, Visual, Speech, and Hearing Aid Software
Microcomputers
Operating System Software
Application Software
Electronic Commerce (EC) Software
Utility Software
Communications Software
Core Financial Management Software
Ancillary Financial Systems Software
Special Physical, Visual, Speech, and Hearing Aid Software
SIN 132-33 - PERPETUAL SOFTWARE LICENSES
FSC CLASS 7030 - INFORMATION TECHNOLOGY SOFTWARE
- ------------------------------------------------
Large Scale Computers
Operating System Software
Application Software
Electronic Commerce (EC) Software
Utility Software
Communications Software
Core Financial Management Software
Ancillary Financial Systems Software
Special Physical, Visual, Speech, and Hearing Aid Software
Microcomputers
Operating System Software
Application Software
Electronic Commerce (EC) Software
Utility Software
Communications Software
Core Financial Management Software
Ancillary Financial Systems Software
Special Physical, Visual, Speech, and Hearing Aid Software
REVISION - AMENDMENT #2
<PAGE>
7
SIN 132-34 - MAINTENANCE OF SOFTWARE
SIN 132-50 - TRAINING COURSES FOR INFORMATION TECHNOLOGY EQUIPMENT AND SOFTWARE
(FPDS Code U012)
SIN 132-51 - INFORMATION TECHNOLOGY (IT) PROFESSIONAL SERVICES
FPDS Code D301 IT Facility Operation and Maintenance
FPDS Code D302 IT Systems Development Services
FPDS Code D306 IT Systems Analysis Services
FPDS Code D307 Automated Information Systems Design and Integration Services
FPDS Code D308 Programming Services
FPDS Code D308 Millennium Conversion Services (Y2K)
FPDS Code D310 IT Backup and Security Services
FPDS Code D311 IT Data Conversion Services
FPDS Code D313 Computer Aided Design/Computer Aided Manufacturing (CAD/CAM)
Services
FPDS Code D316 IT Network Management Services
FPDS Code D317 Automated News Services, Data Services, or Other Information
Services
FPDS Code D399 Other Information Technology Services, Not Elsewhere
Classified
SIN 132-52 - ELECTRONIC COMMERCE (EC) SERVICES
FPDS Code D304 Value Added Network Services (VANs)
FPDS Code D304 E-Mail Services
FPDS Code D304 Internet Access Services
FPDS Code D304 Navigation Services
FPDS Code D399 Other Data Transmission Services, Not Elsewhere Classified -
Except "Voice" and Pager Services
NOTE: Electronic Commerce Services are not intended to supersede or be
substitute for any requirements of FTS2000.
**Indicate the following: Contractor's Name, Complete Address (including zip
code), Telephone Number (including area code) and Internet Address/Web Site.**
Contractor's Name
Complete Address, including Zip Code
Telephone Number, including Area Code
Internet Address/Web Site
<PAGE>
8
**Copy the following language, leaving appropriate blanks, as shown:**
CONTRACT nUMBER: ______________________________________
**will be furnished at time of award**
Period Covered by Contract: ___________________________________
**will be furnished at time
of award**
General Services Administration
Federal Supply Service
Pricelist current through Modification #____, dated _____.
Products and ordering information in this Authorized FSS Information Technology
Schedule Pricelist are also available on the GSA Advantage! System. Agencies
can browse GSA Advantage! by accessing the Federal Supply Service's Home Page
via the Internet at http://www.fss.gsa.gov/
**End of information to be included on the Cover Page of the Pricelist. Any
additional information to be included on this page is subject to approval by the
Contracting Officer.**
<PAGE>
9
**Table of Contents. The next page in the pricelist should be entitled "Table
------------------
of Contents," and should contain the basic sections of the pricelist, along with
corresponding page numbers for ease of use.**
**On a page entitled "Information For Ordering Offices," copy the language
indicated below, as consecutively numbered paragraphs, and provide appropriate
responses, where required.**
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 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
<PAGE>
10
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.**
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: ______________
Block 30: Type of Contractor - ____________________________
**Copy the applicable letter and corresponding language from the following
list**
A. Small Disadvantaged Business
B. Other Small Business
C. Large Business
G. Other Nonprofit Organization
L. Foreign Contractor
<PAGE>
11
Block 31: Woman-Owned Small Business - ________________
**Yes or No**
Block 36: Contractor's Taxpayer Identification Number (TIN)
_________________
4a. CAGE Code: _____________
4b. Contractor has/has not registered with the Central Contractor Registration
Database.
**Choose the appropriate language - has/has not - in the above sentence. (see
C.43).**
**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)
_____
_____
**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.**
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.
REVISION - AMENDMENT #2
<PAGE>
12
7. Discounts: Prices shown are NET Prices; Basic Discounts have been deducted.
a. Prompt Payment: ___% - ___ 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 are 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.**
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:
10. Small Requirements: The minimum dollar value of orders to be issued is
$_____.
**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.
<PAGE>
13
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 $25,000.
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 proceedures 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.]
<PAGE>
14
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 exceeding 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 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
<PAGE>
15
(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' catalogs/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, if the ordering office determines that it is appropriate.
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.
<PAGE>
16
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 or 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 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/TELECOMMUNICATION 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
<PAGE>
17
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) 487-4650.
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.
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 $100,000, 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 (l) Termination for the
Government'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'
<PAGE>
18
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 World Wide 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:
(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 incumpus items not currently covered by
the GSA Schedule contract.
<PAGE>
19
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
(a) As used in this clause, "Year 2000 compliant" means, with respect to
information technology, that the information technology 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,
to the extent that other information technology used in combination with
the information technology being acquired, properly exchanges date/time
data with it.
(b) The Contractor shall warrant that each hardware, software, and firmware
product delivered under this contract shall be able to accurately process
date time 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
products (e.g. hardware, software, firmware) used in combination with
products properly exchange date time 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 products as a system. The duration of this warranty and the remedies
available under this warranty shall include repair or replacement of any
product whose non-compliance is discovered and made known to the Contractor
in
REVISION - AMENDMENT #2
<PAGE>
20
writing within ninety (90) days after acceptance (installation is considered
acceptance). The Contractor may offer an extended warranty to the Government to
include repair or replacement of any product whose non-compliance is discovered
and made known to the Contractor in writing at any time prior to June 1, 2000,
or for a period of 6 months following acceptance (installation is considered
acceptance) whichever is later. 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.
<PAGE>
21
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."
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.
REVISION - AMENDMENT #2
<PAGE>
22
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>
23
TERMS AND CONDITIONS APPLICABLE TO
LEASING OF GENERAL PURPOSE COMMERCIAL
INFORMATION TECHNOLGY EQUIPMENT
(SPECIAL ITEM NUMBER 132-3)
1. STATEMENT
a. It is understood by all parties to this contract that this is a leasing
arrangement. In that regard, the Government, as lessee, anticipates fulfilling
the leasing agreement. The Government, upon issuance of the delivery order,
contemplates the use of the equipment for the life of the lease (N months as
specified in the delivery order). However, unless the ordering office has
funding which exceeds a Government fiscal year, the initial term of the leasing
agreement is from the date of the equipment acceptance through September 30 of
the fiscal year in which the order is placed.
b. Agencies are advised to follow the guidance provided in Federal
Acquisition Regulation (FAR) Subpart 7.4 Equipment Lease or Purchase, and the
guidelines provided in Federal Property Management Regulations (FPMR) 101-25.5
Guidelines for Making Purchase or Lease Determinations, in determining whether
equipment should be acquired by purchase or lease.
2. LEASING OPTIONS
The Government will consider proposals for leasing options which the Contractor
believes will have application in the Government. Only those vendor proposed
options which are considered to represent good value will be accepted. The
following leasing options are suggested :
a. Lease to Ownership (Capital Lease)
b. Lease with Option to Own (Operating Lease)
c. Lease of a Solution
3. ORDERS AND PERIODS OF LEASING ARRANGEMENTS
a. Orders placing equipment under a leasing arrangement must specify the
applicable leasing option under which the equipment is being leased.
b. Annual Funding. When annually appropriated funds are cited on an order
for leasing, the following applies:
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26
(1) Any lease executed by the Government shall be on the basis that the
known requirements exceed the initial leasing term of twelve (12) months, or the
remainder of the fiscal year. Due to funding constraints, however, the
Government cannot normally commit to a longer term at the commencement of the
lease. In order to permit the exercise of renewal options granted to the
Government under the lease, the total leasing term will be specified in the
delivery order. All orders for leasing shall remain in effect through September
30 of the fiscal year or the planned expiration date of the lease, whichever is
earlier, unless the Government exercises its rights hereunder to acquire title
to the equipment prior to the planned expiration date. Orders under the lease
shall not be deemed to obligate succeeding fiscal year's funds or to otherwise
commit the Government to a renewal.
(2) All orders for leasing automatically terminate on September 30 of the
contract term; however, ordering offices should notify the Contractor in writing
thirty (30) calendar days prior to the expiration of such orders as to the
Government's intent to renew. Such notice to renew shall not bind the
Government. The Government has the option to renew each year at the original
lease monthly charge in effect at the time the leasing order is placed, until
the completion of the leasing agreement. If the Government exercises its option
to renew, the leasing order, as renewed, shall include an option to renew until
the expiration of the leasing agreement.
c. Cross-year Funding Within Contract Period. Where an ordering office's
specific appropriation authority provides for funds in excess of a 12 month
(fiscal year) period, the ordering office may place an order for leasing under
this schedule contract for a period up to the expiration of the contract period,
notwithstanding the intervening fiscal years.
d. In recognition of the types of products on this Schedule and the potential
adverse impact to the Government's mission, the Government's quiet and peaceful
possession and unrestricted use of the equipment shall not be disturbed in the
event the equipment is sold by the Contractor, or in the event of bankruptcy of
the Contractor, corporate dissolution of the Contractor, or other event, so long
as the Government is not in default. The equipment shall remain in the
possession of the Government until the expiration of the lease. Any assignment,
sale, bankruptcy, or other transfer of the leased equipment by the Contractor
will not relieve the Contractor of its obligations to the Government, and will
not change the Government's duties or increase the burdens or risks imposed on
the Government.
<PAGE>
27
e. GSAR 552.232-23 Assignment of Claims is incorporated herein by reference
as part of this pricelist.
4. MAINTENANCE AND INSTALLATION
a. Maintenance and installation, when applicable, normally are not included
in the charge for leasing. The Government may obtain installation and/or
maintenance from the Contractor or from other sources, including Government
performed installation and/or maintenance.
b. When installation and/or maintenance is to be performed by the
Contractor, the payments, terms and conditions will be as stated in this
contract. Maintenance payments and terms and conditions during subsequent
renewal periods of this lease will be those of the prevailing GSA Schedule
contract in effect.
5. MONTHLY PAYMENTS
a. Prior to the placement of an order under this Special Item Number, the
Government ordering office and the Contractor must agree on a "base value" for
the products to be leased. For Lease to Ownership (Capital Lease) the base value
will be the contract purchase price (less any discounts). For Lease with Option
to Own (Operating Lease), the base value will be the contract purchase price
(less any discounts), less a mutually agreed upon residual value for the
products. The residual value will be used in the calculation of the original
lease payment, lease extension payments, and the purchase option price.
b. To determine the initial lease term payment, the Contractor agrees to
apply the negotiated lease factor to the agreed upon base value: _______________
______________________________________
For Example: Lease factor one (1) percent over the rate for the three
year (or other term) Treasury Bill (T-bill) at the most current U. S. Treasury
auction.
The lease payment may be calculated by using a programmed business
calculator or by using "rate" functions provided in commercial computer
spreadsheets (e.g., Lotus 1-2-3, Excel).
c. For any lease extension, the extension lease payment will be based on
the original residual value, in lieu of the purchase price. The ordering agency
and the Contractor shall agree on a new residual value based on the estimated
fair market price at the end of the extension. The formula to determine the
lease payment will be that in 5.b. above.
<PAGE>
28
d. The purchase option price will be the fair market value of the product. The
fair market value will not exceed the Base Value principal not paid (see Title
Acquisition Formula shown below), plus the residual value, plus the Financial
Cost for the Residual Value.
Financial Cost for Residual = R x (I x t)
WHERE: R = Residual Value
I = Annual Interest Rate
t = Term in months (T/12)
T = Term in years
In the event the Government desires, at any time, to acquire title to equipment
leased hereunder, the Government may make a one-time lump sum payment. Upon
request by the Government, the Contractor will provide a quotation of the lump
sum payment amount, in accordance with the following Title Acquisition Formula;
such quotation shall be effective only if the order is received by the
Contractor during the month of the applicable quotation.
TITLE ACQUISITION FORMULA =
| X - X |
-------------
| | + Residual Value
| [1 + RATE]/N | + Financial Cost for Residual
| ____________________ |
| RATE |
WHERE: X = Lease monthly charge
N = Number of months in original lease term less the number of full,
unabated lease monthly charges received by the Contractor prior to
exercise of option.
6. LEASE END/DISCONTINUANCE OPTIONS
Upon written notice, at least thirty (30) days prior to expiration of the lease
term, and provided the Government is not in default, the Government may:
a. exercise the purchase option set forth in the lease (5.d above);
b. enter into a new lease agreement (5.c above);
c. return the equipment to the Contractor at the expiration date of the lease
pursuant to paragraph 12.
<PAGE>
29
7. UPGRADES AND ADDITIONS
a. The Government may affix or install any accessory, addition, upgrade,
equipment or device on the equipment ("additions") provided that such additions:
(1) can be removed without causing material damage to the equipment;
(2) do not reduce the value of the equipment; and
(3) are obtained from or approved by the Contractor, and are not
subject to the interest of any third party other than the Contractor.
b. Any other additions may not be installed without the Contractor's prior
written consent. At the end of the lease term, the Government shall remove any
additions which:
(1) were not leased from the Contractor, and
(2) are readily removable without causing material damage or
impairment of the intended function, use, or value of the equipment, and restore
the equipment to its original configuration.
c. Any Additions which are not so removable will become the Contractor's
property (lien free).
8. RISK OF LOSS OR DAMAGE
The Government is relieved from all risk of loss or damage to the equipment
during periods of transportation, installation, and during the entire time the
equipment is in possession of the Government, except when loss or damage is due
to the fault or negligence of the Government. The Government shall assume risk
of loss or damage to the equipment during relocation unless the Contractor shall
undertake such relocation.
9. TITLE
Equipment shall always remain the property of the Contractor. The Government
shall have no right or interest in the equipment except as provided in this
leasing agreement and shall hold the equipment subject and subordinate to the
rights of the Contractor.
10. TAXES
The Contractor is responsible for all state and local taxes.
<PAGE>
30
11. DISCONTINUANCE AND TERMINATION
Notwithstanding the provisions of 3.b(1) and (2), equipment leased under this
agreement may be terminated at any time during a fiscal year in accordance with
FAR 52.212-4, paragraph (l) Termination for the Government's convenience.
12. RETURN OF EQUIPMENT
Within thirty (30) days after the date of expiration or termination of leasing
agreement, the Government shall, at its own risk and expense, have the equipment
packed for shipment in accordance with the Contractor's specifications and shall
return the equipment to the Contractor at the Contractor's facility nearest to
the Government location, in the same condition as when delivered, ordinary wear
and tear excepted.
Upon request by the Government and at the Government's expense, the Contractor
shall assist in the deinstallation and packing of equipment so terminated or
discontinued. Such services, if required, are outside the scope of the
contract.
<PAGE>
31
TERMS AND CONDITIONS APPLICABLE TO PURCHASE OF
GENERAL PURPOSE COMMERCIAL INFORMATION TECHNOLOGY EQUIPMENT
(SPECIAL ITEM NUMBER 132-8)
1. MATERIAL AND WORKMANSHIP
All equipment furnished hereunder must satisfactorily perform the function for
which it is intended.
2. ORDER
Written orders, EDI orders (GSA Advantage! and FACNET), credit card orders, and
orders placed under blanket purchase agreements (BPA) agreements shall be the
basis for purchase in accordance with the provisions of this contract. If time
of delivery extends beyond the expiration date of the contract, the Contractor
will be obligated to meet the delivery and installation date specified in the
original order.
For credit card orders and BPAs, telephone orders are permissible.
3. TRANSPORTATION OF EQUIPMENT
FOB DESTINATION. Prices cover equipment delivery to destination, for any
location within the geographic scope of this contract.
4. INSTALLATION AND TECHNICAL SERVICES
**NOTE: Contractors are to indicate in the pricelist whether the equipment is
self-installable.**
a. INSTALLATION. When the equipment provided under this contract is not
normally self-installable, the Contractor's technical personnel shall be
available to the Government, at the Government's location, to install the
equipment and to train Government personnel in the use and maintenance of the
equipment. The charges, if any, for such services are listed below, or in the
price schedule:
**NOTE: CONTRACTORS SHOULD PROVIDE COMMERCIAL PRACTICES FOR
INSTALLATION/DEINSTALLATION/REINSTALLATION FOR REVIEW AND POSSIBLE INCLUSION IN
THE CONTRACT.**
<PAGE>
32
b. OPERATING AND MAINTENANCE MANUALS. The Contractor shall furnish the
Government with one (1) copy of all operating and maintenance manuals which are
normally provided with the equipment being purchased.
5. INSPECTION/ACCEPTANCE
The Contractor shall only tender for acceptance those items that conform to the
requirements of this contract. The Government reserves the right to inspect or
test any equipment that has been tendered for acceptance. The Government may
require repair or replacement of nonconforming equipment at no increase in
contract price. The Government must exercise its postacceptance rights (1)
within a reasonable time after the defect was discovered or should have been
discovered; and (2) before any substantial change occurs in the condition of the
item, unless the change is due to the defect in the item.
6. WARRANTY
a. Unless specified otherwise in this contract, the Contractor's standard
commercial warranty as stated in the contract's commercial pricelist will apply
to this contract.
**Contractor is to insert commercial warranty clauses.**
b. The Contractor warrants and implies that the items delivered hereunder
are merchantable and fit for use for the particular purpose described in this
contract.
c. Limitation of Liability. Except as otherwise provided by an express or
implied warranty, the Contractor will not be liable to the Government for
consequential damages resulting from any defect or deficiencies in accepted
items.
d. If inspection and repair of defective equipment under this warranty will
be performed at the Contractor's plant, the address is as follows:
7. PURCHASE PRICE FOR ORDERED EQUIPMENT
The purchase price that the Government will be charged will be the Government
purchase price in effect at the time of order placement, or the Government
purchase price in effect on the installation date (or delivery date when
installation is not applicable), whichever is less.
<PAGE>
33
8. RESPONSIBILITIES OF THE CONTRACTOR
The Contractor shall comply with all laws, ordinances, and regulations (Federal,
State, City or otherwise) covering work of this character, and shall include all
costs, if any, of such compliance in the prices quoted in this offer.
9. TRADE-IN OF INFORMATION TECHNOLOGY EQUIPMENT
When an agency determines that Information Technology equipment will be
replaced, the agency shall follow the contracting policies and procedures in
the Federal Acquisition Regulation (FAR), the policies and procedures regarding
disposition of information technology excess personal property in the Federal
Property Management Regulations (FPMR) (41 CFR 101-43.6), and the policies and
procedures on exchange/sale contained in the FPMR (41 CFR part 101-46).
<PAGE>
34
TERMS AND CONDITIONS APPLICABLE TO MAINTENANCE, REPAIR
SERVICE AND REPAIR PARTS/SPARE PARTS FOR GOVERNMENT-OWNED
GENERAL PURPOSE COMMERCIAL INFORMATION TECHNOLOGY
EQUIPMENT (AFTER EXPIRATION OF GUARANTEE/WARRANTY
PROVISIONS AND/OR WHEN REQUIRED SERVICE IS NOT COVERED
BY GUARANTEE/WARRANTY PROVISIONS) AND FOR LEASED EQUIPMENT
(SPECIAL ITEM NUMBER 132-12)
1. SERVICE AREAS
a. The maintenance and repair service rates listed herein are applicable
to any Government location within a _____________ (**insert miles**) mile radius
of the Contractor's service points. If any additional charge is to apply
because of the greater distance from the Contractor's service locations, the
mileage rate or other distance factor shall be stated in paragraphs 7.d and 8.d
of this Special Item Number 132-12.
b. When repair services cannot be performed at the Government installation
site, the repair services will be performed at the Contractor's plant(s) listed
below:
2. MAINTENANCE ORDER
a. Agencies may use written orders, EDI orders, credit card orders, or
BPAs, for ordering maintenance under this contract. The Contractor shall confirm
orders within fifteen (15) calendar days from the date of receipt, except that
confirmation of orders shall be considered automatic for renewals for
maintenance (Special Item Number 132-12). Automatic acceptance of order renewals
for maintenance service shall apply for machines which may have been
discontinued from use for temporary periods of time not longer than 120 calendar
days. If the order is not confirmed by the Contractor as prescribed by this
paragraph, the order shall be considered to be confirmed by the Contractor.
b. The Contractor shall honor orders for maintenance for the duration of
the contract period or a lessor period of time, for the equipment shown in the
pricelist. Maintenance service shall commence on a mutually agreed upon date,
which will be written into the maintenance order. Maintenance orders shall not
---
be made effective before the expiration of any applicable
<PAGE>
35
maintenance and parts guarantee/warranty period associated with the purchase of
equipment. Orders for maintenance service shall not extend beyond the end of
the contract period.
c. Maintenance may be discontinued by the Government on thirty (30)
calendar days written notice, or shorter notice when agreed to by the
Contractor; such notice to become effective thirty (30) calendar days from the
date on the notification. However, the Government may extend the original
discontinuance date upon written notice to the Contractor, provided that such
notice is furnished at least ten (10) calendar days prior to the original
discontinuance date.
d. Annual Funding. When annually appropriated funds are cited on a
maintenance order, the period of maintenance shall automatically expire on
September 30th of the contract period, or at the end of the contract period,
whichever occurs first. Renewal of a maintenance order citing the new
appropriation shall be required, if maintenance is to continue during any
remainder of the contract period.
e. Cross-year Funding Within Contract Period. Where an ordering office's
specific appropriation authority provides for funds in excess of a 12 month,
fiscal year period, the ordering office may place an order under this schedule
contract for a period up to the expiration of the contract period,
notwithstanding the intervening fiscal years.
f. Ordering offices should notify the Contractor in writing thirty (30)
calendar days prior to the expiration of maintenance service, if maintenance is
to be terminated at that time. Orders for continued maintenance will be required
if maintenance is to be continued during the subsequent period.
3. REPAIR SERVICE AND REPAIR PARTS/SPARE PARTS ORDERS
a. Agencies may use written orders, EDI orders, credit card orders, blanket
purchase agreements (BPAs), or small order procedures for ordering repair
service and/or repair parts/spare parts under this contract. Orders for repair
service shall not extend beyond the end of the contract period.
b. When repair service is ordered, only one chargeable repairman shall be
dispatched to perform repair service, unless the ordering office agrees, in
advance, that additional repair personnel are required to effect repairs.
<PAGE>
36
4. LOSS OR DAMAGE
When the Contractor removes equipment to his establishment for repairs, the
Contractor shall be responsible for any damage or loss, from the time the
equipment is removed from the Government installation, until the equipment is
returned to such installation.
5. SCOPE
a. The Contractor shall provide maintenance for all equipment listed
herein, as requested by the Government agency during the contract term. Repair
service and repair parts/spare parts shall apply exclusively to the equipment
types/models within the scope of this Information Technology Schedule.
b. Equipment placed under maintenance service shall be in good operating
condition.
(1) In order to determine that the equipment is in good operating
condition, the equipment shall be subject to inspection by the Contractor,
without charge to the Government.
(2) Costs of any repairs performed for the purpose of placing the
equipment in good operating condition shall be borne by the Contractor, if the
equipment was under the Contractor's guarantee/warranty or maintenance
responsibility prior to the effective date of the maintenance order.
(3) If the equipment was not under the Contractor's responsibility, the
costs necessary to place the equipment in proper operating condition are to be
borne by the Government, in accordance with the provisions of Special Item
Number 132-12 (or outside the scope of this contract).
6. RESPONSIBILITIES OF THE GOVERNMENT
a. Government personnel shall not perform maintenance or attempt repairs to
equipment while such equipment is under the purview of a maintenance order,
unless agreed to by the Contractor.
b. Subject to security regulations, the Government shall permit access to
the equipment which is to be maintained or repaired.
<PAGE>
37
7. RESPONSIBILITIES OF THE CONTRACTOR
For equipment not covered by a maintenance contract or warranty, the
Contractor's repair service personnel shall complete repairs as soon as possible
after notification by the Government that service is required. Within the
service areas, this repair service should normally be done within 4 hours after
notification.
8. MAINTENANCE RATE PROVISIONS
a. The Contractor shall bear all costs of maintenance, including labor,
parts, and such other expenses as are necessary to keep the equipment in good
operating condition, provided that the required repairs are not occasioned by
fault or negligence of the Government.
b. REGULAR HOURS
The basic monthly rate for each make and model of equipment shall entitle the
Government to maintenance service during a mutually agreed upon nine (9) hour
principal period of maintenance, Monday through Friday, exclusive of holidays
observed at the Government location.
c. AFTER HOURS
Should the Government require that maintenance be performed outside of Regular
Hours, charges for such maintenance, if any, will be specified in the pricelist.
Periods of less than one hour will be prorated to the nearest quarter hour.
d. TRAVEL AND TRANSPORTATION
If any charge is to apply, over and above the regular maintenance rates, because
of the distance between the Government location and the Contractor's service
area, the charge will be:
**If there is no additional charge, indicate "none" in the space provided
above.**
<PAGE>
38
e. QUANTITY DISCOUNTS
Quantity discounts from listed maintenance service rates for multiple equipment
owned and/or leased by a Government agency are indicated below:
Quantity Range Discounts
-------------- ---------
________ Units ________%
________ Units ________%
________ Units ________%
9. REPAIR SERVICE RATE PROVISIONS
a. CHARGES. Charges for repair service will include the labor charge,
computed at the rates set forth below, for the time during which repairmen are
actually engaged in work, and, when applicable, the charge for travel or
transportation.
b. MULTIPLE MACHINES. When repairs are ordered by a Government agency on
two or more machines located in one or more buildings within walking distance of
each other, the charges will be computed from the time the repairman commences
work on the first machine, until the work is completed on the last machine. The
time required to go from one machine to another, or from one building to
another, will be considered actual work performance, and chargeable to the
Government, provided the time consumed in going between machines (or buildings)
is reasonable.
c. TRAVEL OR TRANSPORTATION
(1) AT THE CONTRACTOR'S SHOP
(a) When equipment is returned to the Contractor's shop for
adjustments or repairs which are not covered by the guarantee/warranty
provision, the cost of transportation, packing, etc., from the Government
location to the Contractor's plant, and return to the Government location, shall
be borne by the Government.
