<PAGE>
As filed with the Securities and Exchange Commission on August 31, 1999
Registration No. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------
eMachines, Inc.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<C> <C> <S>
Delaware 3571 943311182
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
14350 Myford Road, Suite 100
Irvine, California 92606
(714) 481-2828
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
-----------
Stephen A. Dukker
Chief Executive Officer
14350 Myford Road, Suite 100
Irvine, California 92606
(714) 481-2828
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
-----------
Copies to:
<TABLE>
<S> <C>
John A. Fore, Esq. William D. Sherman, Esq.
Wilson Sonsini Goodrich & Rosati Stephen J. Schrader, Esq.
Professional Corporation Justin L. Bastian, Esq.
650 Page Mill Road Rochelle A. Krause, Esq.
Palo Alto, California 94304 Morrison & Foerster LLP
(650) 493-9300 755 Page Mill Road
Palo Alto, California 94304
(650) 813-5600
</TABLE>
-----------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 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 statement number of the earlier effective registration statement
for the same offering. [_]
---------------
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
---------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<CAPTION>
Proposed Maximum
Title of Each Class of Aggregate Amount of
Securities to be Registered Offering Price (1) Registration Fee
- --------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $0.0000125 par value......... $200,000,000 $55,600
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
(1) Estimated pursuant to Rule 457(o) solely for the purpose of computing the
amount of the registration fee.
-----------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall hereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to such
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 AUGUST 31, 1999
Shares
[LOGO]
eMachines, Inc.
Common Stock
--------
Prior to this offering, there has been no public market for our common stock.
The initial public offering price of our common stock is expected to be between
$ and $ per share. We have applied to list our common stock on The
Nasdaq Stock Market's National Market under the symbol "EEEE."
The underwriters have an option to purchase a maximum of additional
shares to cover over-allotments of shares.
Investing in our common stock involves risks. See "Risk Factors" on page 6.
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions eMachines
------------- ------------- -------------
<S> <C> <C> <C>
Per Share.................................. $ $ $
Total...................................... $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about , 1999.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
Credit Suisse First Boston
BancBoston Robertson Stephens
Hambrecht & Quist
Salomon Smith Barney
The date of this prospectus is , 1999.
<PAGE>
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................. 3
Risk Factors........................ 6
Special Note Regarding Forward-
Looking Statements................. 20
Use of Proceeds..................... 20
Dividend Policy..................... 20
Capitalization...................... 21
Dilution............................ 22
Selected Financial Data............. 23
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 24
Business............................ 32
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Management.......................... 41
Related Party Transactions.......... 46
Principal Stockholders.............. 51
Description of Capital Stock........ 53
Shares Eligible for Future Sale..... 56
Underwriting........................ 57
Notice to Canadian Residents........ 59
Legal Matters....................... 60
Experts............................. 60
Additional Information.............. 60
Index to Financial Statements....... F-1
</TABLE>
------------
You should rely only on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may only be used where it is legal
to sell these securities. The information in this document may only be accurate
on the date of this document.
Dealer Prospectus Delivery Obligation
Until , 1999 (25 days after the commencement of this offering), all
dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This
is in addition to the dealers' obligation to deliver a prospectus when acting
as an underwriter and with respect to unsold allotments or subscriptions.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information described more fully elsewhere in this
prospectus. This summary is not complete and does not contain all the
information you should consider before investing in our common stock. You
should read the entire prospectus, including the Financial Statements and
related Notes, before making an investment decision.
eMachines, Inc.
We are a leading provider of low-price, high-quality branded personal
computers, or PCs. Since our first sale in November 1998 when we introduced our
eTower PCs, we have sold over one million PCs. According to Ziff Davis Market
Intelligence, we sold the third highest number of PCs through retailers in the
United States in June 1999. We also offer an integrated computing and Internet
access solution, currently through our relationship with America Online, Inc.,
and plan to launch e-machines.net, our private label Internet access service,
in the fourth quarter of 1999.
The explosive growth in the popularity of the Internet has increased demand
for PCs as the PC has proven to be the predominant means of accessing the
Internet. We believe the combination of this growing demand for Internet access
and the introduction of the sub-$600 PC creates an opportunity for our low-
price, high-quality integrated computing and Internet access solution. As part
of our integrated solution, our PC buyers may receive rebates in connection
with long-term Internet access service subscriptions, or ISP rebates. We
currently offer our ISP rebates through our relationship with America Online
and, in the future, we plan to directly offer ISP rebates with our planned e-
machines.net service. Our ISP rebates enable consumers to purchase our PCs for
a net effective price of as low as $0 and to gain access to the Internet for a
monthly fee. In addition, our PC buyers who do not enter into a long-term
contract but subscribe to e-machines.net on a month-to-month basis may qualify
for our planned program that will enable subscribers to upgrade the
configuration of their eTower model PC for a low fee. We believe that our
products, services and programs will appeal to a wide variety of consumers,
especially first-time PC buyers, who are looking for an inexpensive and
powerful means of accessing the Internet.
Our operating model allows us to cost-effectively offer our PCs and
integrated computing and Internet access solution for the following reasons:
. we are able to maintain low fixed costs, capital expenditures and
manufacturing and operating costs by outsourcing most of our major
operating and manufacturing functions;
. we maintain low distribution, marketing and administration costs by
distributing and advertising our products and services through a limited
number of large retailers, including Best Buy, Circuit City, Office
Depot and Staples; and
. we achieve high inventory turnover through product management and
outsourcing of manufacturing.
We were incorporated in Delaware in September 1998. Our principal executive
offices are located at 14350 Myford Road, Suite 100, Irvine, California 92606
and our telephone number is (714) 481-2828. Our web site is located at
"www.e4me.com." Information contained on our web site does not constitute a
part of this prospectus.
------------
E-MACHINES(R) is our registered United States trademark. eMachines(TM),
eTower(TM), eView(TM) and eOne(TM) are also our trademarks. This prospectus
contains other trademarks and trade names of other companies.
3
<PAGE>
The Offering
Common stock offered.................... shares
Common stock to be outstanding after
this offering.......................... shares
Use of proceeds......................... General corporate purposes, including
working capital and financing our ISP
rebate program with respect to our
planned e-machines.net service
Proposed Nasdaq National Market
symbol................................. EEEE
Summary Financial Information
(in thousands, except share data)
<TABLE>
<CAPTION>
Period From
Sept. 18, 1998 Six Months
(inception) to Ended
Dec. 31, 1998 June 30, 1999
-------------- -------------
<S> <C> <C>
Statements of Operations Data:
Net revenues.................................... $ 58,283 $ 351,313
Cost of revenues................................ 58,088 338,790
---------- ----------
Gross profit.................................... 195 12,523
Income (loss) from operations................... (1,913) 1,051
Net loss ....................................... (2,802) (3,909)
Basic and diluted net loss per share............ $ (0.04) $ (0.05)
========== ==========
Shares used in computing basic and diluted net
loss per share................................. 77,600,000 77,600,000
========== ==========
</TABLE>
<TABLE>
<CAPTION>
June 30, 1999
-------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
<S> <C> <C> <C>
Balance Sheet Data:
Cash ......................................... $ 10,911 $157,571 $
Working capital............................... (6,502) 140,158
Total assets.................................. 160,313 306,973
Long-term obligations......................... 560 560
Redeemable convertible preferred stock........ -- -- --
Total stockholders' equity (deficiency)....... (5,120) 141,540
</TABLE>
The total number of outstanding shares of our common stock and the pro forma
data above are based on:
. 77,600,000 shares of our common stock outstanding as of June 30, 1999;
. the sale of 24,279,369 shares of our preferred stock in August 1999
(including 5,560,776 not outstanding as of the date of this prospectus
that are issuable to America Online upon regulatory approval) and the
automatic conversion of these shares of preferred stock upon completion
of this offering into 24,279,369 additional shares of common stock; and
. the issuance of 419,538 additional shares of our common stock on August
18, 1999, as consideration for the assignment of our trademark.
See Note 1 of Notes to Financial Statements for an explanation of the
determination of the number of shares used in computing per share data.
4
<PAGE>
The pro forma as adjusted data above has been adjusted to reflect the sale
of shares of common stock in this offering at an assumed initial public
offering price of $ per share (less underwriting discounts and commissions
and estimated offering expenses).
The above information excludes:
. 609,200 shares of common stock issuable upon exercise of options
outstanding as of June 30, 1999, having a weighted average exercise
price of $1.56 per share, and 2,590,800 additional shares authorized to
be issued under our stock plan;
. 227,897 shares of common stock issuable upon exercise of an option
granted to our President and Chief Executive Officer, with an exercise
price of $1.61 per share; and
. shares of common stock issuable to America Online upon exercise of its
warrants. See "Related Party Transactions--Relationship with America
Online, Inc." for a discussion of the America Online warrants.
Unless otherwise specifically stated, information throughout this
prospectus:
. reflects the conversion of all outstanding shares of preferred stock,
including the 5,560,776 shares of preferred stock not outstanding as of
the date of this prospectus that are issuable to America Online upon
regulatory approval, into 24,279,369 shares of common stock
automatically upon the closing of this offering;
. assumes no exercise of the underwriters' over-allotment option; and
. reflects the eight-for-one stock split of our common stock effected on
August 13, 1999 (all share and per share amounts of our common stock
have been retroactively restated to reflect the stock split).
5
<PAGE>
RISK FACTORS
You should carefully consider the following risks before making an
investment decision. The risks described below are intended to highlight risks
that are specific to us and are not the only ones that we face. Additional
risks and uncertainties, such as those that generally apply to our industry or
to companies undertaking initial public offerings, may also impair our business
operations. You should also refer to the other information in this prospectus,
including the discussions in "Special Note Regarding Forward-Looking
Statements," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business," as well as our Financial Statements and
the related Notes.
Because we have operated for a very limited period of time and our business is
still rapidly changing, we may have difficulty accurately predicting future
operating results and you have limited information upon which to evaluate our
business
We were incorporated in September 1998 and sold our first PC in November
1998. To date, most of our revenues have been derived from the sale of PCs and
monitors, and from the provision of customer support and other technical
services. Our business is changing rapidly, and we expect to derive a portion
of our future net revenues from America Online, our Internet access service
provider, and our own planned Internet access services. We intend to introduce
our own branded Internet access service, e-machines.net, during the fourth
quarter of this year. Our limited operating history and our evolving business
make it very difficult for us and for investors to evaluate or predict our
future business prospects. In addition, we may change our business strategy as
a result of changing market conditions. You should consider our business and
prospects in light of the risks and difficulties typically encountered by
companies in the early stages of development, particularly those in the rapidly
changing PC and Internet access service markets. For example, we may be unable
to:
. obtain a sufficient supply of PCs and monitors on a timely basis;
. timely and effectively introduce new PCs, monitors and Internet access
services;
. attract and retain our PC buyers as subscribers to Internet access
services offered by America Online or us;
. raise sufficient capital to support our growth or any future ISP rebate
programs;
. build significant brand name recognition;
. compete successfully in the highly competitive PC and Internet access
service markets;
. successfully manage the outsourcing of a significant portion of our
operations, including the manufacture and distribution of our PCs and
monitors, customer service and support and Internet access services; and
. attract, retain and efficiently integrate new senior management
personnel.
We have incurred significant losses since our inception and may continue to
incur losses in the future
We have incurred net losses since our inception and at June 30, 1999 we had
an accumulated deficit of $6.7 million. While we experienced a period of rapid
revenue growth following our inception, we may not be able to maintain this
revenue growth and we may not become profitable. In addition, pricing pressures
in both the PC and Internet access service markets may cause us to decrease the
prices of our PCs or Internet access services, which would harm our operating
results. Also, we have maintained relatively low operating costs by outsourcing
most of our business operations. We may not be able to successfully manage
these outsourcing relationships. As a result, our ability to achieve
profitability may be significantly harmed.
6
<PAGE>
A number of factors could cause our quarterly operating results to fluctuate
significantly and cause our stock price to be volatile
We expect our operating results to fluctuate significantly in the future due
to a number of factors, many of which are outside of our control. Our PC
business currently generates low operating margins, and we expect this to
continue for the foreseeable future. Thus, slight variations in the sales
prices of our PCs, component or manufacturing costs or operating costs could
significantly affect our operating results in future periods. In addition, the
Internet access services market is highly competitive and subject to rapid
change. If our planned Internet access services are not successful, our
operating results will be harmed. If our operating results do not meet the
expectations of securities analysts and investors, our common stock price could
significantly decline. Some of the other factors that could affect our
quarterly operating results include:
. our ability or our suppliers' ability to effectively develop and support
new PC models;
. new product or Internet access service announcements and introductions
by us or our competitors;
. fluctuations in the amount of, and the number of our PC buyers claiming,
product rebates;
. the number of subscribers who default on their long-term Internet access
service contracts;
. reductions in the sales prices of PCs, monitors or Internet access
services offered by us or our competitors;
. changes in the mix of the PCs and monitors we sell;
. changes in the dollar amount of ISP rebates we offer;
. achieving and maintaining a low-cost business model and managing third-
party relationships necessary to do so;
. the cost of, and our key suppliers' ability to obtain sufficient
supplies of, PCs and monitors and the components for them;
. our key suppliers' ability to manufacture sufficient quantities of PCs
and monitors, and maintain the quality of our products;
. loss of subscribers due to changes in consumer demand for America
Online's CompuServe or our own e-machines.net service;
. the popularity of, and seasonal or other fluctuations in demand for, our
PCs, monitors and Internet access services; and
. our ability to adequately reserve for price protection credits to
retailers, product returns, warranty claims or anticipated defaults
relating to our Internet access services, as well as the cost of our
"PC rEnewal" program.
Historically, demand for PCs and PC-related services has generally been
stronger in the fourth quarter of each year. We believe this seasonal impact on
business will increase to the extent that PCs continue to become more consumer-
oriented or entertainment-driven products. As a result, we expect our net
revenues to generally be greater in the fourth quarter and generally lower in
the first quarter of each year.
Because our business depends on outsourcing a substantial portion of our
operations, if we were unable to do so in the future, our business would be
significantly harmed
Historically, we have had relatively low manufacturing and operating costs
because we outsource most of our operating and manufacturing functions,
including system assembly, warehouse labor, distribution, research, product
design, warranty services and customer support. In addition, we have had
relatively low distribution costs because we distribute our products primarily
through a limited number of large retailers. We may not be successful in
managing our relationships with any of these third parties and if existing
third-party suppliers
7
<PAGE>
cannot provide these services at commercially reasonable prices, or at all, and
we are not able to find suitable alternative suppliers, our business would be
significantly harmed. Moreover, we may not be able to monitor or control
effectively the quality of the PCs and monitors manufactured by our suppliers
and, in the case of Internet access services, the reliability of our suppliers'
network. Low-quality products, poor customer service, capacity constraints
within our suppliers' networks resulting in slow Internet connectivity or
similar inadequacies may harm our brand name, both as a PC vendor and as an
Internet service provider, which would significantly harm our business.
Because we currently depend solely on a single manufacturer for our eTower PCs,
a single manufacturer for our eOne PCs and a limited number of manufacturers
for our monitors, if supply is reduced or discontinued, our business would be
significantly harmed
TriGem Computer currently manufactures all of our eTower PCs. Korea Data
Systems Co. manufactures our eOne PCs and, together with the Taiwanese
manufacturer Jean Company, all of our monitors. TriGem Computer's PC production
facility in Korea is currently operating at full capacity. In order to meet
anticipated demand for our products and the products of other customers, TriGem
Computer has recently entered into an outsourcing manufacturing agreement with
a facility in Xiamen, China and intends to open an additional facility in
Shenyang, China during the second half of 1999. Building and bringing a new
manufacturing facility up to full production capacity is a lengthy, costly and
difficult process. These facilities may not achieve their scheduled production
levels on a timely basis, or at all. Even if these new facilities do meet
projected production levels, the products manufactured may not meet our high-
quality standards. Additionally, TriGem Computer, Korea Data Systems Co. and
Jean Company provide other vendors with PCs and monitors. As a result, we may
not benefit from any increased production capacity. If we are unable to obtain
a sufficient supply of PCs or monitors to meet the demand for our products, our
business would be significantly harmed.
Our suppliers depend on a limited number of key suppliers for microprocessors
and other components used in our products
Our suppliers generally use standard parts and components available from a
number of vendors. However, our suppliers are dependent on Intel Corporation
and Advanced Micro Devices, Inc. for their supply of microprocessors. If, in
the future, our suppliers are unable to obtain sufficient quantities of
microprocessors from Intel or Advanced Micro Devices, or if these companies
stop producing microprocessors that meet our needs, our suppliers could
experience increases in component costs or delays in product shipments that
would significantly harm our business. Even where multiple vendors are
available, our suppliers' strategy has been to concentrate purchases from a
single source to obtain favorable pricing. Our business would be significantly
harmed if supply shortages led to price increases or production delays for our
products.
We operate under a number of verbal agreements with our key suppliers and their
subsidiaries, the terms of which may be changed in a manner adverse to us
We currently operate under a number of verbal agreements with our key
suppliers and their subsidiaries. TriGem Computer provides warranties to us on
PCs sold and provides repair services for returned PCs through its wholly-owned
subsidiary, TriGem America. Korea Data Systems Co. and Jean Company provide us
a warranty for monitors under a verbal agreement as well. Under a verbal
agreement with KDS USA, our inventory trade payable terms are extended out to
90 days with a cash discount on PC purchases proportional to the number of days
we pay early. We also sublease space to TriGem America under our warehouse
lease under a verbal agreement. These verbal agreements are described in more
detail under "Related Party Transactions." Since these agreements are not in
written form, we may not be able to continue to operate our business under
these terms and these terms may be subject to future change. If we are unable
to continue to operate under these verbal agreements or these verbal agreements
are changed in a manner adverse to us, our business would be significantly
harmed.
8
<PAGE>
The international operations of our suppliers of PCs and monitors expose us to
currency, trade, regulatory, political and other risks
All of our PCs and monitors are currently being manufactured in Korea, China
and Malaysia by TriGem Computer, Korea Data Systems Co. and Jean Company. These
suppliers' operations, and in turn our operating results, are subject to a
number of risks associated with international operations including:
. fluctuations in currency values;
. export duties, import controls and trade barriers;
. restrictions on the transfer of funds;
. political and economic instability; and
. compliance with foreign laws.
Because we have partnered with America Online, any reduction in the popularity
of its AOL or CompuServe services would significantly harm our business
The Internet access service industry is highly competitive. To the extent
any particular Internet service provider becomes unpopular with a significant
number of subscribers, that provider's business may be materially harmed.
Pursuant to our agreement with America Online, we offer America Online's AOL
and CompuServe services in connection with our PCs. We are, therefore,
substantially dependent on America Online's ability to maintain AOL and
CompuServe's position as two of the preferred Internet access services. Our
relationship with America Online may not be as successful as we anticipate if
other PC vendors offer similar integrated computing and Internet solutions with
more favorable terms than ours.
America Online is not prohibited from entering into similar agreements with
other PC vendors or retailers, so long as the terms are no more favorable than
ours. For example, America Online has entered into an agreement with Circuit
City, one of our largest customers, for a limited time to offer consumers a
rebate of up to $400 with the purchase of various PCs. In addition, another
retailer recently announced that it plans to offer its own branded low-price
PCs in connection with Internet access service from America Online. If
consumers use the Circuit City rebate offer in connection with the purchase of
another company's PC, or if consumers find other rebate offers more attractive,
any competitive advantage we may gain from our ISP rebate program would be
significantly harmed.
If we are unable to successfully compete with established Internet service
providers, our business will be significantly harmed
We plan to enter a new market where we have no previous experience. The
Internet access services market is highly competitive and we expect competition
in this market to intensify in the future. This market is new and subject to
rapid change, including the impact of new technologies, declining prices and
well-funded promotional campaigns. If we begin providing our own branded
Internet access services, we will compete with many large companies that have
substantially greater market presence, and financial, technical, marketing and
other resources than we have. In addition, as consumers begin to access the
Internet through emerging Internet appliances such as the television, we may
face additional competition. Potential competitors include the following:
. established online services, such as America Online, Microsoft Network
and Prodigy Communications Corp.;
. local, regional and national Internet service providers, including
EarthLink Network, Inc. and MindSpring Enterprises, Inc.;
. nonprofit or educational institutions providing access to the Internet;
. national telecommunications companies, including AT&T Corp., MCI
WorldCom, Inc. and GTE Corp.;
9
<PAGE>
. regional Bell operating companies, including BellSouth and SBC
Communications, Inc.;
. competitive local exchange carriers, including Covad Communications
Group, Inc. and Rhythms NetConnections, Inc.;
. online cable services, including Excite@Home, Time Warner and Road
Runner;
. alternative e-commerce Internet advertising vendors, including Free-PC
and NetZero Inc.; and
. potential new entrants to the Internet access services market such as
computer hardware vendors, including Compaq Computer Corporation, Dell
Computer Corporation, Gateway, Inc. and Micron Electronics, Inc. or
computer retailers, such as Best Buy Co., Inc.
In addition to America Online, some of our current or future strategic
partners may become our competitors. Our entry into the Internet access
services market may have a negative effect on our relationship with America
Online or our relationships with other parties. Competition is likely to remain
intense as large, diversified telecommunications and media companies acquire
Internet service providers, as Internet service providers and PC vendors merge
and as Internet service providers consolidate. The consolidation of existing
competitors with or into larger entities, or entry of new entities into the
Internet access services market, would likely result in greater competition for
us.
If we do not maintain our reputation and expand our name recognition, we will
not remain competitive and our business will be significantly harmed
Developing and maintaining awareness of our "eMachines" brand name is
critical to achieving widespread acceptance of our PCs and monitors and our
branded Internet access service. Promotion and enhancement of our brand will
depend largely on our success in providing high quality products and services,
which is uncertain. If our PC buyers do not perceive our products and services
to be of high quality, our brand name and reputation could be significantly
harmed. Furthermore, the importance of brand recognition will increase as
competition in our market increases. The substantial resources of other PC
vendors may enable them to enter the Internet access industry quickly. As a
result, we may have only a limited opportunity to enter, and maintain a
significant market share of, the Internet access services market. If we fail to
successfully promote our brand name or if we incur significant expenses
promoting and maintaining our brand name, our business could be significantly
harmed.
Our ability to successfully promote and position our brand will depend
largely on the effectiveness of our marketing efforts, our retail customers'
marketing efforts and our ability to develop reliable and desired products at
competitive prices. Therefore, we may need to increase our financial commitment
to create and maintain brand awareness among potential PC buyers. Currently, we
depend exclusively on our retail customers to advertise our PCs. If these
retailers reduce or cease advertising our PCs, we would have to increase our
own sales and marketing expenses and our business would be significantly
harmed.
We are involved in litigation that may be costly and time-consuming
In July 1999, Compaq Computer Corporation filed a complaint against us,
TriGem Computer, TriGem America and Korea Data Systems Co. as defendants in the
U.S. District Court for the Southern District of Texas based on the defendants'
alleged infringement of 13 patents held by Compaq related to improved system
processing speed, enhanced video graphics, peripheral compatibility and overall
system architecture. The complaint seeks an accounting, treble damages, a
preliminary and permanent injunction from further alleged infringement,
attorneys' fees and other unspecified damages. We are currently in the process
of assessing the complaint. As a result, we are currently unable to estimate
the total expenses, possible loss or range of loss that may be ultimately
connected with these allegations. We cannot assure you that Compaq will not
succeed in obtaining monetary damages or an injunction against the production
of our PC products. Our defense of the claims could result in significant
expenses and diversion of management's attention and other resources. In
addition, we cannot assure you that the results of this litigation would not
result in our business being significantly harmed.
10
<PAGE>
In August 1999, Apple Computer, Inc. filed a complaint against us as a
defendant in the U.S. District Court for the Northern District of California
based on our alleged unfair and unauthorized use of the design and trade dress
of the iMac computer. The complaint seeks a constructive trust of profits from
sales of our eOne PC, treble damages, a preliminary and permanent injunction
from further distribution of our eOne PC, attorneys' fees and punitive damages.
We are currently in the process of assessing the complaint. As a result, we are
currently unable to estimate the total expenses, possible loss or range of loss
that may be ultimately connected with these allegations. We cannot assure you
that Apple will not succeed in obtaining monetary damages or an injunction
against the production of our eOne PCs. Our defense of the claims could result
in significant expenses and diversion of management's attention and other
resources. In addition, we cannot assure you that the results of this
litigation would not result in our business being significantly harmed.
Various other lawsuits, claims and proceedings have been or may be asserted
against us, including those related to product liability, intellectual
property, environmental, safety and health and employment matters. Litigation
is expensive and time consuming regardless of the merits of the claim and could
divert management's attention from our business. Moreover, the outcome of
litigation cannot be predicted with certainty. Some lawsuits, claims or
proceedings may be disposed of unfavorably to us.
Our business as a high technology company may subject us to claims that our
trademarks or other intellectual property, or intellectual property used in our
products, infringes the rights of third parties which could cause us to incur
significant costs
It is common in the PC industry to receive communications from time to time
from other parties asserting that they possess patent rights, copyrights,
trademark rights or other intellectual property rights which cover our
products. We receive notices from time to time that our technology allegedly
infringes on intellectual property rights held by others. Any assertions of
this nature may make us subject to legal proceedings and claims in the ordinary
course of our business. For example, in July 1999, Compaq filed a lawsuit
against us alleging that our products infringe a number of its patents. In
addition, in August 1999, Apple filed a lawsuit against us alleging that our
eOne product infringed against the design and trade dress of the iMac computer.
For a discussion of these lawsuits, see the immediately preceding risk factor.
If the final judgment of any legal action is decided against us, our business
could be significantly harmed. Intellectual property litigation is expensive
and time consuming regardless of the merits of the claim, and could divert our
management's attention from our business. Any potential intellectual property
litigation could also force us to do one or more of the following:
. stop using the challenged intellectual property or selling our products
or services that incorporate it;
. obtain, if possible, a license to use the challenged intellectual
property or to sell products or services that incorporate it, although a
license may not be available on reasonable terms, or at all; or
. redesign those products or services that are based on or incorporate the
challenged intellectual property.
If we are forced to take any of the foregoing actions, we may be unable to
sell our products or services and our business would be significantly harmed.
Misappropriation by others of our trademarks and other proprietary rights could
harm our reputation, affect our competitive position and cause us to incur
significant costs to defend our rights
We believe our trademarks and other proprietary rights are critical to our
success and competitive position. If we are unable to protect our trademarks
and other proprietary rights against unauthorized use by others, our reputation
and brand name would be damaged and our competitive position would be
significantly harmed. One of our trademarks is registered in the United States.
We seek to limit access to our proprietary information and our third-party
licensors' proprietary information. Nonetheless, we may not be able to deter
misappropriation of our proprietary information and material in light of the
following risks:
. nonrecognition or inadequate protection of our proprietary rights in
certain foreign countries;
11
<PAGE>
. undetected misappropriation of our proprietary information or materials;
and
. unenforceability of confidentiality agreements entered into by our
employees.
Because we depend on licenses of intellectual property from third parties to
produce our products, the loss of any of these licenses would significantly
harm our business
We are required to obtain licenses from software providers in order to
market and sell our products and services. In particular, we currently pre-
install Windows 98 and Microsoft Works on our PCs pursuant to a license.
However, if we are unable to maintain these licenses, or obtain the necessary
licenses in the future, we may be forced to market products without these
technological features or software. We may also be forced to discontinue sales
of our products which incorporate allegedly protected technology for which we
have no license or defend legal actions taken against us relating to our use of
the allegedly protected technology. Our inability to obtain licenses on
competitive terms necessary to sell our PCs at a profit would significantly
harm our business.
We have no prior experience in providing Internet access services and if we are
unsuccessful, our business will be significantly harmed
Our future success is partially dependent on the success of our e-
machines.net Internet access service. We intend to begin offering this service
to our PC buyers in the fourth quarter of 1999. However, we may decide to
postpone the introduction of our e-machines.net Internet service or decide to
pursue alternative Internet strategies as a result of changing market
conditions. If introduced, this service will compete directly with America
Online's CompuServe service as well as other Internet access services. We may
not successfully introduce e-machines.net or attract subscribers to this
service. The success of e-machines.net depends on a variety of other factors,
including:
. the quality and reliability of our service;
. our ability to develop new products and services;
. our pricing policies and the pricing policies of our competitors;
. our ability to introduce new services before our competitors; and
. general economic trends.
If we do not maintain and strengthen our relationships with our retail and
strategic partners, our ability to generate revenues will suffer and our
business will be significantly harmed
We are substantially dependent on retailers to sell our PCs and monitors.
Since inception, we have derived a significant portion of our gross revenues
from sales to a limited number of large retailers. For the six months ended
June 30, 1999, approximately 70% of our gross revenues were from sales to our
four largest retail customers. We expect to continue to derive a large
percentage of our gross revenues from sales to a limited number of leading
retailers. However, our retail customers are not contractually committed to
future purchases of our products and could discontinue carrying our products at
any time. In addition, we compete with an increasing number of companies for
access to limited shelf space with these retailers. Generally, these retailers
limit the number of PC brands they carry and may stop carrying our PCs at any
time. Any significant disruption of our relationship with any of our major
retailers, or any significant reduction in purchases by them, could
significantly harm our business.
If we are unable to sell Internet access services to our PC buyers, our
business would be significantly harmed
Our future success depends in part on our ability to sell Internet access
services to our PC buyers. The PC industry and the Internet industry are
currently evolving and converging. We believe that this convergence will
12
<PAGE>
result in the PC becoming the Internet appliance that attracts consumers to
enter into long-term Internet access service contracts. Our business would be
harmed if a significant number of buyers do not also purchase Internet access
service from either America Online or us. In addition, if Internet access
services fees decline significantly or become free, our ISP rebate program will
be unattractive to consumers and our business would be significantly harmed.
If we are unable to monitor and manage our product rebate programs, our
business could be significantly harmed
We currently offer product rebates to buyers of our PCs. We have limited
historical data to assist us in determining what percentage of consumers will
claim these product rebates. At the same time, we must approximate future
product rebate redemptions in order to price our products effectively. Our
business would be significantly harmed if an unexpectedly large number of our
PC buyers redeemed the product rebates to which they were entitled, thereby
reducing the effective average selling price of our products below the level we
anticipated.
Our business would be significantly harmed if our PC buyers who elect to
receive an ISP rebate and enter into long-term contracts for Internet access
services fail to honor their commitments
We intend to directly offer an ISP rebate to our PC buyers who subscribe to
our planned e-machines.net for a three year period. In addition, with each new
subscriber, we may pre-pay UUNET, an MCI WorldCom company that provides
Internet infrastructure services, a nonrefundable fee for the Internet services
that we will outsource to UUNET. As prices for Internet access services
decline, subscribers may default and subscribe to a lower-priced service. If
significant numbers of our PC buyers who elect to enter into long-term
contracts for Internet access services fail to honor their contractual
subscription obligations after receiving an ISP rebate, we will lose the amount
of the ISP rebate that we paid and the amount of any prepayment to UUNET that
has not been recovered through monthly subscription fees, and our business
would be significantly harmed. Further, although we intend to establish
reserves in anticipation of a certain number of defaults, we have limited
experience in determining the appropriate amount of these reserves. If our
reserves are inadequate, we may incur unexpected losses.
In addition, if recurring monthly net revenues are discontinued due to the
default by buyers of our PCs who subscribe to America Online's CompuServe
Internet access service, our business could be significantly harmed. Because we
operate our business on narrow margins, any change in our expected net revenues
from Internet access service monthly payments or e-commerce could adversely
affect our business.
If we extend credit to retailers that do not repay us, or that pay late, we may
have unexpected losses, which would significantly harm our business
We extend credit to our retail customers, which exposes us to credit risk.
Most of our outstanding accounts receivable are from a limited number of large
retailers. As of June 30, 1999, the five highest outstanding accounts
receivable balances totaled $102.4 million, representing 83% of our gross
accounts receivable, with one customer accounting for $34.8 million,
representing 28% of our gross accounts receivable. In the event that we fail to
monitor and manage effectively the resulting credit risk and a material portion
of our accounts receivable is not paid in a timely manner or becomes
uncollectible, our business would be significantly harmed and we could incur a
significant loss associated with any outstanding accounts receivable.
Technology in the PC industry changes rapidly, therefore, we must continually
introduce new products and services to remain competitive or our business will
be significantly harmed
We must introduce new PCs with features that address the needs and
preferences of consumers to remain competitive. The PC industry is
characterized by short product life cycles resulting from rapid changes in
technology and consumer preferences and declining product prices. We must
regularly introduce new PCs and services, including new computer configurations
and offerings, to maintain retailer and consumer interest in our
13
<PAGE>
products. These new PCs or services may not be successful. Further, the
successful introduction of new products or services by us or our competitors
may significantly harm the sale of, or gross margins on, our existing products.
We may not be able to adapt to future changes in the PC industry because we do
not maintain a research and development group. Currently, we work closely with
TriGem Computer to evaluate the latest developments in PC-related technology.
In the future, we may not have access to new technology, successfully
incorporate new technology into our products or be able to deliver commercial
quantities of new products or features in a timely and cost-effective manner.
If any of these events occur, our business would suffer.
Products that contain, or are rumored to contain, design defects could result
in significant costs to us or otherwise significantly harm our business
The design and production of PC components is highly complex and, since we
do not design or produce our own products, we rely on our suppliers and
component manufacturers to provide us with high-quality products. If any of our
products contain defective components, we could experience delays in shipment
of our products and increased costs. If defects are discovered after we have
shipped our affected products in volume, we could be harmed in the following
ways:
. replacements or recalls could impose substantial costs on us;
. rumors, false or otherwise, could be circulated by the press and other
media which could cause a decrease in sales of our products and
significant damage to our brand; and
. our PC buyers could file suits against us alleging damages caused by
defective products.
Because average selling prices of PCs decline rapidly, if we fail to properly
manage our inventory our business could be significantly harmed
The average selling prices of PCs are subject to rapid declines. To address
the problems created by excess inventory in the face of rapid price decreases,
PC vendors must carefully manage their inventory. Additionally, due to our
narrow margins, we must manage our inventory more efficiently than traditional
PC vendors. From time to time in the past, our inventory has been limited by
the capacity of our manufacturers and may be limited in the future. We may be
unsuccessful in managing the supply of our PCs and monitors to meet demand in
the future. Our business is dependent on our ability to quickly sell our PC
products through the retail channel. We must carefully monitor market demand
for, and supply of, our products in an effort to match supply to consumer
demand. If we overestimate the supply needed to meet consumer demand, our
business could be significantly harmed. If we underestimate needed supply or
otherwise maintain too little inventory, we may not be able to react quickly to
sudden increases in market demand for a given product, which may significantly
harm our business.
In connection with the introduction of new products, we may be required to
discount prices of existing products or to give other sales incentives to
retailers. As a result, we may experience price protection adjustments to a
significant degree in the future. For example, in the second quarter of 1999,
we offered a significant price protection to certain retailers in connection
with the introduction of our next generation of products. In addition,
retailers generally have the right to return a portion of excess inventory
purchased in the prior quarter within a limited period of time. Increased
inventory levels in our distribution channels, whether due to a decrease in
consumer demand for our products, lower-than-anticipated demand for PCs in
general, problems in managing product transitions or component pricing
movements could significantly harm our profitability. Production delays at the
beginning of a new PC product cycle could affect our sales of newer products
and how we manage the sale of older PC product inventory held by retailers. If
we are unable to sell our aging products at anticipated prices, our business
could suffer. In managing our supply chain, we must accurately forecast
consumer demand for our products. The amount we establish as reserves for price
adjustments in the event we must credit a retail customer for a price decrease
may be insufficient and any future returns or price protection charges may
significantly harm our business.
14
<PAGE>
Increased popularity of non-PC Internet access devices could result in lower
sales of our PCs
Our future business depends on PCs remaining the predominant Internet access
device. Internet services are currently accessed primarily by PCs. However,
television set-top boxes, hand held products and other non-PC devices may
increasingly be used to access the Internet. Television set-top boxes equipped
with modems and cable modems allow users to transmit data at substantially
faster speeds than the analog modems currently incorporated in our PCs. If
consumers prefer this or any other alternative devices to PCs to access the
Internet, sales of our PCs may slow, we may be unable to attract subscribers to
our Internet access service and our business would be significantly harmed.
Our business will be significantly harmed if growth in the use of the Internet
does not continue
We believe a significant number of our PC buyers are purchasing our products
and services as a means of connecting to the Internet. As a result, our future
success is substantially dependent upon continued growth in Internet use. The
adoption of the Internet for commerce and communications generally requires the
understanding and acceptance of a new way of purchasing goods and exchanging
information. The use and acceptance of the Internet may not increase for a
number of other reasons, including the following:
. actual or perceived lack of security of information, such as credit card
numbers;
. high cost or lack of availability of access;
. congestion of traffic or other usage delays on the Internet;
. inconsistent quality of service;
. possible outages due to year 2000 difficulties or other damage to the
Internet;
. uncertainty regarding intellectual property ownership; and
. government regulation of the Internet.
Capacity constraints caused by growth in the use of the Internet may impede
further development of the Internet to the extent that users experience delays,
transmission errors and other difficulties. If the necessary infrastructure,
products, services or facilities are not developed to mitigate the effects of
these factors, or if the Internet does not become a viable and widespread
commercial and communication medium, our business could be significantly
harmed.
If demand for PCs does not continue to grow, our business will be significantly
harmed
Our future success is significantly dependent on the continued strong demand
for PCs generally and for low-price PCs in particular. The PC market is
characterized by rapid new product and technology introductions and generally
declining prices for existing products. Demand for PCs might be significantly
reduced if consumers perceive little technological advantage in new PCs or
believe that the price of a new PC is not worth the perceived technical
advantage. Further, if consumers view anticipated changes as significant, such
as the introduction of a new operating system or microprocessor architecture,
overall market demand for PCs may decline because potential consumers may
postpone their purchases until release of the new PCs or in anticipation of
lower prices on existing PCs following the introduction of new models. Reduced
demand could result in excessive inventories that could take several quarters
to correct. If any of these events occur, our business would be significantly
harmed.
Our business would be significantly harmed if we are unable to compete
successfully in the PC industry
The PC industry is highly competitive and we expect this competition to
increase significantly, particularly in the low-price PC market. We have been
able to gain market share by selling high-quality PCs at prices significantly
lower than those offered by established PC vendors. We expect pricing pressures
in the PC market to continue, particularly as more vendors combine Internet
access with the purchase of a PC. PC vendors may
15
<PAGE>
continue to reduce their prices to compete with us at our low price points.
Large PC vendors such as Compaq, Gateway, Hewlett-Packard and IBM have
significantly greater financial, marketing and technical resources than we do
and may decide to accept lower margins or losses on a sustained basis on their
low-price PC sales to regain market share. The introduction of low-price PCs
combined with brand strength, extensive distribution channels and financial
resources of the larger PC vendors may cause us to lose market share.
Most major PC vendors have begun to offer Internet access services. Some PC
vendors are trying to increase their sales of higher-price PCs by offering
additional services, such as free Internet access for a limited period of time.
In addition, other PC vendors are adopting programs similar to ours that rebate
a portion of the purchase price of PCs in exchange for entering into long-term
Internet services contracts. There are relatively few barriers preventing
competitors from entering this market. As a result, new market entrants pose a
threat to our business. We do not own any patented technology that precludes or
inhibits competitors from entering the low-price PC market. Existing or future
competitors may develop or offer products or services that are comparable or
superior to ours at a lower price, which could significantly harm our business.
For example, a retailer recently announced that it plans to offer its own
branded low-price PCs in connection with Internet access service from America
Online. Our PC and monitor suppliers are not contractually bound to meet our
demand for products and can divert some or all of their output to others,
including our competitors, or sell directly to the retail channel. If any of
these events were to occur, our business would be significantly harmed unless
we were able to successfully compete with these parties and source other low-
cost manufacturers of high-quality PCs and monitors.
If we, our key suppliers or our retailers fail to be ready for the year 2000
calendar change, our business may be disrupted and be significantly harmed
The year 2000 issue refers to the potential for disruption to business
activities caused by system failures or miscalculations that are triggered by
advancement of date records past the year 1999. Many existing computer programs
use only two digits to identify a year. These programs were designed and
developed without addressing the impact of the upcoming change in the century.
If not corrected, many computer software applications could fail or create
erroneous results by, at or beyond the year 2000. We use software, computer
technology and other services provided by third-party vendors that may fail due
to the year 2000 calendar change. A failure due to year 2000 issues involves
numerous risks including:
. potential product warranty or other claims from our consumers;
. negative impact on market demand for PCs in general until preparations
for the calendar change by existing and potential consumers is complete;
and
. manufacturing, information, facility and development systems problems,
both those that are unique to us and those that affect geographical
areas, such as Korea, where our business, employees or suppliers reside
or operate.
Our PCs may operate in complex network environments, including the Internet,
and may directly or indirectly interact with a number of other hardware
systems, any of which may not be ready for the year 2000 calendar change.
Further, consumers may install software on our PCs that is not ready for the
year 2000 calendar change. We may discover that our PCs contain errors or
defects associated with the year 2000 date functions. We are unable to predict
to what extent our business may be affected if our PCs, the systems that they
operate in conjunction with, including the Internet, or consumers' software
experience material year 2000 problems. Known or unknown errors or defects in
our PCs or that affect our PCs, whether or not originating with our PCs, could
result in delays or losses of net revenues, interruptions of Internet service,
cancellations of subscriptions by our consumers, diversions of our resources,
damage to our brand name or reputation, increased service and warranty costs or
litigation costs. Any of these costs could adversely affect our business. Our
suppliers are currently in the process of assessing their year 2000 readiness.
In the event we or our suppliers are not year 2000 ready, we could experience
product delays. Further, regardless of whether we experience year 2000
problems, consumers may reduce their spending on PCs during the latter part of
1999 in anticipation of
16
<PAGE>
the potential effects of the year 2000, waiting until the beginning of 2000 to
buy a new PC so that they know a particular PC did not suffer problems
associated with the year 2000 calendar change. Any reduction in consumer demand
for our PCs due to year 2000 worries could have a material adverse effect on
our business.
The loss of key personnel or our inability to attract and retain additional
personnel when needed could significantly harm our business
Our future success will depend, in part, on our ability to attract and
retain key management and personnel. Competition in the PC and Internet access
services industries is high. If we are unable to retain existing personnel and
attract and retain additional personnel, our business could be significantly
harmed. Our success also depends on the skills, experience and performance of
our senior management and other key personnel, many of whom have worked
together for only a short period of time. For example, Steven H. Miller, our
Chief Financial Officer, joined us in June 1999. We will also need to hire
additional personnel with expertise in the Internet access services market. If
we do not quickly and efficiently integrate these and other new executives, our
business could suffer. Our operations are substantially dependent on the
continued services of certain members of senior management, especially our
President and Chief Executive Officer, Stephen A. Dukker. Other than Mr.
Dukker, all of our senior management and other key personnel are at-will
employees. Further, we do not maintain "key man" life insurance with respect to
any of our employees. Loss of any key employees could significantly harm our
business.
Our principal stockholders can exercise a controlling influence over our
business and affairs
Immediately after the offering, our three principal stockholders, TriGem
Corporation, Korea Data Systems America and Stephen A. Dukker, will own
approximately % of our common stock ( % if the underwriters' over-allotment
option is exercised in full). If these stockholders acted or voted together,
they would have the power to elect our directors and to exercise a controlling
influence over our business and affairs, including:
. any determinations over whether to change the source of our supply of
PCs and monitors;
. the appointment of new management;
. any determinations with respect to mergers, acquisitions or other
business combinations;
. future issuances of debt and equity securities; and
. the approval of any action requiring the consent of the stockholders,
including amendments to our certificate of incorporation.
In addition, this concentration of ownership could prevent a change in
control that might otherwise be beneficial to stockholders.
We may have potential conflicts of interest with our principal stockholders
which could be resolved in a manner that is inconsistent with other
stockholders' interests
Conflicts of interest may arise between us and our principal stockholders in
a number of areas relating to our present and ongoing relationships, which
could be resolved in a manner which is inconsistent with stockholders'
interests. Conflicts of interests which may arise include:
. the ongoing indirect supply relationships between us and our principal
corporate stockholders that may result in terms that may not be as
favorable to us as arrangements we could negotiate at arm's length
between unrelated parties;
. potential competitive business activities;
. potential acquisitions or financing transactions;
. sales or other dispositions by these principal stockholders of shares of
our common stock, including through the exercise of their registration
rights; and
. tax and intellectual property matters.