(b) The Government should not return defective equipment to the
Contractor for adjustments and repairs or replacement without his prior
consultation and instruction.
<PAGE>
39
(2) AT THE GOVERNMENT LOCATION (Within Established Service Areas)
When equipment is repaired at the Government location, and repair service rates
are established for service areas or zones, the listed rates are applicable to
any Government location within such service areas or zones. No extra charge,
time, or expense will be allowed for travel or transportation of repairmen or
machines to or from the Government office; such overhead is included in the
repair service rates listed.
(3) AT THE GOVERNMENT LOCATION (Outside Established Service Areas)
(a) The repair service rates listed for subparagraph (2) above
apply, except that a travel charge of _____ per mile for repairmen will apply to
the round-trip distance between the geographic limits of the applicable service
area and the Government location. Such charge will apply as an additional
charge, but it will be limited to one round trip for each request that is made
by the ordering activity for repair service, regardless of whether repairs are
performed at the Government location or at the Contractor's shop.
(b) When the overall travel charge computed at the above mileage
rate is unreasonable (considering the time required for travel, actual and
necessary transportation costs, and the allowable Government per diem rate for
each night the repairman is required to remain overnight at the Government
location), the Government shall have the option of reimbursing the Contractor
for actual costs, provided that the actual costs are reasonable and allowable.
The Contractor shall furnish the Government with a report of travel performed
and related expenses incurred. The report shall include departure and arrival
dates, times, and the applicable mode of travel.
d. LABOR RATES
(1) REGULAR HOURS
The Regular Hours repair service rates listed herein shall entitle the
Government to repair service during the period 8:00 a.m. to 5:00 p.m., Monday
through Friday, exclusive of holidays observed at the Government location.
There shall be no additional charge for repair service which was requested
during Regular Hours, but performed outside the Regular Hours defined above, at
the convenience of the Contractor.
<PAGE>
40
(2) AFTER HOURS
When the Government requires that repair service be performed outside the
Regular Hours defined above, except Sundays and Holidays observed at the
Government location, the After Hours repair service rates listed herein shall
apply. The Regular Hours rates defined above shall apply when repair service is
requested during Regular Hours, but performed After Hours at the convenience of
the Contractor.
(3) SUNDAYS AND HOLIDAYS
When the Government requires that repair service be performed on Sundays and
Holidays observed at the Government location, the Sundays and Holidays repair
service rates listed herein shall apply. When repair service is requested to be
performed during Regular Hours and/or After Hours, but is performed at the
convenience of the Contractor on Sundays or Holidays observed at the Government
location, the Regular Hours and/or After Hours repair service rates, as
applicable, shall apply.
REPAIR SERVICE RATES
--------------------
<TABLE>
<CAPTION>
REGULAR AFTER SUNDAYS AND
MINIMUM HOURS HOURS HOLIDAYS
LOCATION CHARGE* PER HOUR** PER HOUR** PER HOUR
- -------- ------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
CONTRACTOR'S SHOP ______ _________ _________ __________
GOVERNMENT LOCATION
(WITHIN ESTABLISHED
SERVICE AREAS) ______ _________ _________ __________
GOVERNMENT LOCATION
(OUTSIDE ESTABLISHED
SERVICE AREAS) ______ _________ _________ __________
</TABLE>
*MINIMUM CHARGES INCLUDE ___ FULL HOURS ON THE JOB.
**FRACTIONAL HOURS, AT THE END OF THE JOB, WILL BE PRORATED TO THE NEAREST
QUARTER HOUR.
10. REPAIR PARTS/SPARE PARTS RATE PROVISIONS
All parts, furnished as spares or as repair parts in connection with the repair
of equipment, unless otherwise indicated in this pricelist, shall be new,
standard parts manufactured by the equipment manufacturer. All parts shall be
furnished at prices indicated in the Contractor's commercial pricelist dated
______________, at a discount of ______% from such listed prices.
<PAGE>
41
11. GUARANTEE/WARRANTY--REPAIR SERVICE AND REPAIR PARTS/SPARE PARTS
a. REPAIR SERVICE
All repair work will be guaranteed/warranted for a period of _________________
**insert commercial warranty**.
b. REPAIR PARTS/SPARE PARTS
All parts, furnished either as spares or repairs parts will be
guaranteed/warranted for a period _________________ **insert commercial
warranty**.
12. INVOICES AND PAYMENTS
a. Maintenance Service
(1) Invoices for maintenance service shall be submitted by the
Contractor on a quarterly or monthly basis, after the completion of such period.
Maintenance charges must be paid in arrears (31 U.S.C. 3324). PROMPT PAYMENT
DISCOUNT, IF APPLICABLE, SHALL BE SHOWN ON THE INVOICE.
(2) Payment for maintenance service of less than one month's duration
shall be prorated at 1/30th of the monthly rate for each calendar day.
b. Repair Service and Repair Parts/Spare Parts
Invoices for repair service and parts shall be submitted by the Contractor as
soon as possible after completion of work. Payment under blanket purchase
agreements will be made quarterly or monthly, except where cash payment
procedures are used. Invoices shall be submitted separately to each Government
office ordering services under the contract. The cost of repair parts shall be
shown as a separate item on the invoice, and shall be priced in accordance with
paragraph #10, above. PROMPT PAYMENT DISCOUNT, IF APPLICABLE, SHALL BE SHOWN ON
THE INVOICE.
<PAGE>
42
TERMS AND CONDITIONS APPLICABLE TO
TERM SOFTWARE LICENSES (SPECIAL ITEM NUMBER 132-32),
PERPETUAL SOFTWARE LICENSES (SPECIAL ITEM NUMBER 132-33) AND
MAINTENANCE (SPECIAL ITEM NUMBER 132-34) OF GENERAL PURPOSE
COMMERCIAL INFORMATION TECHNOLOGY SOFTWARE
1. INSPECTION/ACCEPTANCE
The Contractor shall only tender for acceptance those items that conform to the
requirements of this contract. The Government reserves the right to inspect or
test any software that has been tendered for acceptance. The Government may
require repair or replacement of nonconforming software at no increase in
contract price. The Government must exercise its postacceptance rights (1)
within a reasonable time after the defect was discovered or should have been
discovered; and (2) before any substantial change occurs in the condition of the
software, unless the change is due to the defect in the software.
2. GUARANTEE/WARRANTY
a. Unless specified otherwise in this contract, the Contractor's standard
commercial guarantee/warranty as stated in the contract's commercial pricelist
will apply to this contract.
**Contractor is to insert commercial guarantee/warranty clauses.**
b. The Contractor warrants and implies that the items delivered hereunder
are merchantable and fit for use for the particular purpose described in this
contract.
c. Limitation of Liability. Except as otherwise provided by an express or
implied warranty, the Contractor will not be liable to the Government for
consequential damages resulting from any defect or deficiencies in accepted
items.
3. TECHNICAL SERVICES
The Contractor, without additional charge to the Government, shall provide a hot
line technical support number _______________ for the purpose of providing user
assistance and guidance in the implementation of the software. The technical
support number is available from ___________ to ___________.
**Provide telephone number and hours of operation for technical support hot
line; indicate applicable time zone for the hours of operation--i.e., Eastern
time, Central time, Mountain time or Pacific time.**
<PAGE>
43
4. SOFTWARE MAINTENANCE
a. Software maintenance service shall include the following:
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
b. Invoices for maintenance service shall be submitted by the Contractor on
a quarterly or monthly basis, after the completion of such period. Maintenance
charges must be paid in arrears (31 U.S.C. 3324). PROMPT PAYMENT DISCOUNT, IF
APPLICABLE, SHALL BE SHOWN ON THE INVOICE.
5. PERIODS OF TERM LICENSES (132-32) AND MAINTENANCE (132-34)
a. The Contractor shall honor orders for periods for the duration of the
contract period or a lessor period of time.
b. Term licenses and/or maintenance may be discontinued by the Government
on thirty (30) calendar days written notice to the Contractor.
c. Annual Funding. When annually appropriated funds are cited on an order
for term licenses and/or maintenance, the period of the term licenses and/or
maintenance shall automatically expire on September 30 of the contract period,
or at the end of the contract period, whichever occurs first. Renewal of the
term licenses and/or maintenance orders citing the new appropriation shall be
required, if the term licenses and/or maintenance is to be continued during any
remainder of the contract period.
d. Cross-Year Funding Within Contract Period. Where an ordering office's
specific appropriation authority provides for funds in excess of a 12 month
(fiscal year) period, the ordering office may place an order under this schedule
contract for a period up to the expiration of the contract period,
notwithstanding the intervening fiscal years.
e. Ordering offices should notify the Contractor in writing thirty (30)
calendar days prior to the expiration of an order, if the term licenses and/or
maintenance is to be terminated at that time. Orders for the continuation of
term licenses and/or maintenance will be required if the term licenses and/or
maintenance is to be continued during the subsequent period.
<PAGE>
44
**The phrase, "Term Licenses and/or Maintenance" in the preceding paragraphs may
need to be revised in order to be consistent with the Offeror's proposal; e.g.,
if only software maintenance is offered, all references to "term licenses"
should be deleted from the preceding paragraphs.**
6. CONVERSION FROM TERM LICENSE TO PERPETUAL LICENSE
a. The Government may convert term licenses to perpetual licenses for any
or all software at any time following acceptance of software. At the request of
the Government the Contractor shall furnish, within ten (l0) calendar days, for
each software product that is contemplated for conversion, the total amount of
conversion credits which have accrued while the software was on a term license
and the date of the last update or enhancement.
b. Conversion credits which are provided shall, within the limits
specified, continue to accrue from one contract period to the next, provided the
software remains on a term license within the Government.
c. The term license for each software product shall be discontinued on the
day immediately preceding the effective date of conversion from a term license
to a perpetual license.
d. The price the Government shall pay will be the perpetual license price
that prevailed at the time such software was initially ordered under a term
license, or the perpetual license price prevailing at the time of conversion
from a term license to a perpetual license, whichever is the less, minus an
amount equal to __________% of all term license payments during the period that
the software was under a term license within the Government.
7. TERM LICENSE CESSATION
a. After a software product has been on a continuous term license for a
period of ___________ * months, a fully paid-up, non-exclusive, perpetual
license for the software product shall automatically accrue to the Government.
The period of continuous term license for automatic accrual of a fully paid-up
perpetual license does not have to be achieved during a particular fiscal year;
it is a written Contractor commitment which continues to be available for
software that is initially ordered under this contract, until a fully paid-up
perpetual license accrues to the Government. However, should the term license
of the software be discontinued before the specified period of the continuous
term license has been satisfied, the perpetual license accrual shall be
forfeited.
<PAGE>
45
**Each separately priced software product shall be individually enumerated, if
different accrual periods apply for the purpose of perpetual license
attainment.**
b. The Contractor agrees to provide updates and maintenance service for the
software after a perpetual license has accrued, at the prices and terms of
Special Item Number l32-34, if the licensee elects to order such services. Title
to the software shall remain with the Contractor.
8. UTILIZATION LIMITATIONS - (132-32, 132-33, AND 132-34)
a. Software acquisition is limited to commercial computer software defined
in FAR Part 2.101.
b. When acquired by the Government, commercial computer software and
related documentation so legend shall be subject to the following:
(1) Title to and ownership of the software and documentation shall remain
with the Contractor, unless otherwise specified.
(2) Software licenses are by site and by agency. An agency is defined as a
cabinet level or independent agency. The software may be used by any
subdivision of the agency (service, bureau, division, command, etc.) that has
access to the site the software is placed at, even if the subdivision did not
participate in the acquisition of the software. Further, the software may be
used on a sharing basis where multiple agencies have joint projects that can be
satisfied by the use of the software placed at one agency's site. This would
allow other agencies access to one agency's database. For Government public
domain databases, user agencies and third parties may use the computer program
to enter, retrieve, analyze and present data. The user agency will take
appropriate action by instruction, agreement, or otherwise, to protect the
Contractor's proprietary property with any third parties that are permitted
access to the computer programs and documentation in connection with the user
agency's permitted use of the computer programs and documentation. For purposes
of this section, all such permitted third parties shall be deemed agents of the
user agency.
REVISION - AMENDMENT #1
<PAGE>
46
(3) Except as is provided in paragraph 8.b(2) above, the Government shall
not provide or otherwise make available the software or documentation, or any
portion thereof, in any form, to any third party without the prior written
approval of the Contractor. Third parties do not include prime Contractors,
subcontractors and agents of the government who have the Government's
permission to use the licensed software and documentation at the facility, and
who have agreed to use the licensed software and documentation only in
accordance with these restrictions. This provision does not limit the right of
the Government to use software, documentation, or information therein, which the
Government may already have or obtains without restrictions.
(4) The Government shall have the right to use the computer software and
documentation with the computer for which it is acquired at any other facility
to which that computer may be transferred, or in cases of disaster recovery, the
Government has the right to transfer the software to another site if the
Government site for which it is acquired is deemed to be unsafe for Government
personnel; to use the computer software and documentation with a backup computer
when the primary computer is inoperative; to copy computer programs for
safekeeping (archives) or backup purposes; to transfer a copy of the software to
another site for purposes of benchmarking new hardware and/or software; and to
modify the software and documentation or combine it with other software,
provided that the unmodified portions shall remain subject to these
restrictions.
(5) "Commercial Computer Software" may be marked with the Contractor's
standard commercial restricted rights legend, but the schedule contract and
schedule pricelist, including this clause, "Utilization Limitations" are the
only governing terms and conditions, and shall take precedence and supersede
any different or additional terms and conditions included in the standard
commercial legend.
9. SOFTWARE CONVERSIONS - (132-32 AND 132-33)
Full monetary credit will be allowed to the Government when conversion from one
version of the software to another is made as the result of a change in
operating system, or from one computer system to another. Under a perpetual
license (132-33), the purchase price of the new software shall be reduced by the
amount that was paid to purchase the earlier version. Under a term license
(132-32), conversion credits which accrued while the earlier version was under a
term license shall carry forward and remain available as conversion credits
which may be applied towards the perpetual license price of the new version.
<PAGE>
47
10. DESCRIPTIONS AND EQUIPMENT COMPATIBILITY
The Contractor shall include, in the schedule pricelist, a complete description
of each software product and a list of equipment on which the software can be
used. Also, included shall be a brief, introductory explanation of the modules
and documentation which are offered.
11. RIGHT-TO-COPY PRICING
The Contractor shall insert the discounted pricing for right-to-copy licenses.
<PAGE>
49
TERMS AND CONDITIONS APPLICABLE TO PURCHASE OF
TRAINING COURSES FOR GENERAL PURPOSE COMMERCIAL
INFORMATION TECHNOLOGY EQUIPMENT AND SOFTWARE
(SPECIAL ITEM NUMBER 132-50)
1. SCOPE
a. The Contractor shall provide training courses normally available
to commercial customers, which will permit Government users to make full,
efficient use of general purpose commercial IT products. Training is restricted
to training courses for those products within the scope of this solicitation.
b. The Contractor shall provide training at the Contractor's facility
and/or at the Government's location, as agreed to by the Contractor and the
Government.
2. ORDER
Written orders, EDI orders (GSA Advantage! and FACNET), credit card orders, and
orders placed under blanket purchase agreements (BPAs) shall be the basis for
the purchase of training courses in accordance with the terms of this contract.
Orders shall include the student's name, course title, course date and time, and
contracted dollar amount of the course.
3. TIME OF DELIVERY
The Contractor shall conduct training on the date (time, day, month, and year)
agreed to by the Contractor and the Government.
4. CANCELLATION AND RESCHEDULING
a. The Government will notify the Contractor at least seventy-two
(72) hours before the scheduled training date, if a student will be unable to
attend. The Contractor will then permit the Government to either cancel the
order or reschedule the training at no additional charge. In the event the
training class is rescheduled, the Government will modify its original training
order to specify the time and date of the rescheduled training class.
b. In the event the Government fails to cancel or reschedule a
training course within the time frame specified in paragraph a, above, the
Government will be liable for the
<PAGE>
50
contracted dollar amount of the training course. The Contractor agrees to
permit the Government to reschedule a student who fails to attend a training
class within ninety (90) days from the original course date, at no additional
charge.
c. The Government reserves the right to substitute one student for
another up to the first day of class.
d. In the event the Contractor is unable to conduct training on the
date agreed to by the Contractor and the Government, the Contractor must notify
the Government at least seventy-two (72) hours before the scheduled training
date.
5. FOLLOW-UP SUPPORT
The Contractor agrees to provide each student with unlimited telephone support
for a period of one (1) year from the completion of the training course. During
this period, the student may contact the Contractor's instructors for refresher
assistance and answers to related course curriculum questions.
6. PRICE FOR TRAINING
The price that the Government will be charged will be the Government training
price in effect at the time of order placement, or the Government price in
effect at the time the training course is conducted, whichever is less.
7. INVOICES AND PAYMENT
Invoices for training shall be submitted by the Contractor after Government
completion of the training course. Charges for training must be paid in arrears
(31 U.S.C. 3324). PROMPT PAYMENT DISCOUNT, IF APPLICABLE, SHALL BE SHOWN ON THE
INVOICE.
8. FORMAT AND CONTENT OF TRAINING
a. The Contractor shall provide written materials (i.e., manuals,
handbooks, texts, etc.) normally provided with course offerings. Such
documentation will become the property of the student upon completion of the
training class.
b. **If applicable** For hands-on training courses, there must be a
one-to-one assignment of IT equipment to students.
c. The Contractor shall provide each student with a Certificate of
Training at the completion of each training course.
<PAGE>
51
d. The Contractor shall provide the following information for each
training course offered:
(1) The course title and a brief description of the course content,
to include the course format (e.g., lecture, discussion, hands-on training);
(2) The length of the course;
(3) Mandatory and desirable prerequisites for student enrollment;
(4) The minimum and maximum number of students per class;
(5) The locations where the course is offered;
(6) Class schedules; and
(7) Price (per student, per class (if applicable)).
e. For those courses conducted at the Government's location, instructor
travel charges (if applicable), including mileage and daily living expenses,
must be indicated below. Rates paid as a result of travel must comply with the
Federal Travel Regulation or Joint Travel Regulations, as applicable, in effect
on the date(s) the travel is performed. Contractors cannot use GSA city pair
contracts.
9. "NO CHARGE" TRAINING
The Contractor shall describe any training provided with equipment and/or
software provided under this contract, free of charge, in the space provided
below.
<PAGE>
52
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 are 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 Item Numbers (SINs) within a Schedule. GSA has established
special ordering procedures for IT professional services (SIN 132-51) 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.
<PAGE>
53
(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.
(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.
<PAGE>
54
(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 limitation 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.
(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 -
<PAGE>
55
(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 BPA: 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.
(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
<PAGE>
56
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 the micro-purchase threshold. Ordering
offices can place orders at or below the micro-purchase threshold with any
Federal Supply Schedule Contractor.
(2) Orders exceeding 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 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 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--
<PAGE>
57
(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.
(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.
<PAGE>
58
(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 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 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.
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 Agency should include the criteria for satisfactory completion for
each task in the Statement of Work or Delivery Order. Services shall be
completed in a good and workmanlike manner.
REVISION - AMENDMENT #1
<PAGE>
59
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 date(s) 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 SERVICES
The Inspection of ServicesFixed Price (AUG 1996) clause at FAR 52.246-4 applies
to firm-fixed price orders placed under this contract. The InspectionTime-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.
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.
<PAGE>
60
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.
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 52.232-7 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.
<PAGE>
61
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 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:
<PAGE>
62
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
<PAGE>
63
**Include the following in the proposed FSS IT Schedule Pricelist.**
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, mentor-protege programs, joint ventures, teaming arrangements,
and subcontracting.
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>
64
**Include the following SUGGESTED Blanket Purchase Agreement (BPA) format in the
---------
proposed FSS IT Schedule Pricelist.**
BEST VALUE
BLANKET PURCHASE AGREEMENT
FEDERAL SUPPLY SCHEDULE
(Insert Customer Name)
In the spirit of the Federal Acquisition Streamlining Act (Agency) and
-------------
(Contractor) enter into a cooperative agreement to further reduce the
- -------------------
administrative costs of acquiring commercial items from the General Services
Administration (GSA) Federal Supply Schedule Contract(s) ____________________.
Federal Supply Schedule contract BPAs eliminate contracting and open market
costs such as: search for sources; the development of technical documents,
solicitations and the evaluation of offers. Teaming Arrangements are permitted
with Federal Supply Schedule Contractors in accordance with Federal Acquisition
Regulation (FAR) 9.6.
This BPA will futher decrease costs, reduce paperwork, and save time by
eliminating the need for repetitive, individual purchases from the schedule
contract. The end result is to create a purchasing mechanism for the Government
that works better and costs less.
Signatures
AGENCY DATE CONTRACTOR DATE
<PAGE>
65
BPA NUMBER_____________
(CUSTOMER NAME)
BLANKET PURCHASE AGREEMENT
Pursuant to GSA Federal Supply Schedule Contract Number(s)____________, Blanket
Purchase Agreements, the Contractor agrees to the following terms of a Blanket
Purchase Agreement (BPA) EXCLUSIVELY WITH (Ordering Agency):
------------------
(1) The following contract items can be ordered under this BPA. All orders
placed against this BPA are subject to the terms and conditions of the contract,
except as noted below:
MODEL NUMBER/PART NUMBER *SPECIAL BPA DISCOUNT/PRICE
(2) Delivery:
DESTINATION DELIVERY SCHEDULE/DATES
(3) The Government estimates, but does not guarantee, that the volume of
purchases through this agreement will be ______________.
(4) This BPA does not obligate any funds.
(5) This BPA expires on _________________ or at the end of the contract period,
whichever is earlier.
(6) The following office(s) is hereby authorized to place orders under this
BPA:
OFFICE POINT OF CONTACT
(7) Orders will be placed against this BPA via Electronic Data Interchange
(EDI), FAX, or paper.
(8) Unless otherwise agreed to, all deliveries under this BPA must be
accompanied by delivery tickets or sales slips that must contain the following
information as a minimum:
<PAGE>
66
(a) Name of Contractor;
(b) Contract Number;
(c) BPA Number;
(d) Model Number or National Stock Number (NSN);
(e) Purchase Order Number;
(f) Date of Purchase;
(g) Quantity, Unit Price, and Extension of Each Item (unit prices and
extensions need not be shown when incompatible with the use of automated
systems; provided, that the invoice is itemized to show the information); and
(h) Date of Shipment.
(9) The requirements of a proper invoice are specified in the Federal Supply
Schedule contract. Invoices will be submitted to the address specified within
the purchase order transmission issued against this BPA.
(10) The terms and conditions included in this BPA apply to all
purchases made pursuant to it. In the event of an inconsistency between the
provisions of this BPA and the Contractor's invoice, the provisions of this BPA
will take precedence.
<PAGE>
67
**Include the following language regarding Contractor Team Arrangements in the
proposed FSS IT Schedule Pricelist.**
BASIC GUIDELINES FOR USING
"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.
These Team Arrangements can be included under a Blanket Purchase Agreement
(BPA). BPAs are permitted under all Federal Supply Schedule contracts.
Orders under a Team Arrangement are subject to terms and conditions or the
--------------------
Federal Supply Schedule Contract.
Participation in a Team Arrangement is limited to Federal Supply Schedule
Contractors.
Customers should refer to FAR 9.6 for specific details on Team Arrangements.
Here is a general outline on how it works:
* The customer identifies their requirements.
* Federal Supply Schedule Contractors may individually meet the customers
needs, or -
* Federal Supply Schedule Contractors may individually submit a Schedules
"Team Solution" to meet the customer's requirement.
* Customers make a best value selection.
<PAGE>
68
ATTACHMENT II
PAST PERFORMANCE EVALUATION REPORT
BY DUN & BRADSTREET
_______________________________________
FAX REQUEST TO: Lori Pinkerton
Dun & Bradstreet Information Services
FAX Number: 610/807-1075
Attn: Past Performance Evaluation Fulfillment
SECTION ONE
ABOUT YOUR COMPANY
------------------
Please prepare and distribute a Past Performance Evaluation Report on my
company, as listed below:
Company Name:
Address:
City/State/Zip:
Phone Number:
FAX Number:
Point of Contact:
SECTION TWO
THE RECEIPIENT OF THE INFORMATION
---------------------------------
Provide one copy of the Past Performance Evaluation Report on my company to the
following:
General Services Administration
Federal Supply Service/FCI
ADP Acquisition Center
Crystal Mall #4; Room 1017
1941 Jefferson Davis Highway
Arlington, VA 22202
Attn: Past Performance Report
<PAGE>
69
SECTION THREE
PAYMENT INFORMATION
-------------------
[ ] Bill to my Credit Card:
[ ] American Express
[ ] Visa
[ ] Mastercard
Card Number:
Expiration Date:
Signature
of Card Holder:
[ ] Payment Enclosed - See attached check.
[ ] Bill Me - Send invoice to the address shown in Section One.
I agree to pay $125 for the preparation/distribution of my Past Performance
Evaluation Report, a copy of which will be provided both to my company and the
company identified in Section Two above.
QUESTIONS? Call 800/999-3867 x7862, and ask for information about the Past
Performance Evaluation Report. Also, more information on Past Performance
Evaluations performed by D&B can be accessed in the Internet at
http://www.dnb.com.
This Form is for ordering a Past Performance Evaluation Report as required by
GSA. A Past Performance Evaluation Report will be sent directly to GSA for a
fee of $125. Past Performance Evaluation Reports are furnished subject to the
following conditions:
1. you understand that the report requested us to be sent directly to GSA and
to you;
2. you understand that D&B does not guarantee or warrant the information and
you agree that even if D&B is negligent in preparing the information, D&B
shall not be liable to you or your company or business for any loss
resulting from reliance on it;
3. if for any reason a court holds D&B liable based on reliance of the
information, the amount of such liability shall not exceed $10,000.
The information provided to and received by D&B may be maintained by D&B, but
D&B will never sell the information.
<PAGE>
70
PAST PERFORMANCE EVALUATION REPORT
----------------------------------
Please provide 20 of Your Customers to be Surveyed
Customer Name:
Name of Contract:
City/State: Phone:
Customer Name:
Name of Contract:
City/State: Phone:
Customer Name:
Name of Contract:
City/State: Phone:
Customer Name:
Name of Contract:
City/State: Phone:
Customer Name:
Name of Contract:
City/State: Phone:
Customer Name:
Name of Contract:
City/State: Phone:
Customer Name:
Name of Contract:
City/State: Phone:
REFERENCE: GSA ITS MAS
<PAGE>
71
Customer Name:
Name of Contract:
City/State: Phone:
Customer Name:
Name of Contract:
City/State: Phone:
Customer Name:
Name of Contract:
City/State: Phone:
Customer Name:
Name of Contract:
City/State: Phone:
Customer Name:
Name of Contract:
City/State: Phone:
Customer Name:
Name of Contract:
City/State: Phone:
Customer Name:
Name of Contract:
City/State: Phone:
Customer Name:
Name of Contract:
City/State: Phone:
REFERENCE: GSA ITS MAS
<PAGE>
72
Customer Name:
Name of Contract:
City/State: Phone:
Customer Name:
Name of Contract:
City/State: Phone:
Customer Name:
Name of Contract:
City/State: Phone:
Customer Name:
Name of Contract:
City/State: Phone:
Customer Name:
Name of Contract:
City/State: Phone:
REFERENCE: GSA ITS MAS
<PAGE>
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
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<PAGE>
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 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
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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.
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
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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 premises from any adjacent
premises occupied by other tenants) shall be shared equally by
___________________
/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.
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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 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
________________
/4// within thirty (30) days
/5// reasonable
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<PAGE>
must be approved by Landlord./6// The service contract must include all services
suggested by the 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
____________________
/6// , which approval shall not be unreasonably withheld, conditioned or
delayed
/7// , reasonable wear and tear excepted
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such calendar year, pay to the Landlord as Additional Rent the amount of the
Tenant's operating 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//
____________________________
/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.
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
______________________
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.
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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 payment of the Rent and
performance of all of its other obligations under the provisions of this
___________________
/9// within thirty (30) days after Tenant's receipt of invoice.
/10// twelve percent (12%)
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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.
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.
____________________
/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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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.
3.5 [DELETED]
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.
4.2 INSURANCE TO BE MAINTAINED BY TENANT.
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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 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.
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<PAGE>
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//
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.
_____________________
/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.
/14// at its sole cost and expense
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<PAGE>
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 equalling 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.
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)
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<PAGE>
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,
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,
_________________________
/15// (if during the last six (6) months of the Term)
/16// one hundred eighty (180)
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<PAGE>
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 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
_________________________
/17// one hundred eighty (180)
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<PAGE>
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.
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
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<PAGE>
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 consent/18// and, if given, shall not constitute a consent to any
subsequent such Transfer, whether
____________________
/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.
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<PAGE>
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 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
________________________
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.
/19// fifty percent (50%) of
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<PAGE>
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, 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
______________________
/20// Except for the Transfers to subsidiaries or other affiliates of
Tenant,
/21// other
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<PAGE>
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 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;
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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 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
_______________________
/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>
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
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
______________________
/25// reasonable
/26// twelve percent (12%)
-23-
<PAGE>
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 or 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
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
-24-
<PAGE>
(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.
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
_______________________
/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.
-25-
<PAGE>
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.
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.
_______________________
/28// and delivery by Landlord to Tenant
-26-
<PAGE>
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.
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
-27-
<PAGE>
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.
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
/s/ By: /S/ ROBERT R. VILLENEUVE
- ---------------------- ------------------------------------
Mr. Robert R. Villeneuve
Vice President
Date: 8/11/98
----------------------------------
-28-
<PAGE>
WITNESS: TENANT: PULSAR DATA SYSTEMS, INC.
/s/ 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
[DIAGRAM OF BUILDING
WITH A PARKING LOT AND
WOODED PICNIC AREA]
-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>
EXHIBIT 27
AGREEMENT OF LEASE
by and between
MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY
and
PULSAR DATA SYSTEMS, INC.
EXHIBIT B-1
"SPACE PLAN"
[This is all that
appears in the
original exhibit]
-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, and 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
-34-
<PAGE>
EXHIBIT C
CURRENT RULES AND REGULATIONS (CONTINUED)
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
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
-35-
<PAGE>
EXHIBIT C
CURRENT RULES AND REGULATIONS (CONTINUED)
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 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
-36-
<PAGE>
EXHIBIT C
CURRENT RULES AND REGULATIONS (CONTINUED)
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.
-37-
<PAGE>
AGREEMENT OF LEASE
by and between
MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY
and
PULSAR DATA SYSTEMS, INC.
EXHIBIT D
BASE RENT
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
RENTAL SQUARE ANNUAL MONTHLY
LEASE YEAR RATE FEET BASE RENT BASE RENT
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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 $114,603.02 $9,550.25
- --------------------------------------------------------------------------------
5 $9.23 12,790 $118,041.11 $9,836.76
- --------------------------------------------------------------------------------
</TABLE>
-38-
<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 of ten 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
-39-
<PAGE>
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.
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 and clear of such right and
such right shall be deemed terminated in all respects. Once Landlord has made
the offer to Tenant to lease any Offer Space during the Term, whether or not
Tenant leases such space, this right of first offer shall automatically
terminate in all respects and Tenant shall have no further rights of first offer
with respect to any other Offer Space.
3. Parking: Tenant shall have the right to use up to forty (40) parking spaces
on the surface lot adjacent to the Building. As the Tenant occupies additional
space in the Building, Tenant shall have the right to park additional
automobiles on the building lot based on the same ratio and terms as under the
initial lease agreement.
4. Signage: Landlord, at Landlord's sole cost and expense, shall install
Tenant's name on Tenant's entrance to the Premises. Landlord at Landlord's sole
cost and expense, shall have the right to install a building standard sign
bearing the Tenant name and logo on the facade of the Building facing Martin
Luther King, Jr. Highway. The exact location, design and method of installation
of the sign shall be approved by the Landlord and completed in accordance with
all necessary jurisdictional regulations.
H:\EDDIE\PULSAR.LSE
5. Designation of Agent. Landlord's resident agent for the purpose of service
of process, notice, order, or demand required or permitted by law to be served
upon Landlord and the agent's office address is R. Harvey Chappell, Jr., 1200
Mutual Building, Richmond, Virginia 23219.
(initials)
(initials)
(initials)
-40-
<PAGE>
EXHIBIT 10.39
NON-EXCLUSIVE
DISTRIBUTOR AGREEMENT
THIS LITRONIC NON-EXCLUSIVE DISTRIBUTOR AGREEMENT ("Agreement"), is entered
into as of the EFFECTIVE DATE set forth below by and between LITRONIC, Inc., a
California (U.S.A) corporation ("LITRONIC"), having its principal place of
business at 2030 Main, Suite 1250, Irvine, California 92614, U.S.A. and the
DISTRIBUTOR identified below.
This Agreement consists of the following Term Sheet, the Standard Terms and
Conditions and the Exhibits attached hereto.
TERM SHEET
1. EFFECTIVE DATE: ________________________
2. DISTRIBUTOR:
ITOCHU TECHNO-SCIENCE Corporation ("CTC")
Street Address: 11-5, Fujimi 1-Chome, Chiyoda-Ku, TOKYO, 102-0071 JAPAN
Telephone: +81-3-5526-1737 Facsimile: +81-3-5226-1729
ITOCHU CORPORATION ("ITC"; together with CTC, collectively, DISTRIBUTOR)
Street Address: 5-1, Kita-Aoyama 2-chome, Minato-ku, TOKYO, 107-77 JAPAN
Telephone : +81-3-3497-2419 Facsimile : +81-3-3497-4181
3. CONTACT PERSON: Kazuya Ishikawa ("CTC")
Title: Group Leader, Project Promoting Group, Electronic Commerce
Promotion Dept.
Contact Person's Telephone: +81-3-5526-1737
Contact Person's E-mail address: [email protected]
4. START DATE OF AGREEMENT: __________________________
5. END DATE OF AGREEMENT: December 31, 1999
<PAGE>
6. TERRITORY: JAPAN
7. PREPAYMENT: $160,000.00 ____________________
8. ANNUAL TARGET: $500,000.00
9. PRODUCT SCHEDULE AND DISCOUNT:
<TABLE>
<CAPTION>
Included in Product Minimum Discount
Schedule order
quantity
- ---------------------------------------------------------------------------------
Minimum
quantity
to 999
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Yes MULTIFLEX SMARTCARD 100 30%
Yes CRYPTOFLEX SMARTCARD 4K 100 30%
Yes CRYPTOFLEX SMARTCARD 8K 100 30%
Yes 210 READER 100 30%
Yes 215 READER 100 30%
Yes 410 READER 100 30%
Yes NETSIGN W/210 READER EXPORT 100 40%
Yes NETSIGN W/215 READER EXPORT 100 40%
Yes NETSIGN W/410 READER EXPORT 100 40%
Yes NETSIGN PRO W/210 READER EXPORT 100 40%
Yes NETSIGN PRO W/215 READER EXPORT 100 40%
Yes NETSIGN PRO W/410 READER EXPORT 100 40%
Yes PROFILE MANAGER EDK 1 40%
Yes PROFILE MANAGER EDK PLUS 1 40%
Yes PROFILE MANAGER 1 40%
Yes PROFILE MANAGER MAINTENANCE* 1 40%
Yes NETSIGN SUPPORT* N/A N/A
</TABLE>
*LITRONIC DOES NOT PROVIDE TECHNICAL SUPPORT TO CUSTOMERS OF DISTRIBUTOR.
LITRONIC SUPPORTS DISTRIBUTOR BY E-MAIL AND/OR TELEPHONE.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
<TABLE>
<S> <C>
LITRONIC, INC. ITOCHU TECHNO-SCIENCE
CORPORATION
By: By:
Name: Name:
Title: Title:
Date: Date:
ITOCHU CORPORATION
By: _____________________________
Name: ___________________________
Title : _________________________
Date : __________________________
</TABLE>
<PAGE>
STANDARD TERMS AND CONDITIONS
1. DEFINITIONS
Capitalized terms used and not otherwise defined in this Agreement or the
Exhibits hereto shall have the meanings shown below:
1.1 "Intellectual Property" means all of the following owned by a party: (i)
trademarks and service marks (registered and unregistered) and trade names, and
goodwill associated therewith; (ii) patents, patentable inventions, computer
programs, and software; (iii) databases; (iv) trade secrets and the right to
limit the use or disclosure thereof; (v) copyrights in all works, including
software programs; and (vi) domain names. The rights owned by a party in its
Intellectual Property shall be defined, collectively, as "Intellectual Property
Rights."
1.2 "Product(s)" shall mean those LITRONIC products that have been explicitly
included in this Agreement and specified on the term sheet. LITRONIC shall have
the right to withdraw any Product(s) from this Agreement upon ninety (90) days
advance written notice. Products shall also include modifications,
enhancements, corrections, or upgrades to the Products to be furnished by
LITRONIC to DISTRIBUTOR hereunder.
1.3 "Discount" shall mean the discount applicable to Unit Price for a product
as specified in the then current Reseller/Distributor Price List. The now
current Reseller/Distributor Price List is attached to this Agreement as
Exhibit A. All Reseller/Distributor Price Lists are incorporated in this
Agreement by this reference.
1.4 "Distributor" means trade dealers only, that is companies which sell
only to Resellers. The term "Distributor" does not include companies which sell
to end-users or purchase products for their own use.
1.5 "End-User" shall mean a customer or prospective customer of DISTRIBUTOR
that purchases a Product for its internal use.
1.6 "Reseller" means retail dealers only, that is companies which sell only to
end-users. The term "Reseller" does not include companies which sell to
distributors or purchase products for their own use.
1.7 "Territory" shall mean the distribution territory set forth on the Term
Sheet attached hereto.
1.8 "Trademarks" shall mean LITRONIC's registered and unregistered
trademarks, trade names and other commercial symbols, including but not limited
to those set forth in Exhibit B.
2. APPOINTMENT AS DISTRIBUTOR
2.1 Appointment. Subject to the terms and conditions of this Agreement,
-----------
LITRONIC hereby appoints DISTRIBUTOR, and DISTRIBUTOR hereby accepts such
appointment, as a non-exclusive Distributor and a non-exclusive Reseller for the
Products in the Territory. In connection with such appointment, to the extent
permitted by the laws of the Territory, LITRONIC grants DISTRIBUTOR a non-
exclusive and non-transferable right to promote, market, sub-license and solicit
orders in the Territory from Resellers and end-users for the Products and
services described in the Term Sheet.
<PAGE>
2.2 Authorization. DISTRIBUTOR may represent itself as a distributor for the
-------------
Products. DISTRIBUTOR shall not represent that it is otherwise affiliated with
LITRONIC. DISTRIBUTOR is authorized to represent to Resellers and end-users for
the Products only such facts about LITRONIC and the Products as LITRONIC posts
on its Web site or as are contained in other published advertising and
promotional materials.
2.3 Independent Contractors. The relationship of LITRONIC and DISTRIBUTOR is
-----------------------
that of independent contractors. Neither DISTRIBUTOR nor DISTRIBUTOR's
employees, consultants, contractors or agents are agents, employees, partners or
joint venturers of LITRONIC, nor do they have any authority to bind LITRONIC by
contract or otherwise to any obligation. They will not represent to the
contrary, either expressly, implicitly, by appearance or otherwise.
2.4 End-User License Agreement. DISTRIBUTOR shall (i) prepare an end-user
- --- --------------------------
license agreement (the "End-User License Agreement") in Japanese language which
shall contain similar terms and restrictions and provide the same protection to
LITRONIC as those set forth in the LITRONIC`s standard end-user license
agreement which is attached hereto as Exhibit D, and (ii) enter into the End-
User License Agreement with each end-user for the software Products sub-licensed
by DISTRIBUTOR. DISTRIBUTOR shall provide an English version of its End-User
License Agreement which Litronic shall have the right to approve prior to use by
DISTRIBUTOR.
3. MARKETING LITRONIC PRODUCTS
3.1 Program Orientation. Within the first sixty (60) days after the Effective
-------------------
Date, DISTRIBUTOR will cause certain employees to obtain the training outlined
in Exhibit C attached hereto. To the extent such training requires that
DISTRIBUTOR's personnel travel, DISTRIBUTOR shall bear the travel and lodging
expenses of such personnel.
3.2 Sales Collateral. LITRONIC shall provide DISTRIBUTOR with a reasonable
----------------
number of copies of the sales collateral related to each Product as are
specified in Term Sheet. DISTRIBUTOR will be responsible for creation of all
collateral materials relating to the TERRITORY. DISTRIBUTOR shall bear the
costs for all such materials required to satisfactorily market and sell the
Products, including any translation costs. A copyright for such materials
translated by DISTRIBUTOR shall be possessed by DISTRIBUTOR and assigned to
LITRONIC at the time of termination or expiration of this Agreement as set forth
in Section 8.1 below.
3.3 DISTRIBUTOR Efforts. During the term of this Agreement, DISTRIBUTOR shall
-------------------
use its commercially reasonable efforts to market and promote the Products to
Resellers and end-users for the Products in the Territory. Without limiting the
generality of the foregoing, DISTRIBUTOR shall undertake the specific marketing
activities for each Product, which are set forth in the Term Sheet.
3.4 Product Resale. DISTRIBUTOR shall resell the Products only to Resellers
--------------
for resale to end users and, directly, to End-Users for the Products.
3.5 Market Area. LITRONIC shall be the sole and final arbiter of any question
-----------
whether a specific Reseller is within the Territory.
3.6 Prepayment. Within thirty (30) days after the Effective Date,
DISTRIBUTOR shall pay to LITRONIC an up-front fee (the "Up-Front Fee") for the
Products in the amount of One Hundred Sixty Thousand United States Dollars (USD
160,000) as specified on Section 7 of the term sheet above.
<PAGE>
DISTRIBUTOR shall have the right to apply all of the Up-Front Fee as a credit
against all future fees for the Products payable by DISTRIBUTOR pursuant to
Section 5 (PURCHASE AND PAYMENT TERM) below, and for the future fees for the
Products to be paid by DISTRIBUTOR as an end-user for the Products.
3.7 Annual Target. LITRONIC and DISTRIBUTOR have established annual target
-------------
purchase quota for the Products during the period commencing from the Effective
Date and ending on December 31, 1999 as set forth in Section 8 of the term sheet
above (the "Target Purchase Quota"), and CTC shall use its commercially
reasonable efforts to meet the Target Purchase Quota. Notwithstanding anything
contained herein to the contrary and for avoidance of doubts, the parties
acknowledge and agree that the Target Purchase Quota shall not be construed as
creating any legally binding obligation of DISTRIBUTOR to purchase those amounts
of the Products.
3.8 DISTRIBUTOR Personnel. DISTRIBUTOR will train and maintain a sufficient
---------------------
number of capable technical and sales personnel, minimum of one full-time
employee, having the knowledge and training necessary to: (i) inform potential
Resellers and End Users properly concerning the features and capabilities of the
Products and, if necessary, competitive products; (ii) service and support the
Products in accordance with DISTRIBUTOR's obligations under this Agreement; and
(iii) otherwise carry out the obligations and responsibilities of DISTRIBUTOR
under this agreement.
3.9 Technical Expertise. DISTRIBUTOR warrants that its staff will be
-------------------
conversant with the technology contained in the Products and similar
technologies in general, and will develop sufficient knowledge of the industry
and products competitive with the Products (including specifications, features
and benefits) so as to be able to explain in detail to its potential Resellers
and End Users the differences between the Products and competitive products.
3.10 DISTRIBUTOR Covenants. DISTRIBUTOR will: (i) conduct business in a manner
---------------------
that reflects favorable at all times on the Products and the good name, good
will and reputation of LITRONIC; (ii) avoid deceptive, misleading or unethical
practices that are or might be detrimental to LITRONIC, the Products and
services or the public; (iii) make no false or misleading representations with
regard to LITRONIC, or the Products; (iv) not publish or employ, or cooperate in
the publication or employment of, any misleading or deceptive advertising
material with regard to LITRONIC or the Products; and (v) make no
representation, warranties or guarantees to potential Resellers or End Users or
to the trade with respect to the specifications, features or capabilities of the
Products that are inconsistent with the literature distributed by LITRONIC.
3.11 Costs and Expenses. Except as expressly provided herein or agreed to in
------------------
writing by LITRONIC and DISTRIBUTOR, DISTRIBUTOR will pay all costs and expenses
incurred in the performance of DISTRIBUTOR's obligations under this Agreement.
3.12 Marketing Activities. DISTRIBUTOR shall develop and execute a marketing
--------------------
plan sufficient to fulfill its obligations under this Agreement. To the extent
LITRONIC offers and this is agreed to by DISTRIBUTOR in advance, DISTRIBUTOR
agrees to participate with LITRONIC in joint marketing activities with respect
to certain Products.
3.13 Compliance with Laws. DISTRIBUTOR will comply with all applicable
--------------------
international, national, state, regional and local laws and regulations in
performing its duties hereunder and in any of its dealings with respect to the
Products.
<PAGE>
3.14 Governmental Approval. If any approval with respect to this Agreement, or
---------------------
the notification or registration hereof, will be required at any time during the
term of this Agreement, with respect to giving legal effect to this Agreement in
any jurisdiction in which DISTRIBUTOR is operating, or with respect to
compliance with exchange regulations or other requirements so as to assure the
right of remittance from abroad of U.S. Dollars, DISTRIBUTOR will immediately
take whatever steps may be necessary in this respect, and any charges incurred
in connection therewith will be for the account of DISTRIBUTOR. DISTRIBUTOR
will keep LITRONIC currently informed of its efforts in this connection.
LITRONIC will be under no obligation to ship any Products or other materials to
DISTRIBUTOR hereunder until DISTRIBUTOR has provided LITRONIC with satisfactory
evidence that such approval, notification or registration is not required or
that it has been obtained.
4. TECHNICAL SUPPORT
4.1 Reseller Support. DISTRIBUTOR shall provide all technical support relating
----------------
to its own products and services, and to the Products as described in the TERM
SHEET, directly to its Resellers and End-Users for the Products. DISTRIBUTOR
shall provide LITRONIC with a telephone number for LITRONIC to contact
DISTRIBUTOR directly for DISTRIBUTOR's support under this Section 4. If
LITRONIC receives such an inquiry, LITRONIC shall provide the inquiring party
with the telephone number of DISTRIBUTOR, and DISTRIBUTOR shall be responsible
for providing support to such party.
4.2 DISTRIBUTOR Support. LITRONIC shall provide DISTRIBUTOR with the technical
-------------------
support services for each Product as set forth in the TERM SHEET.
4.3 Maintenance Contract. Litronic shall provide DISTRIBUTOR with product
--------------------
updates and upgrades to new releases of the same products for software products
with a current maintenance contract. Litronic will provide technical support to
DISTRIBUTOR and DISTRIBUTOR will provide technical support to end-user."
5. PURCHASE AND PAYMENT TERMS
5.1 Forecasts, Purchase and Sale. DISTRIBUTOR shall submit quarterly non-
binding forecasts of its requirements for Products to LITRONIC at least forty-
five (45) days in advance of each calendar quarter. DISTRIBUTOR will, at its
sole discretion, maintain reasonable stock levels for the Products. LITRONIC
agrees to sell to DISTRIBUTOR those Products order by DISTRIBUTOR at the prices
set forth in Reseller/Distributor Price List described in Exhibit A attached
hereto reduced by the discount percentage set forth in Section 9 of the term
sheet above and under the conditions specified in this Agreement during the term
of this Agreement. Product orders will be placed by DISTRIBUTOR's issuance of a
purchase order. The terms and conditions of this Agreement shall supersede the
terms and conditions of any purchase order issued by DISTRIBUTOR (or any order
acknowledgements and invoices issued by LITRONIC). Any additional or
conflicting purchase order terms and conditions (and order acknowledgment and
invoice terms and conditions) shall be deemed null and void and shall be of no
force or effect.
5.2 Payments for LITRONIC Products. DISTRIBUTOR shall be responsible for
------------------------------
invoicing Resellers (and end users) and collecting invoiced amounts from
Resellers (and end users) for all Products licensed, sold or otherwise
distributed on the basis of orders solicited by DISTRIBUTOR. For the Products
licensed, sold or otherwise distributed based upon orders solicited by
DISTRIBUTOR, DISTRIBUTOR will pay LITRONIC the amounts set forth in the
applicable Reseller/Distributor Price List described in
<PAGE>
Exhibit A attached hereto reduced by the discount percentage set forth in
Section 9 of the term sheet above, in the manner and at the time set forth in
Section 5.4 (Terms of Payment) below. DISTRIBUTOR's payments shall not be
affected by Resellers payments or non- payment for the Products ordered.
5.3 Price Changes. LITRONIC's prices for the Products as of the date of this
-------------
Agreement are set forth in the applicable Reseller/Distributor Price List
attached hereto as Exhibit A. LITRONIC reserves the right to change the prices
for any LITRONIC Product or any other product or service at any time. Price
decreases shall take effect immediately upon announcement. In the event of a
price increase, LITRONIC shall provide DISTRIBUTOR with sixty (60) days' advance
notice. Such changes shall not require DISTRIBUTOR's approval. In the event of
any price increase, LITRONIC shall be bound to honor any orders placed at the
prices in effect prior to price increase (which effective date shall be the 61st
day following LITRONIC's written notice described in this Section 5.3).
Notwithstanding any increase in LITRONIC's price, if DISTRIBUTOR shall deliver
to LITRONIC a copy of the quotation furnished to its potential customer(s) no
later than five (5) business days after the receipt of notice for the price
increase and LITRONIC has received firm order from such customer(s) within
ninety (90) days after the effective date of such price increase, ex-price shall
apply to such orders. DISTRIBUTOR shall determine its own market prices for the
Products and for other products and services it sells, licenses or otherwise
distributes or makes available.
5.4 Terms of Payment. Amounts due LITRONIC hereunder shall be wire transferred
to LITRONIC's designated bank account by DISTRIBUTOR Invoices shall be due and
payable on or before the sixtieth (60th) day after the date of invoice issued by
LITRONIC for the full amount owed for the ordered and delivered Products. A late
payment penalty on any amounts not paid when due shall be assessed at the rate
of one and one-half percent (1 1/2%) per thirty (30) days or the maximum rate
permitted by law, whichever is less. Such late payment penalty shall accrue
beginning on the sixty-first (61st) day after the day the invoice was issued.
All payments to LITRONIC shall be made directly to the bank nominated by
LITRONIC in United States Dollars, free of any currency control or other
restrictions to LITRONIC and with all transfer charges paid by the DISTRIBUTOR.
5.5 Taxes. Except for the withholding income tax described below in this
-----
Section 5.5, DISTRIBUTOR shall pay, indemnify and hold LITRONIC harmless from
(i) any sales, use, excise, import or export, value-added, or similar tax or
duty, and any other tax or duty not based on LITRONIC's income, and (ii) all
government permit fees, customs fees and similar fees which LITRONIC may incur
with respect to this Agreement. Such taxes, fees and duties paid by DISTRIBUTOR
shall not be considered a part of, a deduction from, or an offset against,
payments due to LITRONIC hereunder. LITRONIC acknowledges and agrees that the
payment for the software Products pursuant to this Agreement by DISTRIBUTOR to
LITRONIC shall be subject to the withholding income tax based on (i) Sections
161-7-2, 178, 179-1, and 212 of Income Tax Laws of Japan, and (ii) Article 14 of
the Tax Convention between U.S.A. and Japan (the "USA/Japan Tax Convention").
DISTRIBUTOR shall (i) withhold such tax from the payment to LITRONIC, (ii) pay
such tax to the Japanese tax authority on behalf of LITRONIC, and (iii) transmit
to LITRONIC an official tax receipt issued by the Japanese tax authority after
such tax payment. LITRONIC shall execute and deliver to DISTRIBUTOR an
appropriate application form and DISTRIBUTOR shall execute such application form
and file it with a competent tax office in Japan in order to reduce an
applicable tax rate of withholding income tax in accordance with the USA/Japan
Tax Convention.
5.6 Audit Rights. LITRONIC shall have the right, at its sole cost and expense,
------------
to have an independent certified public accountant conduct during normal
business hours and not more frequently
<PAGE>
than annually, an audit of the appropriate records of DISTRIBUTOR to verify the
volume of Products licensed or otherwise distributed by DISTRIBUTOR and
DISTRIBUTOR's calculation of amounts payable to LITRONIC therefor in the case
where the applicable Distributor Price List specifies that DISTRIBUTOR is
required to report amounts payable with respect to the Products. If the amounts
accrued are different than those reported, DISTRIBUTOR will be invoiced or
credited for the difference, as applicable. Any additional amounts, along with
the late payment penalty assessed in accordance with Section 5.4, shall be
payable within thirty (30) days of such invoice. If the deficiency in the
amounts paid by DISTRIBUTOR is greater than five percent (5%) of the amounts
reported by DISTRIBUTOR for any reporting period, DISTRIBUTOR will pay the
reasonable expenses associated with such audit, in addition to the deficiency.