17
<PAGE>
If we are not able to manage our growth successfully, our business could be
significantly harmed
Our ability to successfully offer products and services and implement our
business plan in a rapidly changing market requires an effective planning and
management process. Our net revenues increased from $58.3 million for the
period from our inception to December 31, 1998, to $351.3 million for the six
months ended June 30, 1999. We are increasing the scope of our operations, and
we have recently hired a significant number of additional employees. As of June
30, 1999, our total number of employees was 49, of which 26 joined us during
the second quarter of 1999. This growth has placed, and will continue to place,
a significant strain on our management systems, infrastructure and resources.
We will need to continue improving our product distribution systems, financial
and managerial controls, and reporting systems and procedures. We will also
need to continue to expand, train and manage our workforce. We also expect to
manage an increasing number of relationships with various retail customers and
other third parties. If we fail to successfully execute in these areas, our
business could be significantly harmed.
We operate with a minimal number of employees to maintain a cost effective
business model. As a result, we do not have the ability to assume various
operations in the event that one of our third party suppliers is no longer
available to perform those functions. Further, our executive management team
does not have prior experience in the management and administration of a public
company. If our senior management team does not efficiently and effectively
integrate and gain experience in these duties, our business may be
significantly harmed.
Substantial future sales of our common stock in the public market may depress
our stock price
Our current stockholders hold a substantial number of shares of our common
stock that they will be able to sell in the public market in the future. Sales
of a substantial number of shares of our common stock after this offering could
cause our stock price to fall. In addition, the sale of these shares could
impair our ability to raise capital through the sale of additional stock. You
should read "Shares Eligible for Future Sale" for a full discussion of shares
that may be sold in the public market in the future.
Our management has broad discretion over the use of the proceeds from this
offering
Our management has broad discretion over the use of the proceeds of this
offering. Accordingly, it is possible that our management may allocate the
proceeds differently than investors in this offering would have preferred, or
that we will fail to maximize our return on the proceeds. See "Use of Proceeds"
for a more complete description of our current intention regarding the net
proceeds of this offering.
As a new investor you will experience immediate and substantial dilution
If you purchase common stock in this offering, you will pay more for your
shares than the amount paid by existing stockholders which acquired shares
before this offering. As a result, the value of your investment based on the
value of our net tangible assets, as recorded on our books, will be less than
the amount you pay for shares of common stock in this offering. In addition,
the total amount of our capital will be less than what it would have been had
all the existing stockholders and optionees paid the same amount per share of
common stock as you will pay in this offering. See "Dilution" for a more
complete description of the dilution of your investment in our common stock
upon the completion of this offering.
Our charter documents could make it more difficult for a third party to acquire
us and discourage a takeover
Our certificate of incorporation and bylaws are designed to make it
difficult for a third party to acquire control of us, even if a change in
control would be beneficial to stockholders. For example, our amended and
restated certificate of incorporation to be filed upon completion of this
offering, authorizes our board of directors to issue up to 25,000,000 shares of
preferred stock without previously designated rights and privileges. Without
stockholder approval, the board of directors has the authority to attach
special rights, including voting and dividend rights, to this preferred stock.
With these rights, preferred stockholders could make it more difficult for a
third party to acquire our company, including takeover attempts that might
result in a premium over the market price for shares of our common stock.
18
<PAGE>
Our charter documents will, subject to appropriate corporate action, create
a classified board of directors, eliminate the right of stockholders to call a
special meeting of stockholders, and eliminate the ability of stockholders to
take action by written consent. As a Delaware corporation, we are also subject
to the Delaware anti-takeover statute contained in Section 203 of the Delaware
General Corporation Law. See "Description of Capital Stock--Delaware Anti-
Takeover Law and Certain Charter and Bylaw Provisions" for a more complete
description of Section 203 of the Delaware General Corporation Law. These
provisions could make it more difficult for a third party to acquire us, even
if doing so would be beneficial to our stockholders.
Our stock price may be volatile
There has not previously been a public market for our common stock. We
cannot predict the extent to which investor interest in eMachines will lead to
the development of a trading market or how liquid that market might become. The
initial public offering price for our shares will be determined by negotiations
between us and the representatives of the underwriters and may not be
indicative of prices that will prevail in the trading market.
In addition, the stock markets in general, and The Nasdaq National Stock
Market and technology companies in particular, have experienced extreme price
and volume fluctuations that have often been unrelated or disproportionate to
the operating performance of such companies. The trading prices of many
comparable technology companies' stocks are at or near historical highs. These
trading prices are substantially above historic levels and may not be
sustained. These broad market and industry factors may seriously impact the
market price of our common stock, regardless of our actual operating
performance.
19
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that relate to future
events or our future financial performance. In some cases, you can identify
forward-looking statements by terminology such as "may," "will," "should,"
"expects," "plans," "anticipates," "believes," "estimates," "predicts,"
"intend," "potential" or "continue" or the negative of such terms or other
comparable terminology. These forward-looking statements include, but are not
limited to, statements about our plans, objectives, expectations and intentions
and other statements contained in the prospectus that are not historical facts.
These statements are only predictions. We cannot guarantee future results,
levels of activity, performance or achievements. We undertake no obligation to
publicly update or revise any forward-looking statements, whether as a result
of new information, future events or otherwise. Our actual results could differ
materially from those anticipated in these forward-looking statements as a
result of various factors, including the risk outlined under "Risk Factors" and
elsewhere in this prospectus.
USE OF PROCEEDS
We estimate that the net proceeds to us from the sale of the shares of
common stock offered will be approximately $ million (approximately $
million if the underwriters' over-allotment option is exercised in full), at an
assumed initial public offering price of $ per share (less underwriting
discounts and commissions and estimated offering expenses).
We intend to use the net proceeds from this offering for general corporate
purposes, including working capital and financing our ISP rebate program with
respect to our planned e-machines.net service. In addition, we may use a
portion of the net proceeds to acquire complementary products, technologies or
businesses. We currently have no commitments or agreements and are not involved
in any negotiations with respect to any such transactions. Pending use of the
net proceeds of this offering, we intend to invest the net proceeds in
interest-bearing, investment-grade securities.
DIVIDEND POLICY
We have never declared or paid any dividends on our capital stock. We
currently expect to retain future earnings for use in the operation and
expansion of our business and do not anticipate paying any cash dividends in
the foreseeable future.
20
<PAGE>
CAPITALIZATION
The following table sets forth our unaudited capitalization as of June 30,
1999 on the following three bases:
. on an actual basis;
. on a pro forma basis to reflect the sale of 24,279,369 shares of our
preferred stock in August 1999 (including 5,560,776 not outstanding as
of the date of this prospectus that are issuable to America Online upon
regulatory approval) and the automatic conversion of these shares of
preferred stock upon completion of this offering into 24,279,369 shares
of common stock and the issuance of 419,538 shares of our common stock
on August 18, 1999, as consideration for the assignment of our
trademark; and
. on a pro forma as adjusted basis to reflect the sale of shares of
common stock in this offering at an assumed initial public offering
price of $ per share (less underwriting discounts and commissions
and estimated offering expenses).
The table excludes the following:
. 609,200 shares of common stock issuable upon exercise of options
outstanding as of June 30, 1999 and 2,590,800 additional shares of our
common stock authorized to be issued under our 1998 stock plan;
. 227,897 shares of common stock issuable pursuant to an option granted to
our President and Chief Executive Officer, with an exercise price of
$1.61 per share; and
. shares of common stock issuable to America Online upon exercise of its
warrants. For information with respect to the America Online warrants,
see "Related Party Transactions--Relationship With America Online, Inc."
<TABLE>
<CAPTION>
June 30, 1999
-------------------------------
Pro Forma
Actual Pro Forma As Adjusted
------- --------- -----------
(in thousands, except share
data)
<S> <C> <C> <C>
Long-term obligations........................... $ 560 $ 560 $
Redeemable convertible preferred stock, $0.01
par value: no shares authorized, issued and
outstanding (actual); 25,000,000 shares
authorized, no shares issued and outstanding
(pro forma); no shares authorized, issued and
outstanding (pro forma as adjusted) ........... -- -- --
Stockholders' equity:
Preferred stock, $0.01 par value: 50,000,000
shares authorized, no shares issued and
outstanding (actual); 25,000,000 authorized,
no shares issued or outstanding (pro forma
and pro forma as adjusted)................... -- -- --
Common stock, $0.0000125 par value:
250,000,000 authorized, 77,600,000 issued and
outstanding (actual); 102,298,907 issued and
outstanding (pro forma); shares issued
and outstanding (pro forma as adjusted)...... 1 1
Additional paid-in capital...................... 3,765 150,425
Unearned stock compensation..................... (1,675) (1,675) ( )
Notes receivable from stockholders.............. (500) (500) ( )
Accumulated deficit............................. (6,711) (6,711) ( )
------- -------- ----
Total stockholders' equity (deficiency)....... (5,120) 141,540
------- -------- ----
Total capitalization........................ $(4,560) $142,100 $
======= ======== ====
</TABLE>
21
<PAGE>
DILUTION
If you invest in our common stock, your interest will be diluted to the
extent of the difference between the public offering price per share of our
common stock and the pro forma as adjusted net tangible book value per share of
common stock after this offering. Pro forma net tangible book value per share
represents the amount of our total tangible assets less total liabilities,
divided by the pro forma number of shares of common stock outstanding. Dilution
in pro forma net tangible book value per share represents the difference
between the amount per share paid by purchasers of shares of common stock in
the offering made hereby and the net tangible book value per share of common
stock immediately after the completion of this offering.
Our pro forma net tangible book value as of June 30, 1999 was $141,540 or
$1.38 per share of common stock. Pro forma net tangible book value per share
represents the amount of our stockholders' equity divided by 102,298,907 shares
of our common stock (on a pro forma basis to reflect issuance and conversion of
all preferred stock outstanding or issuable upon regulatory approval and
issuance of the 419,538 shares issued as consideration for the assignment of
our trademark). After giving effect to the sale of the shares of common
stock offered hereby at an assumed public offering price of $ per share
(less underwriting discounts and commissions and estimated offering expenses),
our pro forma as adjusted net tangible book value as of June 30, 1999 would
have been $ or $ per share. This represents an immediate increase in net
tangible book value of $ per share to existing stockholders and an immediate
dilution in net tangible book value of $ per share to new investors of
common stock in this offering, as illustrated in the following table:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................... $
Pro forma net tangible book value per share as of June 30, 1999... $1.38
Increase per share attributable to new investors.................. $
-----
Pro forma as adjusted net tangible book value per share after this
offering.......................................................... $
----
Dilution per share to new investors................................ $
====
</TABLE>
The following table sets forth, as of June 30, 1999, 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 holders of common stock
(on a pro forma basis to reflect issuance and conversion of all preferred stock
outstanding or issuable upon regulatory approval) and by new investors, before
deducting the underwriting discounts and commissions and estimated offering
expenses at an assumed public offering price of $ per share.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------- ---------------------- Average Price
Number Percent Amount Percent Per Share
----------- ------- ----------- ---------- -------------
(in thousands, except share data)
<S> <C> <C> <C> <C> <C>
Existing stockholders... 102,298,907 % $ 148,600 % $1.45
New investors........... $
----------- ----- ----------- --------
Total................. 100.0% $ 100.0%
=========== ===== =========== ========
</TABLE>
The foregoing discussion and table assume no exercise of the underwriters'
over-allotment option and any stock options outstanding as of June 30, 1999. As
of June 30, 1999, there were options outstanding to purchase 609,200 shares of
common stock at a weighted average exercise price of $1.56 per share, an option
outstanding to purchase 227,897 shares of common stock granted to our President
and Chief Executive Officer with an exercise price of $1.61 per share and
shares of common stock issuable to America Online upon exercise of its
warrants. For information with respect to the America Online warrants, see
"Related Party Transactions--Relationship with America Online, Inc." To the
extent any of these options or warrants are exercised, there will be further
dilution to investors. See "Capitalization," "Management--Stock Plans,"
"Description of Capital Stock" and Note 5 to Notes to Financial Statements.
22
<PAGE>
SELECTED FINANCIAL DATA
You should read the selected financial data set forth below in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and our Financial Statements and related Notes included
elsewhere in this prospectus. The financial data and other operating
information as of and for the period from inception to December 31, 1998 are
derived from audited financial statements included elsewhere in this
prospectus. The financial data and other operating information as of and for
the six months ended June 30, 1999 are derived from the unaudited financial
statements included elsewhere in this prospectus. We believe the unaudited
financial statements and other operating information contain all adjustments
necessary to present fairly the information included in those statements, and
that the adjustments consist of only normal recurring adjustments. Historical
results are not necessarily indicative of results that may be expected for any
future period.
<TABLE>
<CAPTION>
Sept. 18, 1998 Six Months
(inception) to Ended
Dec. 31, 1998 June 30, 1999
-------------- -------------
(unaudited)
(in thousands, except share
data)
<S> <C> <C>
Statements of Operations Data:
Net revenues..................................... $ 58,283 $ 351,313
Cost of revenues................................. 58,088 338,790
---------- ----------
Gross profit.................................. 195 12,523
Operating expenses:
Sales and marketing............................. 840 5,517
Customer service and technical support.......... 269 2,522
General and administrative...................... 988 3,293
Stock-based compensation........................ 11 140
---------- ----------
Total operating expenses...................... 2,108 11,472
---------- ----------
Income (loss) from operations.................... (1,913) 1,051
Financing charges and interest expense, net...... (889) (4,960)
---------- ----------
Net loss......................................... $ (2,802) $ (3,909)
========== ==========
Basic and diluted net loss per share............. $ (0.04) $ (0.05)
========== ==========
Shares used in computing basic and diluted net
loss per share.................................. 77,600,000 77,600,000
========== ==========
<CAPTION>
Dec. 31, 1998 June 30, 1999
Balance Sheet Data: -------------- -------------
<S> <C> <C>
Cash............................................. $ 3,791 $ 10,911
Working capital deficiency....................... (1,311) (6,502)
Total assets..................................... 60,011 160,313
Long-term obligations............................ 560 560
Total stockholders' deficiency................... (1,351) (5,120)
</TABLE>
See Note 1 of Notes to Financial Statements for an explanation of the
determination of the weighted average common and common equivalent shares used
to compute net loss per share.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This prospectus contains forward-looking statements the accuracy of which
involves risks and uncertainties. We use words such as "anticipates,"
"believes," "plans," "expects," "future" and "intends" and similar expressions
to identify forward-looking statements. Prospective investors should not place
undue reliance on these forward-looking statements, which apply only as of the
date of this prospectus. Our actual results could differ materially from those
anticipated in these forward-looking statements for many reasons, including the
risks we face described in "Risk Factors" and elsewhere in this prospectus.
Overview
We were incorporated in September 1998 and sold our first PC in November
1998. Our founding stockholders were Stephen A. Dukker, our Chief Executive
Officer, President and a member of our board of directors, and two wholly-owned
U.S. subsidiaries of Korean PC and monitor manufacturers--TriGem Corporation
and Korea Data Systems America. TriGem Computer, the parent corporation of
TriGem Corporation, manufactures all of our eTower PCs. Korea Data Systems Co.
Ltd., the parent corporation of Korea Data Systems America, manufactures our
eOne PCs and, together with the Taiwanese manufacturer Jean Company, all of our
monitors. We source all the PCs and monitors we sell from KDS USA, a company
wholly-owned by Lap Shun Hui, which in turn purchases them from these
manufacturers. Mr. Hui is a member of our board of directors and one of our
stockholders. Initially, we sourced our PCs through KDS USA primarily because
we could not establish our creditworthiness due to our limited operating
history. We may in the future establish direct relationships with TriGem
Computer or other PC or monitor manufacturers.
We currently derive a significant portion of our gross revenues from sales
to a limited number of large retailers. In the six months ended June 30, 1999,
approximately 70% of our gross revenues were from sales to our four largest
retail customers. We expect to continue to derive a large percentage of our
gross revenues from sales to a limited number of leading retailers.
We have operated to date only in the United States and Canada and all of our
sales to date have been made in U.S. dollars. In addition, substantially all of
our purchases from our suppliers to date have been made in U.S. dollars. As a
result, changes in currency exchange rates do not generally have a direct
effect on our financial position. However, we do face foreign business,
political and economic risks because our supply of PCs and monitors are
manufactured outside of the United States. In addition, changes in currency
exchange rates may indirectly affect the cost of our PCs and monitors purchased
from our foreign suppliers, thereby indirectly affecting consumer demand for
our products and our net revenues.
Our gross margins are affected by fluctuations in demand for our products,
the mix of products sold, the timing of new product implementations, new
product introductions by us and our competitors, changes in our pricing
policies and those of our competitors and component costs.
Substantially all of our product sales and supplier purchases are done on a
purchase order basis, not pursuant to long-term contracts.
We outsource technical support, warehouse staffing, inspection/repair and
repackaging of returned PCs and administration of our rebate program to third-
parties. Similarly, we plan to outsource the infrastructure, administration and
technical support of our e-machines.net Internet access service. As a result of
this outsourcing, we have a relatively small internal organization that
consisted of 49 employees as of June 30, 1999. This outsourcing strategy
enables us to minimize capital investment, maintain a low-cost structure and
respond quickly to market changes.
PC and Monitor Revenue
To date, we have derived substantially all of our net revenues from sales of
PCs and monitors. We sell a limited number of PC configurations to our retail
customers. When appropriate, we intend to introduce
24
<PAGE>
enhanced configurations of our eTower PCs and new PC models. Generally, our
lowest-price PC model carries significantly lower gross margins than our other
PC models. We also sell monitors to our retail customers. We do not require
retail customers to buy PCs and monitors as a bundled package. To date, we have
sold substantially more PCs than monitors.
We recognize revenues from PC and monitor sales at the time products are
shipped to our retail customers. Revenues are recorded net of outbound shipping
costs, returns, price protection and estimated costs for sales incentive
programs. Sales incentive programs consist primarily of cash rebates offered by
us to our PC buyers. In general, we offer a product rebate during a redemption
period which extends for up to thirty days after the PC is purchased. We rely
on historical data to forecast the percentage of our PC buyers who will redeem
their product rebates. If in a given period these redemptions exceed our
expectations, our gross margin and operating results will be adversely
impacted. In addition, we intend to modify from time to time our product rebate
programs in response to changing market conditions. These modifications may
affect the mix of PCs sold, our gross margin and the percentage of rebates
redeemed.
We also derive limited revenues from the sale of extended service contracts
and technical support provided on an as-needed basis. We offer these services
through Sykes Enterprises, Inc., a third-party customer service provider. Our
PC buyers receive free technical support for 15 days following their initial
support call under our technical support program. After this period, our PC
buyers who require additional support can choose to enter into an extended
service contract or pay on a per incident basis until the problem is resolved.
We recognize revenues from extended service contracts ratably over the contract
period and from technical support calls outside the initial 15 day period of
free support as the services are performed.
Internet Service Revenues
We have begun to earn and will report Internet service revenues in the third
quarter of 1999. Until we deploy our private label Internet service, which we
anticipate launching in the fourth quarter of 1999, Internet service revenues
will consist of revenues earned under our agreement with America Online. We
will recognize these revenues when reported to us by America Online.
In June 1999, we entered into a marketing agreement with America Online
under which it will provide rebates to our PC buyers to significantly reduce
the net effective price of our PCs. To obtain an ISP rebate, our PC buyers must
enter into an agreement with America Online to subscribe to America Online's
CompuServe Internet access service over a predetermined period of time at a
stated monthly fee. In addition to the rebate provisions, the marketing
agreement also provides that we will include America Online's software on our
PCs. America Online will pay us recurring revenue or a one-time fee depending
on which service or plan a PC buyer elects.
In addition, the agreement calls for us to work together with America Online
to design an e-commerce package that will consist of a specially designed
keyboard, desktop icons and America Online services links. Any revenue
generated by the marketing and sale of this package will be shared by America
Online and us. Finally, the agreement provides for the joint development of a
portal on a custom Netscape Netcenter homepage. The Netcenter portal will
include a dedicated area for placement of advertising and links that we can
sell to third parties and an area allowing access to third party content areas
by subscribers to e-machines.net.
25
<PAGE>
Results of Operations
Because of our limited operating history and the rapidly evolving nature of
our business, year-to-year period comparisons are not available and we believe
that quarter-to-quarter period comparisons are not meaningful and should not be
relied upon as an indication of future performance. The following table
presents our operating results for the period from September 18, 1998
(inception) to December 31, 1998, each of the quarters ended March 31, 1999 and
June 30, 1999 and the six-month period ended June 30, 1999.
<TABLE>
<CAPTION>
Period from
Sept. 18, 1998 Quarter Quarter Six Months
(inception) to Ended Ended Ended
Dec. 31, 1998 Mar. 31, 1999 June 30, 1999 June 30, 1999
-------------- ------------- ------------- -------------
(in thousands, except as a percentage of net revenues)
<S> <C> <C> <C> <C>
Statements of Operations
Data:
Net revenues.......... $58,283 $137,434 $213,879 $351,313
Cost of revenues...... 58,088 131,101 207,689 338,790
------- -------- -------- --------
Gross profit......... 195 6,333 6,190 12,523
Operating expenses:
Sales and marketing.. 840 2,719 2,798 5,517
Customer service and
technical support... 269 949 1,573 2,522
General and
administrative...... 988 1,106 2,187 3,293
Stock-based
compensation........ 11 41 99 140
------- -------- -------- --------
Total operating
expenses........... 2,108 4,815 6,657 11,472
------- -------- -------- --------
Income (loss) from
operations.......... (1,913) 1,518 (467) 1,051
Financing charges and
interest expense,
net................. (889) (2,390) (2,570) (4,960)
------- -------- -------- --------
Net loss............ $(2,802) $ (872) $ (3,037) $ (3,909)
======= ======== ======== ========
As a Percentage of Net
Revenues:
Net revenues.......... 100.0% 100.0% 100.0% 100.0%
Cost of revenues...... 99.7 95.4 97.1 96.4
------- -------- -------- --------
Gross profit......... 0.3 4.6 2.9 3.6
Operating expenses:
Sales and marketing.. 1.4 2.0 1.3 1.6
Customer service and
technical support... 0.5 0.7 0.8 0.8
General and
administrative...... 1.7 0.8 1.0 0.9
Stock-based
compensation........ 0.0 0.0 0.0 0.0
------- -------- -------- --------
Total operating
expenses........... 3.6 3.5 3.1 3.3
------- -------- -------- --------
Income (loss) from
operations.......... (3.3) 1.1 (0.2) 0.3
Financing charges and
interest expense,
net................. (1.5) (1.7) (1.2) (1.4)
------- -------- -------- --------
Net loss............ (4.8)% (0.6)% (1.4)% (1.1)%
======= ======== ======== ========
</TABLE>
Net Revenues
Our net revenues increased from $58.2 million for the period from inception
to December 31, 1998 to $137.4 million in the quarter ended March 31, 1999 and
to $213.9 million in the quarter ended June 30, 1999, representing an increase
of 55.6% from the first to second quarters of 1999. These increases were
primarily due to increases in unit shipments at each of the $399, $499 and $599
price points. Net revenue from extended service contracts and technical support
calls during these periods was minimal. In addition, we recognized only
26
<PAGE>
immaterial Internet service revenues from America Online and, therefore, we did
not report Internet service revenues separately. We expect to report Internet
service revenues separately in the future.
Cost of Revenues
Cost of revenues consists of the cost of PCs and monitors, inbound shipping
costs and inventory valuation reserves. Cost of revenues increased from $58.1
million for the period from inception to December 31, 1998 to $131.1 million,
in the quarter ended March 31, 1999, to $207.7 million, in the quarter ended
June 30, 1999. These increases were primarily due to increases in unit
shipments. The increase in gross margin from 0.3% in the period ended December
31, 1998 to 4.6% in the quarter ended March 31, 1999 was primarily due to
reduced component costs in the first quarter. Gross margin decreased to 2.9% in
the quarter ended June 30, 1999 primarily as a result of price protection given
to certain retail customers and higher redemption rates associated with the
offer of a $75 product rebate during the period versus a $50 product rebate in
the prior quarter. Our historical gross margins may not be indicative of our
future results of operations. For example, we are currently launching a number
of new sales incentives in conjunction with our agreement with America Online,
and in the fourth quarter of 1999 we expect to launch e-machines.net and our
associated ISP rebate and "PC rEnewal" programs. We do not expect to incur
significant costs from the services offered through America Online. However, we
will incur significant costs associated with e-machines.net and our associated
ISP rebate programs. These new programs are expected to affect the level of
demand for different product models, the mix of PCs we sell and the gross
margins that we earn.
Operating Expenses
Sales and Marketing
Sales and marketing expenses consist primarily of cooperative advertising
incentives paid to retail customers, net of cooperative advertising credits
earned by us from component suppliers. Sales and marketing expenses also
include payroll expenses for sales and marketing personnel. Sales and marketing
expenses have increased from approximately $840,000 for the period from
inception to December 31, 1998 to $2.7 million in the quarter ended March 31,
1999 and $2.8 million in the quarter ended June 30, 1999. These increases were
primarily due to increased commission expenses and cooperative advertising
costs associated with increased sales volumes. As a percentage of net revenues,
sales and marketing costs decreased from 2.0% in the quarter ended March 31,
1999 to 1.3% in the quarter ended June 30, 1999. This decrease is a result of a
one-time increase in cooperative advertising credits earned from component
suppliers which reduced our cooperative advertising costs. We are able to
maintain a small sales and marketing staff by selling product primarily to a
limited number of large retailers. Marketing and advertising programs
undertaken by these retailers also help establish the "eMachines" brand
nationwide without requiring us to spend significant amounts on radio,
television and print advertisements. Our sales and marketing expenses in
absolute dollars will increase as sales increase and to the extent we increase
the number of our sales representatives, a possibility we are currently
evaluating.
Customer Service and Technical Support
Customer service and technical support expenses consist primarily of the
cost of technical support provided for us by Sykes. In addition, we anticipate
that when we launch e-machines.net, Sykes will provide technical support to our
subscribers. For either of these services, Sykes charges on a per minute basis
for each support call they receive. We expect customer service and technical
support expenses to increase to the extent our sales volumes increase or we
successfully introduce e-machines.net. Customer service and technical support
expenses were approximately $949,000 in the quarter ended March 31, 1999 and
$1.6 million in the quarter ended June 30, 1999.
General and Administrative
General and administrative expenses consist primarily of payroll and related
expenses for management and administrative personnel, outsourced warehousing
activities, facilities expenses, professional service fees, travel
27
<PAGE>
and other general corporate expenses. General and administrative expenses were
approximately $988,000 or 1.7% of net revenues for the period from inception to
December 31, 1998, $1.1 million, or 0.8% of net revenues, in the quarter ended
March 31, 1999 and $2.2 million, or 1.0% of net revenues, in the quarter ended
June 30, 1999. We anticipate that general and administrative expenses will
increase in absolute dollars primarily due to increased expenses associated
with the addition of personnel and additional professional fees, including
costs associated with being a public company. We anticipate that general and
administrative expenses may increase in future periods as a result of
litigation costs associated with the recent lawsuits filed against us by Compaq
and Apple. For a discussion of these lawsuits, see "Business--Legal
Proceedings."
Stock-based Compensation
Stock based compensation arises when an option to purchase stock, with an
exercise price less than the fair value of the underlying stock, is granted to
an employee. The amount of compensation is measured as the spread between the
exercise price and the fair value of the underlying stock. Stock-based
compensation is considered earned, and we recognize the related expense, as the
options vest. From inception to June 30, 1999, we recognized approximately
$151,000 of stock-based compensation. As of June 30, 1999, $1.7 million was
unearned and will be amortized according to the vesting schedules of the
relevant options.
Financing Charges and Interest Expense, Net
Financing charges and interest expense, net consists primarily of interest
on trade payables. Finance charges and interest expense, net were approximately
$889,000 or 1.5% of net revenues for the period from inception to December 31,
1998, $2.4 million, or 1.7% of net revenues, in the quarter ended March 31,
1999 and $2.6 million, or 1.2% of net revenues, in the quarter ended June 30,
1999. These increases in absolute dollars were primarily due to increases in
trade payable financing associated with inventory purchases, resulting from
higher sales volumes in each succeeding period, partially offset by a decrease
in the effective annual interest rate from 12% to 10% as of March 31, 1999.
Liquidity and Capital Resources
Since inception we have financed operations by extended payment terms on
trade payables, issuance of common stock and issuance of subordinated notes
payable to stockholders. As of June 30, 1999, we had $10.9 million in cash.
Trade payable terms with respect to inventory purchases are extended out to 90
days with a discount on PC purchases proportional to the number of days that we
pay early. The effective annual interest rate as of June 30, 1999 was 10%. As
of June 30, 1999 these trade payables were $134.4 million. Issuance of common
stock through June 30, 1999, yielded net cash proceeds of $1.4 million. On
December 18, 1998, we received cash proceeds of $560,000 pursuant to long-term
subordinated notes payable to stockholders, which bear interest at 5.79% and
mature on June 7, 2004.
The private placement of 18,718,593 shares of our Series A preferred stock
on August 18, 1999 provided us with proceeds of approximately $119.5 million. A
portion of the proceeds from the issuance of our Series A preferred stock was
used to reduce trade payables. Upon regulatory approval, we will issue an
additional 5,560,776 shares of Series A preferred stock to America Online,
which will provide us with additional proceeds of approximately $35.5 million.
Net cash provided by operating activities was $2.3 million in the period
from inception to December 31, 1998, $1.3 million in the quarter ended March
31, 1999 and $7.3 million in the quarter ended June 30, 1999. Cash provided by
operating activities for these periods consisted primarily of increases in
trade payables. Cash used in operating activities for these periods consisted
primarily of increases in accounts receivable and inventories.
Net cash used in investing activities was approximately $550,000 in the
period from inception to December 31, 1998, approximately $662,000 in the
quarter ended March 31, 1999 and approximately $863,000
28
<PAGE>
in the quarter ended June 30, 1999. Net cash used in investing activities for
these periods consisted primarily of purchases of property and equipment.
Net cash provided by financing activities was $2.0 million in the period
from inception to December 31, 1998. Net cash provided by financing activities
consisted of proceeds from the issuance of common stock and subordinated notes
payable to stockholders.
We currently anticipate that the net proceeds of this offering, together
with our available funds as of June 30, 1999, and the proceeds from the
issuance of Series A preferred stock, will be sufficient to meet our
anticipated needs for at least the next 12 months. If additional funds are
required, financing may not be available on acceptable terms, if at all, and
may be dilutive to our stockholders.
Year 2000 Issues
Many existing computer programs use only two digits to identify a year.
These programs were designed and developed without addressing the impact of the
upcoming change in the century. If not corrected, many computer software
applications could fail or create erroneous results by, at or beyond the year
2000. We sell PCs that rely on date information and use software, computer
technology and other services provided by third-party vendors that may fail due
to the year 2000 calendar change.
Risks
The failure of any of our third-party suppliers, including TriGem Computer,
Korea Data Systems Co., KDS USA and Jean Company, to be year 2000 compliant
could materially adversely affect our business. The failure of our own PCs to
be year 2000 compliant could damage our brand name and result in warranty
claims, costly litigation or unexpected costs incurred in connection with
correcting errors or defects in our PCs. A failure of the Internet
infrastructure to be year 2000 ready may adversely affect our Internet related
businesses, including our planned e-machines.net service and the service
provided to our consumers by America Online.
State of Readiness
We recognize the importance of year 2000 readiness for our PCs. We are
following the guidelines of National Software Testing Laboratories', or NSTL,
Year 2000 Hardware Compliance Program, an open industry standard to verify
proper date handling by PCs during the year 2000 calendar change. We have used
the software provided by NSTL to self-test our currently offered eTower and
eOne models, and have determined that they are year 2000 compliant. Pursuant to
these guidelines, several of our earlier models, including our eTower 333id and
366i models, have been certified year 2000 compliant by NSTL.
We are currently assessing the year 2000 readiness of our third-party
supplied software and other services, which includes software bundled with our
PCs as well as for use in our accounting, database and other internal systems.
Much of this third-party supplied software and other services, including
Microsoft Windows98, Microsoft Works, AOL, CompuServe, and the services
supplied by Sykes, are certified year 2000 compliant by the companies that make
them. We have not assessed the year 2000 readiness of the internal information
technology systems of any of our manufacturers or suppliers.
Our ability to assess the reliability of the Internet infrastructure is
limited and we are relying solely on generally available news reports, surveys
and comparable industry data.
Costs of Compliance
To date, the amount spent on year 2000 preparations has been immaterial. We
do not expect to make any material expenditures related to year 2000 compliance
issues in the future.
29
<PAGE>
Contingency Plan
We do not currently have a contingency plan to address any unanticipated
occurrence of year 2000 errors in our products or problems with our internal
information technology systems, a failure of our third-party suppliers products
or information systems to be year 2000 compliant or a serious disruption in the
general infrastructure of the Internet, and have no current plan to make one.
Quantitative and Qualitative Discussion of Market Risk
We currently have no floating rate indebtedness, hold no derivative
instruments and do not earn significant foreign sourced income. Accordingly,
changes in interest rates or currency exchange rates do not generally have a
direct effect on our financial position. In addition, we have operated only in
the United States and Canada and all purchases and sales to date have been made
in U.S. dollars. As a result, we have not had any material exposure to foreign
currency rate fluctuations. Changes in currency exchange rates, however, may
affect the cost of our PCs and monitors purchased from our foreign suppliers,
thereby indirectly affecting consumer demand for our products and our net
revenues. In addition, to the extent that changes in interest rates and
currency exchange rates affect general economic conditions, we would also be
affected by such changes.
We intend to implement an investment policy, the primary objective of which
would be to preserve principal while at the same time maximizing the income we
receive from our investments without significantly increasing risk. Some of the
securities that we may invest in may be subject to market risk. This means that
a change in prevailing interest rates may cause the principal amount of the
investment to fluctuate. For example, if we hold a security that was issued
with a fixed interest rate at the then-prevailing rate and the prevailing
interest rate later rises, the principal amount of our investment will probably
decline. To minimize this risk in the future, we intend to maintain our
portfolio of cash equivalents and short-term investments in a variety of
securities, including commercial paper, money market funds, government and non-
government debt securities. In general, money market funds are not subject to
market risk because the interest paid on such funds fluctuates with the
prevailing interest rate. As of June 30, 1999, all of our cash was on deposit
with our bank.
Quarterly Fluctuations
We have a limited operating history upon which you can base an evaluation of
our business and prospects. Our prospects must be considered in light of the
risks, expenses, and difficulties encountered by companies in their early stage
of development. It is likely that in some future quarter our operating results
may fall below the expectations of securities analysts and investors. In this
event, the trading price of our common stock may fall significantly. See "Risk
Factors" for a more complete description of the risks we face. We believe that
the factors influencing quarterly variability include the following:
. the overall growth in the computer industry;
. shifts in short-term demand for our products resulting, in part, from
the introduction of new products or updates of existing products;
. the intensity of price competition among us and our competitors as
influenced by various factors;
. the fact that virtually all sales in a given quarter result from orders
booked in that quarter; and
. the popularity of, and seasonal or other fluctuations in demand for,
Internet services generally and e-machines.net in particular.
Traditionally, computer sales in the fourth quarter are historically higher
than in the previous three quarters. We believe that this pattern of higher
fourth quarter sales is partially due to customer buying patterns relating to
calendar year-end business and holiday purchases. This pattern could be
adversely affected in 1999 due to consumer concern of the year 2000 issues
shifting demand for PCs into the following year.
30
<PAGE>
Effects of Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income," which requires an enterprise to report, by major components and as a
single total, the change in its net assets during the period from nonowner
sources, and SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information," which establishes annual and interim reporting standards
for an enterprise's business segments and related disclosures about its
products, services, geographic areas and major customers. We had no
comprehensive income items to report for the period from September 18, 1998
(inception) to December 31, 1998 and the six months ended June 30, 1999. We
currently operate one reportable segment under SFAS No. 131. Adoption of these
statements at our inception did not impact our financial position, results of
operations or cash flows.
In June 1998, SFAS No 133 "Accounting for Derivative Instruments and Hedging
Activities" was released. The statement requires the recognition of all
derivatives as either assets or liabilities in the balance sheet and the
measurement of those instruments at fair value. The accounting for changes in
the fair value of a derivative depends on the planned use of the derivative and
the resulting designation. We are required to implement the statement in the
first quarter of fiscal 2001. We have not used derivative instruments and
believe the impact of adoption of this statement will not have a significant
effect on the financial statements.
31
<PAGE>
BUSINESS
Overview
We are a leading provider of low-price, high-quality branded personal
computers, or PCs. Since our first shipment in November 1998, we have sold over
one million PCs. We sold the third highest number of PCs through retailers in
the United States in June 1999 according to Ziff Davis Market Intelligence. We
also offer an integrated computing and Internet access solution, currently
through our relationship with America Online, and we plan to launch
e-machines.net, our private label Internet access service, in the fourth
quarter of 1999.
A growing number of consumers are seeking to gain access to the Internet for
the first time. As a result, many of these first-time Internet users are also
purchasing their first PC. In addition, consumers across a range of income
levels are seeking to upgrade their existing PC or add a second or third PC to
their homes. We support these trends by consistently providing high-quality PCs
and monitors at low prices through nationally-recognized retailers including
Best Buy, Circuit City, Costco, Fry's Electronics, MicroCenter, Office Depot,
QVC, Sears and Staples. Our integrated computing and Internet access solution
enables these consumers to purchase a PC with a net effective price of as low
as $0 and gain access to the Internet.
Industry Background
The explosion in popularity of the Internet has transformed the home PC from
a stand-alone system used to process discrete tasks into the predominant means
of accessing the Internet. International Data Corporation, or IDC, estimates
that there were approximately 159 million worldwide users of the Internet at
the end of 1998 and that the number of users will grow to approximately 510
million by the end of 2003. According to IDC, PCs accounted for approximately
94% of the access devices connected to the Internet in the United States for
1998. We believe that this is because the PC is ideally suited for the
Internet. PCs offer a media-rich Internet experience on an architecture
sufficiently flexible to run most applications and accommodate frequently
changing Internet technologies, such as streaming video, MP3 audio files and
browser technologies. After their initial manufacture, dedicated Internet
appliances cannot easily be adapted to accommodate the evolving technologies
utilized by the Internet. In addition, many of the most popular PC software
applications, such as those used for personal finance, games and education, are
enhanced when combined with access to the Internet. Over the past two decades,
continuous technological advancements in, and improved manufacturing
efficiencies of, key PC components, such as microprocessors and storage
devices, have significantly improved PC functionality while dramatically
lowering PC prices. This in turn has expanded the market for potential PC
buyers and Internet subscribers.
In recent years, however, the growth rate of PC household penetration had
slowed. According to the U.S. Bureau of the Census, household PC penetration in
1990 was approximately 15%. While the PC penetration level grew to 37% by 1996,
this level only grew to 43% by April 1998, according to a January 1999 report
by Inteco Corporation. In addition, since July 1997 first-time buyers still
spent an average of $1,880, while replacement buyers spent a slightly lower
average of $1,830, according to a May 1998 Inteco Corporation report. We
believe this price point inhibited penetration of households with annual
incomes below $50,000. Based on IDC's U.S. Household Survey, approximately
84.3% of U.S. households that did not own a PC had annual incomes below
$50,000.
We believe that the introduction of the sub-$600 PC started a change in PC
buyers' behavior. According to Ziff Davis Market Intelligence, sales of sub-
$600 PCs increased as a percentage of the total retail market from 0.7% in
September 1998 to 28.2% in June 1999. At the sub-$600 price point, we believe
that consumers increasingly view the PC as a household appliance, like a VCR or
television set, which is renewing growth in household PC penetration. Moreover,
we believe the introduction of the sub-$600 PC has attracted consumers seeking
to add a second or third PC in their home. According to IDC, the number of U.S.
households with more than one PC will increase from approximately 15.6 million
in 1998 to approximately 22.9 million in 2002. We believe that computer buying
decisions are increasingly based on price, brand identity and ease of use and
that this will continue to increase the market share of sub-$600 PCs.
32
<PAGE>
Despite the slowing growth rate of household PC penetration, the demand for
Internet access continues to increase. According to IDC, net revenues generated
by providing consumer Internet access in the United States will grow from $4.7
billion in 1998 to $7.6 billion in 2000. However, Internet users increasingly
view Internet access as a commodity product, resulting in frequent changes in
providers. According to IDC, the industry average churn rate experienced by
consumer Internet service providers in the United States is approximately 4%
per month. In response to these trends, Internet service providers have
invested significantly in advertising and marketing programs to differentiate
their services and establish brand loyalty which has led to higher operating
costs.
To address these trends, both traditional PC vendors and Internet service
providers are exploring new solutions. Some vendors of high-price PCs have
started to offer free Internet access for limited periods to increase the
volume of PCs they sell. Internet service providers have recently initiated
programs that combine Internet access services with the purchase of a PC, which
allow PC buyers to minimize the effective purchase price of a PC.
Traditional PC vendors and Internet service providers seeking to provide
these new solutions face significant challenges. We believe that traditional PC
vendors may have limited revenue opportunities from bundling Internet access
services with their PCs. Typically, these high-price PCs are sold to
experienced consumers with existing Internet relationships. We believe these
consumers are less likely to make purchasing decisions based on the bundling of
Internet access services. In addition, traditional PC vendors are limited by
high fixed costs, high distribution and marketing costs and shrinking gross
margins resulting from rapidly declining prices and obsolete inventory.
Moreover, a change in their traditional sales model to very low-price PCs would
reduce sales of their existing product lines and further accelerate the decline
in average selling prices. In addition, traditional Internet access service
providers are not able to offer independently a combined computing and Internet
access solution. Therefore, they are dependent upon the PC manufacturers for
the supply of PCs and the growth in PC sales. Further, Internet service
providers cannot partner with retailers to tailor content and pre-install
features on PCs.
The eMachines Solution
We provide an integrated computing and Internet access solution that enables
consumers to cost effectively purchase a PC and gain access to the Internet. We
sell low-price, high-quality PCs through leading retailers and currently offer
Internet access through our strategic relationship with America Online. To
expand our integrated solution, we intend to launch e-machines.net, our private
label Internet access service, in the fourth quarter of 1999.
Our widely-available, integrated computing and Internet access solution is
designed to attract first-time PC buyers that do not have an existing
relationship with an Internet service provider. Our solution is also designed
to appeal to buyers seeking to upgrade their existing PC or add an additional
PC to their household. As a result of our ISP rebate programs, we believe that
many first-time buyers may be willing to enter into a long-term Internet access
service contract in order to purchase a PC at a net effective price as low as
$0. We intend to launch two associated programs concurrently with our planned
e-machines.net service. Our PC buyers may elect to receive an ISP rebate from
us at the time of the purchase of their PC if they enter into a long-term
Internet access service contract. Alternatively, our PC buyers may elect to
subscribe to our e-machines.net service on a month-to-month basis. Month-to-
month subscribers to e-machines.net who remain enrolled for 24 consecutive
months will qualify for our planned "PC rEnewal" program. This program will be
designed to enable these subscribers to upgrade the configuration of their
eTower PC for a low fee.
We believe the following elements of our operating model allow us to cost
effectively offer our PCs and integrated computing and Internet access
solution:
. Low PC Manufacturing and Operating Costs. We maintain fixed costs,
capital expenditures and manufacturing and operating costs significantly
below the industry average by outsourcing most of our major operating and
manufacturing functions. This includes outsourcing system assembly,
warehouse labor, distribution, research and development, product design,
warranty and customer support to leading suppliers such as TriGem
Computer, Korea Data Systems Co. and Sykes.
33
<PAGE>
. Low Distribution, Marketing and Administration Costs. We also maintain
low distribution, marketing and administration costs by distributing and
advertising our products and services primarily through a limited number
of large retailers. For the six months ended June 30, 1999, approximately
70% of our gross revenues were from sales to our four largest retail
customers. This enables us to significantly lower sales, marketing and
administration expenses, and eliminate costs associated with the
logistical support of a large customer base. Our retail strategy also
allows us to increase awareness of the "eMachines" brand by leveraging
our retail customers' marketing programs. In addition, we plan to offer
our e-machines.net service to our PC buyers, thereby providing a cost-
effective means of promoting our Internet access service.
. High Inventory Turns. We believe that we have been successful in
achieving higher inventory turnover than the industry average through
product management and outsourcing manufacturing. Higher inventory
turnover helps mitigate the risk of having to reduce product prices
because of product obsolescence and generally lowers inventory costs and
associated working capital needs.