5.7 Itochu Technology, Inc. (ITI USA"). DISTRIBUTOR hereby engages ITI USA, a
Delaware corporation with its office currently located at 3100 Patrick Henry
Drive, Santa Clara, CA 95054 or any successor entity to act as an order
processing agent acting for and on behalf of DISTRIBUTOR with its authority
including, without limitation, to receive shipment, place orders and effect
payments from, with and to LITRONIC, respectively, on behalf of DISTRIBUTOR.
DISTRIBUTOR shall be responsible to LITRONIC for any act or omission of ITI USA
regarding its activities contemplated herein.
6. CONFIDENTIALITY
6.1 Confidential Information. The parties acknowledge that in their
------------------------
performance of their duties hereunder either party may communicate to the other
(or its designees) certain confidential and proprietary information, including
without limitation information concerning DISTRIBUTOR's products and services,
LITRONIC's products and services, and the know-how, technology, techniques, or
business or marketing plans related thereto (collectively, the "Confidential
Information") all of which are confidential and proprietary to, and trade
secrets of, the disclosing party. Confidential Information does not include
information that: (i) is public knowledge at the time of disclosure by the
disclosing party; (ii) becomes public knowledge or known to the receiving party
after disclosure by the disclosing party other than by breach of the receiving
party's obligations under this Section 6 or by breach of a third party's
confidentiality obligations; (iii) was known by the receiving party prior to
disclosure by the disclosing party other than by breach of a third party's
confidentiality obligations; (iv) is independently developed by the receiving
party, or (v) is required to be disclosed pursuant to any statutory or
regulatory provision or court order.
6.2 Protection of Confidential Information. As a condition to the receipt of
--------------------------------------
the Confidential Information from the disclosing party, the receiving party
shall: (i) not disclose in any manner, directly or indirectly, to any third
party any portion of the disclosing party's Confidential Information; (ii) not
use the disclosing party's Confidential Information in any fashion except to
perform its duties hereunder or with the disclosing party's express prior
written consent; (iii) disclose the disclosing party's Confidential Information,
in whole or in part, only to employees and agents who need to have access
thereto for the receiving party's internal business purposes; (iv) take all
necessary steps to ensure that its employees and agents are informed of and
comply with the confidentiality restrictions contained in this Agreement; and
(v) take all necessary precautions to protect the confidentiality of the
Confidential Information received hereunder and exercise at least the same
degree of care in safeguarding the Confidential Information as it would with its
own confidential information, and in no event shall apply less than a reasonable
standard of care to prevent disclosure. The receiving party shall promptly
notify the disclosing party of any unauthorized disclosure or use of the
Confidential Information arising under this Agreement. The receiving party
shall cooperate and assist the disclosing party in preventing or remedying any
such unauthorized use or disclosure.
<PAGE>
6.3 Injunctive Relief. Both parties acknowledge that the restrictions
-----------------
contained in this Section 6 are reasonable and necessary to protect their
legitimate interests and that any violation of these restrictions will cause
irreparable damage to the other party. Each party agrees that damages are not
an adequate remedy for any such violation and that the other party will be
entitled to injunctive relief against each violation.
7. TRADEMARK RIGHTS
7.1 License. LITRONIC grants DISTRIBUTOR the nonexclusive right and license to
-------
use LITRONIC's Trademarks during the term of this Agreement solely in
conjunction with the marketing, promotion and resale of the Products. LITRONIC
grants no rights in the Trademarks or in any other trademark, trade name,
service mark, business name or goodwill of LITRONIC except as licensed hereunder
or by separate written agreement of the parties. DISTRIBUTOR agrees that it
will not at any time during or after this Agreement assert or claim any interest
in or do anything that may adversely affect the validity of any Trademark or any
other trademark, trade name or product designation belonging to or licensed to
LITRONIC (including, without limitation registering or attempting to register
any Trademark or any such other trademark, trade name or product designation).
7.2 No Confusing Use. During the term of this Agreement, DISTRIBUTOR agrees
----------------
not to use any trademark, trade name or product name confusingly similar to a
trademark, trade name or product name of LITRONIC, as expressly licensed in
Section 7.1.
7.3 Marking Requirements. DISTRIBUTOR agrees to (i) use the appropriate
--------------------
trademark, logo, product descriptor and trademark symbol (either "TM" or "(R)"
or local equivalents), (ii) clearly indicate LITRONIC's ownership of the
Trademarks whenever the Trademarks are first mentioned in any document, and
(iii) comply with the other usage requirements set forth in LITRONIC's Trademark
and Logo Usage Guide provided to DISTRIBUTOR from time to time.
7.4 No Continuing Rights. Upon expiration or termination of this Agreement,
--------------------
DISTRIBUTOR will immediately cease all display, advertising and use of all of
the Trademarks and will not thereafter use, advertise or display any trademark,
trade name or product designation which is, or any part of which is, similar to
or confusing with any Trademark or with any trademark, trade name or product
designation associated with LITRONIC or any Product.
8. INTELLECTUAL PROPERTY RIGHTS
8.1 Ownership. Other than the express licenses granted by this Agreement,
---------
LITRONIC grants no right or license to DISTRIBUTOR by implication, estoppel or
otherwise to the Products or any Intellectual Property Rights of LITRONIC. Each
party shall retain all ownership rights, title, and interest in and to its own
products and services (including in the case of LITRONIC, in the Products) and
all intellectual property rights therein, subject only to the rights and
licenses specifically granted herein. To the extent that DISTRIBUTOR translates,
or causes to be translated, any of LITRONIC's marketing materials, user manuals
or other documentation, DISTRIBUTOR agrees to assign all copyrights in such
translations to LITRONIC at the time of termination or expiration of this
Agreement.
8.2 Obtaining Rights. LITRONIC (and not DISTRIBUTOR) shall have the sole
----------------
right, but not the obligation, to pursue copyright, patent and trademark
protection, in its sole discretion, for the Products and any Intellectual
Property Rights incorporated therein. DISTRIBUTOR will provide reasonable
<PAGE>
assistance to LITRONIC in pursuing such protection, including without limitation
executing and delivering to LITRONIC such instruments as may be required to
register or perfect LITRONIC's interests in any Intellectual Property Rights and
any assignments thereof.
8.3 Pursuit of Infringers. DISTRIBUTOR shall notify LITRONIC of infringements
---------------------
of LITRONIC's Intellectual Property Rights of which DISTRIBUTOR becomes aware.
DISTRIBUTOR shall reasonably assist LITRONIC, at no cost to DISTRIBUTOR, in
pursuing LITRONIC's legal rights against any such infringers. LITRONIC, at its
sole discretion, shall determine whether to pursue any particular case of
infringement.
8.4 Proprietary Markings and Copyright Notices. DISTRIBUTOR shall not remove
------------------------------------------
or destroy any proprietary, confidentiality, trademark, service mark, or
copyright markings or notices placed upon or contained in any materials or
documentation received from LITRONIC in connection with this Agreement.
9. INDEMNITIES
9.1 DISTRIBUTOR Indemnity. DISTRIBUTOR's indemnity obligations under Section
---------------------
9.3 shall apply to any claim, suit or proceeding by a third party against
LITRONIC and any of its directors, officers, agents, employees, contractors,
parent companies, affiliates, and/or subsidiaries (collectively, the "LITRONIC
Parties") based on or arising out of (i) the misconduct or omissions of
DISTRIBUTOR in connection with (A) its performance or failure to perform any
other obligations in this Agreement or any agreement with an Reseller or End-
User of the Products, and (B) any other product or service provided by
DISTRIBUTOR to Resellers or End-User of the Products; and (ii) any unauthorized
representation or any misrepresentation of fact to any third party with respect
to one or more of the LITRONIC Parties or the LITRONIC Products made by
DISTRIBUTOR or any director, officer, agent, or employee of DISTRIBUTOR.
9.2 LITRONIC Indemnity. LITRONIC's indemnity obligations under Section 9.3
------------------
shall apply to any claim, suit or proceeding by a third party against
DISTRIBUTOR and any of its directors, officers, agents, employees, contractors,
parent companies, affiliates, and/or subsidiaries (collectively, the
"DISTRIBUTOR Parties") based on or arising out of (i) the misconduct or
omissions of LITRONIC in connection with (A) its performance or failure to
perform the obligations in this Agreement, and (B) any Products provided to
DISTRIBUTOR under this Agreement; (ii) any unauthorized representation or any
misrepresentation of fact to any third party with respect to one or more of
DISTRIBUTOR Parties made by LITRONIC or any director, officer, agent, or
employee of LITRONIC, or (iii) any third party claims of patent or copyright
infringement or trade secret misappropriation to the extent such claims arise
directly from the LITRONIC proprietary components of the Product.
9.3 Notices and Indemnities. Subject to the limitations set forth herein, each
-----------------------
party (the "Indemnifying Party"), at its own expense, shall (a) defend, or at
its option settle, any claim, suit, or proceeding against the other party (the
"Indemnified Party") for which it has an indemnification obligation under this
Agreement and (b) pay any final judgment entered or settlement (including
attorneys' fee) against the Indemnified Party in any such suit or proceeding
defended by the Indemnifying Party. An Indemnifying Party shall not take any
action to settle or defend any such claim, suit, or proceeding that would in any
manner impose obligations (monetary or otherwise) on an Indemnified Party
without the Indemnified Party's written consent. An Indemnified Party shall
have the right to participate in the defense of any claim with its own counsel
and shall be responsible for all costs associated therewith. An Indemnifying
Party shall have the right to control and direct the investigation,
<PAGE>
preparation, defense, and settlement of the claim, and the Indemnified Party
shall reasonably cooperate with the Indemnifying Party in the defense of such
claim at the Indemnifying Party's expense. In addition, an Indemnified Party
shall give the Indemnifying Party prompt written notice of any claim, suit, or
proceeding for which the Indemnifying Party has an indemnification obligation
under this Agreement. In the event such notice is not promptly given, the
Indemnifying Party's obligation hereunder shall not include any additional
expenses or damages to the extent attributable to such failure or delay of
notice.
9.4 Injunction. If claim for infringement described in Section 9.2 above has
----------
occurred or in LITRONIC's opinion is likely to occur, LITRONIC shall, at its
option and expense, either (i) procure for DISTRIBUTOR the right to continue a)
using and/or distributing the Products, or b) using the Trademarks or (ii) to
replace or modify the same so that it becomes non-infringing to the extent that
functions of the Products is maintained. If neither of the foregoing is
reasonably available, LITRONIC shall refund to DISTRIBUTOR the price thereof
less a reasonable amount for use, damage and obsolescence.
10. LIMITED WARRANTY
10.1 Limited Warranty. LITRONIC warrants to DISTRIBUTOR that the hardware
----------------
Products is free from defects in materials and workmanship for a period of (i)
fifteen (15) months from the date of shipment from LITRONIC to DISTRIBUTOR or
(ii) one (1) year from the date of installation of the Products at end-user's
site, whichever comes first ("the Warranty Period"). LITRONIC warrants to
DISTRIBUTOR that the delivered software Products will materially conform to the
functional specifications set forth in the manuals. Should a Product fail to
comply with this Limited Warranty at any time during the Warranty Period, the
purchaser's sole and exclusive remedy is for LITRONIC, at its option, to either
repair or replace the Product as described below, provided that in LITRONIC's
sole determination the part or Product has not been abused, misused, repaired or
modified. All Products will be serviced and returned via air at no charge to
DISTRIBUTOR. In the event LITRONIC is unable to repair or replace the Product
within a reasonable period of time, DISTRIBUTOR's sole and exclusive remedy is
to receive reimbursement of the amount DISTRIBUTOR actually paid for the
Product.
10.2 Returns. All returns under this Limited Warranty require a Return
-------
Merchandise Authorization number (RMA #) provided by LITRONIC Customer Service.
Products which require Limited Warranty service during the Warranty Period must
be delivered to LITRONIC at the address listed below. The RMA # should be
prominently displayed on the outside of the shipping container. Replacement
parts or complete products will be furnished on an exchange basis only.
Replaced parts or products become the property of LITRONIC.
Returns Department, Litronic, Inc.
17895 Sky Park Circle, Suite A, Irvine, CA 92614
Tel (949) 851-1085, E-mail: [email protected]
10.3 Shipping. DISTRIBUTOR agrees to pay shipping charges to LITRONIC or
--------
directly to the carrier, insure the Product or assume the risk of loss or damage
-
which may occur in transit, and to use a shipping container equivalent to the
original packaging. If any labor, repair or parts replacement is required
because of accident, negligence, misuse, theft, vandalism, fire, water or other
peril, or because of conditions outside of specifications, including, but not
limited to, electric power, temperature, humidity, or dust; or by moving,
repair, relocation, or alteration not performed by LITRONIC, or by any other
cause other than normal use, this Limited Warranty shall be void and shall not
apply.
<PAGE>
10.4 Duty and Sales Tax. DISTRIBUTOR agrees to pay any applicable duties sales
------------------
taxes or similar charges. LITRONIC Products are supplied to the DISTRIBUTOR FOB,
-
Irvine, California, USA. As used herein, the term "FOB" shall be construed in
accordance with California Commercial Code Section 2-319.
10.5 Applicability. This Limited Warranty shall not be applicable to the
-------------
extent that any provision of this Limited Warranty is prohibited by or contrary
to, any international, federal, state or local law or regulation which cannot be
preempted. This Limited Warranty gives the purchaser specific legal rights, but
the purchaser may have different or additional legal rights, depending on the
jurisdiction in which the purchaser is located.
10.6 Year 2000 Compliance. Subject to the limitations set forth in Section
- ---- --------------------
11.2 herein, LITRONIC represents and warrants that the Products accurately
process 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 by using four
digit year format, and that such processing shall not require user to invoke
special procedures, subject to the condition that other information technology,
used in combination with the Products, properly exchanges date/time data with
it. Notwithstanding anything contained herein to the contrary, the remedies
available to DISTRIBUTOR under this warranty shall include repair or replacement
of any Product whose non-compliance is discovered and made known to LITRONIC in
writing within ninety (90) days after discovery. Nothing in this warranty shall
be construed to limit any rights or remedies DISTRIBUTOR may otherwise have
under this Agreement with respect to defects other than Year 2000 performance.
11. DISCLAIMER OF WARRANTIES; LIMITATION OF LIABILITY
11.1 Disclaimer. EXCEPT FOR (I) THE EXPRESS LIMITED WARRANTY PROVIDED IN THIS
----------
AGREEMENT, AND (II) YEAR 2000 COMPLIANCE DESCRIBED IN SECTION 10.6 ABOVE AND AS
LIMITED BY SECTION 11.2 HEREIN, LITRONIC'S PRODUCTS AND SERVICES ARE PROVIDED
"AS IS" WITHOUT ANY WARRANTY WHATSOEVER. LITRONIC DISCLAIMS ALL WARRANTIES,
EXPRESS, IMPLIED, OR STATUTORY, TO DISTRIBUTOR AS TO ANY MATTER WHATSOEVER,
INCLUDING ALL IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR
PURPOSE AND NON-INFRINGEMENT OF THIRD PARTY RIGHTS. NO ORAL OR WRITTEN
INFORMATION OR ADVICE GIVEN BY LITRONIC OR ITS EMPLOYEES OR REPRESENTATIVES
SHALL CREATE A WARRANTY OR IN ANY WAY INCREASE THE SCOPE OF LITRONIC'S
OBLIGATIONS.
11.2 Limitation of Liability. NEITHER PARTY SHALL BE LIABLE TO THE OTHER PARTY
-----------------------
OR TO ANY OTHER THIRD PARTY FOR ANY CONSEQUENTIAL, INDIRECT, SPECIAL,
INCIDENTAL, RELIANCE, OR EXEMPLARY DAMAGES ARISING OUT OF OR RELATING TO THIS
AGREEMENT OR THE LITRONIC PRODUCTS, WHETHER FORESEEABLE OR UNFORESEEABLE, AND
WHETHER BASED ON BREACH OF ANY EXPRESS OR IMPLIED WARRANTY, BREACH OF CONTRACT,
MISREPRESENTATION, GROSS NEGLIGENCE, STRICT LIABILITY IN TORT, OR OTHER CAUSE
OF ACTION (INCLUDING, BUT NOT LIMITED TO, DAMAGES FOR LOSS OF DATA, GOODWILL,
PROFITS, INVESTMENTS, USE OF MONEY, OR USE OF FACILITIES; INTERRUPTION IN USE OR
AVAILABILITY OF DATA; STOPPAGE OF OTHER WORK OR IMPAIRMENT OF OTHER ASSETS; OR
LABOR CLAIMS), EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH
DAMAGES. UNDER NO CIRCUMSTANCES SHALL LITRONIC'S TOTAL LIABILITY TO DISTRIBUTOR
OR
<PAGE>
ANY THIRD PARTY ARISING OUT OF OR RELATED TO THIS AGREEMENT EXCEED THE AMOUNT
PAID BY DISTRIBUTOR UNDER THIS AGREEMENT TO A MAXIMUM OF ONE MILLION DOLLARS
($1,000,000.00), REGARDLESS OF WHETHER AN ACTION OR CLAIM IS BASED ON WARRANTY,
CONTRACT, TORT OR OTHERWISE. NO ACTION MAY BE BROUGHT BY A PARTY AGAINST THE
OTHER PARTY BEYOND TWO (2) YEARS AFTER THE CAUSE OF ACTION HAS ARISEN OR SHOULD
HAVE ARISEN.
12. FORCE MAJEURE
In no event shall either party be responsible for delays in delivery or
performance when the same are the result of any cause beyond such party's
control.
13. TERM AND TERMINATION
13.1 Term and Termination. The term of this Agreement shall commence on the
start date of the Agreement as set forth in Section 4 of the term sheet above
and, unless earlier terminated pursuant to the terms of this Agreement, will
continue until December 31, 1999. This Agreement shall be automatically extended
on a year to year basis unless either party shall give written notice of non-
renewal to the other party not less than sixty (60) days prior to the expiration
of the then current term. The parties agree that the Limitation of Liability
provision of Section 11.2 shall apply to any termination of this Agreement by
either party. DISTRIBUTOR waives any right it may have to receive any
compensation or reparations on termination or expiration of this Agreement or
any rights hereunder under the law of any jurisdiction, other than as expressly
provided in this Agreement. Neither party shall be liable to the other party in
the event of termination, expiration or failure to agree upon an extension of
the term of this Agreement for compensation, reimbursement or damages on account
of loss of prospective profits, or anticipated sales, or on account of
expenditures, investments, leases or commitments in connection with the business
or goodwill of the other party.
13.2 Termination for Default. Either party may terminate this Agreement at any
-----------------------
time on written notice to the other in the event of a material default by the
other party and a failure to cure such default within a period of thirty (30)
days following receipt of written notice specifying that a default has occurred.
13.3 Insolvency. Either party may terminate this Agreement at any time upon
----------
(i) the institution of any proceedings by or against the other party seeking
relief, reorganization or arrangement under any laws relating to insolvency,
which proceedings are not dismissed within sixty (60) days; (ii) the assignment
for the benefit of creditors, or the appointment of a receiver, liquidator or
trustee, of the other party's property or assets; or (iii) the liquidation,
dissolution or winding up of the other party's business.
13.4 Effect of Termination. Upon the expiration or termination of this
---------------------
Agreement, DISTRIBUTOR shall cease using, marketing, promoting and soliciting
orders for the Products. DISTRIBUTOR will discontinue the use of all
Trademarks. Upon the expiration or termination of this Agreement, LITRONIC will
provide support to End-Users of the Products referred by DISTRIBUTOR. Any
expiration or termination of this Agreement shall not discharge any obligation
to make payments which have accrued or are owing as of the effective date of
such expiration or termination or which accrue after expiration or termination
for LITRONIC Products shipped or invoiced upon orders placed before such
expiration or termination. Termination or expiration of this Agreement shall not
terminate or cancel any sublicense to the software Products granted by
DISTRIBUTOR to the End-User of the Products hereunder prior to the termination
or expiration of this Agreement.
<PAGE>
13.5 Return of Confidential Information. Upon expiration or termination of
----------------------------------
this Agreement for any reason, each party shall return the other party's
Confidential Information to it, or, with the prior written consent of the other
party, shall destroy the other party's Confidential Information. Each party
shall certify to the other in writing within thirty (30) days of expiration or
termination that such party has returned or destroyed all of such Confidential
Information.
13.6 Survival of Terms. Expiration or termination of this Agreement shall not
-----------------
relieve either party of any obligations that accrue prior to the date of such
expiration or termination. The provisions of Sections 3.11, 3.14, 5, 6, 7, 8, 9,
10, 11, 13.1, 13.4, 13.5, 13.6, 14.1, 14.6, 14.8 and 14.9 of this Agreement
shall survive the expiration or termination of this Agreement for any reason;
provided, however, that Section 6 shall survive for five (5) years thereafter .
14. MISCELLANEOUS PROVISIONS
14.1 Governing Law, Waiver of Jury Trial and Arbitration. This Agreement shall
---------------------------------------------------
be governed by and construed in accordance with the laws of the State of
California, U.S.A. (irrespective of its choice of law principles). The parties
agree that the United Nations Convention on Contracts for the International Sale
of Goods shall not apply to this Agreement. The parties hereby waive any right
to jury trial with respect to any action brought in connection with this
Agreement. Any and all disputes arising directly or indirectly out of or
relating in any way to this Agreement which can not be satisfactorily resolved
by the parties shall be submitted to binding arbitration pursuant to the Rules
then in effect of the American Arbitration Association for any petition brought
by LITRONIC, or of Conciliation and Arbitration of the International Chamber of
Commerce (Paris) for any petition brought by DISTRIBUTOR. Arbitration shall be
held in the city and country where the petitioner resides. The arbitrator(s)
shall decide the matters submitted to them based upon the evidences presented
and the terms of this Agreement and arbitrator(s) shall issue a written award
which shall state the basis of the award and include findings of fact and
conclusions of law. The award of the arbitration shall be final, non-appealable
and binding upon the parties and their respective successors and permitted
assigns. Judgment upon the award may be entered in any court having the
jurisdiction thereof.
14.2 Binding upon Successors and Assigns. Except as otherwise provided herein,
-----------------------------------
this Agreement shall be binding upon, and inure to the benefit of, the
successors, representatives and assigns of the parties hereto. This Agreement
shall not be assignable by DISTRIBUTOR by operation of law (including as a
result of a merger or a transfer of a controlling interest in DISTRIBUTOR's
voting securities) or otherwise without the prior written authorization of
LITRONIC, which shall not be unreasonably withheld. Any such purported
assignment shall be void and of no effect and shall permit LITRONIC to terminate
this Agreement.
14.3 Severability. If any provision of this Agreement shall be invalid or
------------
unenforceable, the remainder of this Agreement shall be interpreted so as best
to reasonably effect the intent of the parties hereto. IT IS EXPRESSLY
UNDERSTOOD AND AGREED THAT EACH AND EVERY PROVISION OF THIS AGREEMENT WHICH
PROVIDES FOR A LIMITATION OF LIABILITY, DISCLAIMER OF WARRANTIES OR EXCLUSION OF
DAMAGES IS INTENDED BY THE PARTIES TO BE SEVERABLE AND INDEPENDENT OF ANY OTHER
PROVISION AND TO BE ENFORCED AS SUCH.
14.4 Entire Agreement. This Agreement, and the Exhibits and Distributor Price
----------------
Lists attached hereto constitute the entire understanding and agreement of the
parties with respect to the subject matter hereof
<PAGE>
and supersede all prior and contemporaneous negotiations, representations,
agreements or understandings between the parties.
14.5 Amendment and Waivers. Except as otherwise expressly provided in this
---------------------
Agreement, any term or provision of this Agreement may be amended, and the
observance of any term of this Agreement may be waived, only by a writing signed
by the party to be bound.
14.6 Attorneys' Fees. Should suit be brought to enforce or interpret any part
---------------
of this Agreement, the prevailing party shall be entitled to recover its
reasonable attorneys' fees and costs.
14.7 Notices. Any notice, demand, or request with respect to this Agreement
-------
shall be in writing and shall be effective only if it is delivered by a courier
service that confirms delivery in writing, or mailed, certified or registered
mail, postage prepaid, return receipt requested, and in each case addressed to
the parties at the addresses set forth in paragraph 1, and in the case of
LITRONIC, to the attention of the President and Chief Executive Officer, and in
the case of DISTRIBUTOR to the Contact Person as identified on the Term Sheet.
Such communications shall be effective when they are received. Any party may
change its address for such communications by giving notice thereof to the other
party in conformity with this Section.
14.8 Foreign Reshipment Liability. THIS AGREEMENT IS EXPRESSLY MADE SUBJECT TO
----------------------------
ANY LAWS, REGULATIONS, ORDERS OR OTHER RESTRICTIONS ON THE EXPORT FROM THE
UNITED STATES OF AMERICA OF TECHNICAL INFORMATION, SOFTWARE OR INFORMATION ABOUT
SUCH SOFTWARE WHICH MAY BE IMPOSED FROM TIME TO TIME BY THE U.S. GOVERNMENT.
NOTWITHSTANDING ANYTHING CONTAINED IN THIS AGREEMENT TO THE CONTRARY,
DISTRIBUTOR AGREES THAT IT WILL NOT EXPORT OR RE-EXPORT, DIRECTLY OR INDIRECTLY,
ANY TECHNICAL INFORMATION, SOFTWARE OR INFORMATION ABOUT SUCH SOFTWARE TO ANY
COUNTRY FOR WHICH SUCH GOVERNMENT OR ANY AGENCY THEREOF REQUIRES AN EXPORT
LICENSE OR OTHER GOVERNMENTAL APPROVAL AT THE TIME OF EXPORT OR RE-EXPORT
WITHOUT FIRST OBTAINING SUCH LICENSE OR APPROVAL.
14.9 Publicity. Neither party will disclose to third parties, other than its
---------
agents and representatives on a need-to-know basis, the terms of this Agreement
or any exhibits hereto without the prior written consent of the other party,
except (i) either party may disclose such terms to the extent required by law;
(ii) either party may disclose the existence of this Agreement, (iii) either
party may disclose such terms to the extent necessary in connection with the due
diligence review of such party by potential business partners, investors or
acquirers, or investment bankers, to such persons and to their employees,
agents, attorneys and auditors; and (iv) either party shall have the right to
disclose that DISTRIBUTOR is a distributor of the Products.