The eMachines Strategy
We intend to continue to increase PC sales while developing significant
Internet related recurring revenue streams by leveraging our strong position in
the consumer market and key retail relationships. Our strategy includes the
following core elements:
Increase Penetration of the Consumer Market by Providing a Low-Price, High-
Quality Integrated Computing and Internet Access Solution
We intend to increase our market share and our penetration into non-PC
households by continuing to offer a low-price, high-quality integrated
computing and Internet access solution. Our ISP rebate programs are designed to
reduce the net effective price of our PCs to the consumer to as low as $0 when
a PC buyer subscribes to a long-term Internet service contract. Currently, we
offer this ISP rebate through our relationship with America Online, and, in the
future, we plan to directly offer our own ISP rebate in combination with our
e-machines.net Internet access service. Through our "PC rEnewal" program we
will offer subscribers to e-machines.net who did not receive an ISP rebate the
opportunity to upgrade the configuration of their eTower for a low fee after 24
continuous months of e-machines.net service. We believe that these programs
will increase consumer purchases of our PCs, increase Internet-related
recurring revenue opportunities through our relationship with America Online,
expand our e-machines.net subscriber base and improve the retention of both e-
machines.net and America Online's CompuServe subscribers.
Establish Brand Recognition by Leveraging the Retail Channel
We believe that by distributing our products through retailers, we can
rapidly increase awareness of our brand, thereby cost-effectively reaching
millions of potential PC buyers and Internet access subscribers. We will
continue to sell our products through leading retailers to benefit from their
marketing campaigns that feature our products nationwide in television, radio,
newspaper, magazine and catalog advertisements. The retail channel also enables
us to effectively target first-time PC buyers that do not typically have
established relationships with Internet service providers.
Strengthen Strategic Relationships with Leading Retailers
We intend to continue to strengthen our strategic relationships with leading
retailers, including Best Buy, Circuit City, Office Depot and Staples, to
capture and retain prime shelf space. We believe we are an attractive partner
to leading retailers because our low-price, high-quality PCs and integrated
computing and Internet access solution drive high sales volumes which provide
significant profit opportunities to retailers. We believe our relationships
with these retailers enable us to quickly introduce updated systems
configurations, new products and merchandising programs on a national basis.
For example, we were one of the first to establish a widely-available rebate-
based pricing format for an integrated sale of PCs and Internet access services
through the retail channel. In addition, we believe our low-price, high-quality
PCs and integrated computing and Internet access solution draws large numbers
of potential consumers of software, PC peripherals and other products into
retail stores.
34
<PAGE>
Leverage Outsourced, Low-Cost Business Model
We intend to utilize our low-cost infrastructure to profitably sell
increasingly powerful PC models at low prices, thus meeting the needs of the
evolving PC market. We maintain low manufacturing and operating costs by
outsourcing most of our major operating and manufacturing functions including
system assembly, warehouse labor, distribution, research and development,
product design, warranty and customer support to established industry
providers. We intend to leverage the experience of established third parties,
such as UUNET for the provision of Internet access and Sykes for customer
service and technical support. By outsourcing directly to these third parties,
we reduce the cost of providing these services. Further, we intend to maintain
low distribution, sales, marketing and administrative costs by continuing to
distribute and advertise our products and services primarily through a limited
number of large retailers.
Enhance Internet-Related Recurring Revenue Generating Opportunities
We intend to aggressively pursue recurring revenue generating opportunities,
including Internet service payments, e-commerce, web-based advertising and
other related revenues. For example, as part of our marketing agreement with
America Online, we have structured a number of revenue sharing arrangements.
America Online will pay us recurring revenue or a one-time fee depending on
which service or plan a PC buyer elects. In addition, the agreement calls for
us to work together with America Online to design an e-commerce package that
will consist of a specially designed keyboard, desktop icons and America Online
services links. Any revenue generated by the marketing and sale of this package
will be shared by America Online and us. Also under this marketing agreement,
Netscape's Netcenter web page will be the default home page for subscribers to
e-machines.net. In return for the deployment of the Netcenter home page to our
e-machines.net subscriber base, America Online has agreed to share a portion of
e-commerce and advertising revenues derived from traffic driven to the
Netcenter portal by subscribers to e-machines.net.
35
<PAGE>
PC and Monitor Products
Our retail customers offer our eTower PCs at static prices of $399, $499 and
$599 to consumers, which prices reflect redemption by the consumer of our
regularly offered product rebate. Each PC comes with software including Windows
98, Microsoft Works, Netscape Navigator and other utilities, and is Internet
ready. We update our configurations of eTower models when appropriate to
accommodate the introduction of new components and sub-systems that we believe
our PC buyers will find attractive. In August 1999, we introduced the eOne PC,
an integrated single piece PC and monitor based on Windows-Intel architecture.
We also offer monitors ranging in size from 14 to 17 inches. The following
table sets forth our most recently released product configurations and the
manufacturers' suggested retail prices after product and ISP rebates.
[CHART APPEARS HERE]
36
<PAGE>
Internet Access Services
America Online
In June 1999, we entered into a marketing agreement with America Online
under which it will provide rebates to our PC buyers to significantly reduce
the net effective price of our PCs. To obtain an ISP rebate, our PC buyers must
enter into an agreement with America Online to subscribe to America Online's
CompuServe Internet access service over a predetermined period of time at a
stated monthly fee. In addition to the rebate provisions, the marketing
agreement also provides that we will include America Online's software on our
PCs. America Online will pay us recurring revenue or a one-time fee depending
on which service or plan a PC buyer elects.
In addition, the agreement calls for us to work together with America Online
to design an e-commerce package that will consist of a specially designed
keyboard, desktop icons and America Online services links. Any revenue
generated by the marketing and sale of this package will be shared by America
Online and us. Finally, the agreement provides for the joint development of a
portal on a custom Netscape Netcenter homepage. The Netcenter portal will
include a dedicated area for placement of advertising and links that we can
sell to third parties and an area allowing access to third party content areas
by subscribers to e-machines.net.
e-machines.net
We intend to become a leading Internet access provider by offering e-
machines.net, our planned private label Internet access service, to our PC
buyers. We believe that we will be able to successfully market our services to
first-time buyers, because they are less likely to have established
relationships with an Internet service provider. In addition, we believe our
ISP rebate on PC purchases and our "PC rEnewal" programs will be attractive to
consumers. These programs will significantly reduce the cost of PC ownership
and PC replacement while providing our PC buyers with Internet access.
We have also entered into an Internet service provider agreement with UUNET
to cost effectively provide our program on a nationwide basis. UUNET has built
a network infrastructure that we believe will accommodate our e-machines.net
subscribers. Outsourcing this service with UUNET eliminates our need to make
significant up-front capital expenditures to build an independent network.
Under the UUNET agreement, we will offer a basic service package with an option
to upgrade to a premium service package. UUNET will bill subscribers monthly a
predetermined price set by us based on the level of service. UUNET will then
pay us the difference between our cost and the price charged subscribers for
the service.
We have, as part of our planned e-machines.net service, developed a set of
on-screen instructions to provide our PC buyers with a user-friendly and
intuitive guide to facilitate the process of subscribing to e-machines.net.
These instructions will appear in the first screen to be displayed to our PC
buyers when they first turn the PC on, even before the Windows operating system
has completed its initial boot-up process. We believe that the appearance of
these instructions early in the registration process will help us attract a
significant number of subscribers to our e-machines.net service.
For those buyers who do become e-machines.net subscribers, our planned
Netscape Netcenter portal will become the primary point of access to the
Internet. This will allow us to not only provide an easy point of subscriber
access to third-party content providers, but also to direct subscribers to
advertising displayed on dedicated advertising space on the portal. We expect
to benefit from e-commerce and advertising net revenues associated with this
program.
Customer Service and Technical Support
In order to maintain low costs, we outsource all technical support related
to our PCs and our Internet service to Sykes, a leading supplier of technical
support outsourcing services. We offer technical support services free for 15
days after the first call from our PC buyer seeking assistance. We believe that
buyers of our PCs require the most assistance during the first two weeks after
they begin using their PC. Following that period, PC buyers who require
additional support can choose to enter into an extended service contract or pay
for technical support on a per incident basis until the problem is resolved.
37
<PAGE>
Manufacturing
We currently outsource manufacturing of all of our PCs and monitors. TriGem
Computer manufactures all of our eTower PCs. Korea Data Systems Co.
manufactures our eOne PCs and, together with the Taiwanese manufacturer Jean
Company, all of our monitors. TriGem Computer and Korea Data Systems Co. are
ISO 9001 certified and Jean Company is ISO 9002 certified. We have no
obligation to order, take minimum delivery or purchase at a pre-negotiated
price from TriGem Computer, Korea Data Systems Co. or Jean Company.
Additionally, TriGem Computer, Korea Data Systems Co. and Jean Company have no
contractual obligation to supply us with PCs and monitors. TriGem Computer has
supplied PCs to Epson, Hewlett-Packard Company, Nokia Corp., Olivetti S.p.A.
and Sharp. Korea Data Systems Co. has supplied monitors to original equipment
manufacturers, distributors and retailers including Best Buy, Compaq, CompUSA,
IBM, Ingram Micro Inc. and Tech Data Corporation.
TriGem Computer recently entered into an outsourcing manufacturing agreement
with a facility in Xiamen, China and intends to open an additional facility in
Shenyang, China during the second half of 1999. The Xiamen facility is expected
to produce 100,000 PC units per month initially, increasing to 200,000 PC units
per month in the fourth quarter of 1999. The Shenyang facility is a final-
assembly plant expected to complete production of 200,000 PC units each month.
This facility may not commence operations when planned, and we may not benefit
from the increased capacity from either of these facilities.
TriGem America, a wholly-owned subsidiary of TriGem Computer, provides
inspection, repair and repackaging services for PCs returned to us. We are
assessed a per unit service charge for the testing and repackaging of returned
PCs determined to be non-defective. If the PC is defective and repair service
is required, we receive a partial credit of the purchase price that we paid for
the PC. The TriGem Computer warranty is effective for 14 months from the date
the PC is shipped to us. Additionally, Korea Data Systems Co. and Jean Company
have agreed to warranty monitors sold to us for 18 and 36 months respectively.
We offer a 12 month warranty covering defects in materials or workmanship on
every PC and monitor we sell.
Sales and Marketing
Our sales and marketing strategy is focused on selling our products and
services through leading retailers. In recent years, retailers attracted fewer
PC buyers as a result of the availability of custom configured systems from
direct vendors. We believe that the introduction of sub-$600 PCs has increased
the number of first-time PC buyers, many of whom viewed high prices as a
barrier to PC ownership. Since first-time buyers are less likely to want or
need custom configurations and less likely to already have Internet access, the
introduction of the sub-$600 PC has also enabled retail stores to re-emerge as
a viable method of selling PCs by increasing the number of first-time PC
buyers. Our strategy of selling primarily through leading retailers has enabled
us to leverage their sales and marketing efforts. As a result, we have been
able to establish our brand while maintaining a relatively small sales and
marketing organization. As of June 30, 1999, our sales and marketing
organization consisted of a total of 8 employees. Our sales and marketing staff
is located at our headquarters in Irvine, California.
Competition
The markets for our PCs and Internet services are highly competitive and
rapidly evolving. For sales of PCs to consumers, we compete principally against
traditional PC vendors, including Compaq, Dell, Gateway, Hewlett-Packard, IBM
and others. In addition, we compete or may compete with low-price PC vendors,
such as Free-PC, Future Power, Gobi and Microworkz. For the provision of
Internet access and services, we will compete with a variety of entities
including online services, traditional Internet service providers, cable
companies and telecommunications providers. In addition, we compete or may
compete with a limited number of PC vendors that have begun offering Internet
access services in combination with their PCs.
The PC industry is highly competitive and we expect this competition to
increase significantly. We expect pricing pressures in the PC market to
continue, particularly as a result of the introduction of a variety of
38
<PAGE>
product rebate programs that include Internet access with the purchase of a PC.
Additionally, traditional PC vendors may reduce their prices to compete with us
at our price points or offer additional services. There are relatively few
barriers preventing our competitors from capitalizing on the convergence of the
PC and Internet markets. As a result, new integrated computing and Internet
services offerings pose a threat to our business.
The Internet access services market is also highly competitive and we expect
competition in this market to intensify in the future. This market is new and
subject to rapid change, including the introduction of new technologies, price
declines and well-funded promotional campaigns. As we begin providing our
e-machines.net Internet service, we will compete with many large companies that
have substantially greater market presence, financial, technical, marketing and
other resources than we have. Potential competitors include the following:
. established online services, such as America Online, Microsoft Network
and Prodigy;
. local, regional and national Internet service providers, including
EarthLink and MindSpring;
. nonprofit or educational institutions providing Internet service;
. national telecommunications companies, including AT&T, MCI WorldCom and
GTE;
. regional Bell operating companies, including BellSouth and SBC
Communications;
. competitive local exchange carriers, including Covad Communications and
Rhythms NetConnections;
. online cable services, including Excite@Home, Time Warner and Road
Runner;
. alternative e-commerce Internet advertising vendors, including Free-PC
and NetZero; and
. potential new entrants to the Internet services market such as computer
hardware vendors, including Compaq, Dell, Gateway and Micron Electronics
or computer retailers, such as Best Buy.
The consolidation of existing competitors, new entrants to the PC and
Internet service markets or alliances between PC vendors and Internet service
providers may result in greater competition for us. In addition to America
Online, some of our current or future strategic partners may become our
competitors. Our entry into the Internet services market may have a negative
effect on our relationship with America Online or our relationships with other
partners. Competition is likely to remain intense as large, diversified
telecommunications and media companies acquire Internet service providers, as
Internet service providers and PC vendors merge and as Internet service
providers consolidate.
Customers
We currently sell our products to leading retailers, catalog and on-line
merchandisers in the United States and Canada. Our customer list includes the
following:
America Online Future Shop Office Depot
Best Buy Insight Outpost.com
BrandsMart Nexcom QVC
Circuit City J&R Computer World Sears
Costco MicroCenter Staples
Creative Computers MicroWarehouse TigerDirect
Fry's Electronics Nationwide Value America
Electronics
For the six months ended June 30, 1999, approximately 70% of our gross
revenues were from sales to our four largest retail customers. Sales to Office
Depot represented 25% of our gross revenues for the six month period ended
June 30, 1999. Further, sales to Best Buy, Circuit City and MicroCenter each
represented more than 10% of our gross revenues for the six month period ended
June 30, 1999. Since our first shipment in November 1998 through December 31,
1998, sales to Best Buy, MicroCenter and Office Depot each represented more
than 10% of our gross revenues. This concentration of sales allows us to
maintain a low-cost infrastructure while establishing preferred vendor status
with large leading retailers. We intend to continue to sell the majority of our
products to a limited number of large retailers for the foreseeable future.
39
<PAGE>
Facilities
Our principal administrative, marketing and distribution facilities are
located in Irvine, California. We lease approximately 147,000 square feet at
this facility pursuant to a lease that expires in 2004, unless terminated
earlier or extended as described below. Under the terms of the lease, we make
monthly payments of approximately $84,000, increasing to approximately $97,000
over the term of the lease. We have an option to extend the term of the lease
for an additional 60-month period. Of the total facility, pursuant to a verbal
agreement, we sublease approximately 48,000 square feet to TriGem America for
monthly payments of approximately $27,000, increasing to approximately $32,000
over the term of the sublease. TriGem America uses this space to refurbish our
returned PCs.
Legal Proceedings
In July 1999, Compaq Computer Corporation filed a complaint against us,
TriGem Computer, TriGem America and Korea Data Systems as defendants in the
U.S. District Court for the Southern District of Texas based on the defendants'
alleged infringement of 13 patents held by Compaq related to improved system
processing speed, enhanced video graphics, peripheral compatability and overall
system architecture. The complaint seeks an accounting, treble damages, a
preliminary and permanent injunction from further alleged infringement,
attorneys' fees and other unspecified damages. We are currently in the process
of assessing the complaint. As a result, we are currently unable to estimate
the total expenses, possible loss or range of loss that may be ultimately
connected with these allegations. We cannot assure you that Compaq will not
succeed in obtaining monetary damages or an injunction against the production
of our PC products. Our defense of the claims could result in significant
expenses and diversion of management's attention and other resources. In
addition, we cannot assure you that the results of this litigation would not
result in our business being significantly harmed.
In August 1999, Apple Computer, Inc. filed a complaint against us as a
defendant in the U.S. District Court for the Northern District of California
based on our alleged unfair and unauthorized use of the design and trade dress
of the iMac computer. The complaint seeks a constructive trust of profits from
sales of our eOne PC, treble damages, a preliminary and permanent injunction
from further distribution of our eOne PC, attorneys' fees and punitive damages.
We are currently in the process of assessing the complaint. As a result, we are
currently unable to estimate the total expenses, possible loss or range of loss
that may be ultimately connected with these allegations. We cannot assure you
that Apple will not succeed in obtaining monetary damages or an injunction
against the production of eOne PC products. Our defense of the claims could
result in significant expenses and diversion of management's attention and
other resources. In addition, we cannot assure you that the results of this
litigation would not result in our business being significantly harmed.
It is common in the PC manufacturing industry for patent, trademark and
other intellectual property claims to be asserted against companies. We receive
notices from time to time that our technology allegedly infringes on
intellectual property rights held by others. As a result, we may be required to
defend legal actions relating to allegedly protected technology. Various other
lawsuits, claims and proceedings have been or may be asserted against us,
including those related to product liability, intellectual property,
environmental, safety and health and employment matters. Litigation is
expensive and time consuming regardless of the merit of the claim and could
divert management's attention from our business. Moreover, the outcome of
litigation cannot be predicted with certainty. Some lawsuits, claims or
proceedings may be disposed of unfavorably to us.
Employees
We operate with a minimal number of employees, significantly reducing our
fixed cost base. As of June 30, 1999, we employed 49 people, including 8 in
sales and marketing, 21 in operations and 20 in finance and accounting. None of
our employees are represented by a labor union, and we have no collective
bargaining agreements. We consider our relations with our employees to be good.
40
<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table sets forth information with respect to our executive
officers and directors as of August 18, 1999.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Stephen A. Dukker....... 46 President, Chief Executive Officer and Director
Steven H. Miller........ 43 Vice President, Chief Financial Officer and Secretary
James L. Mertz.......... 36 Vice President, Operations
Hong Soon Lee........... 39 Chairman of the Board
Chul Chung.............. 39 Director
Lap Shun Hui............ 43 Director
Jung Koh................ 46 Director
Nathan Morton (1)(2).... 50 Director
C. Toms Newby, III Director
(1)(2)................. 32
</TABLE>
- ---------------------
(1) Member of the audit committee.
(2) Member of the compensation committee.
Stephen A. Dukker has served as our President, Chief Executive Officer and a
member of our board of directors since founding us in September 1998. From
October 1997 through August 1998, Mr. Dukker was Senior Vice President of
Merchandising and Operations of Computer City. Prior to that, Mr. Dukker was
President of OPTi, a manufacturer of PC multimedia and core logic
semiconductors, from January 1995 through September 1997. From May 1994 through
October 1994, Mr. Dukker was President of Videologic, Inc. Mr. Dukker currently
serves on the board of directors of OPTi and Digital Persona. Mr. Dukker
attended the University of Chicago.
Steven H. Miller has served as our Vice President, Chief Financial Officer
and Secretary since June 1999. Mr. Miller was employed by Ingram Micro, Inc.
from May 1992 through May 1999, most recently as Vice President and Controller.
Mr. Miller is a CPA and received a B.A. in Economics from the University of
California, Santa Barbara.
James L. Mertz has served as our Vice President of Operations since
September 1998. From August 1997 through September 1998, Mr. Mertz was Director
of Build-to-Order and Private Label programs for Computer City. Previously, Mr.
Mertz had served in various positions, including as a regional manager and a
general manager, at Comp USA from October 1989 through August 1997.
Hong Soon Lee has been Chairman of our board of directors since September
1998. Mr. Lee is currently President, Chief Executive Officer and a member of
the board of directors of TriGem Computer and has served in various positions
at TriGem Computer since June 1994. In addition, Mr. Lee has been a director of
TriGem Corporation since July 1997. Mr. Lee received a B.S. from Korea
University and a M.S. in Engineering from the Florida Institute of Technology.
Chul Chung has been a member of our board of directors since September 1998.
Mr. Chung also serves as Executive Vice President of Worldwide Operations for
TriGem Computer, a position he has held since August 1997. From March 1989
through September 1997, Mr. Chung was President and Chief Executive Officer of
Human Computer, a subsidiary of TriGem Computer. Mr. Chung received a B.S. from
Seoul National University, and both a M.S. and Ph.D. from the Korea Advanced
Institute of Science & Technology.
41
<PAGE>
Lap Shun Hui has been a member of our board of directors since September
1998. Mr. Hui is currently President and a member of the board of directors of
KDS USA, a position he has held since June 1995. From January 1993 through June
1995, Mr. Hui was Chief Executive Officer of Orchestra Multisystems, a company
that was acquired by KDS USA. Mr. Hui received a B.S. in Business from the
State University of New York at Buffalo and a M.B.A. from McMaster University,
Ontario, Canada.
Jung Koh has been a member of our board of directors since our formation in
September 1998. Mr. Koh also serves as Vice Chairman of Korea Data Systems Co.,
a position he has held since 1983. In addition, Mr. Koh has been a member of
the board of directors of Du Go since 1983. Mr. Koh received a B.A. from Rhode
Island College.
Nathan Morton has been a member of our board of directors since August 1999.
Mr. Morton is currently Chairman of both Buildnet, Inc. and Handtech.com,
positions he has held since November 1998. In addition, Mr. Morton currently
serves as Chairman of Starpower and as Senior Partner of Channel Marketing.
From July 1997 through September 1998, Mr. Morton was Co-Chairman and Chief
Executive Officer of Computer City. Prior to that, Mr. Morton served as
President and Chief Executive Officer of Open Environment from March 1994
through February 1996. Mr. Morton has a B.A. from State University of New York
at Buffalo.
C. Toms Newby, III has been a member of our board of directors since August
1999. Mr. Newby is currently a General Partner at Technology Crossover
Ventures, a position he has held since April 1996, and a member of the board of
directors of Emerald Solutions, Inc. From 1994 through April 1996, Mr. Newby
was an associate at Montgomery Securities in the Corporate Finance Technology
Group. Mr. Newby received a B.S. from the University of North Carolina and a
M.B.A. from Stanford University.
Board of Directors
We currently have authorized seven directors. Our amended and restated
certificate of incorporation filed in connection with this offering provides
that the terms of office of the members of the board of directors will be
divided into three classes: Class I, whose term will expire at the annual
meeting of stockholders to be held in 2000, Class II, whose term will expire at
the annual meeting of stockholders to be held in 2001, and Class III, whose
term will expire at the annual meeting of stockholders to be held in 2002. At
each annual meeting of stockholders after the initial classification, the
successors to directors whose term will then expire will be elected to serve
from the time of election and qualification until the third annual meeting
following election. Any additional directorships resulting from an increase in
the number of directors will be distributed among the three classes so that, as
nearly as possible, each class will consist of one-third of the total number of
directors. This classification of our board of directors may have the effect of
delaying or preventing changes in our control or management.
Committees
Our board of directors has an audit committee and a compensation committee.
The audit committee consists of Messrs. Morton and Newby. The audit committee
reviews our internal accounting procedures and consults with and reviews the
services provided by our independent accountants. The compensation committee
consists of Messrs. Morton and Newby. The compensation committee reviews the
compensation and benefits of our employees and directors and makes
recommendations to our board of directors.
Compensation
Directors do not receive cash compensation from us for the services they
provide as directors, although non-employee directors are reimbursed for
expenses incurred in connection with attending board and committee meetings.
42
<PAGE>
Compensation Committee Interlocks and Insider Participation
Prior to August 1999, our board of directors did not maintain a standing
compensation committee, and the entire board participated in all decisions
regarding compensation of our executive officers. In August 1999, the board
formed the compensation committee and appointed Messrs. Morton and Newby as
committee members. None of the members of the compensation committee is
currently or has ever been at any time since our formation, one of our officers
or employees. No member of the compensation committee serves as a member of the
board of directors or compensation committee of any entity that has one or more
officers serving as a member of our board of directors or compensation
committee.
Executive Officers
Executive officers are appointed by our board of directors and serve until
their successors are qualified and appointed. There are no family relationships
among any of our directors or executive officers.
Compensation
The following table sets forth the compensation earned by our Chief
Executive Officer during the year ended December 31, 1998. None of our other
executive officers earned more than $100,000 during the year ended December 31,
1998.
<TABLE>
<CAPTION>
Annual Compensation
--------------------
Name and Principal Positions Salary Bonus
---------------------------- --------------------
<S> <C> <C>
Stephen A. Dukker................................... $ 96,923 $ 126,000
President and Chief Executive Officer
</TABLE>
Option Grants in Last Fiscal Year
Our Chief Executive Officer, the only one of our executive officers named in
the compensation table above, received no option grants in the year ended
December 31, 1998.
Employment Agreements
In June 1999, we entered into an employment agreement with Stephen A.
Dukker, our President and Chief Executive Officer, which agreement was amended
and restated in August 1999. The agreement provides for an annual base salary
of $300,000 with a variable bonus. For the period from September 18, 1998
through June 30, 1999, the bonus was equal to $1 for each central processor
unit shipped during the period. For the period July 1, 1999 through November
30, 1999, Mr. Dukker's bonus is a fully vested option to purchase 227,897
shares of our common stock at an exercise price of $1.61 per share. The
agreement provides that if we terminate Mr. Dukker's employment without cause,
if Mr. Dukker voluntarily terminates his employment after he is relocated, if
his duties or benefits are materially reduced, or if his employment terminates
because of death or disability, we must continue to pay his base salary and
bonus through the term of the agreement which ends in September 2001.
Limitations on Directors' and Officers' Liability and Indemnification
Our certificate of incorporation limits the liability of our directors to
the maximum extent permitted by Delaware law. Delaware law provides that
directors of a corporation will not be personally liable for monetary damages
for breach of their fiduciary duties as directors, except liability associated
with any of the following:
. any breach of their duty of loyalty to the corporation or its
stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
43
<PAGE>
. unlawful payments of dividends or unlawful stock repurchases or
redemption; or
. any transaction from which the director derived an improper personal
benefit.
The limitation of a director's liability does not apply to liabilities
arising under the federal securities laws and does not affect the availability
of equitable remedies such as injunctive relief or rescission.
Our certificate of incorporation and bylaws also provide that we shall
indemnify our directors and executive officers and may indemnify our other
officers and employees and other agents to the fullest extent permitted by law.
We believe that indemnification under our bylaws covers at least negligence and
gross negligence on the part of indemnified parties. Our bylaws also permit us
to secure insurance on behalf of any officer, director, employee or other agent
for any liability arising out of his or her actions in such capacity,
regardless of whether our bylaws would permit indemnification.
We have entered into indemnification agreements with each of our directors
and intend to enter into indemnification agreements with each of our officers.
The indemnification agreements contain or will contain, as applicable,
provisions that require us to, among other things, indemnify our officers and
directors against liabilities that may arise by reason of their status or
service as directors or officers (other than liabilities arising from willful
misconduct of a culpable nature), to advance their expenses incurred as a
result of any proceeding against them as to which they could be indemnified,
and to cover our directors and officers under any of our liability insurance
policies applicable to our directors and officers. We believe that these
provisions and agreements are necessary to attract and retain qualified persons
as directors and executive officers.
Stock Plans
1998 Stock Plan
Our 1998 stock plan was approved by our board of directors in September
1998. We have reserved a total of 3,200,000 shares of our common stock for
issuance under the plan. The plan provides for the granting to our employees of
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, and for the granting to employees, including
officers and directors, nonemployee directors and consultants of nonstatutory
stock options and stock purchase rights. Unless terminated sooner, this plan
will terminate automatically in 2008.
Our 1998 stock plan is administered by our board of directors and, thus, the
board determines the terms of the options or stock purchase rights granted,
including the exercise price, the number of shares subject to each option or
stock purchase right, the vesting and the form of consideration payable upon
such exercise. In addition, the board has the authority to amend, suspend or
terminate the plan, provided that no such action may affect any share of common
stock previously issued and sold or any option previously granted and then
outstanding under the plan.
Options and stock purchase rights granted under our 1998 stock plan are not
generally transferable by the optionee, and each option and stock purchase
right is exercisable during the lifetime of the optionee only by the optionee.
Options granted under the plan must generally be exercised within three months
of the end of optionee's status as our employee or consultant, or within twelve
months after his or her termination by death or disability, but in no event
later than the expiration of the option's ten year term. In the case of stock
purchase rights, unless the board determines otherwise, the agreement
evidencing the grant shall provide that we have a repurchase option exercisable
upon the voluntary or involuntary termination of his or her employment for any
reason (including death or disability). In this event, the purchase price per
share will be equal to the original price and may be paid by cancellation of
his or her outstanding indebtedness to us, if any. Our repurchase option shall
lapse at a rate determined by the board. The exercise price of any incentive
stock options granted under this plan and any nonstatutory stock options
intended to qualify as "performance-based compensation" within the meaning of
Section 162(m) of the Code, must be at least equal to the fair market
44
<PAGE>
value of our common stock on the date of grant. With respect to any participant
who owns stock possessing more than 10% of the voting power of all classes of
our outstanding capital stock, the exercise price of any incentive stock option
granted must equal at least 110% of the fair market value on the grant date and
the term of such incentive stock option must not exceed five years. The term of
all other options granted under the plan may not exceed ten years.
Our 1998 stock plan provides that in the event of our merger with or into
another corporation, a sale of substantially all of our assets, each option or
right shall be assumed or an equivalent option or right substituted by the
successor corporation. If the outstanding options or rights are not assumed or
substituted, our board shall provide for the optionee to have the right to
exercise the option or stock purchase right as to all of the optioned stock,
including shares as to which it would not otherwise be exercisable for a period
of 15 days from the date of such notice, and the option or stock purchase right
will terminate upon the expiration of such period.
45
<PAGE>
RELATED PARTY TRANSACTIONS
Relationship with TriGem Computer, TriGem Corporation, TriGem America, Korea
Data Systems Co., Korea Data Systems America and KDS USA
TriGem Computer, a Korean company, is the parent company of TriGem
Corporation, a California corporation. Prior to this offering TriGem
Corporation owned 28.5% of our outstanding common stock after giving effect to
the conversion of all preferred stock outstanding or issuable upon regulatory
approval. Hong Soon Lee, Chairman of our board of directors and one of our
stockholders, is also the President, Chief Executive Officer and a member of
the board of directors of TriGem Computer and a director of TriGem Corporation.
Chul Chung, a member of our board of directors and one of our stockholders is
also Executive Vice President of Worldwide Operations for TriGem Computer.
Korea Data Systems Co., a Korean company, is the parent company of Korea
Data Systems America. Prior to this offering Korea Data Systems America owned
28.2% of our outstanding common stock after giving effect to the conversion all
outstanding Series A preferred stock. Jung Koh, a member of our board of
directors and one of our stockholders also serves as Vice Chairman of Korea
Data Systems Co.
We have entered into a number of agreements, both written and verbal, with
TriGem Computer, TriGem Corporation, TriGem America, Korea Data Systems Co.,
Korea Data Systems America and KDS USA. These agreements are described below.
Trademark Assignment
Under an agreement entered into on June 10, 1999 and amended on August 16,
1999, Korea Data Systems America transferred to us the trademark "E-MACHINES"
for 419,538 shares of our common stock, which we issued to it on August 18,
1999. We agreed to license back to Korea Data Systems America use of the
trademark solely in the Republic of Korea.
Lease
We lease approximately 147,000 square feet of office and warehouse space
located at 14350 Myford Road, Irvine, California from the Irvine Company under
a written lease entered into on November 30, 1998. Our monthly rent is
approximately $84,000 subject to annual increases that will increase our rent
in the fifth year of the lease to approximately $97,000. The lease terminates
in 2004, subject to our right to extend the term. Our performance under the
lease is guaranteed by Korea Data Systems America. Pursuant to a verbal
agreement, we sublease approximately 48,000 square feet of this space to TriGem
America, a subsidiary of TriGem Computer, for a monthly rental of approximately
$27,000 increasing to approximately $32,000 over the term of the sublease.
Subordinated Notes
In connection with our initial capitalization, we issued a subordinate note
payable to TriGem Corporation in the amount of $270,000 and a subordinated note
payable to Korea Data Systems America in the amount of $290,000. See
"Capitalization Agreements" for a description of our initial capitalization.
The subordinated notes bear interest at 5.79% and are due on June 7, 2004. The
subordinated notes may be prepaid without penalty at our option.
Supply of PCs and Monitors
We currently source all of our PCs and monitors that we sell from KDS USA, a
company that is wholly-owned by Lap Shun Hui, a member of our board of
directors and one of our stockholders. All of the these eTower PCs in turn are
manufactured by TriGem Computer, the eOne PC is manufactured by Korea Data
Systems Co. and all of our monitors are manufactured by Korea Data Systems Co.
and by Jean Company, Ltd., an unaffiliated third party. KDS USA orders PCs for
us through TriGem America, a wholly-owned subsidiary of TriGem Computer. We
have no obligation to order, take minimum delivery or purchase at pre-
negotiated prices from KDS USA, TriGem Computer or Korea Data Systems Co.
Additionally, TriGem Computer and Korea Data Systems Co. have no contractual
obligation to supply us with PCs and monitors.
46
<PAGE>
Inventory Purchases and Extended Payment Terms
During the period from inception until December 31, 1998, we purchased an
aggregate of approximately $71 million in PCs and monitors from TriGem
Corporation and KDS USA. Pursuant to a verbal agreement with TriGem Corporation
and Korea Data Systems Co., we financed our inventory purchases by extending
payment of our accounts payable up to 90 days. Under a verbal agreement between
us, TriGem Corporation, Korea Data Systems Co. and KDS USA, we transferred
approximately $58 million of our accounts payable obligations as of December
31, 1998 to KDS USA. Pursuant to a verbal agreement with KDS USA, trade
payables are subject to payment terms that allow us 90 days to pay and that
provide a discount on PC payables proportional to the number of days that we
pay early. The effective interest rate as of June 30, 1999 was a 10% annual
rate. During the six month period ended June 30, 1999, we purchased an
aggregate of $352.8 million in PCs and monitors from KDS USA. As of June 30,
1999, approximately $134.4 million in payables were outstanding to KDS USA. In
connection with these inventory purchases, approximately $888,000 of finance
charges was incurred for the period ended December 31, 1998, and $5 million of
finance charges were incurred for the period ended June 30, 1999.
Warranties and PC Repair Service
Under a verbal agreement, TriGem Computer provides warranties to us on PCs
sold for 14 months from shipment and provides PC repair services for PCs
returned to us by our retail customers or PC buyers through its wholly-owned
subsidiary TriGem America. We are assessed a $15 per unit service charge for
the testing and repackaging of PC returns determined to be nondefective. If a
PC is defective, we receive a credit of 15% of the purchase price of the PC
from KDS USA.
Under verbal agreements, Korea Data Systems Co. warrants its monitors for 18
months and Jean Company warrants its monitors for 36 months (parts and labor
included).
Cooperative Advertising Costs
For the period from inception until December 31, 1998, TriGem Computer
agreed to credit us $363,000 for cooperative advertising credits from component
suppliers. In July 1999, this amount was offset against amounts due to KDS USA.
Freight Costs
For the period from inception until December 31, 1998, TriGem Computer
agreed to credit us $173,000 in freight costs for products shipped to us from
TriGem Computer. In July 1999, this amount was offset against amounts due to
KDS USA.
47
<PAGE>
Capitalization Agreements
On June 10, 1999, pursuant to agreements reached in September 1998, we
issued an aggregate of 77,600,000 shares of our common stock at a price per
share of $0.03. Among the purchasers of our common stock were the following
officers, directors and stockholders of more than 5% of our outstanding shares,
and their immediate family members:
<TABLE>
<CAPTION>
Aggregate
Number of Purchase
Stockholder Shares Price
----------- ---------- ---------
<S> <C> <C>
TriGem Corporation......................................... 29,200,000 $730,000
Korea Data Systems America................................. 28,400,000 710,000
Stephen A. Dukker.......................................... 8,000,000 200,000
Chul Chung................................................. 2,400,000 60,000
Jung Koh................................................... 2,400,000 60,000
Hong Soon Lee.............................................. 2,400,000 60,000
Hong Sun Lee............................................... 1,600,000 40,000
Lap Shun Hui............................................... 1,600,000 40,000
Dae Soo Koh................................................ 1,600,000 40,000
</TABLE>
Hong Sun Lee is Hong Soon Lee's brother and Dae Soo Koh is Jung Koh's
brother. Both Hong Sun Lee and Dae Soo Koh were members of our board of
directors until August 1999 when they resigned in connection with the Series A
preferred stock financing.
Messrs. Dukker, Chung, Hui, Jung Koh, Dae Soo Koh, Hong Soon Lee and Hong
Sun Lee paid for their shares with full recourse promissory notes. Each of the
notes matures in June 2004 and bears interest until maturity at 5.79% per year.
Each note is secured with the shares issued to each purchaser.
On June 10, 1999, we also entered into a Shareholders Agreement with the
above purchasers of our common stock. This agreement superseded an earlier
agreement that had been entered into solely by two of our principal
stockholders, TriGem Corporation and Korea Data Systems America, on April 1,
1999. The Shareholders Agreement terminated upon the closing of the sale of our
Series A preferred stock in August 1999. When it was in effect, this Agreement
provided for board review of significant business decisions, a voting agreement
as to election of directors and a buy-sell agreement among TriGem Corporation
and Korea Data Systems America. When it was in effect, it also provided for
limited preferential supply arrangements with TriGem Computer and Korea Data
Systems Co.
Series A Preferred Stock Financing
On August 18, 1999, we sold an aggregate of 24,279,369 shares of our Series
A preferred stock (including 5,560,776 shares issuable upon regulatory
approval) at a price per share of $6.38.
America Online, a stockholder of more than 5% of our outstanding shares
prior to this offering, purchased 7,832,079 shares (including 5,560,776 shares
issuable to America Online upon regulatory approval) for an aggregate price of
$50.0 million. C. Toms Newby, III, one of our directors, is a managing member
of Technology Crossover Management III, L.L.C., the general partner of TCV III
(GP), TCV III, L.P., TCV III (Q), L.P. and TCV III Strategic Partners. Entities
affiliated with Technology Crossover Management III, L.L.C. purchased 3,602,757
shares for an aggregate price of approximately $23.0 million.
In connection with the sale of our Series A preferred stock, we also entered
into an Amended and Restated Rights and Restrictions Agreement with the
purchasers of our preferred stock and all holders of our common stock. This
agreement superseded a Rights and Restrictions Agreement entered into on June
10, 1999 with
48
<PAGE>
certain purchasers of our common stock. The Amended and Restated Rights and
Restrictions Agreement includes the following key terms:
. Demand Registration: At any time after six months following this
offering, the holders of at least 50% of the shares of common stock
issuable upon conversion of our Series A preferred stock can request
that we register all or a portion of their shares, so long as the total
offering price of the shares to the public is at least $15,000,000. We
will be required to file only one registration statement in response to
their demand registration rights. We may postpone the filing of a
registration statement for up to 120 days once in a 12 month period if
we determine that the filing would not be in the best interests of us
and our stockholders.
. Piggy-back Registration: If we register any securities for public sale,
the holders of the shares of common stock and common stock issuable upon
conversion of our Series A preferred stock will have the right to
include their shares in the registration statement. However, this right
does not apply to a registration statement relating to any of our
employee benefit plans or a corporate reorganization. These registration
rights expire three years after this offering is completed.
. Form S-3 Registration: The holders not less than an aggregate of 25% of
the shares of common stock and the common stock issuable upon conversion
of our Series A preferred stock can request that we register their
shares if we are eligible to file a registration statement on Form S-3
and if the total price of the shares offered to the public is at least
$2,500,000. These holders may only require us to file two registration
statements on Form S-3 in any 12 month period and only three
registration statements in all. We may postpone the filing of a
registration statement for up to 120 days once in a 12 month period if
we determine that the filing would be seriously detrimental to us and
our stockholders.
. Standoff: For 180 days after completion of this offering, or 90 days
after a subsequent offering of our shares, a holder may not transfer
shares without our consent or our underwriters' consent. This
restriction is subject to our executive officers agreeing to the same
restrictions and is to remain in effect for two years from the date of
this offering.
. Right of First Refusal: Before a holder may sell shares of our stock to
a third party, the holder is required to notify us of the sale and the
terms. We then have the right to purchase some or all of the shares on
terms equal to or better than the terms offered to the third party.
. Maintenance Right: Before selling additional shares of our stock, we are
obligated to notify our stockholders of the proposed sale and the terms.
Each stockholder then has the right to purchase, on the same terms,
shares sufficient to maintain its existing ownership percentage.
. Voting Arrangements: The stockholders agreed regarding how shares are
voted in electing the board of directors and the terms and conditions
under which the composition may be altered.
Holders of Series A preferred stock have the right, subject to applicable
legal or regulatory limitations, to purchase shares in the initial public
offering up to an aggregate amount of $10 million. Each holder has the right to
elect to purchase a pro-rata share of an amount of shares equal to $10,000,000
divided by the per share public offering price of this offering. A holder's
pro-rata share is determined by dividing its shares of Series A preferred stock
by the total amount of outstanding Series A preferred stock. Within five days
after the date of the preliminary prospectus with respect to the initial public
offering, we are required to send to holders a copy of the prospectus and a
notice with respect to their right to purchase their pro-rata share. Holders
that wish to purchase their pro-rata portion of shares will be required to
respond to us within the time period specified in the notice.
Upon completion of this offering, all outstanding shares of our preferred
stock will be automatically converted into 24,279,369 shares (including the
5,560,776 shares of preferred stock issuable to America Online
49
<PAGE>
upon regulatory approval) of our common stock. The holders of our Series A
preferred stock have registration rights with respect to the common stock
issuable upon the conversion of the preferred stock as described above, and
those rights are subject to the standoff provision. The right of first refusal,
maintenance right and voting arrangement provisions of the Amended and Restated
Rights and Restrictions Agreement terminate upon completion of this offering.
Relationship with America Online, Inc.
In June 1999, we entered into a marketing agreement with America Online
under which America Online will provide rebates to our PC buyers to
significantly reduce the net effective price of our PCs. To obtain a rebate,
our PC buyers must enter into an agreement with America Online to subscribe to
America Online's CompuServe Internet access service over a predetermined period
of time at a stated monthly fee. We will share in the payments made by
subscribers to America Online for internet access. America Online purchased
2,271,303 shares of our Series A preferred stock on August 18, 1999, and has
committed to purchase an additional 5,560,776 shares upon receipt of regulatory
approval. See "Related Party Transactions--Series A Preferred Stock Financing."
Additionally, we granted America Online a warrant to purchase shares of our
common stock at an aggregate exercise price of $3.6 million. This warrant
expires five years after the date of grant. The number of shares that may be
purchased upon exercise of the warrant is equal to the aggregate exercise price
divided by the greater of 1.25 times the initial offering price of our common
stock or $7.98. If there is no successful completion of an initial public
offering, the number of shares issuable upon exercise of the warrant is equal
to the aggregate exercise price of the warrant divided by $11.82. Upon receipt
of regulatory approval, we will issue America Online an additional warrant to
purchase shares of common stock at an aggregate exercise price of $8.9 million
under the same terms as the earlier warrant. The maximum number of shares that
America Online may receive, subject to anti-dilution adjustments, upon exercise
of its warrants is 1,566,219.
Option Grants to Executive Officers, Directors and Principal Stockholders
Since inception in September 1998, we have granted to our executive officers
and directors options for shares of common stock in the amounts indicated.
. On September 28, 1998, we granted Jim Mertz an option for 80,000 shares
of our common stock at an exercise price of $0.03 per share.
. On June 15, 1999, we granted Steven H. Miller an option for 200,000
shares of our common stock at an exercise price of $3.75 per share.
. On August 18, 1999, we granted Stephen A. Dukker an option for 227,897
shares of our common stock at an exercise price of $1.61 per share,
which was issued in connection with our obligations under Mr. Dukker's
employment agreement.
Employment and Indemnification Agreements
We have entered into an employment agreement with our President and Chief
Executive Officer, Stephen A. Dukker. See "Management--Employment Agreements."
We have entered into agreements with each of our directors that provide for
indemnification and intend to enter into indemnification agreements with our
executive officers. See "Management--Limitations on Directors' and Officers'
Liability and Indemnification."
50
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information known to us with respect to the
beneficial ownership of our common stock as of August 18, 1999 and as adjusted
to reflect the sale of common stock offered hereby by the following:
. each stockholder known by us to own beneficially more than 5% of our
common stock;
. our President and Chief Executive Officer, the only one of our executive
officers named in the compensation table;
. each member of our board of directors; and
. all members of our board of directors and executive officers as a group.