14.10 No Waiver. Failure by either party to enforce any provision of this
---------
Agreement will not be deemed a waiver of future enforcement of that or any other
provision. No waiver of any provision of this Agreement shall be effective
unless in writing and signed by the authorized representative of a party against
whom the waiver is sought to be enforced. No failure or delay by either party
in exercising any right, power or remedy under this Agreement shall operate as a
waiver of the right, power or remedy.
14.11 Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which will be deemed an original, but which collectively
will constitute one and the same instrument.
<PAGE>
14.12 Due Authorization. DISTRIBUTOR hereby represents and warrants to
-----------------
LITRONIC that the individual executing this Agreement on behalf of DISTRIBUTOR
is duly authorized to execute this Agreement on behalf of DISTRIBUTOR and to
bind DISTRIBUTOR hereby.
14.13 Choice of Language. The original of this Agreement has been written in
------------------
English. DISTRIBUTOR waives any right it may have under the law of any
jurisdiction to have this Agreement written in the language of such jurisdiction
or any other language.
14.14 Headings. All Section headings are provided for the convenience or
--------
references only and shall not be construed otherwise.
## End of Terms and Conditions ##
<PAGE>
EXHIBIT A
RESELLER/DISTRIBUTOR PRICE LIST
The following price list is attached:
RESELLER/DISTRIBUTOR PRICE LIST (January 1, 1999
(Products validated for Japanese market)
(Attached)
<PAGE>
EXHIBIT B
LITRONIC TRADEMARKS
The (TM) and (R) symbols should be printed on all major headings and the first
time the product is mentioned on any web page text or document. Thereafter, the
product does not need to contain the symbols.
Pending USA, Canada, European Community, Switzerland, Japan, Singapore
<TABLE>
<S> <C> <C>
o NetSign/TM/
o ProFile Manager/TM/
Pending USA
o Active Cryptos/TM/ PKImanager/TM/
o NetSigner/TM/ PKIos/TM/
o NetSign PRO/TM/ PKIpilot/TM/
o Because Your Business Is No One Else's/TM/ PKItoken/TM/
o California Crypto Cafe/TM/ PKIagent/TM/
o SecureDial/TM/ PKIbutton/TM/
o SecureStart/TM/ PKIcard/TM/
o Forte/TM/ PKIkey/TM/
o JCryptOS/TM/ PKIlib/TM/
o Security BusWare/TM/
o Maestro/TM/
o SpyGuy (design)/TM/
o NetSignee/TM/
Registered USA
o Advanced CryptOS/R/
o CipherServer/R/
o SecureSmart/R/
o CryptOS/R/
o SpyGuy/R/
</TABLE>
<PAGE>
EXHIBIT C
TRAINING REQUIREMENT
1 Engineer to visit Litronic for Profile Manager and NetSign training.
Travel, lodging, meals and miscellaneous expenses relating to such training to
be at Distributor's sole expense.
<PAGE>
EXHIBIT D
End-User License Agreement
LITRONIC AND DISTRIBUTOR VERSIONS
(To be attached)
<PAGE>
Exhibit 10.42
LOAN AND SECURITY AGREEMENT
This Loan and Security Agreement (this "Agreement"), dated as of May 10,
1999, is entered into by and among Litronic Industries, Inc., a California
corporation ("LII"), and Litronic Inc., a Delaware corporation ("Litronic") (LII
and Litronic are sometimes referred to individually as a "Company" and
collectively as the "Companies"), and Fidelity Funding, Inc., a Texas
corporation ("Fidelity"). In consideration of the mutual covenants and
agreements contained herein, the Companies and Fidelity hereby agree as follows:
Section 1. Definitions and Rules of Construction.
1.1 When used herein, the following terms shall have the following
meanings:
"Account" means the right of a Company to payment for goods sold or leased
or for services rendered by such Company 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.
"Advance" has the meaning given to it in Section 2.1.
"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.
"Borrowing Base" means, with respect to any Company, an amount, determined
by Fidelity from time to time, equal to the sum of (a) 85% of the aggregate
outstanding face amount of the Eligible Accounts of such Company and (b) the
lesser of (i) 50% of the value of the Eligible Inventory of such Company, valued
at the lower of cost or market, or (ii) $1,000,000 less 50% of the value of the
Eligible Inventory of the other Company then included in such other Company's
Borrowing Base, valued at the lower of cost or market. Fidelity may change the
percentage of Eligible Accounts and/or Eligible Inventory constituting the
Borrowing Base of any Company from time to time based upon dilution, net
collectibility and other factors deemed appropriate by Fidelity.
"Borrowing Base Certificate" means a certificate in the form attached
hereto as Exhibit A, duly executed by the president or the chief financial
officer of the applicable Company.
"Cash Collateral" has the meaning given to it in Section 7.
"Collateral" has the meaning given to it in Section 6.
"Concentration Limit" means, as of any date and with respect to any
Account Debtor, an amount equal to 20% of the face amount of Eligible Accounts
of all Companies outstanding on such date; provided, however, that the
Concentration Limit, as of any date, with respect to Accounts owed by Lockheed
shall be an amount equal to 30% of the face amount of Eligible Accounts of all
Companies outstanding on such date; and provided, further, however, that the
Concentration Limit, as of any date, with respect to Accounts owed by the United
States or any department or instrumentality thereof (any such department or
instrument being treated as an individual Account Debtor for purposes hereof)
shall be an amount equal to 50% of the Eligible Accounts of all Companies
outstanding on such date.
"Contract Rate" means, prior to the occurrence of an Event of Default or
an event or circumstance that would, with the giving of notice, the passage of
time or both, constitute an Event of Default, a rate of interest equal to the
lesser of (a) the Prime Rate in effect from time to time plus 0.625% per annum
and (b) the maximum rate permitted by applicable law and means, after the
occurrence of an Event of Default or an event or circumstance that would, with
the giving of notice, the passage of time or both, constitute an Event of
Default, a rate of interest equal to the lesser of (x) the Prime Rate in effect
from time to time plus 4.625% per annum and (y) the maximum rate permitted by
applicable law. The Contract Rate shall be automatically increased or decreased,
as the case may be, without notice to the Companies from time to time as of the
effective date of each change in the Prime Rate.
<PAGE>
"Current Assets" means, as of any date and with respect to any Company,
only those assets of such Company that may, in the ordinary course of business,
be convened into cash within a such Company, (b) prepaid expenses for services
or for supplies that are not purchased for resale, and (c) amounts due from
Affiliates of such Company.
"Current Liabilities" means, as of any date, the Advances outstanding on
such date to such Company and all other Obligations of such 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 wit GAAP, (b) all obligations of such Person in respect of any
guaranty of any Debt of another Person, and (c) all obligations, indebtedness
and liabilities secured by any lien on or security interest in any property or
assets of such Person.
"EBIT" means, with respect to any Company and for any period, the sum
(determined without duplication, on a consolidated basis and in accordance with
GAAP) of (a) such Company's Net Profit (or net loss) for such period before
provision for income taxes, and (b) the Interest Expense of such Company for
such period.
"Eligible Accounts" means, at the time of determination thereof, all
Accounts other than (i) any Account which is payable more than 45 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 any Company or an
officer or employee of any Company, (vi) except as approved in writing by
Fidelity from time to time, any Account that arises out of a sale made or
services performed outside of the United States or Canada or that is owed by an
Account Debtor located outside the United States or Canada, (vii) any Account
that is owed by a creditor or supplier of any 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 50% (in dollar amount) of such
Account Debtor's Accounts, have been outstanding more than 90 days from invoice
date, (ix) except as approved in writing by Fidelity from time to time, any
Account that is owed by the United States or any department, agency or
instrumentality thereof, unless (a) 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), (b) such Account arose pursuant
to a discreet purchase order, such purchase order or the related invoice
specifies the Remittance Address as the place of payment and the amount of such
Account does not exceed $100,000, or (c) the Account Debtor on such Account is a
client of LII on the date hereof, and (x) any Account that has not been approved
by Fidelity for inclusion in the applicable Borrowing Base.
"Eligible Inventory" means, at the time of determination, all raw
materials that are part of a Company's Inventory that (i) are owned by such
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 ready for sale, and are not, in the opinion of
Fidelity, damaged, 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 to 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 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.
2
<PAGE>
"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 any Company or any Affiliate thereof with respect to which any
Company has a fixed or contingent liability.
"Event of Default" has the meaning given it in Section 9.
"Facility Limit" means $20,000,000.
"GAAP" means generally accepted accounting principles and practices as
promulgated by the American Institute of Certified Public Accountants, applied
on 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, with respect to any Company, such of such
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
collectibility, including, without limitation, goodwill, noncompetition
agreements, patents, copyrights, trademarks, franchises, organization or
research and development costs.
"Inventory" means all goods, now owned or hereafter acquired by a 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 such 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 such Company).
"Net Profit" means, with respect to any Company and for any period, such
Company's net income before income tax for such period determined in accordance
with GAAP.
"Obligations" means all indebtedness, obligations and liabilities of the
Companies to Fidelity arising under the Transaction Documents, and all other
indebtedness, obligations and liabilities of the Companies 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.
"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
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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.
"Proportionate Share" means, with respect to any Company and as of any
date, the ratio obtained by dividing (a) the outstanding principal balance of
the Advances, if any, to such Company as of such date, by (b) the sum of the
outstanding principal balance of all Advances as of such date.
"Pulsar" means Pulsar Data Systems, Inc., a Delaware corporation.
"Remittance Address" means such address as Fidelity shall direct the
Companies from time to time in writing in accordance with the terms hereof.
"Shareholders Equity" means, with respect to any Company and as of any
date, the shareholders' equity of such Company as of such date determined in
accordance with GAAP plus the principal balance of any Debt of such Company
subordinated to the Obligations pursuant to a written subordination agreement
satisfactory to Fidelity between Fidelity and the Person to whom such Debt is
owed.
"Tangible Net Worth" means, with respect to any Company and as of any
date, the amount obtained by subtracting such Company's Intangible Assets as of
such date from such Company's Shareholders' Equity as of such date.
"Tangible Net Worth Requirement" means $2,000,000 until March 31, 2000 and
for each calendar quarter thereafter means the Tangible Net Worth Requirement as
of the last day of the preceding calendar quarter plus $500,000.
"Term" has the meaning given to it in Section 11.4.
"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 any Company or any Affiliate
of any 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.
"Transaction Documents" means this Agreement and all other documents and
instruments executed and delivered in connection herewith or therewith.
"UCC" means the Uniform Commercial Code as in effect in the applicable
jurisdiction.
"Working Capital" means, as of any date and with respect to any Company,
the excess of Current Assets of such Company over Current Liabilities of such
Company as of such date.
"Working Capital Requirement" means $2,000,000 until March 31, 2000 and
for each calendar quarter thereafter means the Working Capital Requirement as of
the last day of the preceding calendar quarter plus $500,000.
1.2 Terms defined in the UCC and used but not defined herein shall have
the meanings ascribed to them in the UCC.
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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 hereunder shall be calculated on the basis of
actual days elapsed (including the first but excluding the last day) plus three
business days and a year of 360 days. Unless otherwise expressly provided herein
or unless Fidelity otherwise consents, all financial statements and reports
famished 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 statements of account rendered by Fidelity to any Companies relating
to principal, accrued interest or costs owing by any Company under this
Agreement shall be presumed to be correct and accurate unless, within 30 days
after receipt thereof, the Companies shall notify Fidelity in writing of any
claimed error therein.
Section 2. Advances.
2.1 Subject to the terms of this Agreement, including, without limitation,
Section 3, Fidelity shall make advances to each Company (each an "Advance" and
collectively the "Advances") from time to time during the Term; provided,
however, that the aggregate principal amount of Advances outstanding at any time
to any Company shall not exceed such Company's Borrowing Base determined by
Fidelity from time to time; and provided, further, however, that the aggregate
principal amount of Advances outstanding at any time to all Companies shall not
exceed the Facility Limit. Each Advance must be in a minimum amount of $20,000
or, if less, the unadvanced portion of the applicable Borrowing Base. The
Companies hereby agree to repay to Fidelity all Advances made to the Companies
hereunder, together with interest thereon, in the manner provided herein. The
principal owing hereunder in respect of the Advances at any given time shall
equal the aggregate amount of Advances made hereunder minus all principal
payments thereon received by Fidelity hereunder. Subject to the terms and
conditions hereof, the Companies may borrow, repay and reborrow under this
Agreement.
2.2 Each request by a Company to Fidelity for an 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 such supporting information as
Fidelity shall request, signed by an authorized representative of such Company.
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 applicable Borrowing Base, which
redetermination shall take effect immediately and remain in effect until the
next such redetermination. If all conditions precedent to any Advance requested
have been met, Fidelity will on the date requested make such Advance available
to the applicable Company by wire transfer to the account designated in writing
by such Company. In the event Fidelity does not receive an appropriately
completed Borrowing Base Certificate, Fidelity shall have no obligation to
redetermine any Borrowing Base or make any additional Advances hereunder.
2.4 If the aggregate unpaid principal balance of the Advances to any
Company exceeds such Company's Borrowing Base at any time, the Companies shall,
upon receipt of notice thereof from Fidelity, immediately repay the principal of
the 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 Advances plus all
accrued but unpaid interest thereon shall be payable by the Companies to
Fidelity on the last day of the Term.
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2.6 The aggregate unpaid principal balance of all Advances shall bear
interest at the Contract Rate in effect from time to time. Except as provided in
Section 2.5, all accrued but unpaid interest thereon shall be due and payable by
the Companies to Fidelity on the last day of each calendar month.
2.7 The Companies shall pay to Fidelity an annual facility fee in the
amount of $75,000, payable on the date hereof and on each anniversary of the
date hereof during the Term. All facility fees payable shall be deemed earned on
the date hereof, and shall be subject to acceleration upon any early termination
of this Agreement prior to the end of the Term. The Companies hereby authorize
Fidelity, at its sole discretion, to deduct any facility fee from any Advance or
Term Advance hereunder.
2.8 In the event that the income earned by Fidelity during any calendar
month pursuant to Section 2.6 is less than $14,000, the Companies shall pay to
Fidelity a minimum usage fee equal to the difference between the amount so
earned by Fidelity and $14,000, 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, and shall be prorated for any partial calendar
month during the Term.
2.9 In addition to, and not in lieu of, any termination fee required by
Section 11.4, the Companies shall pay to Fidelity a liquidation fee (in this
section called the "Liquidation Fee") in the amount of 2.00% of the face amount
of each Eligible Account included in any Company's 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 any Company of any voluntary or involuntary case under the federal
Bankruptcy Code, (ii) the date of any general assignment by any Company for the
benefit of its creditors; (iii) the date of any appointment or taking possession
by a receiver, liquidation, assignee, custodian or similar official of all or a
substantial part of any Company's assets, or (iv) the date of the cessation of
business of any Company (other than in connection with the sale of substantially
all of the assets of such Company or the merger of such Company with and into
the other Company, provided that Fidelity consented in writing to such sale or
merger prior thereto), and ending on the date on which Fidelity has actually
received all fees, costs, expenses and other amounts owing to it hereunder.
2.10 Contemporaneously with the execution and delivery hereof, the
Companies shall pay to Fidelity a fee of $15,000 plus out-of-pocket expenses to
cover the charges of Fidelity's in-house counsel for the negotiation,
preparation, execution and delivery of the Transaction Documents. In addition,
the Companies shall pay or reimburse Fidelity upon demand for (a) all other
costs and expenses incurred by Fidelity in connection with its due diligence
review of the Companies and the closing of the transactions contemplated hereby
and (b) 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 any Company, the Collateral, or any Account Debtor, including, without
limitation, any representation involving relief from 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.
2.11 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.
2.12 All interest, fees and other amounts due to Fidelity pursuant to this
Section 2 shall be payable on demand, and may, in Fidelity's sole discretion, be
deducted from any Advance or paid from the Cash Collateral.
2.13 The parties hereto intend to contract in strict compliance with
applicable usury law from time to time in effect. In furtherance thereof, the
parties hereto stipulate and agree that none of the terms and provisions
contained in this Agreement or any other Transaction Document shall ever be
construed to create a contract to pay, for the use,
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forbearance or detention of money, interest in excess of the maximum amount of
interest permitted to be charged by applicable law from time to time in effect.
None of any Company, any present or future guarantor or any other Person
hereafter becoming liable for the payment of the Obligations, shall ever be
liable for unearned interest thereon or shall ever be required to pay interest
thereon in excess of the maximum amount that may be lawfully charged under
applicable law from time to time in effect, and the provisions of this paragraph
shall control over all other provisions of the Transaction Documents which may
be in conflict therewith. If any indebtedness or obligation owed by any Company
under any Transaction Document is prepaid or accelerated and as a result any
amounts held to constitute interest are determined to be in excess of the legal
maximum, or Fidelity shall otherwise collect moneys which are determined to
constitute interest which would otherwise increase the interest on all or any
part of such obligations to an amounts in excess of that permitted to be charged
by applicable law then in effect, then all such sums determined to constitute
interest in excess of such legal limit shall, without penalty, be promptly
applied to reduce the then outstanding principal of the related indebtedness or
obligations or, at Fidelity's option returned to such Company or the other payor
thereof upon such determination. In determining whether or not any amount paid
or payable, under any circumstance, exceeds the maximum amount permitted under
applicable law, Fidelity and the Companies shall to the greatest extent
permitted under applicable law, characterize any non-principal payment as an
expense, fee or premium rather than as interest, and amortize, prorate, allocate
and spread the total amount of interest throughout the entire contemplated term
of this Agreement in accordance with the amounts outstanding from time to time
hereunder and the Maximum Rate from time to time in effect under applicable law
in order to lawfully charge the maximum amount of interest permitted under
applicable law. If at any time the rate at which interest is payable hereunder
exceeds the Maximum Rate, the amount outstanding hereunder shall bear interest
at the Maximum Rate only, but shall continue to bear interest at the Maximum
Rate until such time as the total amount of interest accrued hereunder equals
(but does not exceed) the total amount of interest which would have accrued
hereunder had there been no Maximum Rate applicable hereto. In the event
applicable law provides for an interest ceiling under Chapter 1D of the Texas
Credit Title, that ceiling shall be the indicated (weekly) ceiling and shall be
used when appropriate in determining the maximum rate permitted by applicable
law. As used in this paragraph, (i) the term "applicable law" means the laws of
the State of Texas or the laws of the United States of America, whichever laws
allow the greater interest, as such laws now exist or may be changed or amended
or come into effect in the future, and (ii) the term "Maximum Rate" means, at
the time of determination, the maximum rate of interest which, under applicable
law, may then be charged hereunder. The parties agree that this Agreement shall
not be subject to Chapter 346 of the Texas Finance Code.
Section 3. Conditions Precedent to Advances.
3.1 Fidelity shall not be obligated to make any 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) lockbox agreements relating to the lockboxes at any Remittance
Address and the related deposit accounts, duly executed by the
financial institutions establishing and maintaining such lockboxes
and deposit accounts;
(b) certificates executed by the President and the Secretary of each
Company certifying (i) the names and signatures of the officers of
such Company authorized to execute Transaction Documents, (ii) the
resolutions duly adopted by the Board of Directors of such Company
authorizing the execution of the Transaction Documents to it which
it is a party, and (iii) correctness and completeness of the copy of
the bylaws of such Company attached thereto;
(c) a certificate executed by the President and the Chief Financial
Officer/Treasurer of each Company certifying the satisfaction of the
conditions set forth in Section 3.2;
(d) certificates regarding the due formation, valid existence and good
standing of each Company in the state of its organization issued by
the appropriate governmental authorities in such jurisdiction;
(e) landlord agreements subordinating the security interests of any
landlord for premises where Eligible Inventory is located in the
Collateral to the security interest therein of Fidelity granted
herein;
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(f) a favorable opinion of counsel for the Companies covering such
matters as Fidelity may request in its sole discretion;
(g) endorsements naming Fidelity as an additional insured or loss payee,
as appropriate, on all liability insurance and all property
insurance policies of the Companies;
(h) validity guaranties of Kris Shah and William W. Davis, Sr.;
(i) release agreements executed by IBM, AT&T, Hewlett-Packard,
Wilmington Savings, Wilmington Trust, Banyan Systems and Ingram
Micro of any liens or security interests, if any, that they may have
in the Collateral.
3.2 Fidelity shall not be obligated to make any Advance hereunder
(including the first), unless: (i) all representations and warranties made by
each Company in the Transaction Document are true on and as of the date of such
Advance as if such representations and warranties had been made as of the date
of such Advance, (ii) each Company have performed and complied with all
agreements and conditions required in the Transaction Documents to be performed
or complied with by them on or prior to the date of such Advance, (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) such Advance shall not be prohibited by any law or any regulation or any
order of any court or governmental agency or authority, (v) neither Company
shall have repudiated or made any anticipatory breach of any of its obligations
under any Transaction Document, and (vi) Fidelity shall not have disapproved
such Advance in whole or in part.
3.3 Fidelity shall not be obligated to make any Advance hereunder
(including the first), unless (a) Litronic shall have completed an initial
public offering of its capital stock resulting in net proceeds of at least
$20,000,000 to Litronic and (b) the Companies shall have acquired all of the
assets, and assumed all of the liabilities, of Pulsar.
Section 4. The Companies' Representations and Warranties. Each Company
jointly and severally represents and warrants to Fidelity on the date hereof,
and shall be deemed to represent and warrant to Fidelity on each date on which
an Advance is made to any Company hereunder, that:
4.1 Each Company is a corporation or limited liability company duly
organized, validly existing and in good standing under the laws of the state of
its incorporation or formation, 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. Each Company is duly qualified and authorized to do
business as a foreign corporation or limited liability company and is in good
standing in all states in which such qualification and good standing are
necessary or desirable for the conduct by such Company of its business or the
performance by such Company of its obligations hereunder. The execution,
delivery and performance by each 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 such Company's articles or certificate of
incorporation and bylaws or certificate of organization and regulations, as the
case may be, or (b) a material breach of any other document, agreement or
instrument to which such Company is a party or by which such Company is bound.
This Agreement and the other Transaction Documents to which any Company is a
party have been duly authorized, executed and delivered by such Company, and are
legal, valid and binding obligations of such Company enforceable against such
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 any
Company of this Agreement or the other Transaction Documents to which it is a
party.
4.2 Except as described on Schedule 4.2 attached hereto, none of the
Collateral is subject to any lien, encumbrance, security interest or other claim
of any kind or nature, no Company has transferred, sold, pledged or given a
security interest in any of its Accounts, Inventory, machinery or equipment to
anyone other than Fidelity, and there are no financing statements on file in any
public office governing any property of any Company of any kind, real or
personal, in which such Company is named in or has signed as the debtor.
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4.3 Except as described on Schedule 4.2 attached hereto, each Company is
the sole owner and holder of and has good and marketable title to, all
Collateral purported to be owned by it. This Agreement creates a valid security
interest in the Collateral in favor of Fidelity, and on such security interest
is a perfected, first-priority security interest in the Collateral superior to
the rights of any other Persons therein.
4.4 The amount of each Eligible Account of each Company is due and owing
to such Company and represents an accurate statement of a bona fide sale,
delivery and acceptance of Inventory or performance of service by such 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 any 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, 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 any Borrowing Base or prior
to the date it is to be paid. To the best of each Company's knowledge, each
Account Debtor's business is solvent. The Companies have 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 each Company's knowledge.
4.5 All Inventory covered by any Borrowing Base Certificate submitted to
Fidelity is in good condition, meets all standards imposed by any governmental
authority or agency having regulating authority over such Eligible Inventory or
its use or sale, currently is either useable or saleable in the ordinary course
of business without diminution in value and meets all of the criteria contained
in the definition of Eligible Inventory (except clause (vii) thereof).
4.6 The addresses set forth in the perfection certificates delivered by
the Companies to Fidelity in connection herewith are, and for at least the last
six months have been, the mailing addresses, the chief executive offices, the
principal places of business, the offices where all of the books and records
concerning the Eligible Accounts are maintained and the location of all
Collateral of each Company. No Company transacts business, or has transacted
business during the past five years, under any trade, fictitious or assumed name
other than those set forth under such Company's signature hereon, provided that
the name of the Company was "Dril-Tron, Inc." prior to January 4, 1995. During
the past five years, no Company has been a party to a merger or consolidation or
has acquired all or substantially all of the assets of any Person except the
purchase of assets from Pulsar Data Systems, Inc. contemplated by Section 3.3.
4.7 The Companies have filed all tax reports and returns required to be
filed by them and have paid all federal, state and local taxes and governmental
charges imposed upon the Companies.
4.8 Each Company is in compliance with ERISA, and is not required to
contribute to any "multiemployer plan" as defined in Section 4001 of ERISA. Each
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. No Company has
any known material contingent liability under any Environmental Law.
4.9 The application made by the Companies 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 Companies to Fidelity in connection with such
application or hereunder have been prepared in accordance with GAAP and fairly
present the financial condition and results of operations of the Companies as of
the dates and for the periods indicated therein.
4.10 There is no fact which any Company has not disclosed to Fidelity in
writing which could materially adversely affect the properties, business or
financial condition of any 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.
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Section 5. Covenants of the Companies. From the date hereof and until the
payment and performance in full of all of the Obligations, each Company jointly
and severally covenants with Fidelity that, without Fidelity's prior written
consent in each case:
5.1 Each Company shall preserve and maintain its corporate existence, good
standing and authority to transact business in all jurisdictions where necessary
for the proper conduct of its business, and shall maintain all of its
properties, rights, privileges and franchises necessary or desirable in the
normal conduct of its business.
5.2 Each 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 each Company's books and
records during normal business hours. The Companies shall pay all costs
associated with any such audits at the rate of $750 per day per auditor plus
reasonable out-of-pocket expenses; provided, however, that as long as 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 occurred, the
liability of the Companies for any such audits shall be limited to the costs of
four audits per calendar year.
5.3 Each Company shall maintain its books and records in accordance with
GAAP. Each Company shall furnish Fidelity, upon request, such information and
statements as Fidelity shall request from time to time regarding such Company's
business affairs, financial condition and results of its operations. Without
limiting the generality of the foregoing, each Company shall provide Fidelity,
on or prior to the last day of each month, unaudited consolidated financial
statements with respect to the prior month and, within 90 days after the end of
each of such 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 such Company certifying the accuracy of such
financial statements, stating whether any Events of Default have occurred and
stating in detail the nature of any such Events of Default. Each 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 such Company does not request an Advance.
In addition, each 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 Companies 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 be signed by the
president and chief financial officer of each Company and shall specify the
nature of such condition or circumstance, the period of the existence thereof
and the action that the Companies propose to take with respect thereto.
5.4 Each Company promptly shall notify Fidelity of any attachment or any
other legal process levied against such Company and any action, suit, proceeding
or other similar claim initiated against such Company involving an amount in
controversy of more than $50,000.