As of August 18, 1999 there were 78,019,538 shares of our common stock
outstanding. Except as otherwise indicated, we believe that the beneficial
owners of the common stock listed below, on the information furnished by them,
have sole voting power and investment power with respect to such shares.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of common stock subject to options or warrants held by that person that
are currently exercisable or will become exercisable within 60 days after
August 18, 1999 are deemed outstanding, while such shares are not deemed
outstanding for purposes of computing percentage ownership of any other person.
For purposes of computing the number of shares of common stock issuable upon
conversion of preferred stock outstanding, as of August 18, 1999, we have
assumed that all 24,279,369 shares of preferred stock are outstanding,
including the 5,560,776 shares of preferred stock issuable to America Online
upon regulatory approval not currently outstanding as of the date of this
prospectus. Unless otherwise indicated below, the persons and entities named in
the table have sole voting and investment power with respect to all shares
beneficially owned, subject to community property laws where applicable. The
address for those individuals for whom an address is not otherwise indicated is
eMachines, Inc., 14350 Myford Road, Suite 100, Irvine, CA 92606.
<TABLE>
<CAPTION>
Percentage of Shares
Outstanding
-----------------------
Number of Prior to
Name or Group of Beneficial Owners Shares Offering After Offering
- ---------------------------------- ---------- -------- --------------
<S> <C> <C> <C>
TriGem Corporation.......................... 29,200,000 28.5% %
14350 Myford Road
Irvine, CA 92606
Korea Data Systems America, Inc. ........... 28,819,538 28.2
12300 Edison Way
Garden Grove, CA 92841
America Online, Inc.(1)..................... 8,889,340 8.7
22000 AOL Way
Dulles, VA 20166
Stephen A. Dukker(2)........................ 8,227,897 8.0
C. Toms Newby, III(3)....................... 3,602,757 3.5
Chul Chung.................................. 2,400,000 2.3
45-2 YOIDO
Youngdeungpo Seoul, Korea
Jung Koh.................................... 2,400,000 2.3
Korea World Trade Center Bldg., Room #204
159, Samsung-dong
Kangnam-gu Seoul, Korea
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
Percentage of Shares
Outstanding
-----------------------
Number of Prior to
Name or Group of Beneficial Owners Shares Offering After Offering
- ---------------------------------- ---------- -------- --------------
<S> <C> <C> <C>
Hong Soon Lee............................... 2,400,000 2.3
45-2 YOIDO
Youngdeungpo Seoul, Korea
Lap Shun Hui................................ 1,600,000 1.6
12350 Edison Way
Garden Grove, CA 92841
Nathan Morton............................... -- *
All directors and officers as a group (8
persons)................................... 20,630,654 20.2%
</TABLE>
- ---------------------
* Less than 1% of the outstanding shares of common stock.
(1) Includes 1,057,261 shares of common stock issuable (including 750,655
shares issuable pursuant to a warrant not outstanding as of the date of the
prospectus, but to be issued upon regulatory approval) pursuant to the
exercise of warrants at an assumed exercise price of $11.82 per share. See
"Description of Capital Stock--Options and Warrants" for a discussion of
the exercise price of these warrants.
(2) Includes 227,897 shares subject to options which are exercisable within 60
days of August 18, 1999.
(3) Includes 26,161 shares held by TCV III (GP), 124,263 shares held by TCV
III, L.P., 3,302,768 shares held by TCV III (Q), L.P. and 149,565 shares
held by TCV III Strategic Partners, L.P. Mr. Newby is a managing member of
Technology Crossover Management III, L.L.C., the general partner of each of
these entities and disclaims beneficial ownership of the shares held by
these entities except with respect to his pecuniary interest.
52
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the completion of this offering, we will be authorized to issue
250,000,000 shares of common stock, $0.0000125 par value per share, and
25,000,000 shares of preferred stock, $0.01 par value per share. The following
description of our capital stock is only a summary. You should refer to our
certificate of incorporation and bylaws as in effect upon the closing of this
offering, which are included as exhibits to the registration statement of which
this prospectus forms a part, and by the provisions of applicable Delaware law.
Common Stock
As of August 18, 1999, there were 78,019,538 shares of common stock
outstanding, after an eight-for-one stock split that occurred on August 13,
1999. These shares were held of record by approximately nine stockholders.
There will be shares of common stock outstanding (assuming no exercise of
the underwriters' over-allotment option and no exercise of outstanding options
after August , 1999) after giving effect to the sale of our common stock in
this offering. There are 757,097 shares issuable upon exercise of outstanding
options, excluding shares of common stock issuable to America Online under
their warrants. See "Description of Capital Stock--Options and Warrants" for a
description of our outstanding grants. See "Management--Stock Plans" for a
description of our stock plan.
Dividend Rights. Subject to preferences that may apply to shares of our
preferred stock outstanding at the time, the holders of outstanding shares of
our common stock are entitled to receive dividends out of assets legally
available at the times and in the amounts as our board of directors may
determine.
Voting Rights. Each holder of our common stock is entitled to one vote for
each share of common stock held on all matters submitted to a vote of
stockholders. We do not provide for cumulative voting of directors in our
certificate of incorporation.
No preemptive or similar rights. Holders of our common stock are not
entitled to preemptive rights and our common stock is not subject to conversion
or redemption.
Right to receive liquidation distributions. Upon a liquidation, dissolution
or winding-up of our company, the holders of common stock are entitled to share
ratably with holders of any participating preferred stock in all assets
remaining after payment of all liabilities and the liquidation preferences of
any outstanding preferred stock. Each outstanding share of common stock is, and
all shares of common stock to be outstanding upon completion of this offering
will be, fully paid and nonassessable.
Preferred Stock
As of August 18, 1999, there were 24,279,369 shares of convertible Series A
preferred stock outstanding (including 5,560,776 shares issuable to America
Online upon regulatory approval) which were held of record by approximately 35
stockholders. All outstanding shares of Series A preferred stock and those
shares of preferred stock issuable upon receipt of regulatory approval will be
converted into an aggregate of 24,279,369 shares of common stock automatically
upon completion of this offering.
Upon completion of this offering, our board is authorized, without action by
the stockholders, to issue 25,000,000 shares of preferred stock in one or more
series and to fix the rights, preferences, privileges and restrictions of each
wholly unissued series and any of its qualifications, limitations or
restrictions. These rights, preferences and privileges may include dividend
rights, conversion rights, voting rights, terms of redemption, liquidation
preferences, sinking fund terms and the number of shares constituting any
series or the designation of any series, all or any of which may be greater
than the rights of the common stock. The issuance of preferred stock could
adversely affect the voting power of holders of common stock and the likelihood
that the holders of common stock will receive dividend payments and payments
upon liquidation. The issuance of preferred stock, while providing flexibility
in connection with possible acquisitions and other corporate purposes, could,
among other things, have the effect of delaying, deferring or preventing a
change in control of our company and may adversely affect the market price of
our common stock and the voting and other rights of the holders of our common
stock. We have no current plan to issue any shares of preferred stock.
53
<PAGE>
Registration Rights
Pursuant to an amended and restated rights and restrictions agreement we
entered into with all holders of our common and preferred stock prior to this
offering, the holders of these shares are entitled to rights with respect to
the registration of these shares under the Securities Act as described below.
Demand Registration Rights. At any time after six months following this
offering, the holders of at least 50% of the shares of common stock issuable
upon conversion of our Series A preferred stock can request that we register
all or a portion of their shares, so long as the total offering price of the
shares to the public is at least $15,000,000. We will be required to file only
one registration statement in response to their demand registration rights. We
may postpone the filing of a registration statement for up to 120 days once in
a 12 month period if we determine that the filing would not be in the best
interests of us and our stockholders.
Piggyback Registration Rights. If we register any securities for public
sale, the holders of the shares of common stock and common stock issuable upon
conversion of our Series A preferred stock will have the right to include their
shares in the registration statement. However, this right does not apply to a
registration statement relating to any of our employee benefit plans or a
corporate reorganization. These registration rights expire three years after
this offering is completed.
Form S-3 Registration Rights. The holders of not less than an aggregate of
25% of the shares of common stock and the common stock issuable upon conversion
of our Series A preferred stock can request that we register their shares if we
are eligible to file a registration statement on Form S-3 and if the total
price of the shares offered to the public is at least $2,500,000. These holders
may only require us to file two registration statements on Form S-3 in any 12
month period and only three registration statements in all. We may postpone the
filing of a registration statement for up to 120 days once in a 12 month period
if we determine that the filing would be seriously detrimental to us and our
stockholders.
We will pay all of the expenses, except underwriters' and brokers' discounts
and commissions, incurred in connection with the demand registrations and
piggyback registrations described above. The participating holders will bear
all expenses incurred in connection with the exercise of their Form S-3
registration rights.
The registration rights described above will expire with respect to a
particular stockholder if it can sell all of its shares in a three month period
following this offering under Rule 144 of the Securities Act.
Options and Warrants
As of June 30, 1999, options to purchase 609,200 shares of common stock were
outstanding and subject to our 1998 stock plan. An additional 2,590,800 shares
are authorized to be issued under the plan. See "Management--Stock Plans." As a
bonus for the period from July 1, 1999 through November 30, 1999, Mr. Dukker
was granted a fully vested option to purchase 227,897 shares of our common
stock at an exercise price of $1.61 per share. We have also issued a warrant to
purchase shares of common stock at an aggregate exercise price of $3.6 million
in connection with a marketing agreement with America Online. See "Related
Party Transactions--Relationship with America Online, Inc." for a description
of the marketing agreement. The number of shares that may be purchased upon
exercise of the warrant is equal to the aggregate exercise price divided by the
greater of 1.25 times the initial offering price of our common stock or $7.98.
If there is no successful completion of an initial public offering, the number
of shares issuable upon exercise of the warrant is equal to the aggregate
exercise price of the warrant divided by $11.82. This warrant will remain
outstanding after the completion of the offering until August 18, 2004, unless
sooner exercised. We will issue America Online an additional warrant to
purchase shares of common stock at an aggregate exercise price of $8.9 million
upon receipt of regulatory approval on the same terms as the earlier warrant.
The maximum number of shares that America Online may receive, subject to anti-
dilution adjustments, upon exercise of its warrants is 1,566,219.
54
<PAGE>
Delaware Anti-Takeover Law and Certain Charter and Bylaw Provisions
Delaware Law
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law regulating corporate takeovers. This section prevents some
Delaware corporations from engaging, under some circumstances, in a "business
combination," which includes a merger or sale of more than 10% of the
corporation's assets with any "interested stockholder," meaning a stockholder
who owns 15% or more of the corporation's outstanding voting stock, as well as
affiliates and associates of the stockholder, for three years following the
date that the stockholder became an "interested stockholder" unless:
. the transaction is approved by the board of directors prior to the date
the interested stockholder attained that status;
. upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced; or
. on or subsequent to such date the business combination is approved by
the board and authorized at an annual or special meeting of stockholders
by at least two-thirds of the outstanding voting stock that is not owned
by the interested stockholder.
A Delaware corporation may opt out of this provision with an express
provision in its original certificate of incorporation or an express provision
in its certificate or incorporation or bylaws resulting from a stockholders'
amendment approved by at least a majority of the outstanding voting shares.
However, we have not opted out of this provision. The statute could prohibit or
delay mergers or other takeover or change-in-control attempts and, accordingly,
may discourage attempts to acquire us.
Charter and Bylaw Provisions
Our certificate of incorporation and bylaws will provide, subject to
appropriate corporate action, that:
. following the completion of this offering, stockholders may not act by
written consent without a meeting;
. following the completion of this offering, stockholders may not call
special meetings of the stockholders; and
. our board of directors will be divided into three classes, each serving
staggered three-year terms, which means that only one class of directors
will be elected at each annual meeting of stockholders, with the other
classes continuing for the remainder of their respective terms, and
directors may only be removed for cause.
In addition, our certificate of incorporation does not provide for
cumulative voting. We also indemnify officers and directors against losses that
they may incur in investigations and legal proceedings resulting from their
services to us, which may include services in connection with the takeover
defense measures.
These provisions of our certificate of incorporation and bylaws may have the
effect of delaying, deferring or discouraging another person from acquiring
control of us, including takeover attempts that might result in a premium over
the market price for the shares of our common stock.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is .
Nasdaq Stock Market National Market Listing
We have applied to list our common stock on The Nasdaq Stock Market's
National Market under the symbol "EEEE."
55
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have shares of common stock
outstanding based on shares outstanding as of , 1999. Of these shares, the
shares sold in this offering will be freely transferable without
restriction under the Securities Act, unless they are held by "affiliates" as
that term is used under the Securities Act and the Regulations promulgated
thereunder.
Of these shares, the remaining shares were sold by us in reliance on
exemptions from the registration requirements of the Securities Act, are
restricted securities within the meaning of Rule 144 under the Securities Act
and become eligible for sale in the public market as follows:
. beginning 90 days after the effective date, shares will become
eligible for sale, subject to the provisions of Rules 144 and 701;
. beginning 180 days after the effective date, additional shares will
become eligible for sale, subject to the provisions of Rules 144, 144(k)
or 701, upon the expiration of agreements not to sell such shares
entered into between the underwriters and such stockholders;
. beginning on , 1999, the remaining shares will become eligible
for sale, subject to the provisions of Rule 144.
Beginning 180 days after the date of this prospectus, approximately
additional shares subject to vested options as of the date of completion of
this offering will be available for sale subject to compliance with Rule 701
and upon the expiration of agreements not to sell such shares entered into
between the underwriters and such stockholders. Any shares subject to lock up
agreements may be released at any time without notice by the underwriters.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate, who has beneficially
owned restricted shares for at least one year is entitled to sell, within any
three-month period commencing 90 days after the date of completion of this
offering, a number of shares that does not exceed the greater of 1% of the then
outstanding shares of common stock (approximately shares immediately after
this offering), or the average weekly trading volume in the common stock during
the four calendar weeks preceding such sale, subject to the filing of a Form
144 with respect to such sale and certain other limitations and restrictions.
In addition, a person who is not deemed to have been our affiliate 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, would be entitled to sell such
shares under Rule 144(k) without regard to the requirements described above.
Any of our employees, officers or directors of or consultant who purchased
his or her shares prior to the date of completion of this offering or who holds
vested options as of that date pursuant to a written compensatory plan or
contract is entitled to rely on the resale provisions of Rule 701, which
permits nonaffiliates to sell their Rule 701 shares without having to comply
with the public-information, holding- period, volume-limitation or notice
provisions of Rule 144 and permits affiliates to sell their Rule 701 shares
without having to comply with Rule 144's holding-period restrictions, in each
case commencing 90 days after the date of completion of this offering. However,
we and our officers, directors and stockholders have agreed not to sell or
otherwise dispose of any shares of our common stock for the 180-day period
after the date of this prospectus without the prior written consent of the
underwriters. See "Underwriting."
As soon as practicable after the date of completion of this offering, we
intend to file a registration statement on Form S-8 under the Securities Act to
register shares of common stock reserved for issuance under our 1998 stock
plan, thus permitting the resale of such shares by nonaffiliates in the public
market without restriction under the Securities Act. Such registration
statements will become effective immediately upon filing.
Prior to this offering, there has been no public market for our common
stock, and any sale of substantial amounts in the open market may adversely
affect the market price of our common stock offered hereby.
56
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 1999 we have agreed to sell to the underwriters named
below, for whom Credit Suisse First Boston Corporation, BancBoston Robertson
Stephens Inc., Hambrecht & Quist LLC and Salomon Smith Barney Inc. are acting
as representatives, the following respective numbers of shares of common stock:
<TABLE>
<CAPTION>
Number
Underwriter of Shares
----------- ---------
<S> <C>
Credit Suisse First Boston Corporation.............................
BancBoston Robertson Stephens Inc..................................
Hambrecht & Quist LLC..............................................
Salomon Smith Barney Inc...........................................
---
Total............................................................
===
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults, the
purchase commitments of nondefaulting underwriters may be increased or the
offering of common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to additional shares at the initial public offering price
less the underwriting discounts and commissions. The option may be exercised
only to cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The
underwriters and selling group members may allow a discount of $ per share
on sales to other broker/dealers. After the initial public offering, the public
offering price and concession and discount to broker/dealers may be changed by
the representatives.
The following table summarizes the compensation and estimated expenses we
will pay.
<TABLE>
<CAPTION>
Per Share Total
------------------- -------------------
Without With Without With
Over- Over- Over- Over-
allotment allotment allotment allotment
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Underwriting Discounts and
Commissions paid by us............... $ $ $ $
Expenses payable by us............... $ $ $ $
</TABLE>
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.
We and our executive officers, directors and certain other of our security
holders have agreed not to offer, sell, contract to sell, announce an intention
to sell, pledge or otherwise dispose of, directly or indirectly, or file with
the Securities and Exchange Commission a registration statement under the
Securities Act relating to, any shares of common stock or securities
convertible into or exchangeable or exercisable for any common stock without
the prior written consent of Credit Suisse First Boston Corporation for a
period of 180 days after the date of this prospectus.
57
<PAGE>
The underwriters have reserved for sale, at the initial public offering
price (1) up to shares of the common stock for employees, directors and
certain other persons associated with us who have expressed an interest in
purchasing common stock in this offering and (2) up to an additional shares
for the holders of our preferred stock in connection with a pre-existing
contractual right between us and those holders. The number of shares available
for sale to the general public in this offering will be reduced to the extent
these persons purchase the reserved shares. Any reserved shares not so
purchased will be offered by the underwriters to the general public on the same
terms as the other shares.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or contribute to payments which the underwriters may be
required to make in that respect.
We have applied to list the shares of common stock on The Nasdaq Stock
Market's National Market under the symbol "EEEE."
In August 1999, we issued an aggregate of 24,279,369 shares of our Series A
preferred stock (including 5,560,776 not outstanding as of the date of this
prospectus that are issuable to America Online upon regulatory approval) at a
per share price of $6.83 in a private placement. Credit Suisse First Boston
Corporation acted as the placement agent for this private placement, and it
received a customary fee for its services. In addition, Merchant Capital, Inc.,
an affiliate of Credit Suisse First Boston Corporation, purchased 156,641
shares of Series A preferred stock.
Prior to this offering, there has been no public market for our common
stock. The initial public offering price will be determined by negotiation
between us and the underwriters. The principal factors to be considered in
determining the public offering price include: the information in this
prospectus and otherwise available to the underwriters; the history and the
prospects for the industry in which we will compete; the ability of our
management; the prospects for our future earnings; the present state of our
development and our current financial condition; the general condition of the
securities markets at the time of this offering; and the recent market prices
of, and the demand for, publicly traded common stock of generally comparable
companies.
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions, and penalty bids in accordance with Regulation
M under the Exchange Act.
. Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.
. Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
. Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions.
. Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member are purchased in a syndicate covering transaction to
cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty
bids may cause the price of the common stock to be higher than it would
otherwise be in the absence of these transactions. These transactions may be
effected on The Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
58
<PAGE>
NOTICE TO CANADIAN RESIDENTS
Resale Restrictions
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common
stock in Canada must be made in accordance with applicable securities laws
which will vary depending on the relevant jurisdiction, and which may require
resales to be made in accordance with available statutory exemptions or
pursuant to a discretionary exemption granted by the applicable Canadian
securities regulatory authority. Purchasers are advised to seek legal advice
prior to any resale of the common stock.
Representations of Purchasers
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom the
purchase confirmation is received that (i) the purchaser is entitled under
applicable provincial securities laws to purchase the common stock without the
benefit of a prospectus qualified under the securities laws, (ii) where
required by law, that the purchaser is purchasing as principal and not as
agent, and (iii) the purchaser has reviewed the text above under "Resale
Restrictions."
Rights of Action (Ontario Purchasers)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
Enforcement of Legal Rights
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be
possible for Canadian purchasers to effect service of process within Canada
upon the issuer or these persons. All or a substantial portion of the assets of
the issuer and these persons may be located outside of Canada and, as a result,
it may not be possible to satisfy a judgment against the issuer or these
persons in Canada or to enforce a judgment obtained in Canadian courts against
the issuer or these persons outside of Canada.
Notice to British Columbia Residents
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that the purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser in this offering. This report must be
in the form attached to British Columbia Securities Commission Blanket Order
BOR #95/17, a copy of which may be obtained from us. Only one report must be
filed in respect of common stock acquired on the same date and under the same
prospectus exemption.
Taxation and Eligibility for Investment
Canadian purchasers of common stock should consult with their own legal and
tax advisors with respect to the tax consequences of an investment in the
common stock in their particular circumstances and with respect to the
eligibility of the common stock for investment by the purchaser under relevant
Canadian legislation.
59
<PAGE>
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California. Legal matters will be passed upon for the underwriters by Morrison
& Foerster LLP, Palo Alto, California.
EXPERTS
The financial statements included in this prospectus and the related
financial statement schedule included elsewhere in the registration statement
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their reports appearing herein and elsewhere in this registration statement,
and are included in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission, Washington, D.C.,
a registration statement on Form S-1 under the Securities Act with respect to
the shares of common stock offered hereby. This prospectus does not contain all
the information set forth in the registration statement and the exhibits and
schedules thereto. For further information with respect to us and our common
stock, reference is made to the registration statement and to the exhibits and
schedules filed therewith. Statements contained in this prospectus as to the
contents of any contract or other document referred to are not necessarily
complete, and in each instance reference is made to the copy of the contract or
other document filed as an exhibit to the registration statement, each
statement being qualified in all respects by this reference. A copy of the
registration statement may be inspected by anyone without charge at the Public
Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549. Copies of all or any portion of the
registration statement may be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of
prescribed fees. The Commission maintains a web site at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.
60
<PAGE>
eMachines, Inc.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report .............................................. F-2
Balance Sheets............................................................. F-3
Statements of Operations................................................... F-4
Statements of Stockholders' Equity (Deficiency)............................ F-5
Statements of Cash Flows................................................... F-6
Notes to Financial Statements.............................................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of eMachines, Inc.
We have audited the accompanying balance sheet of eMachines, Inc. (the
"Company") as of December 31, 1998 and the related statements of operations,
stockholders' equity (deficiency) and cash flows for the period September 18,
1998 (inception) to December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1998 and the
results of its operations and its cash flows for the period September 18, 1998
(inception) to December 31, 1998 in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
Los Angeles, California
August 23, 1999
F-2
<PAGE>
eMachines, Inc.
BALANCE SHEETS
December 31, 1998 and June 30, 1999 (unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
------------ -----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash................................................ $ 3,791 $ 10,911
Accounts receivable, less allowances ($239 and
$8,972 at December 31, 1998 and June 30, 1999,
respectively)...................................... 43,303 122,609
Inventories......................................... 12,270 22,225
Prepaid and other current assets.................... 127 2,626
------- --------
Total current assets.............................. 59,491 158,371
Property and equipment, Net (Note 3).................. 268 1,449
Other assets.......................................... 252 493
------- --------
$60,011 $160,313
======= ========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Trade payables-related party (Note 8)............... $57,785 $134,438
Accounts payable.................................... 327 4,235
Accrued rebates..................................... 1,838 18,372
Accrued expenses and other current liabilities...... 852 7,828
------- --------
Total current liabilities......................... 60,802 164,873
------- --------
Subordinated notes payable to stockholders (Note 4)... 560 560
------- --------
Commitments and contingencies (Note 7)................
Stockholders' deficiency (Notes 5 and 9):
Preferred stock, $.01 par value; 50,000,000 shares
authorized; no shares outstanding.................. -- --
Common stock, $.0000125 par value; 250,000,000
shares authorized; 77,600,000 shares outstanding at
December 31, 1998 and June 30, 1999................ 1 1
Additional paid-in capital.......................... 2,527 3,765
Unearned stock compensation......................... (577) (1,675)
Notes receivable from stockholders.................. (500) (500)
Accumulated deficit................................. (2,802) (6,711)
------- --------
Total stockholders' deficiency.................... (1,351) (5,120)
------- --------
$60,011 $160,313
======= ========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
eMachines, Inc.
STATEMENTS OF OPERATIONS
Period from September 18, 1998 (inception) to December 31, 1998,
and the six months ended June 30, 1999 (unaudited)
(dollars in thousands, except share information)
<TABLE>
<CAPTION>
Period from
September 18, Six
1998 Months
(inception) to Ended
December 31, June 30,
1998 1999
-------------- -----------
(unaudited)
<S> <C> <C>
Net revenues....................................... $ 58,283 $ 351,313
Cost of revenues................................... 58,088 338,790
---------- ----------
Gross profit..................................... 195 12,523
Operating expenses:
Sales and marketing.............................. 840 5,517
Customer service and technical support........... 269 2,522
General and administrative....................... 988 3,293
Stock-based compensation (Note 5)................ 11 140
---------- ----------
Total operating expenses....................... 2,108 11,472
---------- ----------
Income (loss) from operations...................... (1,913) 1,051
Financing charges and interest expense, net (Notes
4 and 8).......................................... (889) (4,960)
---------- ----------
Net loss........................................... $ (2,802) $ (3,909)
========== ==========
Basic and diluted net loss per common share........ $ (0.04) $ (0.05)
========== ==========
Shares used in computing basic and diluted net loss
per common share.................................. 77,600,000 77,600,000
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
eMachines, Inc.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
Period from September 18, 1998 (inception) to December 31, 1998,
and the six months ended June 30, 1999 (unaudited)
(dollars in thousands, except share information)
<TABLE>
<CAPTION>
Common Stock Additional Unearned
----------------- Paid-in Stock Notes Accumulated
Shares Amount Capital Compensation Receivable Deficit Total
---------- ------ ---------- ------------ ---------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, at September
17, 1998............... -- -- -- -- -- -- --
Capital Contributions
(Note 5).............. 77,600,000 $ 1 $1,939 -- $(500) -- $ 1,440
Compensatory stock
options............... -- -- 588 $ (588) -- -- --
Amortization of
unearned stock
compensation.......... -- -- -- 11 -- -- 11
Net loss............... -- -- -- $(2,802) (2,802)
---------- ---- ------ ------- ----- ------- -------
Balance, at December 31,
1998................... 77,600,000 1 2,527 (577) (500) (2,802) (1,351)
Compensatory stock
options*.............. -- -- 1,238 (1,238) -- -- --
Amortization of
unearned stock
compensation*......... -- -- -- 140 -- -- 140
Net loss*.............. -- -- -- -- -- (3,909) (3,909)
---------- ---- ------ ------- ----- ------- -------
Balance, at June 30,
1999*.................. 77,600,000 $ 1 $3,765 $(1,675) $(500) $(6,711) $(5,120)
========== ==== ====== ======= ===== ======= =======
</TABLE>
- ---------------------
* Unaudited
See accompanying notes to financial statements.
F-5
<PAGE>
eMachines, Inc.
STATEMENTS OF CASH FLOWS
Period from September 18, 1998 (inception) to December 31, 1998,
and the six months ended June 30, 1999 (unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Period from
September 18, Six
1998 Months
(inception) to Ended
December 31, June 30,
1998 1999
-------------- -----------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss.......................................... $ (2,802) $ (3,909)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Provision for bad debts, sales returns and sales
incentives..................................... 239 8,733
Depreciation.................................... 30 103
Stock-based compensation expense................ 11 140
Changes in operating assets and liabilities:
Accounts receivable........................... (43,542) (88,039)
Inventories................................... (12,270) (9,955)
Prepaid and other current assets.............. (127) (2,499)
Trade payables-related party.................. 57,785 76,653
Accounts payable.............................. 327 3,908
Accrued rebates............................... 1,838 16,534
Accrued expenses and other current
liabilities.................................. 852 6,976
-------- --------
Net cash provided by operating activities... 2,341 8,645
-------- --------
Cash flows from investing activities:
Acquisition of property and equipment............. (298) (1,284)
Other assets...................................... (252) (241)
-------- --------
Net cash used in investing activities....... (550) (1,525)
-------- --------
Cash flows from financing activities:
Issuance of common stock.......................... 1,440 --
Issuance of subordinated notes payable to
stockholders..................................... 560 --
-------- --------
Net cash provided by financing activities... 2,000 --
-------- --------
Net increase in cash................................ 3,791 7,120
Cash, beginning of period........................... -- 3,791
-------- --------
Cash, end of period................................. $ 3,791 $ 10,911
======== ========
Supplemental disclosure of cash flow information:
Issuance of common stock in exchange for notes
receivable....................................... $ 500 --
======== ========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
eMachines, Inc.
NOTES TO FINANCIAL STATEMENTS
Period from September 18, 1998 (inception) to December 31, 1998,
and the six months ended June 30, 1999 (unaudited)
(in thousands, except share information)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
eMachines, Inc. (the "Company"), a Delaware corporation, was incorporated in
September 1998 to market and distribute low-priced personal computers ("PCs").
The Company is 37.6% and 36.6% owned by TriGem Corporation ("TriGem") and Korea
Data Systems (America) Inc. ("KDS America"), respectively. The Company is
headquartered in Irvine, California.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited Interim Financial Information--The interim financial information
as of June 30, 1999 and for the six months ended June 30, 1999 is unaudited and
has been prepared on the same basis as the audited financial statements. In the
opinion of management, such unaudited information includes all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the interim information. Operating results for the six months
ended June 30, 1999 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1999.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of net revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Concentration of Credit Risk--Financial instruments that potentially subject
the Company to credit risk are principally bank deposits and accounts
receivable. Cash is deposited with high credit quality financial institutions.
Accounts receivable are derived from net revenues earned from retail customers
in the United States and are denominated in U.S. dollars. The Company performs
ongoing credit evaluations of its customers and maintains an allowance for
potential credit losses. The Company's sales are concentrated in the U.S.
retail channel and, as a result, the Company maintains individually significant
receivable balances with certain retailers. While the Company frequently
monitors and manages this risk, financial difficulties on the part of one or
more of the Company's retail customers may have a material adverse effect on
the Company. For the period from September 18, 1998 (inception) to December 31,
1998, Office Depot, Best Buy, Inc., and MicroCenter accounted for 31%, 24% and
15% of gross revenues, respectively. These customers accounted for
approximately 30%, 24% and 10% of total accounts receivable at December 31,
1998, respectively. For the sixth months ended June 30, 1999, Office Depot,
Circuit City, Best Buy, Inc., and MicroCenter accounted for 25%, 17%, 18% and
10%, of gross revenue, respectively. These customers accounted for
approximately 28%, 16%, 26% and 6% of total accounts receivable at June 30,
1999, respectively.
Financial Instruments--The Company's financial instruments include notes
receivable from stockholders and subordinated notes payable to stockholders. At
December 31, 1998, the fair values of these instruments cannot be determined
due to their related party nature.
Inventories--Inventories consist principally of personal computers and
monitors and are stated at the lower of cost, determined by the moving average
method, or market.
Property and Equipment--Property and equipment are stated at cost.
Depreciation is provided for using the straight-line method over the estimated
useful lives of the assets.
F-7
<PAGE>
eMachines, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Period from September 18, 1998 (inception) to December 31, 1998,
and the six months ended June 30, 1999 (unaudited)
(in thousands, except share information)
Revenue Recognition, Returns and Sales Incentives--Revenue on product sales
is recognized upon shipment. Revenue is recorded net of allowances for rebates
and other sales incentives. The allowances for sales returns, rebates and other
sales incentives are accrued concurrently with the recognition of revenue.
Products are sold to customers under a limited one-year warranty against
material defects, which period is covered by the terms provided to the Company
by the product's manufacturer, a related party (see Note 8).
Equity-Based Compensation--The Company accounts for stock-based employee
compensation arrangements in accordance with provisions of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and complies with the disclosure provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation." Under APB Opinion No. 25, compensation expense is based on the
difference, if any, on the date of grant, between the fair value of the
Company's stock and the exercise price. The Company accounts for stock options
issued to nonemployees in accordance with the provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation."
Income Taxes--The Company accounts for income taxes in accordance with SFAS
No. 109, "Accounting for Income Taxes," which requires recognition of deferred
income tax liabilities and assets for the expected future income tax
consequences of events that have been included in the financial statements or
income tax returns. Under this method, deferred income tax liabilities and
assets are determined based on the temporary difference between the financial
statement and income tax basis of assets and liabilities using presently
enacted tax rates in effect. Valuation allowances are established when
necessary to reduce deferred income tax assets to the amounts that are more
likely than not to be realized.
Net Loss Per Share--The Company computes net income (loss) per share in
accordance with SFAS No. 128, "Earnings Per Share" which requires dual
presentation of basic earnings per share ("EPS") and diluted EPS. Basic EPS is
computed using the weighted average number of common shares outstanding during
the period. Diluted EPS is computed using the weighted average number of common
shares and potentially dilutive shares outstanding during the period. Potential
common shares consist of shares issuable upon the exercise of stock options
(using the treasury stock method). Common share equivalents are excluded from
the computation in loss periods as their effect would be antidilutive.
At December 31, 1998 and June 30, 1999, the Company had 270,000 and 609,200
common stock purchase options outstanding which could potentially dilute basic
earnings per share in the future, but were excluded in the computation of
diluted net loss per share in the periods presented, as their effect would have
been antidilutive.
Effects of Recent Accounting Pronouncements--In June 1997, the Financial
Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive
Income," which requires an enterprise to report, by major components and as a
single total, the change in its net assets during the period from nonowner
sources, and SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information," which establishes annual and interim reporting standards
for an enterprise's business segments and related disclosures about its
products, services, geographic areas and major customers. The Company had no
comprehensive income items to report for the period from September 18, 1998
(inception) to December 31, 1998 and the six months ended June 30, 1999. The
Company currently operates one reportable segment under SFAS No. 131. Adoption
of these statements at our inception did not impact the Company's financial
position, results of operations or cash flows.
F-8
<PAGE>
eMachines, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Period from September 18, 1998 (inception) to December 31, 1998,
and the six months ended June 30, 1999 (unaudited)
(in thousands, except share information)
In June 1998, SFAS No 133 "Accounting for Derivative Instruments and Hedging
Activities" was released. The statement requires the recognition of all
derivatives as either assets or liabilities in the balance sheet and the
measurement of those instruments at fair value. The accounting for changes in
the fair value of a derivative depends on the planned use of the derivative and
the resulting designation. The Company is required to implement the statement
in the first quarter of fiscal 2001. The Company has not used derivative
instruments and believes the impact of adoption of this statement will not have
a significant effect on the financial statements.
3. PROPERTY AND EQUIPMENT
Property and equipment, net consists of:
<TABLE>
<CAPTION>
Useful December 31, June 30,
Lives 1998 1999
------- ------------ --------
<S> <C> <C> <C>
Furniture and office equipment.............. 5 years $ 27 $ 414
Computers and information systems........... 5 years 271 595
Machinery and equipment..................... 5 years 324
Leasehold improvements...................... 5 years 249
---- ------
298 1,582
Accumulated depreciation.................... (30) (133)
---- ------
Property and equipment, net................. $268 $1,449
==== ======
</TABLE>
4. SUBORDINATED NOTES PAYABLE TO STOCKHOLDERS
On December 18, 1998, the Company issued subordinated notes payable to
TriGem and KDS America, both stockholders of the Company (see Note 8), in the
amount of $270 and $290, respectively, bearing interest at 5.79%. Commencing
November 30, 1999, interest payments are due each May 31 and November 30.
Principal and any unpaid interest are due on June 7, 2004. The notes may be
prepaid at the Company's option without penalty.
5. STOCKHOLDERS' EQUITY
In June of 1999, the stockholders of the Company formally executed a stock
purchase agreement that defines the terms and conditions of the Company's
initial capitalization. The stock purchase agreement memorializes the binding
verbal agreements under which the stockholders of the Company had been
operating since inception. The Company issued 77,600,000 shares of common stock
for an aggregate purchase price of $1,940. Of the total, $500 is evidenced by
promissory notes, which bear interest at an annual rate of 5.79% and are due on
June 7, 2004. The notes are collateralized by a pledge of the Company's common
stock and are full recourse notes. All shares issued in connection with the
stock purchase agreement have been treated as issued and outstanding since
incorporation.
Stock Option Plans--The Company has a stock option plan (the "Plan") under
which employees, consultants and directors may be granted options to purchase
common stock up to an aggregate of 3,200,000 shares. Options are generally
granted at not less than the fair market value at grant date, vest over five
years, and expire ten years after the grant date. When the exercise price of
employee stock options issued under the
F-9
<PAGE>
eMachines, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Period from September 18, 1998 (inception) to December 31, 1998,
and the six months ended June 30, 1999 (unaudited)
(in thousands, except share information)
Plan equals the fair value of the underlying stock on the date of grant, no
compensation expense is recorded. Compensation expense is recognized for the
fair value of options granted to nonemployees and to the extent the fair value
of the underlying stock exceeds the exercise price of employee stock options.
The fair value of options granted to nonemployees during the period from
September 18, 1998 (inception) to December 31, 1998 was not significant. There
were no options granted to nonemployees during the six month period ended June
30, 1999. During the period from September 18, 1998 (inception) to December 31,
1998, and the six month period ended June 30, 1999, the Company issued employee
common stock options with exercise prices less than the fair value of its
underlying common stock. The fair value of the common stock, based upon
securities transactions entered into by the Company with certain unrelated
third parties, was $6.38 per share for the respective periods. Accordingly, the
Company recorded $588 and $1,238 as the intrinsic value of such options. Stock-
based compensation of $11 and $140 was amortized to expense during the period
from September 18, 1998 (inception) to December 31, 1998 and the six months
ended June 30, 1999, respectively. At December 31, 1998 and June 30, 1999 the
Company had $577 and $1,675, respectively, in deferred stock compensation
related to these options, which will be amortized to expense through 2004.
A summary of option transactions under the Plan follows:
<TABLE>
<CAPTION>
Weighted-
Average Range of
Number Exercise Exercise
of Shares Price Prices
--------- --------- -------------
<S> <C> <C> <C>
Granted during 1998........................ 270,000 $0.06 $0.03 - $0.13
-------
Outstanding, December 31, 1998............. 270,000 $0.06 $0.03 - $0.13
Granted.................................... 339,200 $2.75 $1.25 - $3.75
-------
Outstanding, June 30, 1999................. 609,200 $1.56 $0.03 - $3.75
=======
</TABLE>
As of June 30, 1999, there were 2,590,800 shares available for future grant.
Additional information regarding options outstanding as of June 30, 1999 is
as follows:
<TABLE>
<CAPTION>
Outstanding Options as of
June 30, 1999
--------------------------------
Weighted-
Weighted- Average
Average Remaining
Number Exercise Contractual
Range of Exercise Prices of Shares Price Life (years)
------------------------ --------- --------- ------------
<S> <C> <C> <C>
$0.03..................................... 176,000 $0.03 9.2
$0.13..................................... 121,600 0.13 9.4
$1.25..................................... 96,400 1.25 9.8
$3.75..................................... 215,200 3.75 9.9
-------
609,200 $1.56 9.6
=======
</TABLE>
There were no options exercisable at June 30, 1999.
F-10
<PAGE>
eMachines, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Period from September 18, 1998 (inception) to December 31, 1998,
and the six months ended June 30, 1999 (unaudited)
(in thousands, except share information)
Accounting for Stock-Based Compensation--As permitted under SFAS No. 123,
the Company has elected to follow APB Opinion No. 25 and related
Interpretations in accounting for stock-based awards to employees. Pro forma
information regarding net income and earnings per share is required by SFAS No.
123. This information is required to be determined as if the Company had
accounted for its stock-based awards to employees under the fair value method
of that statement. The fair value of each option grant was estimated on the
date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants during the period from September
18, 1998 (inception) through December 31, 1998 and the six months ended June
30, 1999: risk-free interest rates of 4.4 percent and 5.2 percent, expected
lives of five years for both periods, and volatility and dividend yield of zero
for both periods.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions, including the expected stock price volatility.
The weighted-average estimated fair value of employee stock options granted
during period from September 18, 1998 (inception) to December 31, 1998 and the
six months ended June 30, 1999 was $4.41 and $4.27 per share, respectively.
For purposes of pro forma disclosures, the estimated fair value of the
options is assumed to be amortized to expense over the options' vesting period.
Had the Company accounted for its stock-based awards to employees under the
fair value method prescribed by SFAS No. 123, the net loss reported during the
period from September 18, 1998 (inception) through December 31, 1998 and the
six months ended June 30, 1999 would have been increased by approximately $3
and $26, respectively, and there would have been no impact on reported earnings
per share.
6. INCOME TAXES
The Company's deferred income tax assets are comprised of the following:
<TABLE>
<CAPTION>
December 31,
1998
------------
<S> <C>
Reserves not recognized for income tax purposes.............. $ 169
Accrued expenses............................................. 844
Net operating loss carryforwards............................. 168
Valuation allowance.......................................... (1,181)
-------
Net deferred income tax assets............................... $ --
=======
</TABLE>
The Company established a 100% valuation allowance at December 31, 1998 and
June 30, 1999 due to the uncertainty of realizing future income tax benefits
from its net operating loss carryforwards and other deferred income tax assets.
F-11
<PAGE>
eMachines, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Period from September 18, 1998 (inception) to December 31, 1998,
and the six months ended June 30, 1999 (unaudited)
(in thousands, except share information)
The provision for income taxes differs from the amount computed by applying
the federal statutory income tax rate to income before taxes as follows:
<TABLE>
<CAPTION>
Period from
September 18, 1998
(inception) to
December 31, 1998
------------------
<S> <C>
Tax computed at federal statutory rate................. (35.0)
State taxes and other.................................. 0.8
Increase in valuation allowance........................ 34.2
-----
Total.................................................. -- %
=====
</TABLE>
At December 31, 1998, the Company had net operating loss carryforwards of
approximately $427 and $214 for federal and state income tax purposes,
respectively. These losses will expire in 2018 for federal income tax purposes
and 2003 for state income tax purposes.
7. COMMITMENTS AND CONTINGENCIES
Operating Leases--The Company leases its corporate office and warehouse
space under an operating lease expiring in 2004. The lease, which is guaranteed
by KDS America, a stockholder, is renewable at the Company's option for an
additional five-year term. Future minimum rental commitments under the lease
agreement as of December 31, 1998, excluding sublease rentals, are as follows:
<TABLE>
<S> <C>
1999............................................................... $ 891
2000............................................................... 1,099
2001............................................................... 1,149
2002............................................................... 1,187
2003............................................................... 1,170
2004............................................................... 194
------
$5,690
======
</TABLE>
Rental expenses under operating leases during the period from September 18,
1998 (inception) to December 31, 1998 and the six months ended June 30, 1999
amounted to approximately $6 and $285, respectively.
The Company subleases a portion of its warehouse space to TriGem America
Corporation, a related party (see Note 8). The total minimum rentals to be
received in the future under the sublease, which expires in 2004, amounted to
$1,738 as of June 30, 1999. Sublease rental income during the six-month period
ended June 30, 1999, amounted to approximately $93.
Legal Proceedings
In July 1999, Compaq Computer Corporation filed a complaint against the
Company, TriGem Computer Inc., TriGem America Corporation and Korea Data
Systems as defendants in the U.S. District Court for the Southern District of
Texas based on the defendant's alleged infringement of 13 patents held by
Compaq related
F-12
<PAGE>
eMachines, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Period from September 18, 1998 (inception) to December 31, 1998,
and the six months ended June 30, 1999 (unaudited)
(in thousands, except share information)
to improved system processing speed, enhanced video graphics, peripheral
compatibility and overall system architecture. The complaint seeks an
accounting, treble damages, a preliminary and permanent injunction from further
alleged infringement, attorneys' fees and other unspecified damages. The
Company and its legal counsel are currently in the process of assessing the
complaint. As a result, the Company is currently unable to estimate the total
expenses, possible loss or range of loss that may be ultimately connected with
these allegations.
In August 1999, Apple Computer, Inc. filed a complaint against the Company
as a defendant in the U.S. District Court for the Northern District of
California based on the Company's alleged unfair and unauthorized use of the
design and trade dress of the iMac computer. The complaint seeks a constructive
trust of profits from sales of the Company's eOne PC, treble damages, a
preliminary and permanent injunction from further distribution of the Company's
eOne PC, attorneys' fees and punitive damages. The Company and its legal
counsel are currently in the process of assessing the complaint. As a result,
the Company is currently unable to estimate the total expenses, possible loss
or range of loss that may be ultimately connected with these allegations.
Employment Agreement--In August 1999, the Company entered into an amended
and restated employment agreement with its President and Chief Executive
Officer, who is also a stockholder. Under the terms of the agreement the
Company is obligated for a three-year term, commencing September 18, 1998, to
pay the executive officer a minimum annual salary of $300 and an annual bonus.
From September 18, 1998 through June 30, 1999, the bonus was equal to $1 for
each CPU unit (dollars not in thousands) shipped. For all services rendered by
the executive from July 1, 1999 through November 30, 1999, the Company is
obligated to grant the executive an option to purchase 227,897 shares of the
Company's common stock at an exercise price of $1.61 per share, which is less
than the fair value of the underlying common stock. The fair value of the
common stock based upon securities transactions entered into by the Company
with certain unrelated third parties, was $6.38 per share at the time the
Company became obligated to grant the option. Accordingly, in August 1999 the
Company recorded $1,100 as the intrinsic value of the options, which will be
expensed in the third quarter of 1999. Approximately $126 and $700 of bonus
expense under the employment agreement is reflected in the accompanying
statements of operations for the period from September 18, 1998 (inception) to
December 31, 1998, and the six months ended June 30, 1999, respectively.
8. RELATED PARTIES
Related Party Balances and Transactions--Two of the Company's major
stockholders, TriGem and KDS America, are the wholly owned subsidiaries of
Korean companies; TriGem Computer Inc. ("TriGem Computer") and Korea Data
Systems Co. Ltd. ("KDS Ltd."), respectively. During the period from
September 18, 1998 (inception) through June 30, 1999, all of the Company's
eTower PCs were manufactured by TriGem Computer. In August 1999, the Company
introduced the eOne PC which is manufactured by KDS Ltd. All of the monitors
sold by the Company are either manufactured by KDS Ltd., or supplied by KDS
Ltd. through its relationship with Jean Company Ltd. ("Jean"), an unrelated
third party. During the period from September 18, 1998 (inception) to December
31, 1998, the Company purchased its PCs and monitors from TriGem America
Corporation ("TriGem America"), another wholly owned subsidiary of TriGem
Computer, and Korea Data Systems (USA), Inc. ("KDS USA"), respectively. Under
an agreement between the Company, TriGem America, KDS Ltd., Jean, and KDS USA,
$57,785 of the Company's accounts payable obligations as of December 31, 1998
to TriGem America, KDS Ltd., and Jean, collectively, were transferred to KDS
USA. KDS USA is wholly owned by a Board member of the Company.
F-13
<PAGE>
eMachines, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Period from September 18, 1998 (inception) to December 31, 1998,
and the six months ended June 30, 1999 (unaudited)
(in thousands, except share information)
During the six months ended June 30, 1999, the Company purchased its PCs and
monitors directly from KDS USA. The Company has no obligation to order, take
minimum delivery or purchase at pre-negotiated prices from TriGem Computer or
KDS Ltd., including their subsidiaries and affiliates.
Since its inception in September 1998, through the six months ended June 30,
1999, the Company operated under various arrangements with TriGem Computer,
TriGem America, KDS Ltd., and KDS USA. The following is a summary of these
arrangements:
Inventory Purchases and Extended Payment Terms--During the period from
September 18, 1998 (inception) to December 31, 1998 and the six months
ended June 30, 1999, the Company purchased $70,989 and $352,764,
respectively, of inventories from TriGem Corporation and KDS USA,
collectively, under extended payment terms which resulted in an effective
interest rate of 12% from September 18, 1998 (inception) through March 31,
1999 and 10% from April 1, 1999 through June 30, 1999. As of December 31,
1998 and June 30, 1999, payables of approximately $57,785 and $134,438,
respectively, were outstanding to KDS USA. Approximately $888 and $4,969 of
finance charges were incurred in connection with the inventory purchases.
PC Repair Service--The Company has an arrangement with TriGem America to
provide PC repair services for PCs returned to the Company by its
customers. Under the terms of the arrangement, the Company is assessed a
$15 per unit service charge (dollars not in thousands) for the testing and
repackaging of PC returns determined to be nondefective. For the period
from September 18, 1998 (inception) to December 31, 1998 and the six months
ended June 30, 1999, these charges, which are included in cost of revenues,
amounted to approximately $43 and $634, respectively. Approximately $43 and
$672 of accrued service charges from TriGem America are included in accrued
expenses and other current liabilities as of December 31, 1998 and June 30,
1999.
Trademark Assignment Agreement--Under an agreement entered into on June 10,
1999, and amended on August 16, 1999, KDS America transferred to the Company
the trademark "E-MACHINES" for 419,538 shares of the Company's common stock,
which the Company issued to KDS America on August 18, 1999. In connection with
the agreement the Company agreed to license KDS America use of the trademark in
the Republic of Korea.
9. SUBSEQUENT EVENTS
America Online Agreement--In June 1999, a Marketing Agreement with America
Online, Inc. ("AOL") was executed whereby the Company agreed to pre-install and
distribute America Online's AOL and CompuServe services or other AOL products
and services on the Company's PCs. The agreement also provides for an Internet
Service Provider ("ISP") rebate program. Under the terms of this agreement,
consumers who purchase the Company's PCs and enter into a three-year Internet
service contract with AOL's CompuServe service are eligible to receive an ISP
rebate directly from AOL of up to $400. The Marketing Agreement expires in June
2004 and contains an additional five-year renewal option.
Stock Split -- In July 1999, the Board of Directors authorized an eight-for-
one stock split that became effective on August 13, 1999 and an increase in the
authorized shares of its common stock to 200,000,000 shares. In conjunction
with the stock split, the par value of the common stock was reduced from
$.0001 to $.0000125. All references in the accompanying consolidated financial
statements to number of shares,
F-14
<PAGE>
eMachines, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Period from September 18, 1998 (inception) to December 31, 1998,
and the six months ended June 30, 1999 (unaudited)
(in thousands, except share information)
sales prices and per share amounts of the Company's common stock have been
retroactively restated to reflect the increased number of common shares
outstanding. In addition, stockholders' equity has been restated to give
retroactive recognition to the stock split by reclassifying from additional
paid-in capital to common stock the par value of the additional shares arising
from the split.
Preferred stock--In August 1999, the Board of Directors amended the
Company's certificate of incorporation to authorize the Company to issue two
classes of stock, to be designated, respectively, "Common Stock" and "Preferred
Stock." The total number of shares which the Company is authorized to issue is
three hundred million (300,000,000) shares. Two hundred fifty million
(250,000,000) shares ("Shares") shall be Common Stock, par value $0.0000125 per
share, and fifty million (50,000,000) shares shall be preferred stock, par
value $0.01 per share. Of the authorized shares of Preferred Stock, a total of
twenty-five million (25,000,000) shares shall be designated Series A Preferred
Stock ("Series A Preferred"). On August 18, 1999 the Company issued 24,279,369
shares of Series A Preferred Stock (including 5,560,776 shares issuable upon
regulatory approval) for proceeds of $146,660 (net of approximately $8,335 in
offering costs). The amended certificate of incorporation and bylaws authorize
the Board of Directors to designate preferred stock with special rights,
including voting and dividend rights, that could make it more difficult for a
third party to acquire the Company, including takeover attempts that might
result in a premium over the market price for shares of the Company's common
stock. The Company's charter documents also eliminate the right of stockholders
to call a special meeting of stockholders, require stockholders to comply with
advance notice requirements before raising a matter at a meeting of
stockholders and eliminate the ability of stockholders to take action by
written consent. The significant terms of the Series A Preferred Stock include:
Conversion--The Series A Preferred Stock is convertible, at the option
of the holder, at the conversion rate then in effect, at any time after
issuance of such share. Each share of Preferred Stock shall automatically
be converted into shares of Common Stock at the Conversion Price at the
time in effect for such share of Preferred Stock immediately upon the
earlier of (i) the closing an underwritten firm commitment public offering
of the Company's Common Stock yielding gross proceeds to the Company (prior
to expenses and underwriting commissions) in excess of $30,000 and at a
price per share greater than 133% of the Series A Preferred Stock original
issuance price per share (as adjusted for any stock dividends, combinations
or splits with respect to such shares), and (ii) the election to convert
all Preferred Stock into Common Stock by holders of at least a majority of
the then outstanding shares of Preferred Stock. The initial conversion rate
is one-to-one and is subject to adjustment based upon subdivisions or
combinations of Common Stock and certain dividends, distributions and
common stock equivalents.
Mandatory Redemption--The Company shall offer to redeem the unconverted
shares of Series A Preferred Stock outstanding on January 1, 2004, reduced
by the number of shares converted into Common Stock after January 1, 2004
through the date of redemption, as follows:
<TABLE>
<CAPTION>
Cumulative
Redemption Redemption
Percentage Date
---------- -----------
<S> <C>
33.3%.................. August 2004
66.7%.................. August 2005
100.0%.................. August 2006
</TABLE>
The redemption price is payable in cash and is equal to the sum of the
original issue price plus cumulative but unpaid dividends. If any portion
of the redemption amount is not paid by the Company on
F-15
<PAGE>
eMachines, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Period from September 18, 1998 (inception) to December 31, 1998,
and the six months ended June 30, 1999 (unaudited)
(in thousands, except share information)
the redemption date, dividends will continue to accrue on the shares
tendered for redemption and late fees will accrue at an annual rate of 15%
until the entire redemption amount is paid.
Liquidation Preference--In the event of the liquidation, dissolution or
winding up of the Company, the holders of Series A Preferred Stock will be
entitled to receive, in preference to the holders of Common Stock, the
amount of $6.38 per share, which presently is equal to the aggregate amount
of $154,995, plus declared and unpaid dividends, if any. After payment has
been made to the holders of the Series A Preferred Stock, any remaining
assets are distributable ratably to the holders of Common Stock.
Voting--Each holder of shares of Series A Preferred Stock is entitled to
the number of votes equal to the number of shares of Common Stock into
which each share is then convertible. Series A Preferred Stock holders also
have the following voting rights:
Board of Directors--Three of the company's current common
stockholders are entitled to elect a total of five of the Company's
seven board members. Holders of Series A Preferred Stock, voting
together as a class, are entitled to elect one member to the Company's
Board of Directors. All remaining members of the Board of Directors
shall be elected by the holders of the then-outstanding shares of
Common Stock and Series A Preferred Stock, voting together as a single
class.
Protective Provisions--As long as 4,000,000 shares of the Series A
Preferred Stock is outstanding, the Company is required to obtain the
written consent of at least 50% of the preferred shareholders before
taking certain corporate actions.
Dividends--The holders of Series A Preferred Stock are entitled to
receive noncumulative dividends only when and if declared by the Company's
Board of Directors, equal to $0.45 per share per year. Dividends shall be
paid to the holders of Series A Preferred Stock prior to any cash dividends
paid to the holders of Common Stock. The Company has not declared any
dividends to date with respect to the Series A Preferred Stock or Common
Stock.
AOL Warrants--In connection with the August 1999 Series A Preferred Stock
financing, AOL purchased 2,271,303 shares of the Company's Series A Preferred
Stock and committed to purchase an additional 5,560,776 shares upon receipt of
regulatory approval. On August 18, 1999, the Company granted AOL a warrant to
purchase common stock of an aggregate exercise price of $3,625. This warrant
expires five years after the date of grant. The number of shares that may be
purchased upon exercise of the warrant is equal to the aggregate exercise price
divided by the greater of 1.25 times the initial public offering price of the
Company's common stock and $7.98. If there is no successful completion of an
initial public offering, the number of shares issuable upon exercise of the
warrant is equal to the aggregate exercise price of the warrant divided by
$11.82. Upon receipt of regulatory approval, the Company is obligated to issue
AOL an additional warrant to purchase shares of common stock at an aggregate
exercise price of $8,875 under the same terms as the earlier warrant. The
maximum number of shares that AOL may receive upon exercise of their warrants
is 1,566,219.
F-16
<PAGE>
[LOGO]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by eMachines in connection with
the sale of Common Stock being registered. All amounts are estimates except the
SEC registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee............................................. $55,600
NASD filing fee.................................................. 20,500
Nasdaq National Market listing fee............................... *
Printing and engraving costs..................................... 300,000
Legal fees and expenses.......................................... *
Accounting fees and expenses..................................... *
Blue Sky fees and expenses....................................... 5,000
Transfer Agent and Registrar fees................................ 5,000
Miscellaneous expenses........................................... *
-------
Total.......................................................... $
=======
</TABLE>
- ---------------------
* To be filed by amendment.
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law permits a corporation to
include in its charter documents, and in agreements between the corporation and
its directors and officers, provisions expanding the scope of indemnification
beyond that specifically provided by the current law.
Article X of the Registrant's Amended and Restated Certificate of
Incorporation provides for the indemnification of directors to the fullest
extent permissible under Delaware law.
Article VI of the Registrant's Bylaws provides for the indemnification of
officers, directors and third parties acting on behalf of the Registrant if
such person acted in good faith and in a manner reasonably believed to be in
and not opposed to the best interest of the Registrant, and, with respect to
any criminal action or proceeding, the indemnified party had no reason to
believe his or her conduct was unlawful.
The Registrant has entered into indemnification agreements with its
directors and intends to enter into indemnification agreements with its
executive officers, in addition to indemnification provided for in the
Registrant's Bylaws.
Item 15. Recent Sales of Unregistered Securities
During the past three years, the Registrant has issued unregistered
securities as described below.
(a) On June 10, 1999, the Registrant sold an aggregate of 77,600,000 shares
of its common stock in exchange for cash and notes in an aggregate amount of
approximately $1.9 million pursuant to an initial capitalization agreement.
(b) As of June 30, 1999, an aggregate of 609,200 shares of common stock are
issuable upon exercise of options under the Registrant's 1998 stock option
plan.
(c) On August 18, 1999, the Registrant sold an aggregate of 24,279,369
shares of Series A preferred stock (including 5,560,776 shares issuable upon
regulatory approval) in exchange for cash in an aggregate amount of
approximately $155.0 million pursuant to a stock purchase agreement.
II-1
<PAGE>
(d) On August 18, 1999, the Registrant issued 419,538 shares of its common
stock to Korea Data Systems America in connection with the transfer of a
trademark to the Registrant.
(e) On August 18, 1999, the Registrant issued a warrant to purchase shares
of its common stock at an aggregate exercise price of $3.6 million. Upon
receipt of regulatory approval, the Registrant will issue an additional warrant
to purchase shares of its common stock at an aggregate exercise price of $8.9
million. The maximum number of shares issuable, subject to anti-dilution
adjustments, upon exercise of the warrants is 1,566,219.
(f) On August 18, 1999, the Registrant granted an option to purchase 227,897
shares of its common stock at an exercise price of $1.61 per share to Mr.
Stephen Dukker in connection with an employment agreement between Mr. Dukker
and the Registrant.
Except as indicated above, none of the foregoing transactions involved any
underwriters, underwriting discounts or commissions, or any public offering,
and the Registrant believes that each transaction was exempt from the
registration requirements of the Securities Act by virtue of Section 4(2)
thereof, Regulation D promulgated thereunder or Rule 701 pursuant to
compensatory benefit plans and contracts relating to compensation as provided
under such Rule 701. The recipients in such transaction represented their
intention to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof, and appropriate
legends were affixed to the share certificates and instruments issued in such
transactions. All recipients had adequate access, through their relationships
with the Registrant, to information about the Registrant.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number
-------
<C> <S>
1.1* Form of Underwriting Agreement
3.1 Amended and Restated Certificate of Incorporation of the Registrant
3.2* Form of Amended and Restated Certificate of Incorporation of the
Registrant to be filed upon the closing of the offering
3.3 Amended and Restated Bylaws
3.4* Amended and Restated Bylaws of the Registrant to be in effect after
the closing of the offering
4.1* Specimen Common Stock Certificate
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation
10.1 Form of Security Agreement entered into between the Registrant and
each of Chul Chung, Stephen A. Dukker, Lap Shun Hui, Dae Soo Koh, Jung
Koh, Hong Soon Lee and Hong Sun Lee dated as of June 10, 1999
10.2 Form of Promissory Note from each of Chul Chung, Stephen A. Dukker,
Lap Shun Hui, Dae Soo Koh, Jung Koh, Hong Soon Lee and Hong Sun Lee
dated as of June 10, 1999
10.3 Amended and Restated Rights and Restrictions Agreement dated as of
August 18, 1999
10.4 Subordinated Promissory Note dated as of June 7, 1999 for TriGem
Corporation
10.5 Subordinated Promissory Note dated as of June 7, 1999 for Korea Data
Systems America, Inc.
10.6 Form of Indemnification Agreement between the Registrant and each of
its directors and executive officers
10.7* 1998 Stock Plan and form of agreements thereunder
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number
-------
<C> <S>
10.8*+ Marketing Agreement between the Registrant and America Online dated as
of June 17, 1999
10.9 Amended and Restated Employment Agreement dated as of August 18, 1999
for Stephen Dukker
10.10 Trademark Assignment Agreement dated as of June 10, 1999
10.11 Agreement (Amending Trademark Assignment) dated as of August 16, 1999
10.12 Industrial Lease between the Registrant and the Irvine Company dated
as of November 30, 1998
10.13 Common Stock Purchase Warrant issued on August 18, 1999 to America
Online, Inc.
10.14 Option to Purchase Common Stock issued on August 18, 1999 to Stephen
Dukker
23.1 Consent of Deloitte & Touche, LLP, Independent Accountants
23.2* Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation
(see Exhibit 5.1)
24.1 Power of Attorney (see page II-4)
27.1* Financial Data Schedules
</TABLE>
- ---------------------
* To be filed by amendment.
+ We intend to seek confidential treatment pursuant to Rule 406 for portions of
the referenced exhibits.
(b) Financial Statement Schedules
<TABLE>
<CAPTION>
Schedule Page
-------- ----
<S> <C>
II - Valuation and Qualifying Accounts S-1
</TABLE>
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
Item 17. Undertakings
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by a
director, officer or controlling person in connection with the securities being
registered hereunder, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
. For purposes of determining any liability under the Securities Act, 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.
. For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of Prospectus shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Irvine,
State of California, on the 31st day of August, 1999.
eMachines, Inc.
/s/ Stephen A. Dukker
By: _________________________________
Stephen A. Dukker,
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Stephen A. Dukker and Steven H. Miller and each
of them, his attorneys-in-fact, each with the power of substitution, for him
and in his name, place and stead, in any and all capacities, to sign any and
all amendments (including post-effective amendments) to this Registration
Statement, and to sign any registration statement for the same offering covered
by this Registration Statement that is to be effective upon filing pursuant to
Rule 462(b) promulgated under the Securities Act of 1933, as amended, and all
post-effective amendments thereto, and to file the same, with all exhibits
thereto and all documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying
and confirming all that such attorneys-in-fact and agents or any of them, or
his or their substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Stephen A. Dukker President, Chief Executive August 31, 1999
______________________________________ Officer and Director
(Stephen A. Dukker) (Principal Executive
Officer)
/s/ Steven H. Miller Executive Vice President August 31, 1999
______________________________________ and Chief Financial
(Steven H. Miller) Officer (Principal
Financial Officer)
/s/ Chul Chung Director August 31, 1999
______________________________________
(Chul Chung)
/s/ Lap Shun Hui Director August 31, 1999
______________________________________
(Lap Shun Hui)
/s/ Jung Koh Director August 31, 1999
______________________________________
(Jung Koh)
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Hong Soon Lee Director August 31, 1999
______________________________________
(Hong Soon Lee)
/s/ Nathan Morton Director August 31, 1999
______________________________________
(Nathan Morton)
/s/ C. Toms Newby, III Director August 31, 1999
______________________________________
</TABLE> (C. Toms Newby, III)
II-5
<PAGE>
SCHEDULE II
eMachines, Inc.
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Balance Additions Balance
at charged to at end
beginning cost and of
Description of period expenses period
----------- --------- ---------- -------
<S> <C> <C> <C>
Allowance for doubtful accounts receivable and
sales returns:
Period from September 18 (inception), 1998 to
December 31, 1998............................... -- $ 239 $ 239
Six months ended June 30, 1999 (unaudited)....... 239 8,733 8,972
</TABLE>
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number
-------
<C> <S>
1.1* Form of Underwriting Agreement
3.1 Amended and Restated Certificate of Incorporation of the Registrant
3.2* Form of Amended and Restated Certificate of Incorporation of the
Registrant to be filed upon the closing of the offering
3.3 Amended and Restated Bylaws
3.4* Amended and Restated Bylaws of the Registrant to be in effect after
the closing of the offering
4.1* Specimen Common Stock Certificate
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation
10.1 Form of Security Agreement entered into between the Registrant and
each of Chul Chung, Stephen A. Dukker, Lap Shun Hui, Dae Soo Koh, Jung
Koh, Hong Soon Lee and Hong Sun Lee dated as of June 10, 1999
10.2 Form of Promissory Note from each of Chul Chung, Stephen A. Dukker,
Lap Shun Hui, Dae Soo Koh, Jung Koh, Hong Soon Lee and Hong Sun Lee
dated as of June 10, 1999
10.3 Amended and Restated Rights and Restrictions Agreement dated as of
August 18, 1999
10.4 Subordinated Promissory Note dated as of June 7, 1999 for TriGem
Corporation
10.5 Subordinated Promissory Note dated as of June 7, 1999 for Korea Data
Systems America, Inc.
10.6 Form of Indemnification Agreement between the Registrant and each of
its directors and executive officers
10.7* 1998 Stock Plan and form of agreements thereunder
10.8*+ Marketing Agreement between the Registrant and America Online dated as
of June 17, 1999
10.9 Amended and Restated Employment Agreement dated as of August 18, 1999
for Stephen Dukker
10.10 Trademark Assignment Agreement dated as of June 10, 1999
10.11 Agreement (Amending Trademark Assignment) dated as of August 16, 1999
10.12 Industrial Lease between the Registrant and the Irvine Company dated
as of November 30, 1998
10.13 Common Stock Purchase Warrant issued on August 18, 1999 to America
Online, Inc.
10.14 Option to Purchase Common Stock issued on August 18, 1999 to Stephen
Dukker
23.1 Consent of Deloitte & Touche, LLP, Independent Accountants
23.2* Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation
(see Exhibit 5.1)
24.1 Power of Attorney (see page II-4)
27.1* Financial Data Schedules
</TABLE>
- ---------------------
* To be filed by amendment.
+ We intend to seek confidential treatment pursuant to Rule 406 for portions of
the referenced exhibits.
<PAGE>
EXHIBIT 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF EMACHINES, INC.
a Delaware corporation
(Originally incorporated on September 18, 1998)
The undersigned, Stephen A. Dukker, does hereby certify that:
1. He is the duly elected and acting President and Chief Executive Officer
of eMachines, Inc., a Delaware corporation (the "Corporation").
2. The Certificate of Incorporation of the Corporation, originally filed
September 18,1998 under the name emachines, Inc. and amended on August 13, 1999
changing its name to eMachines, Inc., with the Secretary of State of the State
of Delaware, is hereby amended and restated to read in its entirety as follows:
ARTICLE I
The name of this Corporation is eMachines, Inc.
ARTICLE II
The address of the registered office of the Corporation in the State of
Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle.
The name of its registered agent at such address is the Corporation Trust
Corporation.
ARTICLE III
The nature of the business or purposes to be conducted or promoted is to
engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of Delaware.
ARTICLE IV
A. Classes of Stock. This Corporation is authorized to issue two classes
----------------
of stock, to be designated, respectively, "Common Stock" and "Preferred Stock."
The total number of shares which the corporation is authorized to issue is three
hundred million (300,000,000) shares. Two hundred fifty million (250,000,000)
shares ("Shares") shall be Common Stock, par value $0.0000125 per share, and
fifty million (50,000,000) shares shall be Preferred Stock, par value $0.01 per
share. Of the authorized shares of Preferred Stock, a total of twenty five
million (25,000,000) shares shall be designated Series A Preferred Stock
("Series A Preferred").
The Board of Directors is further authorized to decrease (but not below
the number of shares of any such series then outstanding) the number of shares
of any series, the number of which was fixed by it, subsequent to the issue of
shares of such series then outstanding, subject to the powers, preferences and
rights, and the qualifications, limitations and restrictions thereof stated in
the resolution of the Board of Directors originally fixing the number of shares
of such series. If the number of shares of any series is so decreased, then the
shares constituting such decrease shall resume the status which they had prior
to the adoption of the resolution originally fixing the number of shares of such
series.
-1-
<PAGE>
B. Rights, Preferences, Privileges and Restrictions of Preferred Stock.
------------------------------------------------------------------
The rights, preferences, privileges and restrictions granted to and imposed on
the Series A Preferred are as set forth below in this Article IV(B).
1. Dividend Provisions. The holders of shares of Series A Preferred
-------------------
shall be entitled to receive dividends, out of any assets legally available
therefor, prior and in preference to any declaration or payment of any dividend
(payable other than in Common Stock) on the Common Stock of this Corporation, at
the rate of $0.44688 per share per annum with respect to the shares of Series A
Preferred held by them (as adjusted for any stock dividends, combinations or
splits with respect thereto). Such dividends shall be payable as, if and when
declared by the Board of Directors, and shall not be cumulative, except as and
to the extent set forth in Section 4 of this Article IV. No dividend shall be
paid on Shares of Common Stock in any fiscal year unless the aforementioned
preferential dividends of the Series A Preferred shall have been paid in full
and the aggregate dividends paid on each share of Series A Preferred during such
fiscal year equals or exceeds the dividends per share (compared on an as-
converted basis) paid during such fiscal year on the Common Stock.
2. Liquidation Preference.
----------------------
a. In the event of any liquidation, dissolution or winding up
of this Corporation, either voluntary or involuntary, the holders of Series A
Preferred shall be entitled to receive, prior and in preference to any
distribution of any of the assets of this Corporation to the holders of Common
Stock by reason of their ownership thereof, the amount of $6.384 (the "Original
Series A Issue Price") for each share of Series A Preferred then held by them
(as adjusted for any stock dividends, combinations or splits with respect to
such shares), plus an amount equal to all declared but unpaid dividends on such
shares (the total of the Original Series A Issue Price and such dividends, the
"Series A Base Liquidation Amount"); provided, however, that if the amount
payable to the holders of Series A Preferred in the event of any liquidation,
dissolution or winding up of this Corporation after conversion of such Preferred
Stock into Common Stock as set forth herein and distribution of assets and funds
as set forth in subparagraph (b) of this Section 2 (and without making any
distribution under this subparagraph (a)) shall exceed the Series A Base
Liquidation Amount, then the holders of Series A Preferred shall be entitled to
receive that greater amount and no distribution under this subparagraph (a)
shall occur. If, upon the occurrence of any event of liquidation, dissolution or
winding up of this Corporation, the assets and funds of the Corporation legally
available for distribution shall be insufficient to permit the payment to the
holders of the then outstanding shares of Series A Preferred of the full Series
A Base Liquidation Amount, then the entire assets and funds of the Corporation
legally available for distribution shall be distributed ratably among the
holders of Series A Preferred in a manner such that the amount distributed to
each holder of Series A Preferred shall equal the amount obtained by multiplying
the entire assets and funds of the Corporation legally available for
distribution hereunder by a fraction, the numerator of which shall be the number
of shares of Series A Preferred then held by the holder and the denominator of
which shall be the total then outstanding number of shares of Series A
Preferred.
b. Upon the completion of the distribution required by
subparagraph (a) of this Section 2 (or if such distribution shall not occur as
provided in such subparagraph), the remaining (or, as applicable, all) assets
and funds of the Corporation available for distribution to stockholders shall be
distributed among the holders of Common Stock (including if the distribution
provided in subparagraph (a) shall not occur, the holders of Series A Preferred
after conversion into Common Stock as referred to in such subparagraph) pro rata
in proportion to the number of Shares of Common Stock held by each such holder.
-2-
<PAGE>
c. Definition of Liquidation Event; Notice.
(i) For purposes of this Section 2, a liquidation,
dissolution or winding up of this Corporation shall be deemed to be occasioned
by, and to include, (A) the acquisition of the Corporation by another entity by
means of any transaction or series of related transactions (including, without
limitation, any reorganization, merger or consolidation); or (B) a sale of all
or substantially all of the assets of the Corporation (including, for purposes
of this section, intellectual property rights which, in the aggregate,
constitute substantially all of the Corporation's material assets); unless in
each case, the Corporation's stockholders of record as constituted immediately
prior to such acquisition or sale will, immediately after such acquisition or
sale (by virtue of securities issued as consideration for the Corporation's
acquisition or sale or otherwise) hold at least fifty percent (50%) of the
voting power of the surviving or successor entity to the business of the
Corporation.
(ii) In any of such events, if the consideration received
by the Corporation is other than cash, its value will be deemed its fair market
value. Any securities shall be valued as follows:
(A) Securities not subject to investment letter or
other similar restrictions on free marketability shall be valued as follows: (1)
if traded on a securities exchange or through the Nasdaq National Market, the
value shall be deemed to be the average of the closing prices of the securities
on such exchange over the thirty day period ending three days prior to the
closing; (2) if actively traded over-the-counter, the value shall be deemed to
be the average of the closing bid or sale prices (whichever is applicable) over
the thirty day period ending three days prior to the closing; and (3) if there
is no active public market, the value shall be the fair market value thereof, as
determined in good faith by the Board of Directors of the Corporation.
(B) Securities subject to investment letter or other
restrictions on free marketability (other than restrictions arising solely by
virtue of a stockholder's status as an affiliate or former affiliate) shall be
valued in such a manner as to make an appropriate discount from the market value
determined as above in (A) (1), (2) or (3) to reflect the approximate fair
market value thereof, as determined in good faith after reasonable inquiry by
the Board of Directors of the Corporation.
(iii) In the event the requirements of this subsection 2(c)
are not complied with, this Corporation shall forthwith either:
(A) cause such closing to be postponed until such
time as the requirements of this Section 2 have been complied with; or
(B) cancel such transaction, in which event the
rights, preferences and privileges of the holders of Preferred Stock shall
revert to and be the same as such rights, preferences and privileges existing
immediately prior to the date of the first notice referred to in subsection
2(c)(iv) hereof.
(iv) The Corporation shall give each holder of record of
Preferred Stock written notice of any such impending transaction not later than
ten (10) days prior to the stockholder meeting called to approve such
transaction, or twenty (20) days prior to the closing of such transaction
whichever notice date is earlier, and shall also notify such holders in writing
of the final approval of such transaction. The first of such notices shall
describe the material terms and conditions of the impending transaction, the
provisions of this Section 2, and the amounts anticipated to be distributed to
holders of each outstanding series and class of capital stock of the Corporation
pursuant to this Section 2, and the Corporation shall
-3-
<PAGE>
thereafter give such holders prompt notice of any material changes. The
transaction shall in no event take place sooner than twenty (20) days after the
Corporation has given the first notice provided for herein or sooner than ten
(10) days after the Corporation has given notice of any material changes
provided for herein; provided, however, that such periods may be shortened upon
the written consent of the holders of Preferred Stock that are entitled to such
notice rights or similar notice rights and that represent at least a majority of
the voting power of all then outstanding shares of such Preferred Stock (on an
as-converted basis).
3. Conversion. The holders of Preferred Stock shall have conversion
----------
rights as follows (the "Conversion Rights"):
a. Right to Convert. Each share of Series A Preferred shall be
----------------
convertible, at the option of the holder thereof, at any time after the date of
issuance of such share at the office of this Corporation or any transfer agent
for such stock, into such number of fully paid and nonassessable Shares of
Common Stock as is determined by dividing the Original Series A Issue Price by
the Series A Conversion Price, determined as hereinafter provided, in effect on
the date the certificate is surrendered for conversion. The initial Conversion
Price per share for shares of Series A Preferred shall be the Original Series A
Issue Price; provided, however, that such Conversion Price shall be subject to
adjustment as set forth in subsection 3(d) hereof.
b. Automatic Conversion. Each share of Preferred Stock shall
--------------------
automatically be converted into Shares of Common Stock at the Conversion Price
at the time in effect for such share of Preferred Stock immediately upon the
earlier of (i) except as provided below in subsection 3(c), the closing of the
Corporation's sale of its Common Stock in an underwritten public offering on
form S-1 (or successor form) under the Securities Act of 1933, as amended (the
"Act"), yielding gross proceeds to the Corporation (prior to expenses and
underwriting commissions) in excess of thirty million dollars ($30,000,000) and
at an offering price per share greater than 133% of the per share Original
Series A Issue Price (as adjusted for any stock dividends, combinations or
splits with respect to such shares) (a "Qualified Public Offering"), and (ii)
the date specified upon the election to convert all Preferred Stock into Common
Stock by holders of at least a majority of the then outstanding shares of
Preferred Stock, voting together as a single class on an as-converted basis at a
duly held meeting or by written consent or other agreement.
c. Mechanics of Conversion. Before any holder of Preferred Stock
-----------------------
shall be entitled to convert the same into Shares of Common Stock, such holder
shall surrender the certificate or certificates therefor, duly endorsed, at the
office of this Corporation or of any transfer agent for the Preferred Stock, and
shall give written notice to this Corporation at its principal corporate office,
of the election to convert the same and shall state therein the name or names in
which the certificate or certificates for Shares of Common Stock are to be
issued. This Corporation shall, as soon as practicable thereafter, issue and
deliver at such office to such holder of Preferred Stock, or to the nominee or
nominees of such holder, a certificate or certificates for the number of Shares
of Common Stock to which such holder shall be entitled as aforesaid. Such
conversion shall be deemed to have been made immediately prior to the close of
business on the date of such surrender of the shares of Preferred Stock to be
converted, and the person or persons entitled to receive the Shares of Common
Stock issuable upon such conversion shall be treated for all purposes as the
record holder or holders of such Shares of Common Stock as of such date. If the
conversion is in connection with a Qualified Public Offering or other
underwritten offering of securities registered pursuant to the Act, the
conversion, unless otherwise designated by the holder, will be conditioned upon
the closing with the underwriters of the sale of securities pursuant to such
offering, in which event the person(s) entitled to receive Common Stock upon
conversion of the Preferred Stock shall not be deemed to have converted such
Preferred Stock until immediately prior to the closing of such sale of
securities.
-4-
<PAGE>
d. Conversion Price Adjustments of Preferred Stock for Certain
-----------------------------------------------------------
Splits and Combinations and Certain Diluting Issues.
- ---------------------------------------------------
(i) Special Definitions. For purposes of this Section 3(d),
------------------
the following definitions apply:
(A) "Convertible Securities" shall mean any evidences
of indebtedness, shares or other securities convertible into or exchangeable for
Common Stock.
(B) "Options" shall mean rights, options, or warrants
to subscribe for purchase or otherwise acquire Common Stock, Series A Preferred
or Convertible Securities.
(C) "Original Issue Date" shall mean the date on which
a share of Series A Preferred was first issued.
(D) "Additional Shares of Common" shall mean all
Shares of Common Stock issued or deemed to be issued by the corporation after
the Original Issue Date, other than Shares of Common Stock issued or issuable:
i) upon conversion of shares of Series A
Preferred;
ii) to officers, directors, or employees of, or
consultants to, the corporation on terms approved by the Board of Directors;
iii) to vendors, customers, lenders, suppliers,
or equipment lessors upon terms approved by the Board of Directors (or, if any
such entity is an affiliate of the Corporation, upon terms approved by a
majority of the disinterested members of the Board) and for property other than
cash; provided that, if any such vendor, customer, lender, supplier or equipment
lessor is Korea Data Systems Co., Ltd. or Trigem Computer, Inc., or any person
or entity in control thereof , under common control therewith or controlled
thereby, such Shares of Common Stock issued or issuable shall have been approved
by the director nominated by the Series A Preferred;
iv) as a dividend or distribution on Series A
Preferred;
v) subject to Section 3(d)(iv), upon exercise
or conversion of options or warrants, respectively;
vi) in a Qualified Public Offering;
vii) for which adjustment of the Series A
Conversion Price is made pursuant to Section 3(d)(ii) or (iii); or
viii) in connection with a joint venture agreement
or acquisition agreement upon the terms approved by the Board of Directors;
provided that, if any joint venture involves Korea Data Systems Co., Ltd. or
Trigem Computer, Inc., or any person or entity in control thereof , under common
control therewith or controlled thereby, such Shares of Common Stock issued or
issuable shall have been approved by the director nominated by the Series A
Preferred.
(ii) Stock Splits and Dividends. In the event that the
--------------------------
Corporation should at any time or from time to time after the effective date of
this Amended and Restated Certificate of
-5-
<PAGE>
Incorporation fix a record date for the effectuation of a split or subdivision
of the outstanding Shares of Common Stock or for the determination of the
outstanding Shares of Common Stock entitled to receive a dividend or other
distribution payable in additional Shares of Common Stock without payment of any
consideration by such holder for the additional Shares of Common Stock, then, as
of such record date (or the date of such dividend, distribution, split or
subdivision if no record date is fixed), the Conversion Price of the Series A
Preferred shall be appropriately decreased so that the number of Shares of
Common Stock issuable on conversion of each share of such series shall be
increased in proportion to such increase of the aggregate of Shares of Common
Stock outstanding.
(iii) Reverse Stock Splits and Combinations. If the number of
-------------------------------------
Shares of Common Stock outstanding at any time after the Original Issue Date is
decreased by a combination of the outstanding Shares of Common Stock or reverse
stock split, then, following the record date of such combination or reverse
stock split, the Conversion Price of the Series A Preferred shall be
appropriately increased so that the number of Shares of Common Stock issuable on
conversion of each share of such series shall be decreased in proportion to such
decrease in outstanding shares.
(iv) Deemed Issuance of Options and Convertible Securities. If
-----------------------------------------------------
this corporation at any time or from time to time after the Original Issue Date
issues any Options or Convertible Securities or fixes a record date for the
determination of holders of any class of securities entitled to receive any
Options or Convertible Securities, then the maximum number of shares (as set
forth in the instrument relating thereto without regard to any provisions
contained therein for a subsequent adjustment of such number and not counting
any shares subject to a material contingency) of Common Stock issuable upon the
exercise of such Options or, in the case of Convertible Securities and Options
therefor, the conversion or exchange of such Convertible Securities, shall be
deemed to be Additional Shares of Common Stock issued as of the time of such
issue or, in case a record date has been fixed, as of the close of business on
such record date.
(v) No Adjustment of Conversion Price. Any provision herein to
---------------------------------
the contrary notwithstanding, no adjustment to the Series A Conversion Price
shall be made in respect of the issuance of Additional Shares of Common unless
the consideration per share (determined pursuant to Section 3(d)(vii) hereof)
for an Additional Share of Common issued by the corporation is less than the
Series A Conversion Price in effect on the date of, and immediately prior to,
such issue.
(vi) Adjustment of Series A Conversion Price Upon Issuance of
--------------------------------------------------------
Additional Shares of Common Stock. In the event this corporation issues or is
- ---------------------------------
deemed to have issued Additional Shares of Common without consideration or for a
consideration per share less than the Series A Conversion Price, as last
adjusted and then in effect on the date of and immediately prior to such issue,
then and in such event, the then applicable Series A Conversion Price shall be
reduced, concurrently with such issue, to a price (calculated to the nearest
cent) determined by multiplying such Series A Conversion Price by a fraction,
the numerator of which shall be (x) the number of Shares of Common Stock
outstanding immediately prior to such issue or deemed issue plus the number of
Shares of Common Stock which the aggregate consideration received by the
corporation for the total number of Additional Shares of Common so issued would
purchase at such Series A Conversion Price in effect immediately prior to such
issuance, and the denominator of which shall be (y) the number of Shares of
Common Stock outstanding immediately prior to such issue or deemed issue plus
the number of such Additional Shares of Common so issued. For the purpose of
the above calculation, the number of Shares of Common outstanding immediately
prior to such issue shall be calculated on a fully diluted basis, as if all
shares of Series A Preferred and all Convertible Securities had been fully
converted into Shares of Common Stock immediately prior to such issuance and any
outstanding warrants, options or other rights for the purchase of shares of
stock or convertible securities had been fully exercised immediately prior to
such issuance (and the resulting securities fully converted into Shares of
-6-
<PAGE>
Common, if so convertible) as of such date, but not including in such
calculation any additional Shares of Common issuable with respect to shares of
Series A Preferred, Convertible Securities, or outstanding options, warrants, or
other rights for the purchase of shares of stock or convertible securities,
solely as a result of the adjustment of the Series A Conversion Price (or other
conversion ratios) resulting from the issuance of the Additional Shares of
Common causing the adjustment in question.
(vii) Determination of Consideration. For purposes of the
------------------------------
operation of Section 2(d), the consideration received (or deemed to have been
received in the case of Options and Convertible Securities) by the corporation
for the issue of any Additional Shares of Common Stock shall:
(A) to the extent it consists of cash, be computed as the
aggregate amount of cash paid before deducting any reasonable brokerage or
underwriting commissions or other expense paid or incurred by the corporation
for the issuance and sale of the securities;
(B) to the extent it consists of property other than
cash, be computed at the fair value thereof at the time of such issue or deemed
issuance, as determined in good faith following reasonable inquiry by the Board
of Directors;
(C) if Additional Shares of Common are issued together
with other shares or securities or other assets of the corporation for
consideration which covers both, be the proportion of such consideration so
received, computed as provided in clauses (1) and (2) above, as determined in
good faith following reasonable inquiry by the Board of Directors; and
(D) for Options and Convertible Securities, be the sum of
the values of (x) the cash and property to be paid to this corporation for the
issue of such Options and Convertible Securities, if any, and (y) the cash and
property payable to this corporation upon the exercise in full of such Option or
the full conversion of such Convertible Securities, if any.
(viii) Calculation of Per Share Amount. The number of Additional
-------------------------------
Shares of Common deemed to be issued upon the issuance or deemed issuance of a
Convertible Security shall be the number of Shares of Common Stock issuable upon
the exercise in full of such Option or the conversion in full of such
Convertible Security as set forth in the instrument relating thereto without
regard to any provisions contained therein for a subsequent increase in the
number of shares issuable or decrease in the amount of consideration payable
upon the exercise, conversion, or exchange thereof.
(ix) Recomputation of Adjustment as a Result of Changes in
-----------------------------------------------------
Options or Convertible Securities. If an Option or Convertible Security by its
- ---------------------------------
terms provides, with the passage of time or otherwise, for any change in the
consideration payable to this corporation or in the number of Shares of Common
issuable upon the exercise, conversion, or exchange thereof, the Series A
Conversion Price computed upon the original issuance or deemed issuance thereof,
and any subsequent adjustments based thereon, shall each be recomputed, upon any
such change becoming effective, to reflect such change insofar as it affects
such Options or the rights of conversion or exchange under such Convertible
Securities (provided however that no such adjustment of the Series A Conversion
Price shall affect Common Stock previously issued upon conversion of the Series
A Preferred).
(x) Recomputation of Adjustment as a Result of Expiration of
--------------------------------------------------------
Options or Conversion. Upon expiration of any Options or any rights of
- ---------------------
conversion or exchange under Convertible Securities that have not been exercised
or converted, the Series A Conversion Price computed upon the original issuance
or deemed issuance thereof, and any subsequent adjustments based thereon, shall
each be recomputed, upon such expiration, as if (a) in the case of Convertible
Securities or Options for Common
-7-
<PAGE>
Stock, the only Additional Shares of Common issued were Shares of Common Stock,
if any, actually issued upon the exercise of such Options or the conversion or
exchange of such Convertible Securities and the consideration received therefor
was the consideration actually received by this corporation for the issuance of
all such Options, whether or not exercised, plus the consideration actually
received by this corporation upon such exercise, or for the issuance of all such
Convertible Securities that were actually received by this corporation upon such
exercise, or for the issuance of all such Convertible Securities that were
actually converted or exchanged, plus the additional consideration, if any,
actually received by this corporation upon such conversion or exchange, and (b)
in the case of Options for Convertible Securities, only the Convertible
Securities, if any, actually issued upon the exercise thereof were issued at the
time of issuance or deemed issuance of such Options, and the consideration
received by this corporation for the Additional Shares of Common Stock deemed to
have been then issued was the consideration actually received by this
corporation for the issuance of all such Options, whether or not exercised, plus
the consideration deemed to have been received by this corporation upon the
issuance of the Convertible Securities with respect to which such Options were
actually exercised.
(xi) Limitation on Readjustments.
---------------------------
(A) Readjustment of Conversion Price. No readjustment
--------------------------------
pursuant to Section 3(d) hereof shall have the effect of increasing the Series A
Conversion Price to an amount that exceeds the lower of (a) the applicable
Conversion Price immediately before the issuance or deemed issuance of such
Options or Convertible Securities or (b) the applicable Conversion Price that
would have resulted from any issuance of Additional Shares of Common between the
date immediately before the issuance or deemed issuance of such Options or
Convertible Securities and such readjustment date.