5.5 The Companies shall keep and maintain adequate insurance by insurers
reasonably acceptable to Fidelity with respect to their business and all
Collateral. 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 Companies 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 Companies shall deliver copies of each insurance policy to Fidelity upon
request.
5.6 The Companies 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 Companies
when due.
5.7 Litronic shall maintain a Tangible Net Worth of not less than the
Tangible Net Worth Requirement at all times, and Litronic shall maintain Working
Capital of not less than the Working Capital Requirement at all times.
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5.8 Each Company shall comply with ERISA and shall not become required to
contribute to any "multiemployee plan" as defined in Section 4001 of ERISA. Each
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, each Company shall comply with
all Environmental Laws now or hereafter applicable to such 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. Each Company promptly shall furnish to Fidelity
all written notices of violation, complaints, penalty assessments, suits or
other proceedings received by such Company with respect to any alleged violation
of or non-compliance with any Environmental Laws.
5.9 The Net Profit of Litronic for each of the calendar quarters in 1999
and 2000 shall not exceed a negative $1,500,000, and the Net Profit of Litronic
for each calendar quarter thereafter shall equal or exceed $500,000.
5.10 No Company shall grant, create or allow to exist any security
interest, lien or other encumbrance on any of the Collateral other than (a) the
lien and security interest granted to Fidelity herein, (b) the security
interests, liens or other encumbrances described on Schedule 4.2 attached hereto
and any liens and security interests granted to holders of Debt refinancing any
Debt secured by such security interests, liens or other encumbrances to the
extent permitted by Section 5.12(c), (c) purchase money liens or security
interests, and (d) liens and security interests securing Debt permitted under
Section 5.12(c), and no Company shall execute any financing statement in favor
of any Person other than Fidelity, the Persons described on Schedule 4.2
attached hereto and any Person to whom a purchase money lien or security
interest or other lien or security interest permitted above has been granted. No
Company shall 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 such Company's signature hereon without
providing at least 30 days' prior written notice thereof to Fidelity.
5.11 No Company shall accept any returns or grant any allowance or credit
(other than those returns, allowances and credits accepted or granted in the
ordinary course of such Company's business) to any Account Debtor without notice
to and the prior written approval of Fidelity. The Companies shall provide to
Fidelity for each Account Debtor on Eligible Accounts a weekly report, in form
and substance satisfactory to Fidelity, itemizing all such returns and
allowances made during the previous week with respect to such Eligible Accounts.
5.12 No Company shall incur, directly, or indirectly, any Debt 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 (a) Debt incurred in favor of Fidelity,
(b) Debt secured by purchase money liens or security interests permitted by
Section 5.10, (c) Debt incurred to refinance any other Debt then existing and
permitted hereunder to the extent that such Debt does not exceed the amount of
Debt refinanced and such Debt is secured only by the properties and assets that
secured the Debt refinanced, (d) Debt subordinated to the Obligations pursuant
to a written subordination agreement satisfactory to Fidelity between Fidelity
and the Person to whom such Debt is owed, or (e) Debt incurred in the normal and
ordinary course of such Company's business.
5.13 The Companies shall not use any of the funds paid to the Companies
hereunder directly or indirectly for personal, family, household or agricultural
purposes.
5.14 No Company shall directly or indirectly become liable in connection
with the Debt 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.
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5.15 No Company shall 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 such Company's existing line of business.
5.16 No Company shall declare, pay or issue any dividends or other
distributions in respect of its capital stock or distribute, reserve, secure, or
otherwise make or commit distributions on account of its capital stock, or make
any payment on account of the purchase, redemption or other acquisition or
retirement of any shares of its capital stock (each, a "Distribution"), unless
(a) immediately prior thereto and after giving effect thereto, no Event of
Default or any event or circumstance that, with the giving of notice, the
passage of time or both, would constitute an Event of Default, has occurred, and
(b) the sum of (i) the amount of such Distribution, (ii) the amount of all other
previous Distributions by such Company in the same calendar year, and (iii) the
amount of all loans and advances previously made by such Company to any officer,
director, shareholder or Affiliate of such Company pursuant to the second
proviso in the first sentence of Section 5.17 in the same calendar year, do not
exceed 50% of such Company's EBIT for the period from January 1 in the year of
such Distribution is made through and including the date of such Distribution.
5.17 No Company shall make any loans or advances to or for the benefit of
any officer, director, shareholder or Affiliate of such Company; provided,
however, that each Company may make advances for routine expense allowances to
its officers and directors in the ordinary course of business; and, provided,
further, however, that so long as (a) immediately prior thereto and after giving
effect thereto, no Event of Default or any event or circumstance that, with the
giving of notice, the passage of time or both, would constitute an Event of
Default, has occurred, and (b) the sum of (i) the amount of such loan or
advance, (ii) the amount of all other previous loans or advances by such Company
to any officer, director, shareholder or Affiliate of such Company in the same
calendar year, and (iii) the amount of all Distributions previously made by such
Company in the same calendar year do not exceed 50% of such Company's EBIT for
the period from January 1 in the year of such loan or advance is made through
and including the date of such loan or advance, a Company may make loans or
advances to the other Company. No Company shall make any payment on any
obligation owing to any officer, director, shareholder or Affiliate of such
Company.
5.18 No Company shall purchase or otherwise acquire assets from any Person
outside the ordinary course of business of such Company.
5.19 No Company shall invest in or otherwise purchase or acquire the
securities of any Person.
5.20 No Company shall sell or dispose of any of its assets other than the
sale of Inventory in the ordinary course of business and other sales or
dispositions of not more than $25,000 in net book value of assets per calendar
month, and no Company shall dissolve or liquidate or become a party to any
merger or consolidation with any Person.
5.21 Each Company shall keep and maintain its furniture, fixtures
machinery and equipment in good operating condition and repair (normal wear and
tear excepted), and shall make all necessary repairs thereto so that the value
and operating efficiency thereof shall at all times be maintained and preserved.
Each Company shall notify Fidelity immediately in writing of any material loss
or damage to any item of its furniture, fixtures, machinery and equipment.
5.22 If any Company now owns or hereafter acquires any vehicles, aircraft,
watercraft or other machinery and equipment for which a certificate of title has
been issued or applied for, such Company immediately shall deliver to Fidelity,
properly endorsed, each certificate of title or application for title or other
evidence of ownership for each such item of machinery and equipment. The
Companies shall take all actions necessary to have Fidelity's security interest
properly recorded on each such certificate of title and shall take all other
actions necessary to perfect Fidelity's security interest in all such assets now
or hereafter acquired by such Company.
Section 6. Collateral. In order to secure the payment and performance of
all Obligations, each Company hereby grants to Fidelity a security interest in
and lien upon all of such 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,
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all guaranties and security therefor and all of such Company's right title and
interest in the goods purchased and represented thereby, if any, including all
of such 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
furniture, fixtures, 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) 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 "Collateral"). The
Companies agree 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 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 Companies or has been
mortgaged by the Companies, upon request by Fidelity.
Section 7. 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 any Company, to notify
any or all Account Debtors on the Collateral of the assignment of the Collateral
to Fidelity and to direct such Account Debtors to make payment of all amounts
due or to become due to any Company directly to Fidelity, and to the extent
permitted by law, to enforce collection of any 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
Collateral of any Company received by Fidelity shall be applied by Fidelity to
the payment of the outstanding Advances of such Company, whether or not then
due, then to any interest due on any Advances to such Company and any other fees
or charges due hereunder and allocable or attributable directly to such Company,
then to such Company's Proportionate Share of all other Obligations then due and
any remaining funds shall be delivered to such 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 Default, any such remaining funds may
be applied to any of the Obligations of the Companies, whether or not then due,
or held by Fidelity as cash collateral ("Cash Collateral") until all Obligations
have been paid in full and Fidelity has no further obligation to advance funds
to the Companies. All amounts and proceeds (including instruments and writings)
received by any Company in respect of the Collateral shall be received in trust
for the benefit of Fidelity hereunder, shall be segregated from other funds of
such Company and shall be immediately 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. If the six-month monthly rolling average
of credit card sales for both Companies in the aggregate exceeds $100,000, all
credit card payments shall be directed to a blocked account set up at a bank
acceptable to Fidelity for Fidelity's benefit and shall be applied to the
Obligations in the manner provided herein.
Section 8. Power of Attorney. Each 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 such Company, to
do any or all of the following: (a) endorse the name of such Company on any
checks or other evidences of payment whatsoever that may come into the
possession of Fidelity regarding Collateral, including checks received by
Fidelity pursuant to Section 7 hereof; (b) receive, open and forward any mail
addressed to such Company and received at the Remittance Address; (c) pay,
settle, compromise, prosecute or defend any action, claim, conditional waiver
and release, or proceeding relating to Collateral; (d) upon the occurrence of an
Event of Default, notify, in the name of such Company, the U.S. Post Office to
change the address for delivery of mail addressed to such Company to such
address as Fidelity may designate (provided that Fidelity shall turn over to
such Company all such mail not relating to Collateral); and (e) execute and file
on behalf of such 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 Collateral or (ii) required or permitted under
any provision of 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. Each Company acknowledges that Fidelity may
verify or confirm the Eligible Accounts from time to time, by among other means,
contacting the related Account Debtors, and each Company consents to such
verification and confirmation.
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Section 9. Default. An event of default ("Event of Default") shall be
deemed to have occurred hereunder, and Fidelity shall have no further obligation
to make any further Advances and may immediately exercise its rights and
remedies with respect to the Collateral under this Agreement, the UCC and
applicable law, upon the happening of one or more of the following:
(a) Any Company shall fail to pay on demand or otherwise as and when
required or due any amount required to be paid or owed by such Company to
Fidelity, whether hereunder or otherwise.
(b) Any Company shall breach any covenant or agreement made herein or in
any other Transaction Document (other than those covered by clause (a) above)
and the same shall not be cured to Fidelity's satisfaction within ten days
after the earlier of (i) the date on which Company first obtains knowledge that
such covenant or agreement has been breached or (ii) the date on which Fidelity
notifies the Companies that such covenant or agreement has been breached.
(c) Any warranty or representation made herein or in any other Transaction
Document shall be untrue in any material respect when made or any report,
certificate, schedule, financial statement, profit and loss statement or other
statement furnished by any Company, or by any other Person on behalf of any
Company, to Fidelity is not true and correct in all material respects when
furnished.
(d) There shall be commenced by or against any Company any voluntary under
the federal Bankruptcy Code, or there shall be commenced against the Company any
involuntary case under the federal Bankruptcy Code that is not dismissed within
60 days after commencement, or any Company shall make an assignment for the
benefit of its creditors, or of a receiver or custodian shall be appointed for
any Company for a substantial portion of its assets.
(e) Any Company shall become insolvent in that its debts are greater than
the fair value of its assets, or any Company is generally not paying its debts
as they become due.
(f) Any involuntary lien, garnishment, attachment or the like shall be
issued against or shall attach to the Collateral and the same is not released or
bonded or insured to the satisfaction of Fidelity within ten days.
(g) An event or circumstance shall have occurred which Fidelity believes
has or may result in a material adverse change in any Company's financial
condition, business or operations or the value of the Collateral.
(h) Any 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.
(i) 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.
(j) Any Company suffers the entry against it a final judgment for the
payment of money in excess of $100,000, and either (i) such judgment is not paid
in full within 30 days after the entry of such judgment or (ii) such judgement
is not bonded or insured to the satisfaction of Fidelity.
(k) Fidelity shall believe in good faith that the prospect for payment or
performance of the Obligations has become impaired.
(l) Any guarantor of the Obligations shall repudiate his, her or its
obligations in respect of such guaranty.
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(m) An "event of default" shall have occurred and be continuing under any
agreement, document or instrument evidencing any Debt exceeding $500,000 of any
Company and such "event of default" is not waived by the holder of such Debt or
otherwise cured by such Company, or any Debt exceeding $500,000 of any Company
is accelerated or called for payment prior to the due date thereof.
(n) Kris Shah or, after the acquisition by Litronic of the stock of Pulsar
Data Systems, Inc., William W. Davis, Sr. shall cease to serve as a member of
the Board of Directors or executive management of Litronic.
Upon the occurrence of an Event of Default described in subsection (d) of this
section, all of the Obligations owing by the Companies to Fidelity under any of
the Transaction Documents shall thereupon be immediately due and payable,
without demand, presentment, notice of demand or of dishonor and nonpayment, or
any other notice or declaration of any kind, all of which are hereby expressly
waived by the Companies. During the continuation of any other Event of Default,
Fidelity, at any time and from time to time, may declare any or all of the
Obligations owing by the Companies to Fidelity under any of the Transaction
Documents immediately due and payable, all without notice, demand, presentment,
notice of demand or of dishonor and nonpayment, or any notice or declaration of
any kind, all of which are hereby expressly waived by the Companies. After any
such acceleration (whether automatic or due to declaration by Fidelity), any
obligation of Fidelity to make any further Advances or Term Advances or loans of
any kind under this Agreement or any other agreement with any Company shall
terminate. All 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 Companies, whether or not an Event of Default may then be in existence.
Section 10. Remedies and application of Proceeds.
10.1 In addition to, and without 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 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 any Company to, and each 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 any 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 each
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. Each Company agrees that, to the extent notice of sale shall be
required by law, at least five days' notice to such Company of the time and
place of any public sale of the Collateral or the time after which any private
sale of the Collateral 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.
10.2 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 any 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
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any Company paid or discharged by Fidelity, and of any expenses of Fidelity
payable by any 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 provision); and (g) by delivery
to such Company or to whomsoever shall be lawfully entitled to receive the same
or as a court of competent jurisdiction shall direct.
Section 11. Miscellaneous.
11.1 In the event that any 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 8 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, such Company
acknowledges that such conduct will 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 such Company
unless otherwise required by applicable law.
11.2 All rights, remedies and powers granted to Fidelity in this
Agreement, or in any other instrument or agreement given by any 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. 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. An Advance by Fidelity during the continuation of an Event of Default
shall not obligate Fidelity to make any further Advances during the continuation
of such Event of Default.
11.3 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 Companies hereby agree that Fidelity may
publicize the transaction contemplated by this Agreement in newspapers, trade
and similar publications including, without limitation, the publication of a
"tombstone".
11.4 The term of this Agreement shall be for three years from the date
hereof (the original term and any extension thereof are herein called the
"Term") and from year to year thereafter unless either party hereto gives notice
to the other party hereto not more than 90 days or less than 60 days prior to
the end of the Term; provided, however, that Fidelity may terminate this
Agreement at any time effective immediately upon the occurrence of an Event of
Default. The Companies acknowledge that termination of this Agreement at any
time prior to the end of the Term would result in the loss by Fidelity of the
benefits of 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 second anniversary of the
date hereof for any reason, the Companies 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 only the maximum extent permitted by applicable law. No early
termination fee shall be payable if such termination occurs after the second
anniversary of the date hereof. 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 completed and
satisfied in full. No Company shall be entitled to terminate this Agreement as
to itself only, unless all Companies terminate this Agreement or Fidelity
consents to such termination.
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11.5 Each and every provision, condition, covenant and representation
contained in this Agreement is, and shall 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.
11.6 The Companies jointly and severally agree to indemnify, hold harmless
and defend all Indemnified Persons from and against any and all Indemnified
Claims other than those arising out of the gross negligence or willful
misconduct of the applicable Indemnified Person. THE FOREGOING INDEMNIFICATION
SHALL APPLY WHETHER OR NOT SUCH INDEMNIFIED CLAIMS ARE IN ANY WAY OR TO ANY
EXTENT OWED, 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. Upon notification and demand, the Companies agree to provide
defense of any Indemnified Claim and to pay all reasonable costs and expenses of
counsel selected by any Indemnified Person in respect thereof. Neither the
Company nor any Indemnified Person shall compromise or settle any Indemnified
Claim without the prior written consent of the other, which consent shall not be
unreasonably withheld. Except as specifically provided in this section, the
Companies waive all notices from any Indemnified Person. The provisions of this
Section 11.6 shall survive the termination of this Agreement.
11.7 All grants, covenants and agreements contained in this Agreement
shall bind and inure to the benefit of the parties hereto and their respective
successors and assigns; provided, however, that the Companies may not delegate
or assign any of their 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 time
to time grant participations in all or any part of the Obligations to any 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 Companies.
11.8 Any action permitted or provided to be taken or omitted by Fidelity
hereunder may be taken or omitted, as the case may be, by Fidelity in its sole
and absolute discretion, and any consent or waiver required of Fidelity or
determination to be made by Fidelity hereunder may be given, withheld or made,
as the case may be, by Fidelity in its sole and absolute discretion.
11.9 ALL OBLIGATIONS HEREUNDER ARE THE JOINT AND SEVERAL OBLIGATION OF ALL
COMPANIES. ALL OBLIGATIONS AND INDEBTEDNESS NOW OR HEREAFTER OWING TO FIDELITY
BY THE COMPANIES JOINTLY AND SEVERALLY OR BY ANY COMPANY INDIVIDUALLY SHALL BE
SECURED BY ALL OF THE COLLATERAL, AND FIDELITY MAY HOLD AND APPLY AND REAPPLY
ALL MONIES, PROPERTY AND OTHER COLLATERAL OF ANY COMPANY IN PAYMENT OF ANY
INDEBTEDNESS, LIABILITIES OR OBLIGATIONS OF ANY OF THE COMPANIES UNDER THIS
AGREEMENT OR ANY OTHER TRANSACTION DOCUMENT. NO COMPANY SHALL HAVE, AND EACH
COMPANY EXPRESSLY WAIVES, ANY, RIGHTS OF SUBROGATION, REIMBURSEMENT, INDEMNIFY,
EXONERATION, CONTRIBUTION OR ANY SIMILAR CLAIM OR AGAINST ANY OTHER COMPANY OR
ANY OTHER PERSON DIRECTLY OR CONTINGENTLY LIABLE FOR THE OBLIGATIONS OR AGAINST
OR WITH RESPECT TO ANY OTHER COMPANY'S PROPERTY (INCLUDING, WITHOUT LIMITATION,
ALL OF SUCH COMPANY'S PROPERTY WHICH SERVES AS COLLATERAL FOR ITS OBLIGATIONS TO
FIDELITY). IN ADDITION, EACH COMPANY WAIVES ANY RIGHT TO ENFORCE ANY REMEDY
WHICH FIDELITY NOW HAS OR MAY HEREAFTER HAVE AGAINST ANY OTHER COMPANY.
NOTWITHSTANDING THE FOREGOING OR ANY OTHER PROVISION OF THIS AGREEMENT, IT IS
UNDERSTOOD AND AGREED THAT NO COMPANY SHALL BE LIABLE HEREUNDER FOR ANY PORTION
OF THE OBLIGATIONS IN EXCESS OF SUCH COMPANY'S "MAXIMUM LIABILITY AMOUNT." AS
USED HEREIN, THE TERM "MAXIMUM LIABILITY AMOUNT" SHALL MEAN, WITH RESPECT TO ANY
COMPANY, THE LESSER OF (a) THE AMOUNT OF THE OBLIGATIONS OR (b) THE SUM OF (i)
THE OUTSTANDING PRINCIPAL BALANCE OF THE ADVANCES TO SUCH COMPANY HEREUNDER,
ACCRUED AND UNPAID INTEREST
17
<PAGE>
THEREON, ANY OTHER FEES AND CHARGES HEREUNDER ALLOCABLE OR ATTRIBUTABLE DIRECTLY
TO SUCH COMPANY AND SUCH COMPANY'S PROPORTIONATE SHARE OF ANY OTHER FEES AND
CHARGES HEREUNDER AND (ii) THE MAXIMUM ADDITIONAL AMOUNT THAT WOULD NOT RESULT
IN SUCH COMPANY'S LIABILITY HEREUNDER CONSTITUTING A FRAUDULENT TRANSFER OR
CONVEYANCE UNDER APPLICABLE STATE OR FEDERAL LAW AS DETERMINED BY A COURT OF
COMPETENT JURISDICTION.
11.10 THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, WITHOUT REFERENCE TO THE RULES
THEREOF RELATING TO CONFLICTS OF LAW. EACH COMPANY HEREBY IRREVOCABLY SUBMITS
ITSELF TO THE JURISDICTION OF THE STATE AND FEDERAL COURTS LOCATED IN ORANGE
COUNTY, CALIFORNIA AND AGREES AND CONSENTS THAT SERVICE OF PROCESS MAY BE MADE
UPON IT IN ANY LEGAL PROCEEDING RELATING TO THIS AGREEMENT, ANY BORROWING
HEREUNDER OR ANY OTHER RELATIONSHIP BETWEEN FIDELITY AND EACH COMPANY BY ANY
MEANS ALLOWED UNDER STATE OR FEDERAL LAW. ANY LEGAL PROCEEDING ARISING OUT OF OR
IN ANY WAY RELATED TO THIS AGREEMENT, ANY BORROWING HEREUNDER OR ANY OTHER
RELATIONSHIP BETWEEN FIDELITY AND EACH COMPANY SHALL BE BROUGHT AND LITIGATED IN
ANY ONE OF THE STATE OR FEDERAL COURTS LOCATED IN ORANGE COUNTY, CALIFORNIA
HAVING JURISDICTION UNLESS FIDELITY SHALL ELECT OTHERWISE. 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.
11.11 EACH OF EACH 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 ARISING 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 THAN, OR IN ADDITION TO, ACTUAL DAMAGES; (C) CERTIFIES THAT 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.
11.12 This Agreement shall not become effective unless and until Litronic
completes a public offering of its capital stock resulting in net proceeds to
Litronic of at least $20,000,000. Effective upon the completion of such a public
offering, this Agreement shall restate and amend the Loan and Security Agreement
dated June 27, 1996 between Litronic Industries, Inc. and Fidelity Funding of
California, Inc. (as the same may have heretofore been amended or modified, the
"Original Agreement,") in its entirety, and all of the terms and provisions
hereof shall supersede the terms and provisions thereof; provided that all
indebtedness and obligations of the Company to Fidelity under the Original
Agreement are renewed and extended hereby and all liens, security interests,
assignments, superior titles, rights, remedies, powers, equities and priorities
(the "Liens") created by the Original Agreement are renewed and extended hereby
and shall continue in full force and effect to secure the Obligations. By this
Agreement, the Liens are hereby ratified and confirmed as valid, subsisting and
continuing to secure the Obligations.
11.13 THIS AGREEMENT AND THE DOCUMENTS DESCRIBED HEREIN AND DELIVERED IN
CONNECTION HEREWITH REPRESENT THE FINAL AGREEMENT OF THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN
18
<PAGE>
THE PARTIES. NO MODIFICATION OR AMENDMENT OF OR SUPPLEMENT TO THIS AGREEMENT OR
TO ANY SUCH DOCUMENTS SHALL BE VALID OR EFFECTIVE UNLESS THE SAME IS IN WRITING
AND SIGNED BY THE PARTY AGAINST WHOM IT IS SOUGHT TO BE ENFORCED.
The undersigned have entered into this Agreement as of the date first
written above.
FIDELITY FUNDING, INC., LITRONIC INDUSTRIES, INC.,
a Texas corporation a California corporation
By: /s/ Michael D. Haddad By: /s/ Kris Shah
----------------------------- ----------------------------
Name: Michael D. Haddad Name: Kris Shah
----------------------- ----------------------
Title: President Title: President & CEO
---------------------- ---------------------
Mailing Address: 12770 Merit Drive, Mailing Address: 2030 Main Street,
Suite 600 Suite 1250
Dallas, Texas 75251 Irvine, California 92614
Street Address: 12770 Merit Drive, Street Address: 2030 Main Street,
Suit 600 Suite 1250
Dallas, Texas 75251 Irvine, California 92614
Other Place of Business:
4390 Parliament Place
Suite R
Lanham, Maryland 20706
Trade, Fictitious and Assumed Names used:
None.
LITRONIC INC.
a Delaware corporation
By: /s/ Kris Shah
----------------------------
Name: Kris Shah
----------------------
Title: President & CEO
---------------------
Mailing Address: 2030 Main Street,
Suite 1250
Irvine, California 92614
Street Address: 2030 Main Street,
Suite 1250
Irvine, California 92614
Other Place of Business:
4390 Parliament Place
Suite R
Lanham, Maryland 20706
Trade, Fictitious and Assumed Names used:
None.
19
<PAGE>
SCHEDULE 4.2
Liens and Security Interests
Secured Party Filing Office File No.
- ------------- ------------- --------
Greyhound Orange County, California 92-347600
General Electric Orange County, California 96-634031
Sun Microsystem California Secretary of State 9829960106
Phoenixcor California Secretary of State 9607360274
Imaging Financial California Secretary of State 94156674
ITT Capital California Secretary of State 94097409
California Thrift California Secretary of State 9533260359
20
<PAGE>
EXHIBIT A
BORROWING BASE CERTIFICATE
LITRONIC INC.
(Date)
REPORT #
<TABLE>
<CAPTION>
FINISHED RAW
COLLATERAL ACCOUNTS GOODS MATERIALS
RECEIVABLE INVENTORY INVENTORY
- ----------------------------------------------------------------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
1 GROSS COLLATERAL LAST REPORT (REPORT #)
REPORT DATE: (DATE) LINE 6 PRIOR REPORT
2 ADD SALES ASSIGNED AND INVENTORY ADDITIONS
3 ADD DEBIT MEMOS AND OTHER ADJUSTMENTS
4 LESS CASH COLLECTIONS AND INVENTORY REDUCTIONS
5 LESS DISCOUNTS, CREDIT MEMOS AND ADJUSTMENTS
6 GROSS COLLATERAL PER THIS REPORT
7 INELIGIBLE COLLATERAL
ACCOUNTS RECEIVABLE INVENTORY
- -----------------------------------------------------------------
A PAST DUE OVER 90 DAYS OBSOLETE
B CREDITS OVER 90 DAYS SLOW MOVING
C CROSS AGING - 25%>90, 0 ELIGIBLE CONSIGNED
D COD SALES >120 DAYS
E FOREIGN RECEIVABLES PACKAGING
F CONTRA ACCOUNTS OTHER LIMIT
UNRECONCILED AIR OVERAGE AMOUNT
H CONCENTRATION - >20% COMMERCIAL ----------
H CONCENTRATION - >30% LOCKHEED MARTIN
H CONCENTRATION - >50% GOVERNMENT
I OFFSITE INVENTORY NOT> 120 DAYS
8 TOTAL INELIGIBLE PER THIS
REPORT (SUM 7A THROUGH 7H) ________________________________________________
9 NET ELIGIBLE COLLATERAL (6-8) ________________________________________________
# ADVANCE RATE ________________________________________________
85% 50% 50%
# TOTAL
----------
COLLATERAL AVAILABILITY
# BORROWING BASE
LESSER 0F 11 OR COMMITMENT TOTAL:
# LESS SPECIAL RESERVE
# NET AVAILABILITY BEFORE LOAN _____________________________________________________________
BALANCE (12-13) _____________________________________________________________
LOAN
- -----------------------------------------------------------------
# LOAN BALANCE - LAST REPORT LINE 22
# LESS PAYMENTS FROM COLLECTIONS
# BALANCE PER FIDELITY FUNDING OF CALIFORNIA
REPORT PRIOR TO NEW ACTIVITY
# LESS NON-COLLECTION PAYMENTS
# ADD LOAN ADJUSTMENTS:
INTEREST
AUDIT FEES
MINIMUM FEE ADJUSTMENT _____________________________________________________________
WIRE TRANSFER, LOCK BOX, MISC, FEES
# ADD LINE MAINTENANCE FEE
# ADD ADVANCE REQUEST THIS REPORT _____________________________________________________________
# NEW LOAN BALANCE _____________________________________________________________
# EXCESS AVAILABILITY _____________________________________________________________
</TABLE>
Page 1
5/10/99
Bbc
<PAGE>
EXHIBIT A
BORROWING BASE CERTIFICATE
LITRONIC INC.