(B) No Adjustment Upon Issuance of Shares Deemed
--------------------------------------------
Outstanding. No adjustment in the Series A Conversion Price shall be made upon
- -----------
the actual issuance of Additional Shares of Common if such Shares are already
deemed issued at the time of issuance.
e. Other Distributions. In the event that this Corporation
-------------------
shall declare a distribution payable in securities of other persons, evidences
of indebtedness issued by this Corporation or other persons, assets (excluding
cash dividends) or options or rights not referred to in subsection 3(d), then,
in each such case for the purpose of this subsection 3(e), the holders of
Preferred Stock shall be entitled to a proportionate share of any such
distribution as though they were the holders of the number of Shares of Common
Stock of the Corporation into which their shares of Preferred Stock are
convertible as of the record date fixed for the determination of the holders of
Common Stock of the Corporation entitled to receive such distribution.
f. Recapitalizations. If at any time or from time to time there
-----------------
shall be a recapitalization of the Common Stock (other than a subdivision,
combination or merger or sale of assets transaction provided for elsewhere in
this Section 3 or Section 2), provision shall be made so that each holder of
Preferred Stock shall thereafter be entitled to receive, upon conversion of the
shares of Preferred Stock held by such holder, the number of shares of stock or
other securities or property, of the Corporation or otherwise, to which a holder
of the number of Shares of Common Stock into which the shares of Preferred Stock
held by such holder are convertible immediately prior to such recapitalization
would have been entitled upon such recapitalization. In any such case,
appropriate adjustment shall be made in the application of the provisions of
this Section 3 with respect to the rights of the holders of Preferred Stock
after the recapitalization to the extent that the provisions of this Section 3
(including adjustment of the Conversion Price then in effect and the number of
shares purchasable upon conversion of Preferred Stock) shall be applicable after
that event as nearly equivalently as may be practicable.
-8-
<PAGE>
g. No Impairment. This Corporation will not, by amendment of its
-------------
Certificate of Incorporation or through any reorganization, recapitalization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed hereunder by this
corporation, but will at all times in good faith assist in the carrying out of
all the provisions of this Section 3 and in the taking of all such action as may
be necessary or appropriate in order to protect the Conversion Rights of the
holders of the Preferred Stock against impairment.
h. No Fractional Shares and Certificate as to Adjustment.
-----------------------------------------------------
(i) No fractional shares shall be issued upon the conversion of
any share or shares of Preferred Stock, and the number of Shares of Common Stock
to be issued shall be rounded to the nearest whole share. Whether or not
fractional shares are issuable upon such conversion shall be determined on the
basis of the total number of shares of Preferred Stock the holder is at the time
converting into Common Stock and the number of Shares of Common Stock issuable
upon such aggregate conversion.
(ii) Upon the occurrence of each adjustment or readjustment of
the Conversion Price of a series of Preferred Stock pursuant to this Section 3,
this Corporation, at its expense, shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and prepare and furnish to each
holder of such series of Preferred Stock a certificate setting forth such
adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. This Corporation shall, upon the reasonable
written request at any time of any holder of Preferred Stock, furnish or cause
to be furnished to such holder a like certificate setting forth (A) such
adjustment and readjustment, (B) the Conversion Price for each series of
Preferred Stock at the time in effect, and (C) the number of Shares of Common
Stock and the amount, if any, of other property which at the time would be
received upon the conversion of a share of each series of Preferred Stock.
i. Notices of Record Date. In the event of any taking by this
----------------------
Corporation of a record date for determining the holders of any class of
securities who are entitled to receive (A) any dividend (other than a cash
dividend) or other distribution, (B) any right to subscribe for, purchase or
otherwise acquire any shares of stock of any class or any other securities or
property, or (C) any other right, this Corporation shall mail to each holder of
Preferred Stock, at least ten (10) days prior to the record date specified
therein, a notice specifying the record date to be taken for the purpose of such
dividend, distribution or right, and the amount and character of such dividend,
distribution or right.
j. Reservation of Stock Issuable Upon Conversion. This Corporation
---------------------------------------------
shall at all times reserve and keep available out of its authorized but unissued
Shares of Common Stock, solely for the purpose of effecting the conversion of
the then outstanding shares of Preferred Stock, such number of its Shares of
Common Stock as shall from time to time be sufficient to effect the conversion
of all outstanding shares of Preferred Stock; and if at any time the number of
authorized but unissued Shares of Common Stock shall not be sufficient to effect
the conversion of all then outstanding shares of Preferred Stock, then in
addition to such other remedies as shall be available to the holder of such
Preferred Stock, this Corporation will take such corporate action as may, in the
opinion of its counsel, be necessary to increase its authorized but unissued
Shares of common stock to such number of shares as shall be sufficient for such
purposes, including, without limitation, engaging in best efforts to obtain the
requisite Board of Directors and stockholder approval of any necessary amendment
to this Certificate of Incorporation.
k. Notices. Any notice required by the provisions of this Section 3
-------
to be given to the holders of shares of Preferred Stock shall be deemed given if
deposited in the United States mail,
-9-
<PAGE>
postage prepaid, and addressed to each holder of record at his address appearing
on the books of this Corporation.
4. Redemption.
----------
a. The Corporation shall offer to redeem 33.3% of the unconverted
shares of Series A Preferred outstanding on January 1, 2004 (such offer to be
reduced by the number of shares of Series A Preferred converted into Common
after January 1, 2004 and before the First Redemption Date, as hereafter
defined) on the fifth anniversary of the Original Issue Date (the "First
Redemption Date") by paying the holders thereof from funds legally available
therefor no later than the First Redemption Date a price (the "Redemption
Price") per share equal to the sum of (i) the Original Series A Issue Price, and
(ii) all declared but unpaid dividends on such share. The Corporation shall
offer to redeem a cumulative 66.7% of the unconverted shares of Series A
Preferred outstanding on January 1, 2004 (such offer to be reduced by the number
of shares of Series A Preferred converted into Common after January 1, 2004 and
before the Second Redemption Date) on the sixth anniversary of the Original
Issue Date (the "Second Redemption Date") by paying the holders thereof from
funds legally available therefor no later than the Second Redemption Date the
per share Redemption Price. The Corporation shall offer to redeem a cumulative
100% of the unconverted shares of Series A Preferred outstanding on January 1,
2004 (such offer to be reduced by the number of shares of Series A Preferred
converted into Common after January 1, 2004 and before the Third Redemption
Date) on the seventh anniversary of the Original Issue Date (the "Third
Redemption Date", and each of the First Redemption Date, Second Redemption Date
and Third Redemption Date, a "Redemption Date") by paying the holders thereof
from funds legally available therefor no later than the Third Redemption Date
the per share Redemption Price. The entire Redemption Price shall in each case
be paid in cash. If any portion of the Redemption Price shall not be paid by the
Corporation on any Redemption Date with respect to shares of Series A Preferred
tendered for redemption on such date, dividends shall thereafter accrue and
accumulate on such shares of Series A Preferred (thus increasing the Redemption
Price thereof), and late fees shall accrue on such increasing Redemption Price
at the rate of 15% per annum until the increased Redemption Price plus all such
late fees are paid in full (which amount shall be paid as liquidated damages and
not as a penalty).
b. A majority in interest of the shares of the Series A Preferred
then outstanding, voting together as a class, at a meeting called for such
purpose or by written consent as permitted by law and this Amended and Restated
Certificate of Incorporation and the By-laws of the Corporation, shall have the
right and option to waive any of the aforesaid requirements that the Corporation
redeem all or a portion of the Series A Preferred on any Redemption Date at the
applicable Redemption Price calculated as set forth above.
c. At least 35 but no more than 45 days prior to each Redemption
Date, written notice shall be mailed, first class postage prepaid, to each
holder of record (at the close of business on the Business Day next preceding
the day on which notice is given) of the Series A Preferred at the address last
shown on the records of the Corporation for such holder, notifying such holder
of the Corporation's offer to redeem as aforesaid, specifying the number of
shares offered to be redeemed from such holder, the Redemption Date, the
Redemption Price, the place at which payment may be obtained and calling upon
such holder to surrender to the Corporation, in the manner and at the place
designated, his certificate or certificates representing the shares to be
redeemed (the "Redemption Notice"). Each holder of Series A Preferred shall
notify the Corporation within ten days of the date of the Redemption Notice
(effecting the "Exercise Notice") of whether it shall exercise its option to
redeem on the Redemption Date set forth in the Redemption Notice. No later than
20 days prior to each Redemption Date, the Corporation shall mail, first class
postage prepaid, to each holder of record to which the Redemption Notice shall
have been addressed at the address to which such Notice was sent, notifying such
holder of the number of holders of Series A Preferred who shall then have sent
Exercise Notices to the Corporation. Any holder of Series A Preferred that shall
desire to exercise
-10-
<PAGE>
its option to redeem as aforesaid but shall not have sent an Exercise Notice may
notify the Corporation no later than 10 days prior to the Redemption Date of its
intention to exercise its option to redeem on the Redemption Date set forth in
the Redemtion Notice. Except as provided in paragraph (d) of this Section 4, on
or after each Redemption Date, each holder of Series A Preferred that shall have
exercised its option to redeem as aforesaid shall surrender to this Corporation
the certificate or certificates representing such shares, in the manner and at
the place designated in the Redemption Notice, and thereupon the Redemption
Price of such shares shall be payable to the order of the person whose name
appears on the records of the Corporation as the record holder on the record
date, and each surrendered certificate shall be canceled. In the event less than
all the shares represented by any such certificate are redeemed, a new
certificate shall be issued representing the unredeemed shares.
d. From and after each Redemption Date, all rights of the holders of
shares of Series A Preferred redeemed on such date (except the right to receive
the Redemption Price without interest upon surrender of their certificate or
certificates) shall cease with respect to such shares, and such shares shall not
thereafter be transferred on the books of the Corporation or be deemed to be
outstanding for any purpose whatsoever. Upon each Redemption Date, the
Corporation shall redeem Series A Preferred ratably among the holders thereof
that shall exercise their respective options to so redeem based upon their
holdings of Series A Preferred. If the funds of the Corporation legally
available for redemption of shares of Series A Preferred on any Redemption Date
are insufficient to redeem the total number of shares of Series A Preferred to
be redeemed in the exercise of such options on such date, those funds which are
legally available will be used to redeem the maximum possible number of such
shares ratably among the holders of such shares to be redeemed based upon their
holdings of Series A Preferred. The shares of Series A Preferred not redeemed
shall remain outstanding and entitled to all the rights and preferences provided
herein. At any time thereafter when additional funds of the Corporation are
legally available for the redemption of shares of Series A Preferred such funds
will immediately be used to redeem the balance of the shares which the
Corporation has become obliged to redeem on the Redemption Date, but which it
has not redeemed, ratably among the holders thereof based upon their holdings of
Series A Preferred.
5. Voting Rights.
-------------
a. Each holder of shares of Preferred Stock shall be entitled to
notice of any stockholder meeting in accordance with the Bylaws of the
Corporation, shall be entitled to a number of votes equal to the number of
Shares of Common Stock into which the shares of Preferred Stock held by such
holder could then be converted, shall have voting rights and powers equal to the
voting rights and powers of the holders of Common Stock, and shall vote together
as a single class with holders of Common Stock and all series of Preferred Stock
on all matters except as otherwise provided herein or as expressly required by
law. Fractional votes shall not be permitted, and any fractional voting rights
resulting from the right of any holder of Preferred Stock to vote on an as
converted basis (after aggregating the shares into which all shares of Preferred
Stock held such holder could be converted) shall be rounded to the nearest whole
number (with one-half being rounded upward). The holders of Preferred Stock
shall have no separate class or series vote on any matter except as otherwise
provided herein or as expressly required by law.
b. The Board of Directors shall consist of seven (7) members. For so
long as TriGem Corporation shall hold at least Eight Million (8,000,000) Shares
of Common Stock (as adjusted for stock dividends, combinations or splits with
respect to such Shares), TriGem Corporation shall be entitled to appoint and
elect two directors. For so long as Korea Data Systems America, Inc. shall hold
at least Eight Million (8,000,000) Shares of Common Stock (as adjusted for stock
dividends, combinations or splits with respect to such Shares), Korea Data
Systems America, Inc. shall be entitled to appoint and elect two directors. For
so long as Stephen A. Dukker shall hold at least Four Million (4,000,000) Shares
of Common Stock (as adjusted for stock dividends, combinations or splits with
respect to such Shares), Stephen A. Dukker shall be
-11-
<PAGE>
entitled to appoint and elect one director. For so long as at least Four Million
(4,000,000) shares of Series A Preferred shall be outstanding (as adjusted for
stock dividends, combinations or splits with respect to such shares), the
holders of shares of Series A Preferred, voting together as a separate class,
shall be entitled to appoint and elect one director. Directors not elected by a
particular class or series of capital stock of the Corporation as aforesaid
shall be appointed and elected by the holders of the outstanding shares of
Series A Preferred and Shares of Common Stock, voting together as a class. Any
vacancy in the Board of Directors occurring because of the death, resignation or
removal of a director shall be filled by the vote or written consent of the
holders of a majority of such class or classes which elected such director or of
the person or entity which elected such director, as applicable. A director may
be removed from the Board of Directors with or without cause only by the vote or
consent of the holders of the outstanding class or classes with voting power
entitled to elect him or her or by the entity which elected such Director, as
applicable, in either case in accordance with Delaware law and the vacancy
created thereby may be filled only by the vote or consent of such holders.
Notwithstanding the foregoing, the consent of the holders of the outstanding
class or classes with voting power entitled to elect any Director or by the
entity which elected such Director, as applicable, shall not be required to
remove such Director for cause involving gross and willful misconduct that is
injurious to the Corporation.
6. Protective Provisions. So long as at least 4,000,000 shares (subject
---------------------
to adjustment for stock dividends, stock distributions, stock splits or reverse
stock splits, combination of shares, subdivision of shares or reclassification
of shares) of Series A Preferred shall be outstanding, the Corporation shall
not, without first obtaining the affirmative vote or written consent of holders
of greater than fifty percent (50%) of all outstanding shares of Series A
Preferred voting together as a class:
a. amend or repeal any provision of, or add any provision to, the
Corporation's Certificate of Incorporation if such action would create or issue
any new series of Preferred Stock or other capital stock of the Corporation or
reclassify any Shares of Common Stock, in either case into shares (i) having any
preference or priority as to redemption rights, dividends or liquidation
preferences superior to or on a parity with such preference or priority of the
Series A Preferred, or (ii) having more votes per share on an as converted basis
than the Series A Preferred;
b. except in the exercise of any first refusal right statutorily or
contractually available to the Corporation or to the redemption of shares of
Preferred Stock in accordance herewith, apply any of its assets to the
redemption, retirement, purchase or other acquisition of any shares of capital
stock except at cost from employees or directors of, or consultants to, the
Corporation upon termination of employment or consultancy; provided however, in
the case of any such redemptions to be made at the election of this Corporation,
such redemptions have been approved by the Board of Directors;
c. merge or consolidate with or into any other corporation or
corporations, or sell or otherwise transfer in a single transaction or a series
of related transactions all or substantially all of the assets of the
Corporation, if in any case (i) the Corporation's shareholders of record as
constituted immediately prior to such merger, consolidation, sale or other
transfer will, immediately after such merger, consolidation, sale or transfer
hold less than fifty percent (50%) of the voting power of the surviving or
acquiring entity, and (ii) the per share valuation of the Shares of Common Stock
of the Corporation calculated on a fully diluted basis (after giving effect to
stock splits, recombinations and the like) shall equal 133% or less of the
Original Series A Issue Price. Calculation of the number of Shares outstanding
on a fully diluted basis on the date of such transaction means assuming that all
shares of Series A Preferred and all Convertible Securities had been fully
converted into Shares of Common Stock immediately prior to such transaction, and
that any outstanding warrants, options or other rights for the purchase of
shares of stock or convertible securities had been fully exercised immediately
prior to such transaction and the resulting securities fully converted into
Shares of Common Stock, if so convertible, as of such date of such transaction;
or
-12-
<PAGE>
d. increase or decrease the aggregate number of authorized
shares or par value of the Series A Preferred.
7. Status of Converted Preferred Stock. In the event any shares of
-----------------------------------
Preferred Stock shall be converted pursuant to Section 3, the shares so
converted shall be canceled and shall not thereafter be issuable by the
Corporation. The Amended and Restated Certificate of Incorporation of this
Corporation shall be appropriately amended to effect the corresponding reduction
in the Corporation's authorized capital stock.
C. Common Stock.
------------
1. Dividend Rights. Subject to the prior rights of holders of all
----------------
classes of stock at the time outstanding having prior rights as to dividends,
the holders of the Common Stock shall be entitled to receive, when and as
declared by the Board of Directors, out of any assets of the Corporation legally
available therefor, such dividends as may be declared from time to time by the
Board of Directors.
2. Liquidation Rights. Upon the liquidation, dissolution or winding
------------------
up of the Corporation, the assets of the Corporation shall be distributed as
provided in Section 2 of Article IV(B) hereof.
3. Redemption. The Common Stock is not redeemable. Repurchases of
----------
Common Stock are not redemptions thereof unless so described in the applicable
governing instrument.
4. Voting Rights. The holder of each share of Common Stock shall
-------------
have the right to one (1) vote, shall be entitled to notice of any stockholder
meeting in accordance with the Bylaws of this Corporation, and shall be entitled
to vote upon such matters and in such manner as is otherwise provided herein or
as may be provided by law.
ARTICLE V
Except as otherwise provided in this Amended and Restated Certificate of
Incorporation, in furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to make, repeal, alter,
amend and rescind any or all of the Bylaws of the Corporation.
ARTICLE VI
The number of directors of the Corporation shall be fixed from time to time
by, or in the manner provided in, the Bylaws or amendment thereof duly adopted
by the Board of Directors or by the stockholders.
ARTICLE VII
Elections of directors need not be by written ballot unless the Bylaws of
the Corporation shall so provide.
ARTICLE VIII
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the Corporation.
-13-
<PAGE>
ARTICLE IX
To the fullest extent permitted by the General Corporation Law of Delaware,
as the same may be amended from time to time, a director of the Corporation
shall not be personally liable to the Corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director. If the General
Corporation Law of Delaware is hereafter amended to authorize, with or without
the approval of a corporation's stockholders, further reductions in the
liability of the corporation's directors for breach of fiduciary duty, then a
director of the Corporation shall not be liable for any such breach to the
fullest extent permitted by the General Corporation Law of Delaware as so
amended.
Any repeal or modification of the foregoing provisions of this Article IX,
by amendment of this Article IX or by operation of law, shall not adversely
affect any right or protection of a director of the Corporation with respect to
any acts or omissions of such director occurring prior to such repeal or
modification.
ARTICLE X
To the fullest extent permitted by applicable law, the Corporation is
authorized to provide indemnification of (and advancement of expenses to)
directors, officers, employees and other agents of the Corporation (and any
other persons to which Delaware law permits the Corporation to provide
indemnification), through Bylaw provisions, agreements with any such director,
officer, employee or other agent or other person, vote of stockholders or
disinterested directors, or otherwise, in excess of the indemnification and
advancement otherwise permitted by Section 145 of the Delaware General
Corporation Law, subject only to limits created by applicable Delaware law
(statutory or nonstatutory), with respect to actions for breach of duty to a
corporation, its stockholders and others.
Any repeal or modification of any of the foregoing provisions of this
Article X, by amendment of this Article X or by operation of law, shall not
adversely affect any right or protection of a director, officer, employee or
other agent or other person existing at the time of, or increase the liability
of any director of the Corporation with respect to any acts or omissions of such
director, officer or agent occurring prior to such repeal or modification.
ARTICLE XI
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Amended and Restated Certificate of Incorporation,
in the manner now or hereafter prescribed by statute, and all rights conferred
upon stockholders herein are granted subject to this reservation.
ARTICLE XII
The Corporation shall have perpetual existence.
* * *
-14-
<PAGE>
The foregoing Amended and Restated Certificate of Incorporation has been
duly adopted by the Corporation's directors and stockholders in accordance with
the applicable provisions of Sections 228, 242 and 245 of the General
Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, the undersigned has executed this certificate on August
17, 1999.
EMACHINES, INC.
By: /s/ Stephen A. Dukker
______________________________________
Stephen A. Dukker
President and Chief Executive Officer
Attest: /s/ Steven H. Miller
___________________________
Steven H. Miller, Secretary
-15-
<PAGE>
EXHIBIT 3.3
AMENDED AND RESTATED
BYLAWS
OF
emachines, Inc.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I CORPORATE OFFICES.............................................. 1
1.1 REGISTERED OFFICE................................................... 1
1.2 OTHER OFFICES....................................................... 1
ARTICLE II MEETINGS OF STOCKHOLDERS...................................... 1
2.1 PLACE OF MEETINGS................................................... 1
2.2 ANNUAL MEETING...................................................... 1
2.3 SPECIAL MEETING..................................................... 1
2.4 NOTICE OF STOCKHOLDERS' MEETINGS.................................... 2
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE........................ 2
2.6 QUORUM.............................................................. 2
2.7 ADJOURNED MEETING; NOTICE........................................... 3
2.8 VOTING.............................................................. 3
2.9 WAIVER OF NOTICE.................................................... 4
2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING............. 4
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS......... 4
2.12 PROXIES............................................................. 5
2.13 LIST OF STOCKHOLDERS ENTITLED TO VOTE............................... 5
ARTICLE III DIRECTORS.................................................... 6
3.1 POWERS.............................................................. 6
3.2 NUMBER OF DIRECTORS................................................. 6
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS............. 6
3.4 RESIGNATION AND VACANCIES........................................... 6
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE............................ 7
3.6 FIRST MEETINGS...................................................... 7
3.7 REGULAR MEETINGS.................................................... 8
3.8 SPECIAL MEETINGS; NOTICE............................................ 8
3.9 QUORUM.............................................................. 8
3.10 WAIVER OF NOTICE.................................................... 8
3.11 ADJOURNED MEETING; NOTICE........................................... 9
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING................... 9
3.13 FEES AND COMPENSATION OF DIRECTORS.................................. 9
3.14 APPROVAL OF LOANS TO OFFICERS....................................... 9
3.15 REMOVAL OF DIRECTORS................................................ 9
ARTICLE IV COMMITTEES.................................................... 10
4.1 COMMITTEES OF DIRECTORS............................................. 10
4.2 COMMITTEE MINUTES................................................... 10
</TABLE>
-i-
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
4.3 MEETINGS AND ACTION OF COMMITTEES.................................... 11
ARTICLE V OFFICERS........................................................ 11
5.1 OFFICERS............................................................. 11
5.2 ELECTION OF OFFICERS................................................. 11
5.3 SUBORDINATE OFFICERS................................................. 11
5.4 REMOVAL AND RESIGNATION OF OFFICERS.................................. 12
5.5 VACANCIES IN OFFICES................................................. 12
5.6 CHAIRMAN OF THE BOARD................................................ 12
5.7 PRESIDENT............................................................ 12
5.8 VICE PRESIDENT....................................................... 12
5.9 SECRETARY............................................................ 13
5.10 TREASURER............................................................ 13
5.11 ASSISTANT SECRETARY.................................................. 13
5.12 ASSISTANT TREASURER.................................................. 14
5.13 AUTHORITY AND DUTIES OF OFFICERS..................................... 14
ARTICLE VI INDEMNITY...................................................... 14
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS............................ 14
6.2 INDEMNIFICATION OF OTHERS............................................ 14
6.3 INSURANCE............................................................ 15
ARTICLE VII RECORDS AND REPORTS........................................... 15
7.1 MAINTENANCE AND INSPECTION OF RECORDS................................ 15
7.2 INSPECTION BY DIRECTORS.............................................. 16
7.3 ANNUAL STATEMENT TO STOCKHOLDERS..................................... 16
7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS....................... 16
ARTICLE VIII GENERAL MATTERS.............................................. 16
8.1 CHECKS............................................................... 16
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS..................... 17
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES............................... 17
8.4 SPECIAL DESIGNATION ON CERTIFICATES.................................. 17
8.5 LOST CERTIFICATES.................................................... 18
8.6 CONSTRUCTION; DEFINITIONS............................................ 18
8.7 DIVIDENDS............................................................ 18
8.8 FISCAL YEAR.......................................................... 18
8.9 SEAL................................................................. 19
8.10 TRANSFER OF STOCK.................................................... 19
</TABLE>
-ii-
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
8.11 STOCK TRANSFER AGREEMENTS.................................... 19
8.12 REGISTERED STOCKHOLDERS...................................... 19
ARTICLE IX AMENDMENTS................................................... 19
ARTICLE X DISSOLUTION.................................................. 20
ARTICLE XI CUSTODIAN.................................................... 20
11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES.................. 20
11.2 DUTIES OF CUSTODIAN.......................................... 21
</TABLE>
-iii-
<PAGE>
AMENDED AND RESTATED
--------------------
BYLAWS
------
OF
--
emachines, Inc.
---------------
ARTICLE I
CORPORATE OFFICES
-----------------
1.1 REGISTERED OFFICE
-----------------
The registered office of the corporation shall be at Corporation Trust
Center, 1209 Orange Street in the City of Wilmington, County of New Castle,
State of Delaware. The name of the registered agent of the corporation at such
location is The Corporation Trust Company.
1.2 OTHER OFFICES
-------------
The board of directors may at any time establish other offices at any place
or places where the corporation is qualified to do business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
------------------------
2.1 PLACE OF MEETINGS
-----------------
Meetings of stockholders shall be held at any place, within or outside the
State of Delaware, designated by the board of directors. In the absence of any
such designation, stockholders' meetings shall be held at the principal
executive office of the corporation.
2.2 ANNUAL MEETING
--------------
The annual meeting of stockholders shall be held each year on a date and at
a time designated by the board of directors. In the absence of such
designation, the annual meeting of stockholders shall be held on the first
Monday of May in each year at 10:00 a.m. However, if such day falls on a legal
holiday, then the meeting shall be held at the same time and place on the next
succeeding full business day. At the meeting, directors shall be elected and
any other proper business may be transacted.
<PAGE>
2.3 SPECIAL MEETING
---------------
A special meeting of the stockholders may be called at any time for any
purpose or purposes by the board of directors, or by the chairman of the board,
or by the president, or by one or more stockholders holding shares in the
aggregate entitled to cast not less than ten percent (10%) of the votes at that
meeting.
If a special meeting is called by any person or persons other than the
board of directors or the president or the chairman of the board, then the
request shall be in writing, specifying the time of such meeting and the general
nature of the business proposed to be transacted, and shall be delivered
personally or sent by registered mail or by telegraphic or other facsimile
transmission to the chairman of the board, the president or the secretary of the
corporation. The officer receiving the request shall cause notice to be
promptly given to the stockholders entitled to vote, in accordance with the
provisions of Sections 2.4 and 2.5 of these bylaws, that a meeting will be held
at the time requested by the person or persons calling the meeting, so long as
that time is not less than ten (10) nor more than sixty (60) days after the
receipt of the request. If the notice is not given within twenty (20) days
after receipt of the request, then the person or persons requesting the meeting
may give the notice. Nothing contained in this paragraph of this Section 2.3
shall be construed as limiting, fixing or affecting the time when a meeting of
stockholders called by action of the board of directors may be held.
2.4 NOTICE OF STOCKHOLDERS' MEETINGS
--------------------------------
All notices of meetings with stockholders shall be in writing and shall be
sent or otherwise given in accordance with Section 2.5 of these bylaws not less
than ten (10) nor more than sixty (60) days before the date of the meeting to
each stockholder entitled to vote at such meeting. The notice shall specify the
place, date, and hour of the meeting, and, in the case of a special meeting, the
purpose or purposes for which the meeting is called.
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
--------------------------------------------
Written notice of any meeting of stockholders, if mailed, is given when
deposited in the United States mail, postage prepaid, directed to the
stockholder at his address as it appears on the records of the corporation. An
affidavit of the secretary or an assistant secretary or of the transfer agent of
the corporation that the notice has been given shall, in the absence of fraud,
be prima facie evidence of the facts stated therein.
2.6 QUORUM
------
The holders of a majority of the stock issued and outstanding and entitled
to vote at a duly called meeting of the stockholders, present in person or
represented by proxy, shall constitute a quorum for the transaction of business
except as otherwise provided by statute or by the certificate of incorporation.
If, however, such quorum is not present or represented at any meeting of the
stockholders, then the meeting may be adjourned from time to time by the vote of
a majority of the
-2-
<PAGE>
shares entitled to vote at such meeting, present in person or represented by
proxy, without notice other than announcement at the meeting, until a quorum is
present or represented.
2.7 ADJOURNED MEETING; NOTICE
-------------------------
When a meeting is adjourned to another time or place, unless these bylaws
otherwise require, notice need not be given of the adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting at which a quorum is presented or represented,
the corporation may transact only such business that might have been transacted
at the original meeting. If the adjournment is for more than thirty (30) days
from the date set for the original meeting, or if after the adjournment a new
record date is fixed for the adjourned meeting, a notice of the adjourned
meeting shall be given to each stockholder of record entitled to vote at the
meeting.
2.8 VOTING
------
The stockholders entitled to vote at any meeting of stockholders shall be
determined in accordance with the provisions of Section 2.11 of these bylaws,
subject to the provisions of Sections 217 and 218 of the General Corporation Law
of Delaware (relating to voting rights of fiduciaries, pledgors and joint owners
of stock and to voting trusts and other voting agreements).
The stockholders' vote may be by voice vote or by ballot; provided,
however, that any election for directors must be by ballot if demanded by any
stockholder at the meeting and before the voting has begun.
Except as provided in the last paragraph of this Section 2.8, or as may be
otherwise provided in the certificate of incorporation, each stockholder shall
be entitled to one vote on each matter submitted to a vote of the stockholders
for each share of capital stock held by such stockholder.
If a quorum is present, the affirmative vote of the majority of shares
present in person or represented by proxy at the meeting and entitled to vote on
the subject matter shall be the act of the stockholders, unless the vote of a
greater number or a vote by classes is required by the General Corporation Law
of Delaware or the Articles of Incorporation. Where a separate vote by class is
required, the affirmative vote of the majority of shares of such class present
in person or represented by proxy at the meeting shall be the act of such class.
At a stockholders' meeting at which directors are to be elected, or at
elections held under special circumstances, a stockholder shall be entitled to
cumulate votes (i.e., cast for any candidate a number of votes greater than the
number of votes which such stockholder normally is entitled to cast). Each
holder of stock, or of any class or classes or of a series or series thereof,
who elects to cumulate votes shall be entitled to as many votes as equals the
number of votes which (absent this provision as to cumulative voting) he
otherwise would be entitled to cast for the election of directors with respect
to his shares of stock multiplied by the number of directors to be elected by
him, and he
-3-
<PAGE>
may cast all of such votes for a single director or may distribute them among
the number to be voted for, or for any two or more of them, as he may see fit.
2.9 WAIVER OF NOTICE
----------------
Whenever notice is required to be given under any provision of the General
Corporation Law of Delaware or of the certificate of incorporation or these
bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the stockholders need be specified in any written waiver of notice unless so
required by the certificate of incorporation or these bylaws.
2.1 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
-------------------------------------------------------
Unless otherwise provided in the certificate of incorporation, any action
required by this chapter to be taken at any annual or special meeting of
stockholders of a corporation, or any action that may be taken at any annual or
special meeting of such stockholders, may be taken without a meeting, without
prior notice, and without a vote if a consent in writing, setting forth the
action so taken, is signed by the holders of outstanding stock having not less
than the minimum number of votes that would be necessary to authorize or take
such action at a meeting at which all shares entitled to vote thereon were
present and voted.
Prompt notice of the taking of the corporate action without a meeting by
less than unanimous written consent shall be given to those stockholders who
have not consented in writing. If the action which is consented to is such as
would have required the filing of a certificate under any section of the General
Corporation Law of Delaware if such action had been voted on by stockholders at
a meeting thereof, then the certificate filed under such section shall state, in
lieu of any statement required by such section concerning any vote of
stockholders, that written notice and written consent have been given as
provided in Section 228 of the General Corporation Law of Delaware.
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS
-----------------------------------------------------------
In order that the corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment thereof,
or entitled to express consent to corporate action in writing without a meeting,
or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock or for the purpose of any other lawful
action, the board of directors may fix, in advance, a record date, which shall
not be more than sixty (60) nor less than ten (10) days before the date of such
meeting, nor more than sixty (60) days prior to any other action.
-4-
<PAGE>
If the board of directors does not so fix a record date:
(i) The record date for determining stockholders entitled to notice
of or to vote at a meeting of stockholders shall be at the close of business on
the day next preceding the day on which notice is given, or, if notice is
waived, at the close of business on the day next preceding the day on which the
meeting is held.
(ii) The record date for determining stockholders entitled to express
consent to corporate action in writing without a meeting, when no prior action
by the board of directors is necessary, shall be the day on which the first
written consent is expressed.
(iii) The record date for determining stockholders for any other
purpose shall be at the close of business on the day on which the board of
directors adopts the resolution relating thereto.
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the board of directors may fix a new record date for the
adjourned meeting.
2.12 PROXIES
-------
Each stockholder entitled to vote at a meeting of stockholders or to
express consent or dissent to corporate action in writing without a meeting may
authorize another person or persons to act for him by a written proxy, signed by
the stockholder and filed with the secretary of the corporation, but no such
proxy shall be voted or acted upon after three (3) years from its date, unless
the proxy provides for a longer period. A proxy shall be deemed signed if the
stockholder's name is placed on the proxy (whether by manual signature,
typewriting, telegraphic transmission or otherwise) by the stockholder or the
stockholder's attorney-in-fact. The revocability of a proxy that states on its
face that it is irrevocable shall be governed by the provisions of Section
212(c) of the General Corporation Law of Delaware.
2.13 LIST OF STOCKHOLDERS ENTITLED TO VOTE
-------------------------------------
The officer who has charge of the stock ledger of a corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
-5-
<PAGE>
ARTICLE III
DIRECTORS
---------
3.1 POWERS
------
Subject to the provisions of the General Corporation Law of Delaware and
any limitations in the certificate of incorporation or these bylaws relating to
action required to be approved by the stockholders or by the outstanding shares,
the business and affairs of the corporation shall be managed and all corporate
powers shall be exercised by or under the direction of the board of directors.
3.2 NUMBER OF DIRECTORS
-------------------
The authorized number of directors shall be seven (7). This number may be
changed by a duly adopted amendment to the certificate of incorporation or by an
amendment to this bylaw adopted by the vote or written consent of the holders of
a majority of the stock issued and outstanding and entitled to vote or by
resolution of a majority of the board of directors.
No reduction of the authorized number of directors shall have the effect of
removing any director before that director's term of office expires.
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS
-------------------------------------------------------
Except as provided in Section 3.4 of these bylaws, directors shall be
elected at each annual meeting of stockholders to hold office until the next
annual meeting. Directors need not be stock holders unless so required by the
certificate of incorporation or these bylaws, wherein other qualifications for
directors may be prescribed. Each director, including a director elected to
fill a vacancy, shall hold office until his successor is elected and qualified
or until his earlier resignation or removal.
Elections of directors need not be by written ballot.
3.4 RESIGNATION AND VACANCIES
-------------------------
Any director may resign at any time upon written notice to the corporation.
When one or more directors so resigns and the resignation is effective at a
future date, a majority of the directors then in office, including those who
have so resigned, shall have power to fill such vacancy or vacancies, the vote
thereon to take effect when such resignation or resignations shall become
effective, and each director so chosen shall hold office as provided in this
section in the filling of other vacancies.
Unless otherwise provided in the certificate of incorporation or these
bylaws:
-6-
<PAGE>
(i) Vacancies and newly created directorships resulting from any
increase in the authorized number of directors elected by all of the
stockholders having the right to vote as a single class may be filled by a
majority of the directors then in office, although less than a quorum, or by a
sole remaining director.
(ii) Whenever the holders of any class or classes of stock or series
thereof are entitled to elect one or more directors by the provisions of the
certificate of incorporation, vacancies and newly created directorships of such
class or classes or series may be filled by a majority of the directors elected
by such class or classes or series thereof then in office, or by a sole
remaining director so elected.
If at any time, by reason of death or resignation or other cause, the
corporation should have no directors in office, then any officer or any
stockholder or an executor, administrator, trustee or guardian of a stockholder,
or other fiduciary entrusted with like responsibility for the person or estate
of a stockholder, may call a special meeting of stockholders in accordance with
the provisions of the certificate of incorporation or these bylaws, or may apply
to the Court of Chancery for a decree summarily ordering an election as provided
in Section 211 of the General Corporation Law of Delaware.
If, at the time of filling any vacancy or any newly created directorship,
the directors then in office constitute less than a majority of the whole board
(as constituted immediately prior to any such increase), then the Court of
Chancery may, upon application of any stockholder or stockholders holding at
least ten (10) percent of the total number of the shares at the time outstanding
having the right to vote for such directors, summarily order an election to be
held to fill any such vacancies or newly created directorships, or to replace
the directors chosen by the directors then in office as aforesaid, which
election shall be governed by the provisions of Section 211 of the General
Corporation Law of Delaware as far as applicable.
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
----------------------------------------
The board of directors of the corporation may hold meetings, both regular
and special, either within or outside the State of Delaware.
Unless otherwise restricted by the certificate of incorporation or these
bylaws, members of the board of directors, or any committee designated by the
board of directors, may participate in a meeting of the board of directors, or
any committee, by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and such participation in a meeting shall constitute presence in
person at the meeting.
3.6 FIRST MEETINGS
--------------
The first meeting of each newly elected board of directors shall be held at
such time and place as shall be fixed by the vote of the stockholders at the
annual meeting and no notice of such meeting shall be necessary to the newly
elected directors in order legally to constitute the meeting,
-7-
<PAGE>
provided a quorum shall be present. In the event of the failure of the
stockholders to fix the time or place of such first meeting of the newly elected
board of directors, or in the event such meeting is not held at the time and
place so fixed by the stockholders, the meeting may be held at such time and
place as shall be specified in a notice given as hereinafter provided for
special meetings of the board of directors, or as shall be specified in a
written waiver signed by all of the directors.
3.7 REGULAR MEETINGS
----------------
Regular meetings of the board of directors may be held without notice at
such time and at such place as shall from time to time be determined by the
board.
3.8 SPECIAL MEETINGS; NOTICE
------------------------
Special meetings of the board of directors for any purpose or purposes may
be called at any time by the chairman of the board, the president, the secretary
or any two (2) directors unless the board consists of only one (1) director, in
which case special meetings shall be called by the president or secretary in
like manner and on like notice on the written request of the sole director.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at that director's address
as it is shown on the records of the corporation. If the notice is mailed, it
shall be deposited in the United States mail at least four (4) days before the
time of the holding of the meeting. If the notice is delivered personally or by
telephone or by telegram, it shall be delivered personally or by telephone or to
the telegraph company at least forty-eight (48) hours before the time of the
holding of the meeting. Any oral notice given personally or by telephone may be
communicated either to the director or to a person at the office of the director
who the person giving the notice has reason to believe will promptly communicate
it to the director. The notice need not specify the purpose or the place of the
meeting, if the meeting is to be held at the principal executive office of the
corporation.
3.9 QUORUM
------
At all meetings of the board of directors, a majority of the authorized
number of directors shall constitute a quorum for the transaction of business
and the act of a majority of the directors present at any meeting at which there
is a quorum shall be the act of the board of directors, except as may be
otherwise specifically provided by statute or by the certificate of
incorporation. If a quorum is not present at any meeting of the board of
directors, then the directors present thereat may adjourn the meeting from time
to time, without notice other than announcement at the meeting, until a quorum
is present.
3.10 WAIVER OF NOTICE
----------------
Whenever notice is required to be given under any provision of the General
Corporation Law of Delaware or of the certificate of incorporation or these
bylaws, a written waiver thereof, signed by
-8-
<PAGE>
the person entitled to notice, whether before or after the time stated therein,
shall be deemed equivalent to notice. Attendance of a person at a meeting shall
constitute a waiver of notice of such meeting, except when the person attends a
meeting for the express purpose of objecting, at the beginning of the meeting,
to the transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the directors, or members of a committee of
directors, need be specified in any written waiver of notice unless so required
by the certificate of incorporation or these bylaws.
3.11 ADJOURNED MEETING; NOTICE
-------------------------
If a quorum is not present at any meeting of the board of directors, then
the directors present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum is present.
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
-------------------------------------------------
Unless otherwise restricted by the certificate of incorporation or these
bylaws, any action required or permitted to be taken at any meeting of the board
of directors, or of any committee thereof, may be taken without a meeting if all
members of the board or committee, as the case may be, consent thereto in
writing and the writing or writings are filed with the minutes of proceedings of
the board or committee.
3.13 FEES AND COMPENSATION OF DIRECTORS
----------------------------------
Unless otherwise restricted by the certificate of incorporation or these
bylaws, the board of directors shall have the authority to fix the compensation
of directors.
3.14 APPROVAL OF LOANS TO OFFICERS
-----------------------------
The corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the corporation or of its
subsidiary, including any officer or employee who is a director of the
corporation or its subsidiary, whenever, in the judgment of the directors, such
loan, guaranty or assistance may reasonably be expected to benefit the
corporation. The loan, guaranty or other assistance may be with or without
interest and may be unsecured, or secured in such manner as the board of
directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing in this section contained shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
3.15 REMOVAL OF DIRECTORS
--------------------
Unless otherwise restricted by statute, by the certificate of incorporation
or by these bylaws, any director or the entire board of directors may be
removed, with or without cause, by the holders of a majority of the shares then
entitled to vote at an election of directors.
-9-
<PAGE>
No reduction of the authorized number of directors shall have the effect of
removing any director prior to the expiration of such director's term of office.
ARTICLE IV
COMMITTEES
----------
4.1 COMMITTEES OF DIRECTORS
-----------------------
The board of directors may, by resolution passed by a majority of the whole
board, designate one or more committees, with each committee to consist of one
or more of the directors of the corporation. The board may designate one or
more directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the board of
directors to act at the meeting in the place of any such absent or disqualified
member. Any such committee, to the extent provided in the resolution of the
board of directors or in the bylaws of the corporation, shall have and may
exercise all the powers and authority of the board of directors in the
management of the business and affairs of the corporation, and may authorize the
seal of the corporation to be affixed to all papers that may require it; but no
such committee shall have the power or authority to (i) amend the certificate of
incorporation (except that a committee may, to the extent authorized in the
resolution or resolutions providing for the issuance of shares of stock adopted
by the board of directors as provided in Section 151(a) of the General
Corporation Law of Delaware, fix any of the preferences or rights of such shares
relating to dividends, redemption, dissolution, any distribution of assets of
the corporation or the conversion into, or the exchange of such shares for,
shares of any other class or classes or any other series of the same or any
other class or classes of stock of the corporation), (ii) adopt an agreement of
merger or consolidation under Sections 251 or 252 of the General Corporation Law
of Delaware, (iii) recommend to the stockholders the sale, lease or exchange of
all or substantially all of the corporation's property and assets, (iv)
recommend to the stockholders a dissolution of the corporation or a revocation
of a dissolution, or (v) amend the bylaws of the corporation; and, unless the
board resolution establishing the committee, the bylaws or the certificate of
incorporation expressly so provide, no such committee shall have the power or
authority to declare a dividend, to authorize the issuance of stock, or to adopt
a certificate of ownership and merger pursuant to Section 253 of the General
Corporation Law of Delaware.
4.2 COMMITTEE MINUTES
-----------------
Each committee shall keep regular minutes of its meetings and report the
same to the board of directors when required.
-10-
<PAGE>
4.3 MEETINGS AND ACTION OF COMMITTEES
---------------------------------
Meetings and actions of committees shall be governed by, and held and taken
in accordance with, the provisions of Article III of these bylaws, Section 3.5
(place of meetings and meetings by telephone), Section 3.7 (regular meetings),
Section 3.8 (special meetings and notice), Section 3.9 (quorum), Section 3.10
(waiver of notice), Section 3.11 (adjournment and notice of adjournment), and
Section 3.12 (action without a meeting), with such changes in the context of
those bylaws as are necessary to substitute the committee and its members for
the board of directors and its members; provided, however, that the time of
regular meetings of committees may also be called by resolution of the board of
directors and that notice of special meetings of committees shall also be given
to all alternate members, who shall have the right to attend all meetings of the
committee. The board of directors may adopt rules for the government of any
committee not inconsistent with the provisions of these bylaws.
ARTICLE V
OFFICERS
--------
5.1 OFFICERS
--------
The officers of the corporation shall be a president, one or more vice
presidents, a secretary, and a treasurer. The corporation may also have, at the
discretion of the board of directors, a chairman of the board, one or more
assistant vice presidents, assistant secretaries, assistant treasurers, and any
such other officers as may be appointed in accordance with the provisions of
Section 5.3 of these bylaws. Any number of offices may be held by the same
person.
5.2 ELECTION OF OFFICERS
--------------------
The officers of the corporation, except such officers as may be appointed
in accordance with the provisions of Sections 5.3 or 5.5 of these bylaws, shall
be chosen by the board of directors, subject to the rights, if any, of an
officer under any contract of employment.
5.3 SUBORDINATE OFFICERS
--------------------
The board of directors may appoint, or empower the president to appoint,
such other officers and agents as the business of the corporation may require,
each of whom shall hold office for such period, have such authority, and perform
such duties as are provided in these bylaws or as the board of directors may
from time to time determine.
-11-
<PAGE>
5.4 REMOVAL AND RESIGNATION OF OFFICERS
-----------------------------------
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by an
affirmative vote of the majority of the board of directors at any regular or
special meeting of the board or, except in the case of an officer chosen by the
board of directors, by any officer upon whom such power of removal may be
conferred by the board of directors.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the officer is a
party.
5.5 VACANCIES IN OFFICES
--------------------
Any vacancy occurring in any office of the corporation shall be filled by
the board of directors.
5.6 CHAIRMAN OF THE BOARD
---------------------
The chairman of the board, if such an officer be elected, shall, if
present, preside at meetings of the board of directors and exercise and perform
such other powers and duties as may from time to time be assigned to him by the
board of directors or as may be prescribed by these bylaws. If there is no
president, then the chairman of the board shall also be the chief executive
officer of the corporation and shall have the powers and duties prescribed in
Section 5.7 of these bylaws.
5.7 PRESIDENT
---------
Subject to such supervisory powers, if any, as may be given by the board of
directors to the chairman of the board, if there be such an officer, the
president shall be the chief executive officer of the corporation and shall,
subject to the control of the board of directors, have general supervision,
direction, and control of the business and the officers of the corporation. He
shall preside at all meetings of the shareholders and, in the absence or
nonexistence of a chairman of the board, at all meetings of the board of
directors. He shall have the general powers and duties of management usually
vested in the office of president of a corporation and shall have such other
powers and duties as may be prescribed by the board of directors or these
bylaws.
5.8 VICE PRESIDENT
--------------
In the absence or disability of the president, the vice presidents, if any,
in order of their rank as fixed by the board of directors or, if not ranked, a
vice president designated by the board of directors, shall perform all the
duties of the president and when so acting shall have all the powers of, and be
subject to all the restrictions upon, the president. The vice presidents shall
have such
-12-
<PAGE>
other powers and perform such other duties as from time to time may be
prescribed for them respectively by the board of directors, these bylaws, the
president or the chairman of the board.
5.9 SECRETARY
---------
The secretary shall keep or cause to be kept, at the principal executive
office of the corporation or such other place as the board of directors may
direct, a book of minutes of all meetings and actions of directors, committees
of directors, and shareholders. The minutes shall show the time and place of
each meeting, whether regular or special (and, if special, how authorized and
the notice given), the names of those present at directors' meetings or
committee meetings, the number of shares present or represented at shareholders'
meetings, and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal executive
office of the corporation or at the office of the corporation's transfer agent
or registrar, as determined by resolution of the board of directors, a share
register, or a duplicate share register, showing the names of all shareholders
and their addresses, the number and classes of shares held by each, the number
and date of certificates evidencing such shares, and the number and date of
cancellation of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings of
the shareholders and of the board of directors required to be given by law or by
these bylaws. He shall keep the seal of the corporation, if one be adopted, in
safe custody and shall have such other powers and perform such other duties as
may be prescribed by the board of directors or by these bylaws.
5.10 TREASURER
---------
The treasurer shall keep and maintain, or cause to be kept and maintained,
adequate and correct books and records of accounts of the properties and
business transactions of the corporation, including accounts of its assets,
liabilities, receipts, disbursements, gains, losses, capital, retained earnings,
and shares. The books of account shall at all reasonable times be open to
inspection by any director.
The treasurer shall deposit all money and other valuables in the name and
to the credit of the corporation with such depositaries as may be designated by
the board of directors. He shall disburse the funds of the corporation as may
be ordered by the board of directors, shall render to the president and
directors, whenever they request it, an account of all of his transactions as
treasurer and of the financial condition of the corporation, and shall have such
other powers and perform such other duties as may be prescribed by the board of
directors or these bylaws.
5.11 ASSISTANT SECRETARY
-------------------
The assistant secretary, or, if there is more than one, the assistant
secretaries in the order determined by the stockholders or board of directors
(or if there be no such determination, then in the order of their election)
shall, in the absence of the secretary or in the event of his or her inability
or
-13-
<PAGE>
refusal to act, perform the duties and exercise the powers of the secretary and
shall perform such other duties and have such other powers as the board of
directors or the stockholders may from time to time prescribe.
5.12 ASSISTANT TREASURER
-------------------
The assistant treasurer, or, if there is more than one, the assistant
treasurers, in the order determined by the stockholders or board of directors
(or if there be no such determination, then in the order of their election),
shall, in the absence of the treasurer or in the event of his or her inability
or refusal to act, perform the duties and exercise the powers of the treasurer
and shall perform such other duties and have such other powers as the board of
directors or the stockholders may from time to time prescribe.
5.13 AUTHORITY AND DUTIES OF OFFICERS
--------------------------------
In addition to the foregoing authority and duties, all officers of the
corporation shall respectively have such authority and perform such duties in
the management of the business of the corporation as may be designated from time
to time by the board of directors or the stockholders.
ARTICLE VI
INDEMNITY
---------
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS
-----------------------------------------
The corporation shall, to the maximum extent and in the manner permitted by
the General Corporation Law of Delaware, indemnify each of its directors and
officers against expenses (including attorneys' fees), judgments, fines,
settlements, and other amounts actually and reasonably incurred in connection
with any proceeding, arising by reason of the fact that such person is or was an
agent of the corporation. For purposes of this Section 6.1, a "director" or
"officer" of the corporation includes any person (i) who is or was a director or
officer of the corporation, (ii) who is or was serving at the request of the
corporation as a director or officer of another corporation, partnership, joint
venture, trust or other enterprise, or (iii) who was a director or officer of a
corporation which was a predecessor corporation of the corporation or of another
enterprise at the request of such predecessor corporation.
6.2 INDEMNIFICATION OF OTHERS
-------------------------
The corporation shall have the power, to the extent and in the manner
permitted by the General Corporation Law of Delaware, to indemnify each of its
employees and agents (other than directors and officers) against expenses
(including attorneys' fees), judgments, fines, settlements, and other amounts
actually and reasonably incurred in connection with any proceeding, arising by
reason
-14-
<PAGE>
of the fact that such person is or was an agent of the corporation. For purposes
of this Section 6.2, an "employee" or "agent" of the corporation (other than a
director or officer) includes any person (i) who is or was an employee or agent
of the corporation, (ii) who is or was serving at the request of the corporation
as an employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, or (iii) who was an employee or agent of a
corporation which was a predecessor corporation of the corporation or of another
enterprise at the request of such predecessor corporation.
6.3 INSURANCE
---------
The corporation may purchase and maintain insurance on behalf of any person
who is or was a director, officer, employee or agent of the corporation, or is
or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him and incurred by him
in any such capacity, or arising out of his status as such, whether or not the
corporation would have the power to indemnify him against such liability under
the provisions of the General Corporation Law of Delaware.
ARTICLE VII
RECORDS AND REPORTS
-------------------
7.1 MAINTENANCE AND INSPECTION OF RECORDS
-------------------------------------
The corporation shall, either at its principal executive office or at such
place or places as designated by the board of directors, keep a record of its
shareholders listing their names and addresses and the number and class of
shares held by each shareholder, a copy of these bylaws as amended to date,
accounting books, and other records.
Any stockholder of record, in person or by attorney or other agent, shall,
upon written demand under oath stating the purpose thereof, have the right
during the usual hours for business to inspect for any proper purpose the
corporation's stock ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the attorney or other agent to so act on
behalf of the stockholder. The demand under oath shall be directed to the
corporation at its registered office in Delaware or at its principal place of
business.
The officer who has charge of the stock ledger of a corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open
to the
-15-
<PAGE>
examination of any stockholder, for any purpose germane to the meeting, during
ordinary business hours, for a period of at least ten (10) days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
7.2 INSPECTION BY DIRECTORS
-----------------------
Any director shall have the right to examine the corporation's stock
ledger, a list of its stockholders, and its other books and records for a
purpose reasonably related to his position as a director. The Court of Chancery
is hereby vested with the exclusive jurisdiction to determine whether a director
is entitled to the inspection sought. The Court may summarily order the
corporation to permit the director to inspect any and all books and records, the
stock ledger, and the stock list and to make copies or extracts therefrom. The
Court may, in its discretion, prescribe any limitations or conditions with
reference to the inspection, or award such other and further relief as the Court
may deem just and proper.
7.3 ANNUAL STATEMENT TO STOCKHOLDERS
--------------------------------
The board of directors shall present at each annual meeting, and at any
special meeting of the stockholders when called for by vote of the stockholders,
a full and clear statement of the business and condition of the corporation.
7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
----------------------------------------------
The chairman of the board, the president, any vice president, the
treasurer, the secretary or assistant secretary of this corporation, or any
other person authorized by the board of directors or the president or a vice
president, is authorized to vote, represent, and exercise on behalf of this
corporation all rights incident to any and all shares of any other corporation
or corporations standing in the name of this corporation. The authority granted
herein may be exercised either by such person directly or by any other person
authorized to do so by proxy or power of attorney duly executed by such person
having the authority.
ARTICLE VII
GENERAL MATTERS
---------------
8.1 CHECKS
------
From time to time, the board of directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other
-16-
<PAGE>
evidences of indebtedness that are issued in the name of or payable to the
corporation, and only the persons so authorized shall sign or endorse those
instruments.
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS
------------------------------------------------
The board of directors, except as otherwise provided in these bylaws, may
authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the board of directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES
--------------------------------------
The shares of a corporation shall be represented by certificates, provided
that the board of directors of the corporation may provide by resolution or
resolutions that some or all of any or all classes or series of its stock shall
be uncertificated shares. Any such resolution shall not apply to shares
represented by a certificate until such certificate is surrendered to the
corporation. Notwithstanding the adoption of such a resolution by the board of
directors, every holder of stock represented by certificates and upon request
every holder of uncertificated shares shall be entitled to have a certificate
signed by, or in the name of the corporation by the chairman or vice-chairman of
the board of directors, or the president or vice-president, and by the treasurer
or an assistant treasurer, or the secretary or an assistant secretary of such
corporation representing the number of shares registered in certificate form.
Any or all of the signatures on the certificate may be a facsimile. In case any
officer, transfer agent or registrar who has signed or whose facsimile signature
has been placed upon a certificate has ceased to be such officer, transfer agent
or registrar before such certificate is issued, it may be issued by the
corporation with the same effect as if he were such officer, transfer agent or
registrar at the date of issue.
The corporation may issue the whole or any part of its shares as partly
paid and subject to call for the remainder of the consideration to be paid
therefor. Upon the face or back of each stock certificate issued to represent
any such partly paid shares, upon the books and records of the corporation in
the case of uncertificated partly paid shares, the total amount of the
consideration to be paid therefor and the amount paid thereon shall be stated.
Upon the declaration of any dividend on fully paid shares, the corporation shall
declare a dividend upon partly paid shares of the same class, but only upon the
basis of the percentage of the consideration actually paid thereon.
8.4 SPECIAL DESIGNATION ON CERTIFICATES
-----------------------------------
If the corporation is authorized to issue more than one class of stock or
more than one series of any class, then the powers, the designations, the
preferences, and the relative, participating, optional or other special rights
of each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on
-17-
<PAGE>
the face or back of the certificate that the corporation shall issue to
represent such class or series of stock; provided, however, that, except as
otherwise provided in Section 202 of the General Corporation Law of Delaware, in
lieu of the foregoing requirements there may be set forth on the face or back of
the certificate that the corporation shall issue to represent such class or
series of stock a statement that the corporation will furnish without charge to
each stockholder who so requests the powers, the designations, the preferences,
and the relative, participating, optional or other special rights of each class
of stock or series thereof and the qualifications, limitations or restrictions
of such preferences and/or rights.
8.5 LOST CERTIFICATES
-----------------
Except as provided in this Section 8.5, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and cancelled at the same time. The corporation
may issue a new certificate of stock or uncertificated shares in the place of
any certificate theretofore issued by it, alleged to have been lost, stolen or
destroyed, and the corporation may require the owner of the lost, stolen or
destroyed certificate, or his legal represen tative, to give the corporation a
bond sufficient to indemnify it against any claim that may be made against it on
account of the alleged loss, theft or destruction of any such certificate or the
issuance of such new certificate or uncertificated shares.
8.6 CONSTRUCTION; DEFINITIONS
-------------------------
Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the Delaware General Corporation Law shall
govern the construction of these bylaws. Without limiting the generality of this
provision, the singular number includes the plural, the plural number includes
the singular, and the term "person" includes both a corporation and a natural
person.
8.7 DIVIDENDS
---------
The directors of the corporation, subject to any restrictions contained in
the certificate of incorporation, may declare and pay dividends upon the shares
of its capital stock pursuant to the General Corporation Law of Delaware.
Dividends may be paid in cash, in property, or in shares of the corporation's
capital stock.
The directors of the corporation may set apart out of any of the funds of
the corporation available for dividends a reserve or reserves for any proper
purpose and may abolish any such reserve. Such purposes shall include but not
be limited to equalizing dividends, repairing or maintaining any property of the
corporation, and meeting contingencies.
8.8 FISCAL YEAR
-----------
The fiscal year of the corporation shall be fixed by resolution of the
board of directors and may be changed by the board of directors.
-18-
<PAGE>
8.9 SEAL
----
The board shall have the power to adopt a corporate seal bearing the words
"emachines, Inc." and "a Delaware Corporation" together with the date of
incorporation.
8.10 TRANSFER OF STOCK
-----------------
Upon surrender to the corporation or the transfer agent of the corporation
of a certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignation or authority to transfer, it shall be the duty of the
corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate, and record the transaction in its books.
8.11 STOCK TRANSFER AGREEMENTS
-------------------------
The corporation shall have power to enter into and perform any agreement
with any number of shareholders of any one or more classes of stock of the
corporation to restrict the transfer of shares of stock of the corporation of
any one or more classes owned by such stockholders in any manner not prohibited
by the General Corporation Law of Delaware.
8.12 REGISTERED STOCKHOLDERS
-----------------------
The corporation shall be entitled to recognize the exclusive right of a
person registered on its books as the owner of shares to receive dividends and
to vote as such owner, shall be entitled to hold liable for calls and
assessments the person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of another person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
ARTICLE IX
AMENDMENTS
----------
The original or other bylaws of the corporation may be adopted, amended or
repealed by the stockholders entitled to vote; provided, however, that the
corporation may, in its certificate of incorporation, confer the power to adopt,
amend or repeal bylaws upon the directors. The fact that such power has been so
conferred upon the directors shall not divest the stockholders of the power, nor
limit their power to adopt, amend or repeal bylaws.
-19-
<PAGE>
ARTICLE X
DISSOLUTION
-----------
If it should be deemed advisable in the judgment of the board of directors
of the corporation that the corporation should be dissolved, the board, after
the adoption of a resolution to that effect by a majority of the whole board at
any meeting called for that purpose, shall cause notice to be mailed to each
stockholder entitled to vote thereon of the adoption of the resolution and of a
meeting of stockholders to take action upon the resolution.
At the meeting a vote shall be taken for and against the proposed
dissolution. If a majority of the outstanding stock of the corporation entitled
to vote thereon votes for the proposed dissolution, then a certificate stating
that the dissolution has been authorized in accordance with the provisions of
Section 275 of the General Corporation Law of Delaware and setting forth the
names and residences of the directors and officers shall be executed,
acknowledged, and filed and shall become effective in accordance with Section
103 of the General Corporation Law of Delaware. Upon such certificate's
becoming effective in accordance with Section 103 of the General Corporation Law
of Delaware, the corporation shall be dissolved.
Whenever all the stockholders entitled to vote on a dissolution consent in
writing, either in person or by duly authorized attorney, to a dissolution, no
meeting of directors or stockholders shall be necessary. The consent shall be
filed and shall become effective in accordance with Section 103 of the General
Corporation Law of Delaware. Upon such consent's becoming effective in
accordance with Section 103 of the General Corporation Law of Delaware, the
corporation shall be dissolved. If the consent is signed by an attorney, then
the original power of attorney or a photocopy thereof shall be attached to and
filed with the consent. The consent filed with the Secretary of State shall
have attached to it the affidavit of the secretary or some other officer of the
corporation stating that the consent has been signed by or on behalf of all the
stockholders entitled to vote on a dissolution; in addition, there shall be
attached to the consent a certification by the secretary or some other officer
of the corporation setting forth the names and residences of the directors and
officers of the corporation.
ARTICLE XI
CUSTODIAN
---------
11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES
-------------------------------------------
The Court of Chancery, upon application of any stockholder, may appoint one
or more persons to be custodians and, if the corporation is insolvent, to be
receivers, of and for the corporation when:
-20-
<PAGE>
(i) at any meeting held for the election of directors the
stockholders are so divided that they have failed to elect successors to
directors whose terms have expired or would have expired upon qualification of
their successors; or
(ii) the business of the corporation is suffering or is threatened
with irreparable injury because the directors are so divided respecting the
management of the affairs of the corporation that the required vote for action
by the board of directors cannot be obtained and the stockholders are unable to
terminate this division; or
(iii) the corporation has abandoned its business and has failed within
a reasonable time to take steps to dissolve, liquidate or distribute its assets.
11.2 DUTIES OF CUSTODIAN
-------------------
The custodian shall have all the powers and title of a receiver appointed
under Section 291 of the General Corporation Law of Delaware, but the authority
of the custodian shall be to continue the business of the corporation and not to
liquidate its affairs and distribute its assets, except when the Court of
Chancery otherwise orders and except in cases arising under Sections 226(a)(3)
or 352(a)(2) of the General Corporation Law of Delaware.
-21-
<PAGE>
EXHIBIT 10.1
SECURITY AGREEMENT
This Security Agreement is made as of June 10, 1999 between emachines,
Inc., a Delaware corporation (the "Pledgee"), ________________ (the "Pledgor"),
and Wilson Sonsini Goodrich & Rosati, P.C., as escrow agent (the "Escrow Agent")
for the Pledgee and holder of the Securities pledged hereunder.
Recitals
--------
Pursuant to the Initial Capitalization Agreement, dated as of June 10, 1999
(the "Agreement"), between the Pledgor and the Pledgee, the Pledgor has
purchased _______________ shares of the Pledgee's Common Stock (the "Shares") at
a price of $0.20 per Share, for a total purchase price of $___________ (the
"Purchase Price"). The Pledgor has paid $___________ of the Purchase Price by
delivery to the Pledgee of a promissory note (the "Note").
NOW, THEREFORE, it is agreed as follows:
1. Creation and Description of Security Interest. In consideration of
---------------------------------------------
the transfer of the Shares to the Pledgor under the Agreement, the Pledgor,
pursuant to the California Uniform Commercial Code, hereby pledges all of such
Shares (herein sometimes referred to as the "Collateral") represented by
certificate number __________, and herewith delivers said certificate to the
Escrow Agent, who shall hold said certificate on behalf of the Pledgee subject
to the terms and conditions of this Security Agreement.
The Shares (together with an executed blank stock assignment or
assignments) shall be held by the Escrow Agent on behalf of the Pledgee as
security for the repayment of the Note, and any extensions or renewals thereof,
to be executed by the Pledgor pursuant to the terms of the Agreement, and the
Escrow Agent shall not encumber or dispose of such Shares except in accordance
with the provisions of this Security Agreement.
2. Pledgor's Representations and Covenants. To induce the Pledgee to
---------------------------------------
enter into this Security Agreement, the Pledgor represents and covenants to the
Pledgee, its successors and assigns, as follows:
(a) Payment of Indebtedness. The Pledgor will pay the principal
-----------------------
sum of the Note secured hereby, and interest thereon, at the time and in the
manner provided in the Note.
(b) Encumbrances. The Shares are free of all other adverse claims,
------------
encumbrances, defenses and liens (other than restrictions on transfer imposed by
applicable securities laws), except for the pledge of the Shares hereunder as
security for payment of the Note, and the Pledgor will not further encumber the
Shares without the prior written consent of Pledgee.
(c) Margin Regulations. In the event that the Pledgee's Common
------------------
Stock is now or later becomes margin-listed by the Federal Reserve Board and the
Pledgee is classified as
<PAGE>
a "lender" within the meaning of the regulations under Part 207 of Title 12 of
the Code of Federal Regulations ("Regulation G"), the Pledgor agrees to
cooperate with the Pledgee in making any amendments to the Note or providing any
additional collateral as may be necessary to comply with such regulations.
3. Voting Rights. During the term of this pledge and so long as all
-------------
payments of principal and interest are made as they become due under the terms
of the Note, the Pledgor shall have the right to vote all of the Shares pledged
hereunder.
4. Stock Adjustments. In the event that during the term of the pledge any
-----------------
stock dividend, reclassification, readjustment or other changes are declared or
made in the capital structure of the Pledgee, all new, substituted and
additional shares or other securities issued by reason of any such change shall
be delivered to and held by the Pledgee under the terms of this Security
Agreement in the same manner as the Shares originally pledged hereunder. In the
event of substitution of such securities, the Pledgor, the Pledgee and the
Escrow Agent shall cooperate and execute such documents as are reasonable so as
to provide for the substitution of such Collateral and, upon such substitution,
references to "Shares" in this Security Agreement shall include the substituted
shares of capital stock of the Pledgor as a result thereof.
5. Options and Rights. In the event that, during the term of this pledge,
------------------
subscription options or other rights or options shall be issued in connection
with the pledged Shares, such rights and options shall be the property of the
Pledgor and, if exercised by the Pledgor, all new stock or other securities so
acquired by the Pledgor as it relates to the pledged Shares then held by the
Escrow Agent shall be immediately delivered to the Escrow Agent, to be held
under the terms of this Security Agreement in the same manner as the Shares
pledged.
6. Default. The Pledgor shall be deemed to be in default of the Note
-------
and of this Security Agreement in the event:
Payment of principal or interest on the Note shall be delinquent for a
period of 10 days or more; or
The Pledgor fails to perform any of the covenants set forth in this
Security Agreement for a period of 10 days after written notice thereof from the
Pledgee; or
A bankruptcy or insolvency proceeding is instituted by or against the
Pledgor, or if a receiver is appointed for the property of the Pledgor; or
(a) The Pledgor makes an assignment for the benefit of creditors.
In the case of a default, as set forth above, the Pledgee shall have the
right to accelerate payment of the entire amount on the Note, and the Pledgee
shall thereafter be entitled to pursue its remedies under the California Uniform
Commercial Code.
7. Foreclosure. In the event of any foreclosure of the security interest,
-----------
the Company may sell the applicable Shares at a private sale and may itself
repurchase any or all of the applicable Shares. The parties acknowledge that,
prior to the establishment of a public market for the Shares of the Company, the
securities laws applicable to the sale of the Shares make a
-2-
<PAGE>
public sale of the Shares commercially unreasonable. The parties agree that the
repurchasing of the Shares by the Company, or by any person to whom the Company
may have assigned its rights hereunder, is commercially reasonable if made at
any of the following prices: (A) a price determined by the Board of Directors in
its discretion, fairly exercised, representing what would be the fair market
value of the Shares diminished by any limitation on transferability, whether due
to the size of the block of Shares or the restrictions of applicable securities
laws, or (B) the book value per Share as recorded on the Company's books at the
end of the last fiscal quarter prior to the date of sale of the Shares upon
foreclosure (whether or not such book value per share is unaudited and subject
to adjustment), or (C) the price at which the Shares were originally purchased
by the Purchaser.
8. Prepayment. In the event that the Pledgor prepays all or a portion of
----------
the Note, in accordance with the provisions thereof, the Escrow Agent, on behalf
of the Pledgee, will release from collateral the applicable Shares represented
by the portion of the Note so repaid.
9. Full Payment. Upon full payment by the Pledgor of all amounts due
------------
on the Pledgor's Note, the Escrow Agent shall deliver to the Pledgor the
certificate or certificates representing the Shares in the Escrow Agent's
possession belonging to the Pledgor, the blank stock assignment and the executed
original of the Note marked "canceled" by the Company, and the Escrow Agent
shall be discharged of all further obligations hereunder; provided, however,
that the Escrow Agent shall nevertheless retain said certificate or certificates
and stock assignment as escrow agent if so required pursuant to other
restrictions imposed pursuant to this Agreement.
10. Release of Collateral. Subject to any applicable contrary rules under
---------------------
Regulation G, there shall be released from this pledge a portion of the pledged
Shares held by the Escrow Agent hereunder upon payments of the principal of the
Note. The number of the pledged Shares which shall be released shall be that
number of full Shares which bears the same proportion to the initial number of
Shares pledged hereunder as the payment of principal bears to the initial full
principal amount of the Note. Notwithstanding the foregoing, upon any release
of pledged Shares hereunder any such Shares which shall not be so released shall
continue to be held in escrow pursuant to Sections 3 and 6 of the Agreement.
11. Withdrawal or Substitution of Collateral. The Pledgor shall not sell,
----------------------------------------
withdraw, pledge, substitute or otherwise dispose of all or any part of the
Collateral without the prior written consent of the Pledgee.
12. Term. The within pledge of Shares shall continue until the payment
----
of all indebtedness secured hereby, subject to the provisions for prior release
of a portion of the Collateral as provided in paragraph 7 above.
13. Escrow Agent Liability.
----------------------
(a) The Escrow Agent shall not be liable to any party for any of his
acts, or omissions to act, as the Escrow Agent unless the Escrow Agent is proved
to have acted in bad faith. Any act done or omitted pursuant to the advice of
legal counsel, other than an act or
-3-
<PAGE>
omission involving gross or willful negligence, shall be deemed to be done or
omitted in good faith.
(b) The Escrow Agent shall be entitled to employ such legal counsel
and other experts as the Escrow Agent may deem necessary properly to advise the
Escrow Agent in connection with its obligations hereunder, and the Escrow Agent
may rely upon the advice of such counsel. Such counsel's reasonable fees and
costs shall be borne by the Pledgor.
(c) It is understood and agreed that should any dispute arise with
respect to the delivery and/or ownership or right of possession of the
securities held by the Escrow Agent hereunder, the Escrow Agent is authorized
and directed to retain in the Escrow Agent's possession as agent of the Pledgee
without liability to anyone all or any part of said securities until such
disputes shall have been settled either by mutual written agreement of the
parties concerned or by a final order, decree or judgment of a court of
competent jurisdiction after the time for appeal has expired and no appeal has
been perfected, but the Escrow Agent shall be under no duty whatsoever to
institute or defend any such proceedings.
In addition, upon any dispute the Escrow Agent should be entitled to
engage legal counsel, whose fees and expenses shall be borne by the Pledgee.
14. Invalidity of Particular Provisions. The Pledgor and the Pledgee agree
-----------------------------------
that the enforceability or invalidity of any provision or provisions of this
Security Agreement shall not render any other provision or provisions herein
contained unenforceable or invalid.
15. Successors or Assigns. The Pledgor and the Pledgee agree that all of
---------------------
the terms of this Security Agreement shall be binding on their respective
successors and assigns, and that the term "Pledgor" and the term "Pledgee" as
used herein shall be deemed to include, for all purposes, the respective
designees, successors, assigns, heirs, executors and administrators.
16. Governing Law. This Security Agreement shall be interpreted and
-------------
governed under the laws of the State of California.
17. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed an original, all of which together
shall constitute one and the same instrument.
-4-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
PLEDGOR
By:____________________________
Name:
Date:
PLEDGEE
emachines, Inc.
By:____________________________
Name:
Title:
Date:
ESCROW AGENT
WILSON SONSINI GOODRICH & ROSATI, P.C.
By:____________________________
Name:
Title:
Date:
-5-
<PAGE>
EXHIBIT 10.2
PROMISSORY NOTE
$___________ Date: June 10,1999
For value received, the undersigned promises to pay to emachines, Inc., a
Delaware corporation (the "Company"), or its order, at its principal office the
principal sum of $___________ with interest, which shall accrue from December
18, 1998, thereof at the rate of 5.79% per annum, compounded annually, on the
unpaid balance of the principal sum. Said principal shall be due on the tenth
anniversary of the date of this Note. Said interest shall be paid as it accrues
by means of regular payroll deductions in the case of an employee and by such
other means as the Board may approve in the case of a member of the Board.
Should the undersigned fail to make full payment of principal or interest
for a period of 10 days or more after the due date thereof, the whole unpaid
balance on this Note of principal and interest shall become immediately due at
the option of the holder of this Note.
This Note is secured by a pledge of the Company's Common Stock under the
terms of a Security Agreement of even date herewith and is subject to the terms
of such agreement.
The holder of this Note shall have full recourse against the undersigned
personally for failure to pay the Note as and when due.
The principal is payable in lawful money of the United States of America.
The privilege is reserved to prepay any portion of the Note at any time.
If the undersigned shall default in the payment of amounts hereunder when
due, the holder of this Note shall be entitled to payment by the undersigned of
all costs of collection, including, without limitation, reasonable attorneys'
fees and costs incurred in connection with such collection efforts, whether or
not suit on this Note is filed. The maker waives presentment for payment,
protest, notice of protest and notice of non-payment of this Note. This Note
shall be governed by the laws of the State of California as they apply to
contracts entered into and wholly to be performed within such state.
_______________________________
Name:
<PAGE>
EXHIBIT 10.3
eMachines, Inc.
AMENDED AND RESTATED
RIGHTS AND RESTRICTIONS AGREEMENT
This AMENDED AND RESTATED RIGHTS AND RESTRICTIONS AGREEMENT(the
"Agreement") is entered into as of August 18, 1999, by and among eMachines,
Inc., a Delaware corporation (the "Company"), the holders of Series A Preferred
Stock identified as such on Schedule A attached hereto (the "Investors"), the
----------
holders of shares ("Shares") of Common Stock of the Company ("Common Stock")
identified as such on Schedule A attached hereto (the "Founders", and the
----------
Investors and the Founders, the "Shareholders"), and such holders of other
securities of the Company who have registration or other rights with respect to
such securities or to the securities of the Company issuable upon exercise or
conversion thereof (the "Additional Rightsholders") identified as such from time
to time on Schedule A attached hereto. The Investors are acquiring their shares
----------
of Series A Preferred Stock contemporaneously herewith or at a later date, in
each case pursuant to a Series A Preferred Stock Purchase Agreement dated as of
August 18, 1999 (the "Stock Purchase Agreement").
R E C I T A L S
A. The Company was incorporated on September 18, 1998 as a corporation
under the laws of the State of Delaware, United States of America. The Company
and the Founders are party to that certain Shareholders Agreement dated as of
June 10, 1999 (the "Shareholders Agreement").
B. Each of the Investors and the Founders owns, and each Additional
Rightsholder that shall enter into this Agreement owns, (i) that number of
outstanding shares of the Company"s Series A Preferred Stock ("Series A
Preferred") or Shares of Common Stock (Common Stock and Series A Preferred,
collectively, the "Equity Securities") and (ii) such warrants and/or options
with respect to the Equity Securities, in each case, as is set forth opposite
his, her, or its name on Schedule A hereto.
----------
C. The Company, the Investors and the Founders have reached an
understanding concerning various aspects of their relationships among themselves
and the organization and operation of the Company and its business. This
Agreement sets forth this understanding, terminates the Shareholders Agreement
and amends, restates and supersedes in its entirety that certain Rights and
Restrictions Agreement dated as of June 10, 1999, by and among the Company and
the Founders (the "Initial Rights Agreement").
D. The Investors acknowledge and agree, and each Additional Rightsholder
that shall enter into this Agreement acknowledges and agrees, that as a
condition to purchasing their Equity Securities, they are subject to certain
rights and restrictions as enumerated herein.
<PAGE>
NOW, THEREFORE IT IS AGREED:
1. Prior Rights; Definitions
1.1 Termination of Prior Rights.
---------------------------
(a) Upon execution of this Agreement by the Company, the
Founders and the Investors, the Shareholders Agreement shall be terminated in
its entirety and the Initial Rights Agreement shall be terminated and superseded
entirely by this Agreement. Execution of this Agreement by each Founder shall
constitute the consent of such Founder referred to in Section 8 of the Initial
Rights Agreement to the preferential registration rights granted to the
Investors hereunder.
(b) Upon execution of this Agreement by the Company and an
Additional Rightsholder, all rights relating to the registration or
qualification of the Company"s securities, under the Securities Act of 1933, as
amended (the "1933 Act"), or other applicable state and federal securities laws
that such Additional Rightsholder has under any warrant, stock option, or other
security or agreement (other than this Agreement) shall be terminated, and the
Company shall be required to include securities of the Company held by such
Additional Rightsholder (or any transferee or assignee thereof) in a
registration statement filed by the Company under the 1933 Act only if and upon
the terms and conditions set forth in this Agreement.
(c) Upon execution of this Agreement by a party to the Initial
Rights Agreement, such party hereby waives the Shareholders" Maintenance Right
pursuant to Section 17 of the Initial Rights Agreement with regard to the
issuance by the Company of its Series A Preferred Stock, the AOL Warrant (as
defined in the Stock Purchase Agreement) and the Shares of Common Stock
underlying the AOL Warrant, and the 419,538 Shares of Common Stock ("KDS
Common") issued to Korea Data Systems America, Inc. ("KDS") pursuant to the
Agreement (amending Trademark Assignment) dated as of August 16, 1999 between
the Company and KDS. Upon execution of this Agreement by a majority of the
outstanding Shares of Common Stock held by the Founders, as such term was
defined in the Initial Rights Agreement, entitled to the Shareholders"
Maintenance Right pursuant to Section 17 of the Initial Rights Agreement, such
Shareholders" Maintenance Right shall be deemed waived as to all Founders with
respect to the issuance and sale of the Series A Preferred, the AOL Warrant, the
Shares of Common Stock underlying the AOL Warrant, and the KDS Common. Execution
of this Agreement by each Founder shall constitute the waiver of such Founder of
the written notice to which it was entitled under such Section of the issuance
and sale of Series A Preferred, the AOL Warrant, the Shares of Common Stock
underlying the AOL Warrant, and the KDS Common.
1.3 Certain Definitions. As used in this Agreement, the
-------------------
following terms shall have the following meanings (such meanings to be equally
applicable to both singular and plural forms of the terms defined herein):
-2-
<PAGE>
"Change in Control" shall mean the occurrence of (i) the sale of all or
substantially all the assets of the Company; or (ii) consummation of any
acquisition, consolidation or merger of the Company other than an acquisition,
consolidation or merger of the Company in which the holders of Common Stock
immediately prior to the acquisition, consolidation or merger have, directly or
indirectly, at least a majority of the total voting power in the aggregate of
all classes of capital stock of the continuing or surviving corporation
immediately after the acquisition, consolidation or merger.
"Commission" shall mean the Securities and Exchange Commission of the
United States or any other federal agency at the time administering the
Securities Act.
"Excluded Registration Statement" shall mean a registration statement
relating to a Rule 145 transaction, an offering solely to employees or a
registration on any form which does not permit secondary sales or does not
include substantially the same information as would be required to be included
in a registration statement covering the sale of the Registrable Securities.
"Founder Registrable Securities" means (i) the Shares owned of record by
the Founders on the date hereof, and (ii) any shares of the Company issued or
issuable in respect of such Shares upon any stock split, stock dividend,
recapitalization, or similar event, (iii) the Shares of Common Stock (other than
Investor Registrable Securities) issued to the Industrial Investor pursuant to
the warrants issued and to be issued to the Industrial Investor by the Company
in connection with the Industrial Investor's purchase of shares of Series A
Preferred, and (iv) any other shares of Common Stock held by persons holding the
securities described in clauses (i) and (ii) of this paragraph; provided,
--------
however, that Founder Registrable Securities shall not include (A) securities
- -------
that have been sold to or through a broker or dealer or underwriter in a public
distribution or a public securities transaction, (B) securities that have been
sold or made available for sale in the opinion of counsel to the Company in a
transaction exempt from the registration and prospectus delivery requirements of
the Securities Act so that all transfer restrictions and restrictive legends
with respect thereto are or shall be removed upon the consummation of such sale
or (C) any securities if such securities constitute all of the securities of a
Holder or its affiliate and all such securities may be sold by the Holder
thereof (or by such affiliate) within a three month period following the
Company"s initial public offering pursuant to Rule 144 promulgated under the
Securities Act, or any successor rule.
"Holder" shall mean any Shareholder holding Registrable Securities and any
person holding Registrable Securities to whom the rights under this Agreement
have been transferred in compliance with Section 2 hereof. Without limiting the
generality of the foregoing, no Additional Rightsholder shall be a Holder
hereunder except with respect to any Registrable Securities that such Additional
Rightsholder may hold at any time or from time to time.
"Industrial Investor" shall mean America Online, Inc., a Delaware
corporation. Except as otherwise noted herein, the Industrial Investor shall be
an Investor for all purposes hereof to the extent that it shall hold Investor
Registrable Securities and a Founder for all purposes hereof to the extent that
it shall hold any Shares of Common Stock (other than Investor Registrable
Securities).
-3-
<PAGE>
"Initiating Holders" shall mean any Holder or Holders of not less than
fifty percent (50%) of the then outstanding Investor Registrable Securities.
"Investor Registrable Securities" means (i) the Shares of Common Stock
issued or issuable upon conversion of shares of Series A Preferred owned of
record by any Investor on the effective date of this Agreement with respect to
such Investor, (ii) any shares of the Company issued or issuable in respect of
the shares of Series A Preferred (or in respect of any Shares of Common Stock
issued or issuable upon conversion of shares of Series A Preferred) upon any
stock split, stock dividend, recapitalization, or similar event, and (iii) any
other Shares of Common Stock held by persons holding the securities described in
clauses (i) and (ii) of this paragraph; provided, however, that Investor
-------- -------
Registrable Securities shall not include (A) securities that have been sold to
or through a broker or dealer or underwriter in a public distribution or a
public securities transaction, (B) securities that have been sold or made
available for sale in the opinion of counsel to the Company in a transaction
exempt from the registration and prospectus delivery requirements of the
Securities Act so that all transfer restrictions and restrictive legends with
respect thereto are or shall be removed upon the consummation of such sale, or
(C) any securities if such securities constitute all of the securities of a
Holder or its affiliate and all such securities may be sold by the Holder
thereof (or by such affiliate) within a three month period following the
Company"s initial public offering pursuant to Rule 144 promulgated under the
Securities Act, or any successor rule.
"IPO" shall mean the declaration of the Commission of the effectiveness of
a registration statement filed by the Company in connection with a firmly
underwritten public offering with an aggregate price to the public exceeding
$30,000,000.
"New Securities" shall have the meaning set forth in Section 17.1.
"Registrable Securities" shall mean, collectively, the Investor Registrable
Securities, the Founder Registrable Securities, and the Rightsholder Registrable
Securities.
The terms "register," "registered" and "registration" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement.
"Registration Expenses" shall mean all expenses incurred by the Company in
complying with Sections 5 and 6 hereof, including, without limitation, all
registration, qualification and filing fees, printing expenses, escrow fees,
fees and disbursements of counsel for the Company, blue sky fees and expenses
and the expense of any special audits incident to or required by any such
registration (but excluding the compensation of regular employees of the
Company, which shall be paid in any event by the Company, and Selling Expenses).
"Restricted Securities" shall mean the securities of the Company required
to bear the legend set forth in Section 2 hereof.
"Rightsholder Registrable Securities" means (i) the Shares of Common Stock
issued or issuable upon exercise or conversion or (consecutive exercises or
conversions) of any warrant,
-4-
<PAGE>
option, right or other security of the Company owned of record by any Additional
Rightsholder on the date of signature of this Agreement by such Additional
Rightsholder, and (ii) any Shares of the Company issued or issuable in respect
of such securities (or in respect of any Shares of Common Stock issued or
issuable upon single or multiple exercise or conversion of such securities) upon
any stock split, stock dividend, recapitalization, or similar event, and (iii)
any other Shares of Common Stock held by, or issuable upon exercise or
conversion of other securities held by, persons holding the securities described
in clauses (i) and (ii) of this paragraph; provided, however, that Rightsholder
-------- -------
Registrable Securities shall not include (A) securities that have been sold to
or through a broker or dealer or underwriter in a public distribution or a
public securities transaction, (B) securities that have been sold or made
available for sale in the opinion of counsel to the Company in a transaction
exempt from the registration and prospectus delivery requirements of the
Securities Act so that all transfer restrictions and restrictive legends with
respect thereto are or shall be removed upon the consummation of such sale, or
(C) any securities if such securities constitute all of the securities of a
Holder or its affiliate and all such securities may be sold by the Holder
thereof (or by such affiliate) within a three month period following the
Company"s initial public offering pursuant to Rule 144 promulgated under the
Securities Act, or any successor rule.
"Securities Act" shall mean the Securities Act of 1933, as amended, or any
similar federal statute and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"Selling Expenses" shall mean all underwriting discounts, selling
commissions and stock transfer taxes applicable to the securities registered by
the Holders and, except as set forth in Section 9.3, all reasonable fees and
disbursements of counsel for any Holder.
"Selling Holder" shall have the meaning set forth in Section 16.
Certain other defined terms used herein have the meanings set forth in
Section 16 and Section 17 of this Agreement.
2. Restrictions on Transferability; Restrictive Legend; Notice of
Proposed Transfers.
2.1 The Shares and shares of Series A Preferred shall not be sold,
assigned, transferred or pledged except upon satisfaction of the conditions
specified in this Agreement, which conditions are intended to ensure compliance
with the provisions of the Securities Act. Each Shareholder will cause any
proposed purchaser, assignee, transferee, or pledgee of the Shares or shares of
Series A Preferred held by such Shareholder to agree to take and hold such
securities subject to the provisions and upon the conditions specified in this
Agreement. Each Additional Rightsholder will cause any proposed purchaser,
assignee, transferee, or pledgee of the Shares or shares of Series A Preferred
held by such Additional Rightsholder (or issuable upon conversion or exercise of
the securities held by such Additional Rightsholder) to agree to take and hold
such securities subject to the provisions and upon the conditions specified in
this Agreement.
-5-
<PAGE>
2.2 Each certificate representing (i) the Shares or shares of Series
A Preferred and (ii) any other securities issued in respect of the Shares or
such shares upon any stock split, stock dividend, recapitalization, merger,
consolidation or similar event shall (unless otherwise permitted by the
provisions of Section 2.3 below) be stamped or otherwise imprinted with the
following legend (in addition to any legend required by any other agreement or
under applicable state securities laws):
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN
ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") OR ANY
STATE SECURITIES LAWS. SUCH SHARES MAY NOT BE SOLD OR
OFFERED FOR SALE IN THE ABSENCE OF SUCH REGISTRATION OR AN
OPINION OF COUNSEL SATISFACTORY TO THE COMPANY AND ITS
COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE
ACT. COPIES OF THE AGREEMENTS COVERING THE PURCHASE OF THESE
SHARES AND RESTRICTING THEIR TRANSFER MAY BE OBTAINED AT NO
COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF THIS
CERTIFICATE TO THE SECRETARY OF THE CORPORATION AT THE
PRINCIPAL EXECUTIVE OFFICE OF THE CORPORATION.
Each Shareholder and Additional Rightsholder consents to the Company making
a notation on its records and giving instructions to any transfer agent of the
Shares or shares of Series A Preferred in order to implement the restrictions on
transfer established in this Agreement.
2.3 The holder of each certificate representing Shares or shares of
Series A Preferred by acceptance thereof agrees to comply in all respects with
the provisions of this Agreement, including, without limitation, Section 16
hereof. Prior to any proposed sale, assignment, transfer or pledge of any Shares
or shares of Series A Preferred (other than a transfer not involving a change in
beneficial ownership), the holder thereof shall give written notice to the
Company of such holder"s intention to effect such transfer, sale, assignment or
pledge. Each such notice shall describe the manner and circumstances of the
proposed transfer, sale, assignment or pledge in sufficient detail, including
the information required by Section 16.1 to the extent the provisions of Section
16 are still in effect, and shall be accompanied, at such holder"s expense by
either (i) an unqualified written opinion of legal counsel who shall, and whose
legal opinion shall be, reasonably satisfactory to the Company addressed to the
Company, to the effect that the proposed transfer of the Restricted Securities
may be effected without registration under the Securities Act, or (ii) a "no
action" letter from the Commission to the effect that the transfer of such
securities without registration will not result in a recommendation by the staff
of the Commission that action be taken with respect thereto, whereupon the
holder of such Restricted Securities shall be entitled to transfer such
Restricted Securities in accordance with the terms of this Agreement and of the
notice delivered by the holder to the Company. Each certificate evidencing the
Restricted Securities transferred as above provided shall bear, except if such
transfer is made pursuant to Rule 144 or pursuant to an effective registration
statement, the appropriate restrictive legend set forth in Section 2.2 above,
except that such certificate shall not bear such restrictive legend if in the
opinion of counsel for such holder that
-6-
<PAGE>
is acceptable to the Company such legend is not required in order to establish
compliance with any provision of the Securities Act.