(Date)
REPORT #
THE UNDERSIGNED HEREBY CERTIFIES TO FIDELITY FUNDING, INC. ("FIDELITY") THAT:
1 HE IS THE DULY ELECTED AND QUALIFIED CHIEF FINANCIAL OFFICER OF
____________________ (THE "COMPANY"), IS FAMILIAR WITH THE FACTS HEREIN
CERTIFIED AND IS DULY AUTHORIZED TO CERTIFY SUCH FACTS AND MAKE AND
DELIVER THIS BORROWING BASE CERTIFICATE FOR AND ON BEHALF OF THE COMPANY,
PURSUANT TO THAT CERTAIN LOAN AND SECURITY AGREEMENT, (THE "AGREEMENT"),
DATED AS OF MAY__, 1999 AMONG LITRONIC INC., LITRONIC INDUSTRIES, INC. AND
FIDELITY.
2 ALL REPRESENTATIONS AND WARRANTIES MADE BY THE COMPANY IN THE AGREEMENT OR
ANY OTHER INSTRUMENT, DOCUMENT, CERTIFICATE OR OTHER AGREEMENT EXECUTED IN
CONNECTION THEREWITH (COLLECTIVELY, THE "TRANSACTION DOCUMENTS") DELIVERED
ON OR BEFORE THE DATE HEREOF ARE TRUE ON AND AS OF THE DATE HEREOF AS IF
SUCH REPRESENTATIONS AND WARRANTIES HAD BEEN MADE AS OF THE DATE HEREOF.
3 NO EVENTS 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
AND IS EXISTING.
4 THE COMPANY HAS PERFORMED AND COMPLIED WITH ALL AGREEMENTS AND CONDITIONS
REQUIRED IN THE TRANSACTION DOCUMENTS TO BE PERFORMED OR COMPLIED WITH BY
IT ON OR PRIOR TO THE FUNDING OF THE ADVANCE REQUESTED HEREBY.
5 AFTER FIDELITY MAKES THE ADVANCE REQUESTED HEREBY, THE AGGREGATE AMOUNT OF
ALL OUTSTANDING ADVANCES WILL NOT EXCEED THE LESSER OF (I) THE COMMITMENT
AND (II) THE BORROWING BASE.
6 ALL INFORMATION CONTAINED IN THIS BORROWING BASE CERTIFICATE IS TRUE,
CORRECT AND COMPLETE.
TERMS USED AND NOT OTHERWISE DEFINED HEREIN SHALL HAVE THE MEANING ASSIGNED TO
THEM IN THE AGREEMENT, IF SO DEFINED UNDER SECTION 1. "DEFINITIONS AND
CONSTRUCTION" OF THE AGREEMENT.
IN WITNESS WHEREOF, THIS INSTRUMENT IS EXECUTED BY THE UNDERSIGNED AS OF: (Date)
COMPANY NAME:_______________________
/s/ TW SEYKORA
THOMAS W. SEYKORA
CHIEF FINANCIAL OFFICER
<TABLE>
<CAPTION>
PAYMENT AND ADJUSTMENT DATA
ACCOUNTS AMOUNT
PAYMENTS RECEIVED BY: RECEIVABLE ACCOUNTS AMOUNT
DATE DEPOSIT TO RECEIVABLE OTHER TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FIDELITY - DALLAS LOCKBOX
FIDELITY - DALLAS LOCKBOX
FIDELITY - DALLAS LOCKBOX
FIDELITY - DALLAS LOCKBOX
FIDELITY - DALLAS LOCKBOX ________________________________________
TOTAL RECEIPTS TO FIDELITY FUNDING TO LINE 16 ________________________________________
CREDIT CARD SALES/WIRE TRANSFER BYL
CREDIT CARD SALES/WIRE TRANSFER BYL
CREDIT CARD SALES/WIRE TRANSFER BYL
CREDIT CARD SALES/WIRE TRANSFER BYL
CREDIT CARD SALES/WIRE TRANSFER BYL
CREDIT CARD SALES/WIRE TRANSFER BYL
CREDIT CARD SALES/WIRE TRANSFER BYL ________________________________________
TOTAL RECEIPTS TO BANK OF YORBA LINDA ________________________________________
DISCOUNTS ALLOWED
________________________________________
TOTAL DISCOUNTS, CREDIT MEMOS AND ADJUSTMENTS ________________________________________
LESS DISCOUNTS, CREDIT MEMOS AND ADJUSTMENTS TO LINE 5 ________________________________________
Page 2
5/10/99
Bbc
________________________________________
TOTAL DEBIT MEMOS AND OTHER ADJUSTMENTS TO LINE 3 ________________________________________
</TABLE>
<PAGE>
VALIDITY GUARANTY
This Validity Guaranty is executed and delivered by Kris Shah, an
individual residing in California ("Validity Guarantor"), for the benefit of
Fidelity Funding, Inc., a Texas corporation ("Fidelity"), as follows:
WITNESSETH:
WHEREAS, Litronic Industries, Inc., a California corporation, and Litronic
Inc., a Delaware corporation (the "Companies"), and Fidelity have entered into a
Loan and Security Agreement (as amended, modified or otherwise supplemented from
time to time, the "Loan and Security Agreement") of even date herewith.
WHEREAS, as a condition (among others provided therein) to making advances
to the Companies under the Loan and Security Agreement, Fidelity requires that
Validity Guarantor make certain covenants, warranties and guaranties for the
benefit of Fidelity as provided herein, and as an inducement to Fidelity to
enter into the Loan and Security Agreement with the Companies and to make
advances to the Companies as provided therein, Validity Guarantor has agreed to
make such covenants, warranties and guaranties to Fidelity as provided herein.
NOW THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which hereby are
acknowledged, Validity Guarantor hereby expressly warrants, covenants and
guarantees to Fidelity as follows:
1. Capitalized terms used but not defined herein shall have the meanings
ascribed to them in the Loan and Security Agreement.
2. All Accounts or Inventory from time to time reported to Fidelity as
Eligible Accounts, Eligible Inventory or otherwise listed or included on any
Borrowing Base Certificate shall be genuine and in all respects what they
purport to be, shall, in the case of Accounts, represent bona fide and existing
obligations of Account Debtors, and shall, in the case of Inventory, constitute
goods useable and saleable in the ordinary course of business without diminution
in value.
3. All reports, schedules, certificates and other information from time to
time delivered or otherwise reported to Fidelity by either Company, including,
without limitation, all financial statements, tax returns and Borrowing Base
Certificates and all supporting information or documentation delivered in
connection therewith, shall be bona fide, complete, correct and accurate in all
respects and shall accurately and completely report all matters purported to be
covered or reported thereby.
<PAGE>
4. Each Account from time to time identified to Fidelity in any Borrowing
Base Certificate as an Eligible Account shall at all times constitute an
Eligible Account. Each item of Inventory from time to time identified to
Fidelity in any Borrowing Base Certificate shall at all times constitute
Eligible Inventory.
5. Any and all officers, employees and other agents or representatives
from time to time signing any reports (including without limitation those
specifically mentioned above) or otherwise delivery any such information to
Fidelity shall be duly authorized to deliver same to Fidelity on behalf of the
applicable Company.
6. All collections and proceeds of Accounts from time to time received by
either Company, or any of its officers, employees, agents or other
representatives, shall forthwith be delivered to Fidelity as required under the
Loan and Security Agreement.
7. The Validity Guarantor agrees to indemnify, defend and save Fidelity
free and harmless of and from any damage or loss which Fidelity may sustain,
directly or indirectly, as a result of (i) any act or omission in breach or
contravention of any of the representations, warranties, covenants and
guaranties contained herein, (ii) any fraud, deceit, deception or criminal act
on the part of any officer, employee, agent or other representative of either
Company in any of its dealings with Fidelity on behalf of such Company, and
(iii) Accounts that are or become disputed, in whole or in part, by reason of
any dispute or disagreement pertaining to actions or inactions by either
Company, whether or not any such dispute, return or non-acceptance is justified.
8. Fidelity's rights and remedies hereunder are cumulative of all other
rights and remedies which Fidelity may now or hereafter have with respect to the
Companies. Validity Guarantor's liability hereunder is direct and unconditional,
and may be enforced by Fidelity without first pursuing any other right, remedy
or security.
9. This agreement shall be binding upon the Validity Guarantor and his or
her heirs, personal representatives, successors and assigns, and shall inure to
the benefit of Fidelity and its successors or assigns.
10. Validity Guarantor agrees that he or she will cooperate with Fidelity
at all times in connection with any actions taken by Fidelity pursuant to the
Loan and Security Agreement to monitor, administer, enforce or collect the
Collateral. In the event either Company should cease or discontinue operating as
a going concern in the ordinary course of business, then for so long as any
Obligations remain outstanding, Validity Guarantor agrees that he or she shall
assist Fidelity in connection with any such action, as Fidelity may request. At
Fidelity's request in such event, Validity Guarantor shall enter into a
collection servicing agreement with Fidelity pursuant to which Validity
Guarantor shall undertake to monitor, administer, enforce and collect the
Collateral, for the benefit of Fidelity, on such terms and conditions as
Fidelity and Validity Guarantor shall determine by mutual agreement.
2
<PAGE>
11. This Agreement shall be a continuing agreement for the benefit of
Fidelity and its successors and assigns. Validity Guarantor expressly consents
to any or all of the following action by Fidelity, at any time, without notice
to Validity Guarantor: (i) renewal, extension or modification of the Loan and
Security Agreement or any of the Transaction Documents, (ii) renewal, extension,
modification, compromise, forbearance or forgiveness of the Obligations, or any
part thereof, (iii) increase or decrease of the rate of interest from time to
time to accrue on the Obligations, (iv) exercise of any rights or remedies under
the Transaction Documents, or forbearance of any rights or remedies under the
Transaction Documents, (v) release of any Person from time to time liable for
the Obligations or any part thereof, (vi) substitution, release or modification
of any Collateral. Validity Guarantor agrees that Fidelity may take all or any
of such action in such manner, and at such time, and upon such terms, as
Fidelity may determine in its sole discretion, without notice to Validity
Guarantor, without in any way impairing Validity Guarantor's obligations under
this Agreement. Validity Guarantor acknowledges that he has reviewed and is
familiar with the Transaction Documents and is familiar with the operations and
financial condition of the Companies, and agrees that Fidelity shall have no
duty or obligation to communicate to Validity Guarantor any information
regarding the Company's financial condition or affairs.
12. ALL ACTS AND TRANSACTIONS HEREUNDER AND THE RIGHTS AND OBLIGATIONS OF
THE PARTIES HERETO SHALL BE GOVERNED, CONSTRUED AND INTERPRETED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF TEXAS, WITHOUT REFERENCE TO THE RULES THEREOF
RELATING TO CONFLICTS OF LAW. VALIDITY GUARANTOR HEREBY IRREVOCABLY SUBMITS TO
THE JURISDICTION OF THE STATE AND FEDERAL COURTS LOCATED IN ORANGE COUNTY,
CALIFORNIA, AND AGREES AND CONSENTS THAT SERVICE OF PROCESS MAY BE MADE UPON
VALIDITY GUARANTOR IN ANY LEGAL PROCEEDING RELATING TO THIS AGREEMENT OR ANY
OTHER RELATIONSHIP BETWEEN FIDELITY AND VALIDITY GUARANTOR BY ANY MEANS ALLOWED
UNDER STATE OR FEDERAL LAW. ANY LEGAL PROCEEDING ARISING OUT OF OR IN ANY WAY
RELATED TO THIS AGREEMENT OR ANY OTHER RELATIONSHIP BETWEEN FIDELITY AND
VALIDITY GUARANTOR SHALL BE BROUGHT AND LITIGATED EXCLUSIVELY IN ANY ONE OF THE
STATE OR FEDERAL COURTS LOCATED IN ORANGE COUNTY, CALIFORNIA HAVING JURISDICTION
UNLESS FIDELITY SHALL ELECT OTHERWISE. VALIDITY GUARANTOR HEREBY WAIVES AND
AGREES 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.
THIS AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY
NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT
ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS
BETWEEN THE PARTIES.
3
<PAGE>
Signed effective as of May 10, 1999.
/s/ Kris Shah
--------------------------------------
Name: Kris Shah
Social Security No.: ###-##-####
Address: 40 Mission Bay Drive
Corona Del Mar, CA 92625
Telephone No.: (949) 640-2354
ACCEPTED:
FIDELITY FUNDING, INC.
By: /s/ Michael D. Haddad
----------------------------
Name: Michael D. Haddad
----------------------
Title: President
----------------------
4
<PAGE>
ACKNOWLEDGMENT AND STIPULATION
The undersigned hereby acknowledges and stipulates that (i) the
undersigned is the spouse of Validity Guarantor and (ii) all community property
interests of Validity Guarantor and the undersigned in all their assets whether
now owned or hereafter acquired (whether subject to the sole management of
Validity Guarantor or the undersigned) are subject to, and may be used for, the
payment and performance of Validity Guarantor's obligations under the above
Validity Guaranty. Notwithstanding the foregoing, Fidelity shall have no
recourse against the separate property of the undersigned for satisfaction of
any such obligations.
This Acknowledgment and Stipulation is entered into as of May 10, 1999 for
the benefit of Fidelity.
/s/ Geraldine Shah
---------------------------
Spouse Name: Geraldine Shah
5
<PAGE>
VALIDITY GUARANTY
This Validity Guaranty is executed and delivered by William W. Davis, Sr.,
an individual residing in Maryland ("Validity Guarantor"), for the benefit of
Fidelity Funding, Inc., a Texas corporation ("Fidelity"), as follows:
WITNESSETH:
WHEREAS, Litronic Industries, Inc., a California corporation, and Litronic
Inc., a Delaware corporation (the "Companies"), and Fidelity have entered into a
Loan and Security Agreement (as amended, modified or otherwise supplemented from
time to time, the "Loan and Security Agreement") of even date herewith.
WHEREAS, as a condition (among others provided therein) to making advances
to the Companies under the Loan and Security Agreement, Fidelity requires that
Validity Guarantor make certain covenants, warranties and guaranties for the
benefit of Fidelity as provided herein, and as an inducement to Fidelity to
enter into the Loan and Security Agreement with the Companies and to make
advances to the Companies as provided therein, Validity Guarantor has agreed to
make such covenants, warranties and guaranties to Fidelity as provided herein.
NOW THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which hereby are
acknowledged, Validity Guarantor hereby expressly warrants, covenants and
guarantees to Fidelity as follows:
1. Capitalized terms used but not defined herein shall have the meanings
ascribed to them in the Loan and Security Agreement.
2. All Accounts or Inventory from time to time reported to Fidelity as
Eligible Accounts, Eligible Inventory or otherwise listed or included on any
Borrowing Base Certificate shall be genuine and in all respects what they
purport to be, shall, in the case of Accounts, represent bona fide and existing
obligations of Account Debtors, and shall, in the case of Inventory, constitute
goods useable and saleable in the ordinary course of business without diminution
in value.
3. All reports, schedules, certificates and other information from time to
time delivered or otherwise reported to Fidelity by either Company, including,
without limitation, all financial statements, tax returns and Borrowing Base
Certificates and all supporting information or documentation delivered in
connection therewith, shall be bona fide, complete, correct and accurate in all
respects and shall accurately and completely report all matters purported to be
covered or reported thereby.
<PAGE>
4. Each Account from time to time identified to Fidelity in any Borrowing
Base Certificate as an Eligible Account shall at all times constitute an
Eligible Account. Each item of Inventory from time to time identified to
Fidelity in any Borrowing Base Certificate shall at all times constitute
Eligible Inventory.
5. Any and all officers, employees and other agents or representatives
from time to time signing any reports (including without limitation those
specifically mentioned above) or otherwise delivery any such information to
Fidelity shall be duly authorized to deliver same to Fidelity on behalf of the
applicable Company.
6. All collections and proceeds of Accounts from time to time received by
either Company, or any of its officers, employees, agents or other
representatives, shall forthwith be delivered to Fidelity as required under the
Loan and Security Agreement.
7. The Validity Guarantor agrees to indemnify, defend and save Fidelity
free and harmless of and from any damage or loss which Fidelity may sustain,
directly or indirectly, as a result of (i) any act or omission in breach or
contravention of any of the representations, warranties, covenants and
guaranties contained herein, (ii) any fraud, deceit, deception or criminal act
on the part of any officer, employee, agent or other representative of either
Company in any of its dealings with Fidelity on behalf of such Company, and
(iii) Accounts that are or become disputed, in whole or in part, by reason of
any dispute or disagreement pertaining to actions or inactions by either
Company, whether or not any such dispute, return or non-acceptance is justified.
8. Fidelity's rights and remedies hereunder are cumulative of all other
rights and remedies which Fidelity may now or hereafter have with respect to the
Companies. Validity Guarantor's liability hereunder is direct and unconditional,
and may be enforced by Fidelity without first pursuing any other right, remedy
or security.
9. This agreement shall be binding upon the Validity Guarantor and his or
her heirs, personal representatives, successors and assigns, and shall inure to
the benefit of Fidelity and its successors or assigns.
10. Validity Guarantor agrees that he or she will cooperate with Fidelity
at all times in connection with any actions taken by Fidelity pursuant to the
Loan and Security Agreement to monitor, administer, enforce or collect the
Collateral. In the event either Company should cease or discontinue operating as
a going concern in the ordinary course of business, then for so long as any
Obligations remain outstanding, Validity Guarantor agrees that he or she shall
assist Fidelity in connection with any such action, as Fidelity may request. At
Fidelity's request in such event, Validity Guarantor shall enter into a
collection servicing agreement with Fidelity pursuant to which Validity
Guarantor shall undertake to monitor, administer, enforce and collect the
Collateral, for the benefit of Fidelity, on such terms and conditions as
Fidelity and Validity Guarantor shall determine by mutual agreement.
2
<PAGE>
11. This Agreement shall be a continuing agreement for the benefit of
Fidelity and its successors and assigns. Validity Guarantor expressly consents
to any or all of the following action by Fidelity, at any time, without notice
to Validity Guarantor: (i) renewal, extension or modification of the Loan and
Security Agreement or any of the Transaction Documents, (ii) renewal, extension,
modification, compromise, forbearance or forgiveness of the Obligations, or any
part thereof, (iii) increase or decrease of the rate of interest from time to
time to accrue on the Obligations, (iv) exercise of any rights or remedies under
the Transaction Documents, or forbearance of any rights or remedies under the
Transaction Documents, (v) release of any Person from time to time liable for
the Obligations or any part thereof, (vi) substitution, release or modification
of any Collateral. Validity Guarantor agrees that Fidelity may take all or any
of such action in such manner, and at such time, and upon such terms, as
Fidelity may determine in its sole discretion, without notice to Validity
Guarantor, without in any way impairing Validity Guarantor's obligations under
this Agreement. Validity Guarantor acknowledges that he has reviewed and is
familiar with the Transaction Documents and is familiar with the operations and
financial condition of the Companies, and agrees that Fidelity shall have no
duty or obligation to communicate to Validity Guarantor any information
regarding the Company's financial condition or affairs.
12. ALL ACTS AND TRANSACTIONS HEREUNDER AND THE RIGHTS AND OBLIGATIONS OF
THE PARTIES HERETO SHALL BE GOVERNED, CONSTRUED AND INTERPRETED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF TEXAS, WITHOUT REFERENCE TO THE RULES THEREOF
RELATING TO CONFLICTS OF LAW. VALIDITY GUARANTOR HEREBY IRREVOCABLY SUBMITS TO
THE JURISDICTION OF THE STATE AND FEDERAL COURTS LOCATED IN ORANGE COUNTY,
CALIFORNIA, AND AGREES AND CONSENTS THAT SERVICE OF PROCESS MAY BE MADE UPON
VALIDITY GUARANTOR IN ANY LEGAL PROCEEDING RELATING TO THIS AGREEMENT OR ANY
OTHER RELATIONSHIP BETWEEN FIDELITY AND VALIDITY GUARANTOR BY ANY MEANS ALLOWED
UNDER STATE OR FEDERAL LAW. ANY LEGAL PROCEEDING ARISING OUT OF OR IN ANY WAY
RELATED TO THIS AGREEMENT OR ANY OTHER RELATIONSHIP BETWEEN FIDELITY AND
VALIDITY GUARANTOR SHALL BE BROUGHT AND LITIGATED EXCLUSIVELY IN ANY ONE OF THE
STATE OR FEDERAL COURTS LOCATED IN ORANGE COUNTY, CALIFORNIA HAVING JURISDICTION
UNLESS FIDELITY SHALL ELECT OTHERWISE. VALIDITY GUARANTOR HEREBY WAIVES AND
AGREES 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.
THIS AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY
NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT
ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS
BETWEEN THE PARTIES.
3
<PAGE>
Signed effective as of May 10,1999.
/s/ William W. Davis, Sr.
--------------------------------------
Name: William W. Davis, Sr.
Social Security No.: ###-##-####
-----------------
Address: 3309 Shorting Ln.
-----------------------------
M. Tedeville, MD 2014
-----------------------------
Telephone No.: 301-390-4333
-----------------------
ACCEPTED:
FIDELITY FUNDING, INC.
By: /s/ Michael D. Haddad
----------------------------
Name: Michael D. Haddad
----------------------
Title: President
----------------------
4
<PAGE>
CERTIFICATE OF CORPORATE RESOLUTION
OF
LITRONIC INDUSTRIES, INC.
The undersigned, the President and the Secretary of Litronic Industries,
Inc. (the "Company"), a California corporation, do hereby certify to Fidelity
Funding, Inc., that:
1. They are the duly elected, qualified and acting President and Secretary
of the Company, are familiar with the facts herein certified and are duly
authorized to certify such facts and make this certificate.
2. The Company is duly organized, validly existing and in good standing
under the laws of the State of California, and is duly authorized to transact
business as a foreign corporation in and is in good standing under the laws of
each jurisdiction where the ownership or lease of its properties and assets or
the conduct of its business would required such qualification; no changes have
been made to the Company's articles or certificate of incorporation since April
1, 1999; all franchise and other taxes required to maintain the Company's
corporate existence have been paid when due and no such taxes are delinquent;
and no proceedings are pending for the forfeiture of the Company's articles or
certificate of incorporation or for the Company's dissolution, voluntarily or
involuntarily.
3. The following resolutions were duly adopted by the Board of Directors
of the Company at a meeting duly called and held on May 10, 1999, in accordance
with all applicable laws and the Company's articles or certificate of
incorporation and by-laws:
RESOLVED, that each of the president, the treasurer/chief financial
officer, the secretary and each vice president of the Company, acting
jointly or alone, hereby are authorized to execute, deliver and perform
the Company's obligations under one or more agreements from time to time
(collectively, the "Loan and Security Agreement") with Fidelity Funding,
Inc. ("Fidelity") and Litronic Inc. (the "Co-Borrower") providing for the
establishment of a $20,000,000 revolving line of credit for the Company
and the Co-Borrower with Fidelity (with the obligations of the Company and
the Co-Borrower thereunder being joint and several) and the pledge of any
or all of the assets of the Company to secure the obligations of the
Company and the Co-Borrower to Fidelity thereunder, such Loan and Security
Agreement to be in form and substance satisfactory to the officer or
officers of the Company executing and delivering the same.
FURTHER RESOLVED, that each of the president, the treasurer/chief
financial officer, the secretary and each vice president of the Company,
acting jointly or alone, hereby are authorized and directed to execute and
deliver such documents and to take such other actions as they (or any of
them) shall deem necessary, desirable or convenient to consummate the
transactions contemplated by the Loan and Security Agreement and otherwise
to effectuate the intent of the foregoing resolution.
<PAGE>
4. The foregoing resolutions have not been amended, modified or rescinded,
and remain in full force and effect on and as of the date hereof.
5. The following persons are the officers, and are the persons authorized
to act on behalf, of the Company pursuant to the foregoing resolutions:
Title Name Signature
- ----- ---- ---------
President Kris Shah /s/ Kris Shah
--------------------- -----------------------
Secretary Geraldine Shah /s/ Geraldine Shah
--------------------- -----------------------
Chief Financial Officer Thomas W. Seykora /s/ Thomas W. Seykora
--------------------- -----------------------
6. Attached hereto as Exhibit A is a true, complete and correct copy of
the by-laws of the Company as in effect on the date hereof.
IN WITNESS WHEREOF, the undersigned have hereunto set the hands for and on
behalf of the Company on May 10, 1999.
LITRONIC INDUSTRIES, INC.
By: /s/ Kris Shah
------------------------------------
President
By: /s/ Geraldine Shah
------------------------------------
Secretary
2
<PAGE>
EXHIBIT A
Bylaws
3
<PAGE>
CERTIFICATE OF CORPORATE RESOLUTION
OF
LITRONIC INC.
The undersigned, the President and the Secretary of Litronic Inc. (the
"Company"), a Delaware corporation, do hereby certify to Fidelity Funding, Inc.,
that:
1. They are the duly elected, qualified and acting President and Secretary
of the Company, are familiar with the facts herein certified and are duly
authorized to certify such facts and make this certificate.
2. The Company is duly organized, validly existing and in good standing
under the laws of the State of Delaware, and is duly authorized to transact
business as a foreign corporation in and is in good standing under the laws of
each jurisdiction where the ownership or lease of its properties and assets or
the conduct of its business would required such qualification; no changes have
been made to the Company's articles or certificate of incorporation since April
1, 1999; all franchise and other taxes required to maintain the Company's
corporate existence have been paid when due and no such taxes are delinquent;
and no proceedings are pending for the forfeiture of the Company's articles or
certificate of incorporation or for the Company's dissolution, voluntarily or
involuntarily.
3. The following resolutions were duly adopted by the Board of Directors
of the Company at a meeting duly called and held on May 10, 1999, in accordance
with all applicable laws and the Company's articles or certificate of
incorporation and by-laws:
RESOLVED, that each of the president, the treasurer/chief financial
officer, the secretary and each vice president of the Company, acting
jointly or alone, hereby are authorized to execute, deliver and perform
the Company's obligations under one or more agreements from time to time
(collectively, the "Loan and Security Agreement") with Fidelity Funding,
Inc. ("Fidelity") and Litronic Industries, Inc. (the "Co-Borrower")
providing for the establishment of a $20,000,000 revolving line of credit
for the Company and the Co-Borrower with Fidelity (with the obligations of
the Company and the Co-Borrower thereunder being joint and several) and
the pledge of any or all of the assets of the Company to secure the
obligations of the Company and the Co-Borrower to Fidelity thereunder,
such Loan and Security Agreement to be in form and substance satisfactory
to the officer or officers of the Company executing and delivering the
same.
FURTHER RESOLVED, that each of the president, the treasurer/chief
financial officer, the secretary and each vice president of the Company,
acting jointly or alone, hereby are authorized and directed to execute and
deliver such documents and to take such other actions as they (or any of
them) shall deem necessary, desirable or convenient to consummate the
transactions contemplated by the Loan and Security Agreement and otherwise
to effectuate the intent of the foregoing resolution.
<PAGE>
4. The foregoing resolutions have not been amended, modified or rescinded,
and remain in full force and effect on and as of the date hereof.
5. The following persons are the officers, and are the persons authorized
to act on behalf, of the Company pursuant to the foregoing resolutions:
Title Name Signature
- ----- ---- ---------
President Kris Shah /s/ Kris Shah
--------------------- -----------------------
Secretary Geraldine Shah /s/ Geraldine Shah
--------------------- -----------------------
Chief Financial Officer Thomas W. Seykora /s/ Thomas W. Seykora
--------------------- -----------------------
6. Attached hereto as Exhibit A is a true, complete and correct copy of
the by-laws of the Company as in effect on the date hereof.
IN WITNESS WHEREOF, the undersigned have hereunto set the hands for and on
behalf of the Company on May 10, 1999.
LITRONIC INC.
By: /s/ Kris Shah
------------------------------------
President
By: /s/ Geraldine Shah
------------------------------------
Secretary
2
<PAGE>
EXHIBIT A
Bylaws
3
<PAGE>
COMPLIANCE CERTIFICATE
Reference is made to the Loan and Security Agreement (the "Fidelity
Agreement"), dated as of May 10, 1999, among Litronic Industries, Inc., a
California corporation, and Litronic Inc., a Delaware corporation (collectively,
the "Companies"), and Fidelity Funding, Inc., a Texas corporation ("Fidelity").
Capitalized terms used but not defined herein shall have the meanings ascribed
to them in the Agreement. The undersigned, the President and the Chief Financial
Officer of each Company, certify to Fidelity that:
1. They are the duly elected, qualified, and acting President and Chief
Financial Officer of each Company.
2. They are familiar with the facts herein certified and are duly
authorized to certify such facts and make this certificate.
3. All representations and warranties made by the Companies in the
Fidelity Agreement or any other instrument, document, certificate or other
agreement executed in connection therewith (collectively, the "Transaction
Documents") delivered on or before the date hereof are true on and as of the
date hereof as if such representations and warranties had been made as of the
date hereof.
4. No Event of Default and no event or circumstance that, with the giving
of notice, the passage of time or both, would constitute an Event of Default
exist on the date hereof.
5. Each Company has performed and complied with all agreements and
conditions required in the Transaction Documents to be performed or complied
with by it on or prior to the date hereof.
IN WITNESS WHEREOF, this instrument is executed by the undersigned as of
May 10, 1999.
LITRONIC INDUSTRIES, INC.
By: /s/ Kris Shah
---------------------------------
President
By: /s/ Thomas W. Seykora
---------------------------------
Chief Financial Officer
<PAGE>
LITRONIC INC.
By: /s/ Kris Shah
---------------------------------
President
By: /s/ Thomas W. Seykora
---------------------------------
Chief Financial Officer
2
<PAGE>
PERFECTION CERTIFICATE
Reference is made to the Loan and Security Agreement (the "Agreement"),
dated as of May 10, 1999. among Litronic Industries, Inc., a California
corporation ("LII"), Litronic Inc., a Delaware corporation ("Litronic"), and
Fidelity Funding, Inc., a Texas corporation ("Fidelity"). Capitalized terms used
but not defined herein shall have the meanings ascribed to them in the
Agreement. The undersigned hereby certify to Fidelity as follows:
A. With respect to LII:
(i) The chief executive office of LII is located at the following
address:
Street Address County
-------------- ------
2030 Main Street, Suite 1250 Orange
Irvine, California 92614
Mailing Address County
--------------- ------
2030 Main Street, Suite 1250 Orange
Irvine, California 92614
(ii) The following are all the locations where LII maintains any books or
records relating to any of its Accounts.
Street Address County
-------------- ------
2030 Main Street, Suite 1250 Orange
Irvine, California 92614
(iii) The following are all the places of business of LII not identified
above:
4390 Parliament Place, Suite R
Lanham, Maryland 20706
(iv) The following are all the locations not identified above where LII
maintains any inventory or equipment: None.
(v) The following are the names and addresses of all Persons other than
LII that have possession of any of LII's inventory or equipment:
None.
<PAGE>
B. With respect to Litronic:
(i) The chief executive office of Litronic is located at the following
address:
Street Address County
-------------- ------
2030 Main Street, Suite 1250 Orange
Irvine, California 92614
Mailing Address County
--------------- ------
2030 Main Street, Suite 1250 Orange
Irvine, California 92614
(ii) The following are all the locations where Litronic maintains any
books or records relating to any of its Accounts.
Street Address County
-------------- ------
2030 Main Street, Suite 1250 Orange
Irvine, California 92614
(iii) The following are all the places of business of Litronic not
identified above:
4390 Parliament Place, Suite R
Lanham, Maryland 20706
(iv) The following are all the locations not identified above where
Litronic maintains any inventory or equipment: None.
(v) The following are the names and addresses of all Persons other than
Litronic that have possession of any of Litronic's inventory or
equipment: None.
IN WITNESS WHEREOF, we have hereunto set our hands on May 10, 1999.
LITRONIC INDUSTRIES, INC.
By: /s/ Kris Shah
------------------------------------
President
By: /s/ Geraldine Shah
------------------------------------
Secretary
2
<PAGE>
LITRONIC INC.
By: /s/ Kris Shah
------------------------------------
President
By: /s/ Geraldine Shah
------------------------------------
Secretary
3
<PAGE>
FINANCING STATEMENT
This instrument is prepared and is intended to be a financing statement
complying with the formal requisites therefor as set forth in the Uniform
Commercial Code.
1. The name and address of debtor ("Debtor") is:
LITRONIC INDUSTRIES, INC.
2030 Main Street, Suite 1250
Irvine, California 92614
FED ID#95-2651703
2. The name and address of secured party ("Secured Party") is:
FIDELITY FUNDING, INC.
12770 Merit Drive, Suite 600
Dallas, Texas 75251
FED ID # 75-2260827
3. This financing statement covers the following types or items of
property (collectively, the "Collateral"):
All of the following which are now or hereafter owned by Debtor or
in which Debtor otherwise has any right, whether now existing or hereafter
arising: (a) all accounts, contract rights and general intangibles,
receivables and claims whether now or hereafter arising, all guaranties
and security therefor and all of Debtor's right, title and interest in the
goods purchased and represented thereby, if any, including all of Debtor's
rights in and to returned goods and rights of stoppage in transit,
replevin and reclamation as unpaid vendor; (b) all inventory, wherever
located and whether now or hereafter existing, (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 Debtor
has an interest in mass or a joint or other interest or rights of any
kind, and goods which are returned to or repossessed by Debtor) and all
accessions thereto and products thereof and documents therefor; (c) all
furniture, fixtures, machinery and equipment, 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) 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 and supplier contracts, sales orders, and
purchasing records; and (e) all proceeds of the foregoing.
<PAGE>
4. This Financing Statement is presented for filing to the California
Secretary of State.
DEBTOR: SECURED PARTY:
LITRONIC INDUSTRIES, INC. FIDELITY FUNDING, INC.
By: /s/ Thomas W. Seykora By:
------------------------------ ------------------------------
Name: Thomas W. Seykora Name:
------------------------- -------------------------
Title: CFO Title:
------------------------ ------------------------
2
<PAGE>
FINANCING STATEMENT
This instrument is prepared and is intended to be a financing statement
complying with the formal requisites therefor as set forth in the Uniform
Commercial Code.
1. The name and address of debtor ("Debtor") is:
LITRONIC INC.
2030 Main Street, Suite 1250
Irvine, California 92614
FED ID#33-075190
2. The name and address of secured party ("Secured Party") is:
FIDELITY FUNDING, INC.
12770 Merit Drive, Suite 600
Dallas, Texas 75251
FED ID # 75-2260827
3. This financing statement covers the following types or items of
property (collectively, the "Collateral"):
All of the following which are now or hereafter owned by Debtor or
in which Debtor otherwise has any right, whether now existing or hereafter
arising: (a) all accounts, contract rights and general intangibles,
receivables and claims whether now or hereafter arising, all guaranties
and security therefor and all of Debtor's right, title and interest in
the goods purchased and represented thereby, if any, including all of
Debtor's rights in and to returned goods and rights of stoppage in
transit, replevin and reclamation as unpaid vendor; (b) all inventory,
wherever located and whether now or hereafter existing, (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 Debtor has an interest in mass or a joint or other interest or
rights of any kind, and goods which are returned to or repossessed by
Debtor) and all accessions thereto and products thereof and documents
therefor; (c) all furniture, fixtures, machinery and equipment, 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) 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 and supplier contracts,
sales orders, and purchasing records; and (e) all proceeds of the
foregoing.
<PAGE>
4. This Financing Statement is presented for filing to the California
Secretary of State.
DEBTOR: SECURED PARTY:
LITRONIC INC. FIDELITY FUNDING, INC.
By: /s/ Thomas W. Seykora By:
------------------------------ ------------------------------
Name: Thomas W. Seykora Name:
------------------------- -------------------------
Title: CFO Title:
------------------------ ------------------------
2
<PAGE>
[GRAPHIC] FIDELITY FUNDING
----------------
FINANCIAL GROUP VIA FEDERAL EXPRESS
May 10, 1999
Tom Seykora
Chief Financial Officer
Litronic, Inc.
2030 Main Street, Suite 1250
Irvine, California 92614
Dear Tom:
Enclosed find the document checklist for the Fidelity loan and two execution
copies of each document checkmarked thereon. Please have these documents signed
and send one full set to us for our files. You may keep the second set for your
records.
Respectfully yours,
/s/ Edward H. Molter
Edward H. Molter
Corporate Counsel
Enclosures
12770 MERIT DRIVE SIXTH FLOOR DALLAS, TEXAS 75251
(972) 687-8000 FAX (972) 687-8050
- --------------------------------------------------------------------------------
<PAGE>
DOCUMENT LIST
FOR
LITRONIC INC.
SECTION I. PRINCIPAL DOCUMENTS
1. Loan and Security Agreement.
2. Validity Guaranty of Kris Shah.
3. Validity Guaranty of William W. Davis, Sr.
SECTION II. INTERCREDITOR AND SUBORDINATION AGREEMENTS
4. Release Agreements.
SECTION III. CORPORATE DOCUMENTS AND CERTIFICATES
5. Certificate of Corporate Resolution of Litronic Industries, Inc.
6. Certificate of Corporate Resolution of Litronic Inc.
7. Compliance Certificate.
8. Perfection Certificate.
9. Certified copy of articles or certificate of incorporation of Litronic
Industries, Inc.
10. Certified copy of articles or certificate of incorporation of Litronic
Inc.
11. Certificate of good standing of Litronic Industries, Inc.
12. Certificate of good standing of Litronic Inc.
SECTION IV. FINANCING STATEMENTS AND LIEN DOCUMENTS
13. Financing Statements covering collateral filed with:
a. Secretary of State of California.
b. State Department of Assessment and Taxes of the State of Maryland.
c. Clerk of Stanly County, Maryland.
14. Termination statements relating to Release Agreement.
<PAGE>
15. Pre-closing lien search and copies from:
a. Secretary of State of California.
b. State Department of Assessment and Taxes of the State of Maryland.
c. Clerk of Stanly County, Maryland.
16. Post-closing lien search and copies from:
a. Secretary of State of California.
b. State Department of Assessment and Taxes of the State of Maryland.
c. Clerk of Stanly County, Maryland.
SECTION V. MISCELLANEOUS DOCUMENTS
17. Opinion of Counsel.
18. Additional Named Insured/Loss Payee Endorsement.
2
<PAGE>
[ILLEGIBLE]
- --------------------------------------------------------------------------------
A. NAME & TEL. # OF CONTACT AT FILER (optional)
- --------------------------------------------------------------------------------
B. FILING OFFICE ACCT. # (optional)
- --------------------------------------------------------------------------------
C. RETURN COPY TO: (Name and Mailing Address)
- --------------------------------------------------------------------------------
D. OPTIONAL DESIGNATION (if applicable): |_| LESSOR/LESSEE
|_| CONSIGNOR/CONSIGNEE
|_| NON-UCC FILING
- --------------------------------------------------------------------------------
1. DEBTOR'S EXACT FULL LEGAL NAME - Insert only one debtor name (1a or 1b)
- --------------------------------------------------------------------------------
1a. ENTITY'S NAME
Litronic Industries, Inc.
- --------------------------------------------------------------------------------
OR 1b. INDIVIDUAL'S LAST NAME FIRST NAME MIDDLE NAME SUFFIX
- --------------------------------------------------------------------------------
1c. MAILING ADDRESS CITY STATE COUNTRY POSTAL CODE
2030 Main Street, Irvine CA USA 92614
Suite 1250
- --------------------------------------------------------------------------------
1d. S.S. OR TAX I.D.# OPTIONAL 1e. TYPE OF ENTITY
ADD'NL INFO RE
95-2651703 ENTITY DEBTOR
- --------------------------------------------------------------------------------
1f. ENTITY'S STATE 1g. ENTITY'S ORGANIZATIONAL I.D.#, if any
OR COUNTRY OF
ORGANIZATION |_| NONE
- --------------------------------------------------------------------------------
2. ADDITIONAL DEBTOR'S EXACT FULL LEGAL NAME - Insert only one debtor name
(2a or 2b)
- --------------------------------------------------------------------------------
2a. ENTITY'S NAME
- --------------------------------------------------------------------------------
OR 2b. INDIVIDUAL'S LAST NAME FIRST NAME MIDDLE NAME SUFFIX
- --------------------------------------------------------------------------------
2c. MAILING ADDRESS CITY STATE COUNTRY POSTAL CODE
- --------------------------------------------------------------------------------
2d. S.S. OR TAX I.D.# OPTIONAL 2e. TYPE OF ENTITY
ADD'NL INFO RE
ENTITY DEBTOR
- --------------------------------------------------------------------------------
2f. ENTITY'S STATE 2g. ENTITY'S ORGANIZATIONAL I.D.#, if any
OR COUNTRY OF
ORGANIZATION |_| NONE
- --------------------------------------------------------------------------------
3. SECURED PARTY'S (ORIGINAL S/P or ITS TOTAL ASSIGNEE) EXACT FULL LEGAL NAME -
Insert only one secured party name (3a or 3b)
- --------------------------------------------------------------------------------
3a. ENTITY'S NAME
Fidelity Funding, Inc.
- --------------------------------------------------------------------------------
OR 3b. INDIVIDUAL'S LAST NAME FIRST NAME MIDDLE NAME SUFFIX
- --------------------------------------------------------------------------------
3c. MAILING ADDRESS CITY STATE COUNTRY POSTAL CODE
12770 Merit Drive, Suite 600 Dallas TX USA 75251
- --------------------------------------------------------------------------------
4. This FINANCING STATEMENT covers the following types or items of property:
(a) all accounts, contract rights and general intangibles, receivables and
claims, whether now existing or hereafter arising, all guaranties and security
therefor and all of Debtor's right, title and interest i the goods purchased and
represented thereby, if any, including all of Debtor's rights in and to returned
goods and rights of stoppage in transit, replevin and reclamation as unpaid
vendor; (b) all inventory, wherever located or hereafter existing, including raw
materials, work i process, finished goods and materials used or consumed in the
manufacture or production thereof, goods in which Debtor has an interest in mass
or a joint or other interest or rights of any kind, goods which are returned to
or repossed by Debtor and all accessions thereto, (c) all furniture, fixtures,
machinery and equipment, (d) all books and records pertaining to the foregoing,
computer programs, data, certificates, records, lists and (e) all proceeds of
the foregoing.
- --------------------------------------------------------------------------------
5. CHECK BOX (if applicable) |_|
This FINANCING STATEMENT is signed by the Secured Party instead of the
Debtor to perfect a security interest (a) in collateral already subject to
a security interest in another jurisdiction when it was brought into this
state, or when the debtor's location was changed to this state, or (b) in
accordance with other statutory provisions (additional data may be
required)
- --------------------------------------------------------------------------------
6. REQUIRED SIGNATURE(S)
Litronic Industries, Inc. /s/ [ILLEGIBLE]
- --------------------------------------------------------------------------------
Fidelity Funding, Inc.
- --------------------------------------------------------------------------------
7. If filed in Florida (check one)
|_| Documentary stamp tax paid
|_| Documentary stamp tax not applicable
- --------------------------------------------------------------------------------
8. |_| This FINANCING STATEMENT is to be filed (for record) (or recorded) in the
REAL ESTATE RECORDS Attach Addendum (if applicable)
- --------------------------------------------------------------------------------
9. Check to REQUEST SEARCH CERTIFICATE(S) on Debtor(s)
(Additional Fee) (optional)
|_| All Debtors |_| Debtor 1 |_| Debtor 2
- --------------------------------------------------------------------------------
(1) FILING OFFICER COPY -- NATIONAL FINANCING STATEMENT (FORM UCC1) (TRANS)
(REV. 12/18/95)
REORDER FROM
Registre, Inc.
514 PIERCE ST.
P.O. BOX 216
ANOKA, MN 55303
(612) 421-1713
<PAGE>
[ILLEGIBLE]
- --------------------------------------------------------------------------------
A. NAME & TEL. # OF CONTACT AT FILER (optional)
- --------------------------------------------------------------------------------
B. FILING OFFICE ACCT. # (optional)
- --------------------------------------------------------------------------------
C. RETURN COPY TO: (Name and Mailing Address)
- --------------------------------------------------------------------------------
D. OPTIONAL DESIGNATION (if applicable): |_| LESSOR/LESSEE
|_| CONSIGNOR/CONSIGNEE
|_| NON-UCC FILING
- --------------------------------------------------------------------------------
1. DEBTOR'S EXACT FULL LEGAL NAME - Insert only one debtor name (1a or 1b)
- --------------------------------------------------------------------------------
1a. ENTITY'S NAME
Litronic Inc.
- --------------------------------------------------------------------------------
OR 1b. INDIVIDUAL'S LAST NAME FIRST NAME MIDDLE NAME SUFFIX
- --------------------------------------------------------------------------------
1c. MAILING ADDRESS CITY STATE COUNTRY POSTAL CODE
2030 Main Street, Irvine CA USA 92614
Suite 1250
- --------------------------------------------------------------------------------
1d. S.S. OR TAX I.D.# OPTIONAL 1e. TYPE OF ENTITY
ADD'NL INFO RE
33-075190 ENTITY DEBTOR
- --------------------------------------------------------------------------------
1f. ENTITY'S STATE 1g. ENTITY'S ORGANIZATIONAL I.D.#, if any
OR COUNTRY OF
ORGANIZATION |_| NONE
- --------------------------------------------------------------------------------
2. ADDITIONAL DEBTOR'S EXACT FULL LEGAL NAME - Insert only one debtor name
(2a or 2b)
- --------------------------------------------------------------------------------
2a. ENTITY'S NAME
- --------------------------------------------------------------------------------
OR 2b. INDIVIDUAL'S LAST NAME FIRST NAME MIDDLE NAME SUFFIX
- --------------------------------------------------------------------------------
2c. MAILING ADDRESS CITY STATE COUNTRY POSTAL CODE
- --------------------------------------------------------------------------------
2d. S.S. OR TAX I.D.# OPTIONAL 2e. TYPE OF ENTITY
ADD'NL INFO RE
ENTITY DEBTOR
- --------------------------------------------------------------------------------
2f. ENTITY'S STATE 2g. ENTITY'S ORGANIZATIONAL I.D.#, if any
OR COUNTRY OF
ORGANIZATION |_| NONE
- --------------------------------------------------------------------------------
3. SECURED PARTY'S (ORIGINAL S/P or ITS TOTAL ASSIGNEE) EXACT FULL LEGAL NAME -
Insert only one secured party name (3a or 3b)
- --------------------------------------------------------------------------------
3a. ENTITY'S NAME
Fidelity Funding, Inc.
- --------------------------------------------------------------------------------
OR 3b. INDIVIDUAL'S LAST NAME FIRST NAME MIDDLE NAME SUFFIX
- --------------------------------------------------------------------------------
3c. MAILING ADDRESS CITY STATE COUNTRY POSTAL CODE
12770 Merit Drive, Suite 600 Dallas TX USA 75251
- --------------------------------------------------------------------------------
4. This FINANCING STATEMENT covers the following types or items of property:
(a) all accounts, contract rights and general intangibles, receivables and
claims, whether now existing or hereafter arising, all guaranties and security
therefor and all of Debtor's right, title and interest i the goods purchased and
represented thereby, if any, including all of Debtor's rights in and to returned
goods and rights of stoppage in transit, replevin and reclamation as unpaid
vendor; (b) all inventory, wherever located or hereafter existing, including raw
materials, work i process, finished goods and materials used or consumed in the
manufacture or production thereof, goods in which Debtor has an interest in mass
or a joint or other interest or rights of any kind, goods which are returned to
or repossed by Debtor and all accessions thereto, (c) all furniture, fixtures,
machinery and equipment, (d) all books and records pertaining to the foregoing,
computer programs, data, certificates, records, lists and (e) all proceeds of
the foregoing.
- --------------------------------------------------------------------------------
5. CHECK BOX (if applicable) |_|
This FINANCING STATEMENT is signed by the Secured Party instead of the
Debtor to perfect a security interest (a) In collateral already subject to
a security interest in another jurisdiction when it was brought into the
state, or when the debtor's location was changed to this state, or (b) in
accordance with other statutory provisions (additional data may be
required)
- --------------------------------------------------------------------------------
6. REQUIRED SIGNATURE(S)
Litronic Inc. /s/ [ILLEGIBLE]
- --------------------------------------------------------------------------------
Fidelity Funding, Inc.
- --------------------------------------------------------------------------------
7. If filed in Florida (check one)
|_| Documentary stamp tax paid
|_| Documentary stamp tax not applicable
- --------------------------------------------------------------------------------
8. |_| This FINANCING STATEMENT is to be filed (for record) (or recorded) in the
REAL ESTATE RECORDS Attach Addendum (if applicable)
- --------------------------------------------------------------------------------
9. Check to REQUEST SEARCH CERTIFICATE(S) on Debtor(s)
(Additional Fee) (optional)
|_| All Debtors |_| Debtor 1 |_| Debtor 2
- --------------------------------------------------------------------------------
(1) FILING OFFICER COPY -- NATIONAL FINANCING STATEMENT (FORM UCC1) (TRANS)
(REV. 12/18/95)
REORDER FROM
Registre, Inc.
514 PIERCE ST.
P.O. BOX 216
ANOKA, MN 55303
(612) 421-1713
<PAGE>
Exhibit 10.43
PROMISSORY NOTE
<TABLE>
<CAPTION>
Principal Loan Maturity Loan No. Call Collateral Account Other Initials
Date
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$750,000.00 05-13-1999 07-31-2000 0221440311 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: $750,000.00 Interest Rate: 6.130% Date of Note: May 13, 1999
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 Seven Hundred Fifty Thousand & 00/100
Dollars ($750,000.00), together with interest at the rate of 6.130% on the
unpaid principal balance from May 13, 1999, until paid in full.
PAYMENT. Borrower will pay this loan in one principal payment of $750,000.00
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 June 13, 1999, 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 10.44
PROMISSORY NOTE
<TABLE>
<CAPTION>
Principal Loan Maturity Loan No. Call Collateral Account Other Initials
Date
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$750,000.00 03-10-1999 02-28-2000 0221440310 RCC4a CBL31 SG
</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
Principal Amount: $750,000.00 Interest Rate: 5.750% Date of Note:
March 10, 1999
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 Seven Hundred Fifty Thousand & 00/100
Dollars ($750,000.00), together with interest at the rate of 5.750% on the
unpaid principal balance from March 10, 1999, until paid in full.
PAYMENT. Borrower will pay this loan in one principal payment of $750,000
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 April 10,
1999, 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.
<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 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 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 February 26, 1999, related to the
consolidated balance sheets of Litronic Inc. and subsidiary as of December 31,
1997 and 1998 and the consolidated statements of operations, shareholders'
deficiency and cash flows for each of the years in the three year period ended
December 31, 1998 and to the reference to our firm under the headings "Selected
Financial Data-Litronic" and "Experts" in the prospectus.
Orange County, California
May 28, 1999
<PAGE>
EXHIBIT 23.2
The Board of Directors
Pulsar Data Systems, Inc.
Our report dated March 31, 1999, except for Note 5 which is as of May 5, 1999,
contains an explanatory paragraph that states that the Company has suffered
losses from operations and has a net working capital deficit, which raise
substantial doubt about its ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of that uncertainty.
We consent to the use of our report included herein and to the reference to our
firm under the headings "Selected Financial Data Pulsar" and "Experts" in the
prospectus.
/s/ KPMG LLP
McLean, Virginia
June 1, 1999
<PAGE>
EXHIBIT 23.3
To The Board of Directors
Pulsar Data Systems, Inc.
Lanham, Maryland
The audits referred to in our report dated April 27, 1998, which contains an
explanatory paragraph that states that the Company incurred a loss, has a net
capital deficiency and was in violation of certain debt convenants, 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 II, 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, L.L.C.
Bethesda, Maryland
June 1, 1999