3. Financial Information
3.1 For so long as any Shareholder owns separately (and not
aggregated together with any of its affiliates for purposes of Section 19.12
hereof) 125,000 or more Shares of Common Stock or shares of Preferred Stock, on
an as if converted basis (adjusted for stock splits, combinations, and the
like), the Company will furnish the following reports to such Shareholder:
(a) As soon as practicable after the end of each fiscal year of
the Company, and in any event within ninety (90) days thereafter, a consolidated
balance sheet of the Company and its subsidiaries, if any, as at the end of such
fiscal year, and consolidated statements of income and cash flows of the Company
and its subsidiaries, if any, for such year, prepared in accordance with
generally accepted accounting principles ("GAAP") consistently applied, all in
reasonable detail and certified by the Chief Financial Officer or Chief
Executive Officer of the Company; and
(b) As soon as practicable after the end of the first, second
and third quarterly accounting periods in each fiscal year of the Company, and
in any event within forty-five (45) days thereafter, a consolidated balance
sheet of the Company and its subsidiaries, if any, as of the end of each such
quarterly period, and consolidated statements of income and cash flows of the
Company and its subsidiaries for such period, prepared in accordance with GAAP
consistently applied, subject to changes resulting from year-end audit
adjustments and the absence of notes, all in reasonable detail and certified by
the Chief Financial Officer or Chief Executive Officer of the Company.
Anything in this Section 3 to the contrary notwithstanding, no Shareholder
by reason of this Agreement shall have access to any trade secrets or classified
information of the Company. Each Shareholder hereby agrees to hold in confidence
and trust and not to misuse or disclose any confidential or proprietary
information provided to such Shareholder pursuant to this Section 3. Each
Shareholder further acknowledges and understands that any information so
obtained which may be considered "inside" non-public information will not be
utilized by such Shareholder in connection with purchases and/or sales of the
Company"s securities except in compliance with applicable state and federal
anti-fraud statutes. The Company shall not be required to comply with this
Section 3 in respect of any Shareholder whom the Company reasonably determines
to be a competitor of the Company or an officer, employee, director or greater
than ten percent (10%) stockholder of such competitor. The Industrial Investor
shall not be considered to be a competitor of the Company unless reasonably
determined by the Board of Directors of the Company, in good faith and after due
deliberation, to be a direct competitor of the Company.
4. Share Allocation
4.1 Subject to any applicable legal and regulatory limitations, the
Company shall, and shall cause all underwriters that it shall engage to, offer
in the Share Allocation to each of the
-7-
<PAGE>
holders of Series A Preferred that shall exercise its option to do so out of the
Shares of Common Stock registered with the SEC in connection with the IPO ("IPO
Shares") such holder"s Pro Rata Share of the IPO Shares included in the Share
Allocation. Such offer shall be made to each such holder at the gross public
offering price set forth on the cover page of the final Prospectus included as a
part of the Company"s Registration Statement. The participation of any holder of
Series A Preferred in the Share Allocation shall be conditioned in all cases on
that holder"s compliance with all applicable federal and state securities laws,
in particular without limiting the generality of the foregoing on its compliance
with applicable disclosure requirements and Rule IM-2110-1 in the Manual of the
National Association of Securities Dealers, Inc.
4.2 The "Share Allocation" shall mean the offer of certain IPO Shares
to the holders of Series A Preferred in accordance with the terms and conditions
of this Section 4, and shall include the number of IPO Shares calculated by
dividing $10,000,000 by the gross per Share offering price in the IPO as set
forth on the cover page of the final Prospectus included as a part of the
Company"s Registration Statement. As set forth in this Section 4, a Series A
Preferred holder"s "Pro Rata Share" at any time shall mean a fraction the
numerator of which is the number of shares of Series A Preferred then held by
such holder and the denominator of which is the total number of shares of Series
A Preferred then outstanding.
4.3 The Company shall transmit to each holder of Series A Preferred
at its address as set forth in the shareholders register of the Company (or of
its transfer agent, if any) within five business days after the date of the
preliminary prospectus with respect to the IPO (and within five business days
after the date of any later preliminary prospectus with respect to the IPO if
the IPO shall be abandoned for any reason at any time or from time to time) a
copy of such preliminary prospectus together with the Company"s calculation
based on its shareholder register (or the shareholders register of its transfer
agent, if any) of each such holder"s Pro Rata Share. Each holder of Series A
Preferred that shall desire to exercise its option to purchase IPO Shares in the
Share Allocation shall respond to the "Indication of Interest" form that it
shall receive from or on behalf of the underwriters of the IPO within the delay
specified therein, effecting a "Holder"s Notification". A holder of Series A
Preferred may exercise its option as aforesaid with respect to all or some of
the IPO Shares offered to it in the Share Allocation. Any holder of Series A
Preferred that shall not have notified the Company of its exercise of such
option within the aforesaid delay shall be deemed not to have exercised its
option hereunder. Neither the Company nor any underwriter engaged by the Company
shall have any liability under this Section 4 to any holder of Series A
Preferred whose address is not correct on the books of the Company (or of its
transfer agent) or who for any other reason shall not effect its Holder"s
Notification in a timely manner or with respect to all of the IPO Shares which
it may be entitled to purchase under this Section 4.
4.4 Each Holder"s Notification shall state (i) how many IPO Shares of
its Pro Rata Share it desires to purchase (and may state "all" or "one half" of
its Pro Rata Share or comparable summary description) and (ii) if it shall
desire to purchase all of its Pro Rata Share, whether in addition it shall
desire to purchase any of its Pro Rata Share of the IPO Shares offered to other
holders of shares of Series A Preferred in the Share Allocation who shall not
have exercised their option to purchase all of the IPO Shares offered them in
the Program. Settlement of the purchase
-8-
<PAGE>
and sale of the IPO Shares shall occur on the same terms and conditions as shall
be offered to the public in the IPO.
4.5 Each holder of Series A Preferred that shall participate in the
Share Allocation agrees, upon request of the Company or the underwriters
managing any underwritten offering of the Company"s securities, not to sell,
make any short sale of, loan, grant any option for the purchase of, or otherwise
dispose of any IPO Shares that it shall acquire pursuant to the Share Allocation
without the prior written consent of the Company or such underwriters, as the
case may be, for such period of time (not to exceed one hundred eighty (180)
days) from the date of the IPO or for such period of time (not to exceed ninety
(90) days) from the effective date of any subsequent registration statement
after the IPO (other than an Excluded Registration Statement) as may be
requested by the underwriters, and if so requested by the Company or such
underwriters, to enter into a lockup agreement to the foregoing effect and in a
form satisfactory to the Company and such underwriters; provided however, that
----------------
holders of shares of Series A Preferred shall not be so obligated not to dispose
of their IPO Shares, and shall not be required to enter into such a lock-up
agreement with respect thereto, unless: (A) in the case of the IPO, (i) all
executive officers and 1% shareholders of the Company agree to the same lock-up
and (ii) such agreement shall provide that any discretionary waiver or
termination of the restrictions of any such lock-up agreements by the Company or
representatives of the underwriters shall apply to all persons subject to such
agreements pro rata based on the number of shares subject to such agreements;
and (B) in the case of a registration statement subsequent to the IPO, (i) all
executive officers agree to the same lock-up and (ii) the holders have the
ability to sell not less than 25% of the Shares registered in any such
subsequent offering. The obligations of the holders of Series A Preferred set
forth in this Section 4.5 shall expire on the date that is the second
anniversary of the IPO of the Company"s securities.
4.6 In lieu of participating in the Share Allocation pursuant to this
Section 4, each holder of the Series A Preferred who originally purchased the
Series A Preferred from the Company may enter into an agreement with the Company
providing for the purchase by such holder of a number of shares of Common Stock
equal to such holder"s Pro Rata Share times 755,179 at a per share price equal
to the gross offering price of the Common Stock in the IPO concurrently with the
closing of the IPO (or, at the Company"s option, promptly thereafter), provided
that a binding agreement in form and substance reasonably acceptable to the
Company and the holder with respect to such purchase has been entered into prior
to the initial filing of the Company of a Registration Statement with respect to
the IPO. Any holder electing to exercise its rights under this Section 4.6 shall
not be entitled to any rights under Sections 4.1 through 4.4. The Company will
use reasonable efforts to provide each holder of Series A Preferred with advance
notice of the initial filing of the Company"s Registration Statement at least
one day in advance of such filing (unless such filing is made within one week of
the date hereof, in which case no further notice will be required). Each holder
purchasing shares pursuant to this Section 4.6 will be required to make
representations, warranties and agreements comparable to those set forth in
Section 3 of the Stock Purchase Agreement with respect to such purchase and to
enter into an appropriate amendment to this Agreement to entitle such shares to
the registration rights and subject such shares to the restrictions and
obligations and on the same terms and conditions set forth herein as if the
Common Stock issuable under this Section 4.6 was Series A Preferred. All of the
parties to this Agreement agree to
-9-
<PAGE>
enter to such an amendment promptly following a written request by the Company
following the exercise by an Purchaser of Series A Preferred of its right to
purchase shares pursuant to this Section 4.6. Shares purchased pursuant to this
Section 4.6 will be subject to the lock-up obligations set forth in Section 4.5
as if they were IPO Shares, subject to the conditions set forth therein.
Notwithstanding any provision to the contrary in this Agreement, for purposes of
this Section 4.6, "Pro Rata Share" is to be calculated as though each Investor
purchasing Series A Preferred at a Later Closing (as defined in the Stock
Purchase Agreement) shall have purchased all such Series A Preferred at the
Closing (as defined in the Stock Purchase Agreement) and was a holder thereof at
the time of such calculation.
5. Requested Registration.
5.1 Notice of Registration; Registration. In case the Company shall
------------------------------------
receive from Initiating Holders a written request that the Company effect any
registration, qualification or compliance (other than a registration on Form S-3
or any successor form) that would result in an aggregate offering of at least
$15,000,000, the Company will:
(a) promptly give written notice of the proposed registration to
all other Holders; and
(b) subject to Section 5.3, use its reasonable efforts to effect,
as soon as practicable, such registration, qualification or compliance
(including, without limitation, the execution of an undertaking to file post-
effective amendments, appropriate qualification under applicable blue sky or
other state securities laws and appropriate compliance with applicable
regulations issued under the Securities Act) as may be so requested and as would
permit or facilitate the sale and distribution of all or such portion of such
Registrable Securities as are specified in such request, together with (i) all
or such portion of the Registrable Securities of any Holder or Holders joining
in such request as are specified in a written request given within ten (10)
business days after receipt of such written notice from the Company, and (ii)
such additional securities as the Company may desire to register, including, but
not limited to, securities of the Company which are held by officers or
directors of the Company or which are held by persons who, by virtue of
agreements with the Company, are entitled to include their securities in any
such registration; provided that the Company shall not be obligated to take any
action to effect any such registration, qualification or compliance pursuant to
this Section 5:
(i) In any particular jurisdiction in which the Company
would be required to execute a general consent to service of process in
effecting such registration, qualification or compliance or subject the Company
to taxation in such jurisdiction unless the Company is already subject to
service in such jurisdiction or taxation in such jurisdiction, respectively, and
except as may be required by the Securities Act;
(ii) After the Company has effected one (1) registration
pursuant to this Section 5 and such registration has been declared or ordered
effective and the securities offered pursuant to such registration have been
sold;
-10-
<PAGE>
(iii) If at the time of the request to register Registrable
Securities the Company gives notice within thirty (30) days of such request that
it is engaged or has fixed plans to engage within thirty (30) days of the time
of the request in a firmly underwritten registered public offering as to which
the Holders may include Registrable Securities pursuant to Section 6 or 7
hereof; or
(iv) Prior to six (6) months following the closing of the
IPO.
Subject to the foregoing clauses (i) through (iv) and to Section 5.3, the
Company shall file a registration statement covering the Registrable Securities
so requested to be registered as soon as practicable after receipt of the
request of the Initiating Holders.
5.2 Underwriting. If the Initiating Holders intend to distribute the
------------
Registrable Securities covered by their request by means of an underwriting,
they shall so advise the Company as a part of their request made pursuant to
Section 5 and the Company shall include such information in the written notice
referred to in Section 5.1. The right of any Holder to registration pursuant to
Section 5 shall be conditioned upon such Holder"s participation in such
underwriting and the inclusion of such Holder"s Registrable Securities in the
underwriting to the extent requested (unless otherwise mutually agreed by a
majority in interest of the Initiating Holders and such Holder) to the extent
provided herein. If officers or directors of the Company shall request inclusion
of securities of the Company other than Registrable Securities in any
registration pursuant to this Section 2.1, or if holders of securities of the
Company who are entitled by contract with the Company (other than this
Agreement) to have securities included in such a registration (such officers,
directors, and other shareholders being collectively referred to as the "Other
Shareholders") request such inclusion, such securities of the Other Shareholders
may be included in the underwriting, provided that such Other Shareholders
accept the further applicable provisions of this Agreement.
The Company shall (together with all Holders proposing to distribute their
securities through such underwriting) enter into an underwriting agreement in
customary form with the underwriter or underwriters selected for such
underwriting by a majority in interest of the Initiating Holders and consented
to by the Company, which consent shall not be unreasonably denied.
Notwithstanding any other provision of this Section 5, if the underwriter
determines that marketing factors require a limitation of the number of shares
to be underwritten and so advises the Initiating Holders in writing, then the
Company shall so advise all Holders and Other Shareholders who have indicated to
the Company their decision to distribute any of their Registrable Securities
through such underwriting and the number of shares of Registrable Securities
that may be included in the registration and underwriting shall be allocated
among all Holders and Other Shareholders as follows: first, an equal aggregate
number of shares of Registrable Securities of each of the Investors (as a group)
and the Founders (as a group); and second, among the Other Shareholders.
Registrable Securities are to be allocated within each group as aforesaid in
proportion, as nearly as practicable, to the respective amounts of Registrable
Securities held by the Investors, the Founders, or the Other Shareholders, as
applicable, at the time of filing the registration statement. To facilitate the
allocation of shares in accordance with the above provisions, the Company may
round the number of shares allocated to any Holder or Other Shareholder to the
nearest 100 shares. No Registrable Securities excluded from
-11-
<PAGE>
the underwriting by reason of the underwriter"s marketing limitation shall be
included in such registration.
If any Holder disapproves of the terms of the underwriting, such person may
elect to withdraw therefrom by written notice to the Company, the underwriter
and the Initiating Holders. The Registrable Securities and/or other securities
so withdrawn from such underwriting shall also be withdrawn from such
registration; provided, however, that, if by the withdrawal of such Registrable
-------- -------
Securities a greater number of Registrable Securities held by other Holders may
be included in such registration (up to the maximum of any limitation imposed by
the underwriters), then the Company shall offer to all Holders who have included
Registrable Securities in the registration the right to include additional
Registrable Securities in the same proportions used above in determining the
underwriter limitation.
If the underwriter has not limited the number of Registrable Securities to
be underwritten, the Company may include securities for its own account or the
account of others in such registration if the underwriter so agrees and if the
number of Registrable Securities which would otherwise have been included in
such registration and underwriting will not thereby be limited.
5.3 Delay of Registration. If the Company shall furnish to the
---------------------
Initiating Holders a certificate signed by the President of the Company stating
that, in the good faith judgment of the Board of Directors of the Company, it
would not be in the best interests of the Company and its shareholders for such
registration statement to be filed on or before the date filing would be
required and it is therefore appropriate to defer the filing of such
registration statement, then the Company may direct that such request for
registration be delayed for a period not in excess of one hundred twenty (120)
days, such right to delay a request to be exercised by the Company not more than
once in any twelve month period.
6. Company Registration.
6.1 Notice of Registration. If at any time or from time to time
----------------------
the Company shall determine to register any of its Common Stock on Form S-1 or
Form S-3 (or any successor form under the Securities Act) (other than with
respect to a shelf registration statement), for its own account in connection
with the public offering of such securities solely for cash, the Company will:
(a) promptly give to each Holder written notice thereof; and
(b) include in such registration (and any related qualification
under blue sky laws or other compliance), and in any underwriting involved
therein, all the Registrable Securities specified in a written request or
requests, made within ten (10) business days after receipt of such written
notice from the Company, by any Holder.
Notwithstanding the foregoing, no registrations of securities by the
Company on an Excluded Registration Statement shall give rise to the rights of
the Holders set forth in this Section.
-12-
<PAGE>
6.2 Underwriting. If the registration of which the Company gives
------------
notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as a part of the written notice given
pursuant to Section 6.1(a). In such event the right of any Holder to
registration pursuant to this Section 6 shall be conditioned upon such Holder"s
participation in such underwriting and the inclusion of Registrable Securities
in the underwriting to the extent provided herein. All Holders proposing to
distribute their securities through such underwriting shall (together with the
Company and the Other Shareholders distributing their securities through such
underwriting) enter into an underwriting agreement in customary form with the
managing underwriter selected for such underwriting by the Company.
Notwithstanding any other provision of this Section 6, if the managing
underwriter determines that marketing factors require a limitation of the number
of shares to be underwritten, the managing underwriter may limit all or any
portion of the Registrable Securities to be included in such registration. The
Company shall so advise all Holders and Other Shareholders distributing their
securities through such underwriting and the number of shares of Registrable
Securities that may be included in the registration and underwriting shall be
allocated as follows: first, an equal aggregate number of shares of Registrable
Securities of each of the Investors (as a group) and the Founders (as a group);
and second, among the Other Shareholders. Registrable Securities are to be
allocated within each group as aforesaid in proportion, as nearly as
practicable, to the respective amounts of Registrable Securities held by the
Investors, the Founders, or the Other Shareholders, as applicable, at the time
of filing the registration statement. To facilitate the allocation of shares in
accordance with the above provisions, the Company may round the number of shares
allocated to any Holder or Other Shareholder to the nearest 100 shares. If any
Holder or Other Shareholder disapproves of the terms of any such underwriting,
he or she may elect to withdraw therefrom by written notice to the Company and
the managing underwriter.
6.3 Right to Terminate Registration. The Company shall have the
-------------------------------
right to terminate or withdraw any registration initiated by it under this
Section 6 prior to the effectiveness of such registration whether or not any
Holder has elected to include securities in such registration.
6.4 Termination of Rights. The rights to cause the Company to
---------------------
register Registrable Securities pursuant to this Section 6 shall terminate three
(3) years after the IPO.
7. Registration on Form S-3.
7.1 If any Holder or Holders holding in the aggregate not less than
25% of the then outstanding Registrable Securities request that the Company file
a registration statement on Form S-3 (or any successor form to Form S-3) for a
public offering of shares of Registrable Securities the reasonably anticipated
aggregate price to the public of which, net of underwriting discounts and
commissions, would exceed $2,500,000, and the Company is at the time of such
request a registrant entitled to use Form S-3 to register the Registrable
Securities for such an offering, the Company shall use its reasonable efforts to
cause such Registrable Securities to be registered for the offering on such form
and to cause such Registrable Securities to be qualified in such jurisdictions
as the Holder or Holders may reasonably request; provided, however, that the
Company shall not be required to effect more than two such registrations
pursuant to this Section 7 in any twelve (12) month period or more than a total
of three registrations under this Section 7. The
-13-
<PAGE>
substantive provisions of Section 5.2 shall be applicable to each registration
initiated under this Section 7.
7.2 Notwithstanding the foregoing, the Company shall not be obligated
to take any action pursuant to this Section 7: (i) in any particular
jurisdiction in which the Company would be required to execute a general consent
to service of process in effecting such registration, qualification or
compliance or subject the Company to taxation in such jurisdiction unless the
Company is already subject to service in such jurisdiction or taxation in such
jurisdiction, respectively, and except as may be required by the Securities Act;
(ii) if the Company, within ten (10) days of the receipt of the request of the
Holders, gives notice of its bona fide intention to effect the filing of a
registration statement (other than an Excluded Registration Statement) with the
Commission within ninety (90) days of receipt of such request; (iii) during the
period starting with the date sixty (60) days prior to the Company"s estimated
date of filing of, and ending on the date six (6) months immediately following,
the effective date of any registration statement pertaining to securities of the
Company (other than an Excluded Registration Statement), provided that the
Company is actively employing in good faith all reasonable efforts to cause such
registration statement to become effective; or (iv) if the Company shall furnish
to such Holder a certificate signed by the President of the Company stating that
in the good faith judgment of the Board of Directors it would be seriously
detrimental to the Company or its shareholders for registration statements to be
filed in the near future, then the Company"s obligation to use its reasonable
efforts to file a registration statement shall be deferred for a period not to
exceed one hundred twenty (120) days from the receipt of the request to file
such registration by such Holder; provided, however, that such right to delay a
filing may not be exercised by the Company more than once in any twelve month
period.
8. Limitations on Subsequent Rights. From and after the date of this
Agreement, the Company shall not, without the consent of Holders of a majority
of the Registrable Securities and of TCV III (Q), L.P. ("TCV"), enter into any
agreement granting any holder or prospective holder of any securities of the
Company registration rights with respect to such securities unless (i) such new
registration rights and related obligations, including standoff obligations, are
on a pari passu basis with those rights of the Investors and the Founders
---- -----
hereunder (it being understood that pari passu shall be determined with
---- -----
reference to the relative pro rata effect, if any, of the granting of the
--- ----
additional registration rights on the Founders (as a group) and the Investors
(as a group)); or (ii) such new registration rights are junior to the
registration rights granted the Investors and the Founders hereunder and the
related obligations, including standoff obligations, are equally or more
burdensome than the obligations of the Holders hereunder.
9. Expenses of Registration.
9.1 All Registration Expenses and Selling Expenses incurred in
connection with a registration pursuant to Section 7 shall be borne pro rata by
the Holder or Holders requesting the registration according to the number of
Registrable Securities included in such registration.
9.2 All Registration Expenses incurred in connection with all
registrations pursuant to Sections 5 or 6 shall be borne by the Company.
-14-
<PAGE>
9.3 All Selling Expenses relating to securities registered on behalf
of the Holders shall be borne by the Holders of such securities pro rata on the
basis of the number of shares so registered. In connection with any registration
pursuant to Sections 5 or 6, if the participating Holders elect to be
represented by counsel for the Company, the Company will pay the fees and
disbursements of its counsel incurred in so representing such participating
Holders and such fees and disbursements will not constitute Selling Expenses.
10. Registration Procedures. In the case of each registration,
qualification or compliance effected by the Company pursuant to this Agreement,
the Company will keep each Holder advised in writing as to the initiation of
each registration, qualification and compliance and as to the completion
thereof. At its expense the Company will:
(a) Prepare and file with the Commission a registration
statement with respect to such securities and use all reasonable efforts to
cause such registration statement to become and remain effective until the
earlier of the expiration of one hundred eighty (180) days or completion of the
distribution described in the Registration Statement;
(b) Prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the 1933 Act with respect to the disposition of all Registrable
Securities covered by such registration statement
(c) Furnish to the Holders participating in such registration
and to the underwriters of the securities being registered such reasonable
number of copies of the registration statement, preliminary prospectus, final
prospectus and such other documents as such underwriters may reasonably request
in order to facilitate the public offering of such securities.
11. Indemnification.
11.1 The Company will indemnify each Holder, each of its officers and
directors and partners, and each person controlling such Holder within the
meaning of Section 15 of the Securities Act, with respect to which registration,
qualification or compliance has been effected pursuant to this Agreement, and
each underwriter, if any, and each person who controls any underwriter within
the meaning of Section 15 of the Securities Act, against all expenses, claims,
losses, damages or liabilities (or actions in respect thereof), including any of
the foregoing incurred in settlement of any litigation, commenced or threatened,
arising out of or based on any untrue statement (or alleged untrue statement) of
a material fact contained in any registration statement, prospectus, offering
circular or other document, or any amendment or supplement thereto, incident to
any such registration, qualification or compliance, or based on any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
in which they were made, not misleading, or any violation by the Company of the
Securities Act or any rule or regulation promulgated under the Securities Act
applicable to the Company in connection with any such registration,
qualification or compliance, and the Company will reimburse each such Holder,
each of its officers and directors, and each person controlling such Holder,
each such underwriter and each person who controls any such underwriter,
-15-
<PAGE>
for any legal and any other expenses reasonably incurred in connection with
investigating, preparing or defending any such claim, loss, damage, liability or
action, provided that the Company will not be liable in any such case to the
extent that any such claim, loss, damage, liability or expense arises out of or
is based on any untrue statement or omission or alleged untrue statement or
omission, made in reliance upon and in conformity with written information
furnished to the Company by an instrument duly executed by such Holder,
controlling person or underwriter and stated to be for use therein.
11.2 Each Holder will, if Registrable Securities held by such Holder
are included in the securities as to which such registration, qualification or
compliance is being effected, indemnify the Company, each of its directors and
officers, each underwriter, if any, of the Company's securities covered by such
a registration statement, each person who controls the Company or such
underwriter within the meaning of Section 15 of the Securities Act, and each
other such Holder, each of its officers and directors and each person
controlling such Holder within the meaning of Section 15 of the Securities Act,
against all claims, losses, damages and liabilities (or actions in respect
thereof) arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any such registration statement,
prospectus, offering circular or other document, or any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and will reimburse the
Company, such Holders, such directors, officers, persons, underwriters or
control persons for any legal or any other expenses reasonably incurred in
connection with investigating or defending any such claim, loss, damage,
liability or action, in each case to the extent, but only to the extent, that
such untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such registration statement, prospectus, offering circular
or other document in reliance upon and in conformity with written information
furnished to the Company by an instrument duly executed by such Holder and
stated to be specifically for use therein. Notwithstanding the foregoing, the
maximum liability of each Holder under this Section 11.2 shall be limited in an
amount equal to the net proceeds received by such Holder in such offering,
unless such liability arises out of or is based solely on willful misconduct by
such Holder.
11.3 Each party entitled to indemnification under this Section 11
(the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not unreasonably be
withheld), and the Indemnified Party may participate in such defense at such
party's expense, and provided further that the failure of any Indemnified Party
to give notice as provided herein shall not relieve the Indemnifying Party of
its obligations under this Agreement unless the failure to give such notice is
materially prejudicial to an Indemnifying Party's ability to defend such action
and provided further, that the Indemnifying Party shall not assume the defense
for matters as to which there is a conflict of interest or separate and
different defenses. No Indemnifying Party, in the defense of any such claim or
litigation, shall, except with the consent of each Indemnified Party, consent to
entry of any judgment or enter into any settlement which does
-16-
<PAGE>
not include the giving by the claimant or plaintiff to such Indemnified Party of
an unconditional release from all liability in respect to such claim or
litigation.
12. Information by Holder. The Holder or Holders of Registrable
Securities included in any registration shall furnish to the Company such
information regarding such Holder or Holders, the Registrable Securities held by
them and the distribution proposed by such Holder or Holders as the Company may
request in writing and as shall be required in connection with any registration,
qualification or compliance referred to in this Agreement. At any time during
the effectiveness of any registration statement covering Registrable Securities
offered by a Holder, if such Holder becomes aware of any change materially
affecting the accuracy of the information contained in such registration
statement or the prospectus (as then amended or supplemented) relating to such
Holder, it shall immediately notify the Company of such change.
13. Rule 144 Reporting. With a view to making available the benefits
of certain rules and regulations of the Commission which may at any time permit
the sale of the Restricted Securities to the public without registration, after
such time as a public market exists for the Common Stock of the Company, the
Company agrees to use its reasonable efforts to:
(a) Make and keep public information available, as those
terms are understood and defined in Rule 144 under the Securities Act, at all
times after the date that the Company becomes subject to the reporting
requirements of the Securities Act or the Securities Exchange Act of 1934, as
amended.
(b) Use its reasonable efforts to file with the commission
in a timely manner all reports and other documents required of the Company under
the Securities Act and the Securities Exchange Act of 1934, as amended (the
"Exchange Act") (at any time after it has become subject to such reporting
requirements); and
(c) So long as a Holder owns any Restricted Securities, to
furnish to the Holder forthwith upon request a written statement by the Company
as to its compliance with the reporting requirements of said Rule 144 (at any
time after ninety (90) days after the effective date of the first registration
statement filed by the Company for an offering of its securities to the general
public), and of the Securities Act and the Exchange Act (at any time after it
has become subject to such reporting requirements), a copy of the most recent
annual or quarterly report of the Company, and such other reports and documents
so filed by the Company with the Commission on a non-confidential basis as a
Holder may reasonably request in availing itself of any rule or regulation of
the Commission allowing a Holder to sell any such securities without
registration; provided, however, that no such copies shall need to be provided
-------- -------
by the Company if such reports or documents are available from the Commission's
internet EDGAR database.
14. Transfer of Rights. The rights to cause the Company to register
securities granted Holders under Sections 5, 6 and 7, and the first refusal and
maintenance rights granted Holders under Sections 16 and 17 hereof, may be
assigned to any affiliate of a Holder (including without limitation any former
partner in any Holder that is a partnership or former member in a Holder that is
a limited liability company) or to a transferee or assignee reasonably
acceptable to the Company in connection
-17-
<PAGE>
in each case with any transfer or assignment of Registrable Securities by a
Holder (but may not be otherwise assigned or transferred) provided that: (i)
such transfer complies with Section 2 hereof and otherwise with applicable
securities laws; (ii) in the case of an assignment of the rights granted under
Sections 5, 6 and 7 hereof, such assignee or transferee acquires an aggregate of
at least 150,000 Shares (as may be appropriately adjusted upon any stock split,
stock dividend, recapitalization, merger, consolidation or similar event) or
shares of Series A Preferred (counted on an as-converted into Common Stock
basis); (iii) in the case of an assignment of the rights granted under Section
16 or 17 hereof, such assignee or transferee acquires an aggregate of at least
250,000 Shares (as may be appropriately adjusted upon any stock split, stock
dividend, recapitalization, merger, consolidation or similar event) or shares of
Series A Preferred (counted on an as-converted into Common Stock basis); and
(iv) such assignee or transferee becomes a party to this Agreement and assumes
all of the obligations of the transferring Holder hereunder.
15. Standoff Agreement. Each Shareholder and Additional Rightsholder
agrees, upon request of the Company or the underwriters managing any
underwritten offering of the Company's securities, not to sell, make any short
sale of, loan, grant any option for the purchase of, or otherwise dispose of any
Registrable Securities (other than those included in the registration) without
the prior written consent of the Company or such underwriters, as the case may
be, for such period of time (not to exceed one hundred eighty (180) days) from
the date of the IPO or for such period of time (not to exceed ninety (90) days)
from the effective date of any subsequent registration statement after the IPO
(other than an Excluded Registration Statement) as may be requested by the
underwriters, and if so requested by the Company or such underwriters, to enter
into a lockup agreement to the foregoing effect and in a form satisfactory to
the Company and such underwriters; provided however, that holders of shares of
----------------
Series A Preferred shall not be so obligated not to dispose of their Registrable
Securities, and shall not be required to enter into such a lock-up agreement
with respect thereto, unless: (A) in the case of the IPO, (i) all executive
officers and 1% shareholders of the Company agree to the same lock-up and (ii)
such agreement shall provide that any discretionary waiver or termination of the
restrictions of any such lock-up agreements by the Company or representatives of
the underwriters shall apply to all persons subject to such agreements pro rata
based on the number of shares subject to such agreements; and (B) in the case of
a registration statement subsequent to the IPO, (i) all executive officers agree
to the same lock-up and (ii) the holders have the ability to sell not less than
25% of the Shares registered in any such subsequent offering. The obligations
of the Shareholders and Additional Rightsholders set forth in this Section 15
shall expire on the date that is the second anniversary of the IPO of the
Company"s securities.
16. Right of First Refusal. Before any Shares or other securities of
the Company held by a Shareholder or any transferee (either being sometimes
referred to herein as the "Selling Shareholder") may be sold or otherwise
transferred (including transfer by gift or operation of law), the remaining
Shareholders and the Company shall have a right of first refusal to purchase
such securities on the terms and conditions set forth in this Section 16 (the
"Right of First Refusal").
16.1 First Refusal Notice. If a Shareholder desires to transfer
--------------------
any securities of the Company owned by it ("Sale Shares"), then at least 60 days
prior to such transfer, other than a
-18-
<PAGE>
transfer exempt pursuant to Section 16.7, such Selling Shareholder must give
notice (the "First Refusal Notice") to the Company and other Shareholders of its
intention to effect such transfer. The First Refusal Notice must set forth (a)
the number and class of Sale Shares to be sold by the Shareholder, (b) the date
or proposed date of such transfer and the name and address of the transferee
(the "Proposed Transferee"), and (c) the principal terms of such transfer,
including the cash or other property or consideration to be received upon such
transfer.
16.2 Purchase Price. The purchase price for the Sale Shares and other
--------------
securities purchased by the Shareholders or the Company under this Section 16
("First Refusal Price") shall be the bona fide cash price or other consideration
for which the Selling Shareholder proposes to transfer the Sale Shares as set
forth in the First Refusal Notice. If the First Refusal Price includes
consideration other than cash, the cash equivalent value of the non-cash
consideration shall be determined in good faith by the Board of Directors of the
Company.
16.3 Company's Option. The Company shall have the option, but not the
----------------
obligation, to purchase all, but not less than all, of the Sale Shares at the
First Refusal Price. Within 20 days after the date the First Refusal Notice is
given, the Company shall give written notice to the Selling Shareholder and the
other Shareholders stating its intention to exercise such option, and a date and
time for consummation of the purchase not less than 60 days nor more than 90
days after the date the First Refusal Notice was given. Failure by the Company
to give such notice within such time period shall be deemed an election by it
not to exercise its option.
16.4 Shareholders" Option.
--------------------
(a) If the Company fails to exercise the option with respect to
all of the Sale Shares, each of the other Shareholders shall have the option,
but not the obligation, to purchase all but not less than all of the Sale Shares
on the same terms, including the First Refusal Price, as specified in the First
Refusal Notice. After the expiration of the 20 day period in Section 16.3
hereof, but within 30 days after the First Refusal Notice is given, any electing
Shareholder shall give written notice to the transferring Selling Shareholder
and the Company stating that it elects to exercise its option and a date and
time for consummation of the purchase not more than 90 days after the date the
First Refusal Notice is given. Failure by a Shareholder to give such notice
within such time period shall be deemed an election by it not to exercise its
option. If more than one Shareholder exercises this option, the number of Sale
Shares that each such Shareholder shall be entitled to purchase shall be equal
to such Shareholder"s Pro Rata Share.
(b) "Pro Rata Share" of a Shareholder for purposes of this
Section 16 shall be calculated as of the date of the First Refusal Notice and
shall be determined by dividing:
(i) the sum of (A) the number of outstanding shares of
Common Stock then held by such Shareholder, plus (B) the number of shares of
Common Stock issuable upon conversion in full of all shares of outstanding
preferred stock, if any, then held by such Shareholder; by
-19-
<PAGE>
(ii) the sum of (A) the number of outstanding shares of
Common Stock then held by all Shareholders exercising their option under this
Section 16.4 with respect to the securities to be sold pursuant to such First
Refusal Notice (the "Purchasing Shareholders"), plus (B) the number of shares of
Common Stock issuable upon conversion in full of all outstanding shares of
preferred stock, if any, then held by all Purchasing Shareholders.
16.5 Payment. Payment of the First Refusal Price shall be made in
-------
cash, by check, or, in the case of a sale to the Company, by cancellation of all
or a portion of any outstanding indebtedness of the Selling Shareholder to the
Company, or by any appropriate combination thereof.
16.6 Selling Shareholder's Right to Transfer. If all of the Sale
---------------------------------------
Shares proposed in the First Refusal Notice to be transferred to a given
Proposed Transferee are not purchased by either the Shareholders or the Company,
then the Selling Shareholder may sell or otherwise transfer such Sale Shares and
other securities to that Proposed Transferee at the First Refusal Price or at a
higher price, provided that such sale or other transfer is consummated within
120 days after the date of the First Refusal Notice and provided further that
any such sale or other transfer is effected in accordance with any applicable
securities laws and the Proposed Transferee agrees in writing that the
provisions of this Agreement shall continue to apply to the Sale Shares and such
other securities if applicable in the hands of such Proposed Transferee. If the
Sale Shares and other securities described in the First Refusal Notice are not
transferred to the Proposed Transferee within such period, a new First Refusal
Notice shall be given to the Company and the Shareholders, and the Shareholders
and the Company shall again be offered the Right of First Refusal in accordance
with this Section 16 before any Shares held by the Selling Holder may be sold or
otherwise transferred.
16.7 Exception for Certain Transfers. Anything to the contrary
-------------------------------
contained in this Section 16 notwithstanding, (i) in the case of a Selling
Shareholder that is an individual, the transfer of any or all of the Shares or
other securities of the Company during the Selling Shareholder's lifetime or on
the Selling Shareholder's death by will or intestacy to the Selling
Shareholder"s immediate family or a trust for the benefit of the Selling
Shareholder"s immediate family shall be exempt from the provisions of this
Section 16 and (ii) in the case of a Selling Shareholder that is a corporation,
partnership or other business entity, the transfer of any or all of the Shares
or other securities of the Company to any controlled or controlling corporate,
partnership or other business entity of such Selling Shareholder (or any
corporate, partnership or other business entity under common control with such
Selling Shareholder) shall be exempt from the provisions of this Section 10.
"Immediate Family" as used herein shall mean spouse, lineal descendant or
antecedent, father, mother, brother or sister. In such case, the transferee or
other recipient shall receive and hold the Shares so transferred subject to the
provisions of this Section 16, and there shall be no further transfer of such
Shares or other securities except in accordance with the terms of this Section
16.
16.8 Transfers Void. Any attempted transfer in violation of the terms
--------------
of this Section 16 shall be ineffective to vest in any Proposed Transferee any
interest held by the transferring Selling Shareholder in the shares. Without
limiting the foregoing, any purported transfer in violation hereof shall be
ineffective as against the Company, and the Company and the Shareholders shall
have a continuing right and option (but not an obligation), until the
restrictions
-20-
<PAGE>
contained in this Section 16 terminate, to purchase the securities purported to
be transferred by the Selling Shareholder in violation of this Section 16 for a
price and on terms provided for herein.
16.9 Termination or Waiver of Right of First Refusal. The Right of
-----------------------------------------------
First Refusal shall terminate upon the earlier of (i) the IPO, (ii) the
dissolution of the Company, or (iii) the effective date of a Change in Control.
17. Maintenance Right. In the event that the Company shall offer for sale
New Securities (as defined below) after the date of this Agreement, each Major
Shareholder (as hereafter defined) shall be entitled to purchase its Pro Rata
Share (as hereafter defined) of the New Securities, on the same terms and
conditions and at the same price as that offered to third parties. A "Major
Shareholder" is a Shareholder that shall hold on the date of the notice referred
to in Section 17.3 below more than 125,000 Shares (as may be appropriately
adjusted upon any stock split, stock dividend, recapitalization, merger,
consolidation or similar event occurring between the date hereof and the date of
such Notice), calculated by adding the number of outstanding Shares then held by
such Shareholder to the number of Shares issuable upon conversion in full of all
shares of outstanding Series A Preferred then held by such Shareholder.
The "Pro Rata Share" of a Shareholder, for purposes of this Section, shall
be calculated as of the date of the relevant notice referred to in Section 17.3
and shall be determined by dividing:
(i) the sum of (A) the number of outstanding Shares then
held by such Shareholder plus (B) the number of Shares issuable upon conversion
in full of all shares of outstanding Series A Preferred then held by such
Shareholder; by
(ii) the sum of (A) the total number of Shares then
outstanding, plus (B) the total number of Shares issuable upon conversion in
full of all Series A Preferred then outstanding.
17.2 Maintenance Right. This maintenance right (the "Maintenance
-----------------
Right") shall be subject to the following provisions:
"New Securities" shall mean any Shares of Common Stock or any series of the
Company's preferred stock convertible into Common Stock and rights, options or
warrants to purchase such Shares or share of preferred stock, and securities of
any type whatsoever (including, without limitation, convertible debt securities)
that are, or may become, convertible into Shares of Common Stock. However, "New
Securities" does not include:
(a) Common Stock issuable pursuant to any outstanding
securities;
(b) securities issued in a firm commitment underwritten public
offering, pursuant to an effective registration statement under the Securities
Act, covering the offer and sale of equity securities for the Company's account;
-21-
<PAGE>
(c) securities issued pursuant to any acquisition, merger,
purchase, reorganization, or consolidation;
(d) securities issued to employees, officers, or directors of,
or consultants to, the Company, pursuant to stock purchase or stock option plans
or other arrangements approved by the Company's Board of Directors or pursuant
to the terms of such securities;
(e) securities issued to effect any stock split, stock dividend
or recapitalization or similar event by the Company;
(f) securities issued to vendors, customers, lenders, or in
connection with other principally non-equity financing arrangements; provided
that, if any such vendor, customer or lender is Korea Data Systems Co., Ltd. or
Trigem Computer, Inc., or any person or entity in control thereof , under common
control therewith or controlled thereby, such securities issuance shall have
been approved by the director nominated by the Series A Preferred;
(g) issuances to non-affiliates for non-cash consideration; or
(h) Series A Preferred Stock issued pursuant to the Stock
Purchase Agreement.
17.3 Notice. In the event the Company proposes to undertake issuance
------
of New Securities, it shall give each Major Shareholder written notice of its
intention, describing the type of New Securities, and the price and terms upon
which the Company proposes to issue the same and providing each Shareholder, at
such Shareholder's request, with all information provided to prospective
purchasers of such New Securities. Each Major Shareholder shall have twenty (20)
days from the date of receipt of any such notice to agree to purchase up to its
Pro-Rata Share of such New Securities for the price and upon the terms specified
in the notice by giving written notice to the Company and stating therein the
quantity of New Securities it elects to purchase. The Company shall inform each
Major Shareholder that has elected to purchase New Securities of the date and
place of the closing of the sale of New Securities pursuant to Section 17.4
below (a "New Securities Closing") and at such closing each such Shareholder
will purchase and pay for the New Securities it elected, and is entitled, to
purchase.
17.4 Company's Right to Sell New Securities. The Company shall have
--------------------------------------
ninety (90) days thereafter to sell or enter into an agreement (pursuant to
which the sale of New Securities covered thereby shall be closed, if at all,
within sixty (60) days from the date of such agreement) to sell the New
Securities respecting which the foregoing Maintenance Rights were not exercised,
at the price and upon the terms no more favorable to the purchasers of such
securities than specified in the Company's notice. In the event the Company has
not, within such ninety (90) day period, sold the New Securities or entered into
an agreement to sell the New Securities (or sold and issued New Securities in
accordance with the foregoing within sixty (60) days from the date of such
agreement), the Company shall not thereafter issue or sell any New Securities
without first offering such securities to the Shareholders in the manner
provided above.
-22-
<PAGE>
17.5 Termination or Waiver of Shareholders Maintenance Right. The
-------------------------------------------------------
Maintenance Right granted pursuant to this Section 17 shall terminate upon the
earlier of (i) the IPO, (ii) the dissolution of the Company, or (iii) the
effective date of a Change in Control.
18. Board of Directors: Voting Agreement.
18.1 Agreement to Vote. Subject to Section 18.6 below, the Investors,
-----------------
the Founders and any Additional Rightsholder that shall then be a Holder
(collectively, the "Voting Holders") agree to vote the Shares of Common Stock
and shares of Series A Preferred then held by them at any regular or special
meeting of shareholders of the Company, or, in lieu of any such meeting, to give
their written consent, as provided in Section 18.2 below. As used in this
Section 18, the term "vote" shall have the meaning set forth in Section 194 of
the California Corporations Code (the "Code").
18.2 Board of Directors. As is more fully elaborated in the Amended
------------------
and Restated Certificate of Incorporation of the Company, the Board of Directors
shall consist of seven (7) members, elected as set forth therein. During the
respective periods set forth in the Restated Certificate, two of the Directors
shall be elected by TriGem Corporation ("TriGem"), two shall be elected by Korea
Data Systems America, Inc. ("KDS"), one shall be elected by Stephen A. Dukker,
one shall be elected by the holders of shares of Series A Preferred and one
shall be elected by the holders of the outstanding shares of Series A Preferred
and Shares of Common Stock, voting together as a class. A director may be
removed from the Board of Directors, and any vacancy in the Board of Directors
shall be filled, in each case as set forth in the Restated Certificate. With
respect to any proposal concerning the election of either director who is to be
elected by TriGem, the Voting Holders hereby covenant and agree that each Voting
Holder shall vote its shares of Series A Preferred and Shares of Common Stock to
nominate, appoint and elect as such director the nominee of TriGem. With respect
to any proposal concerning the election of either director who is to be elected
by KDS, the Voting Holders hereby covenant and agree that each Voting Holder
shall vote its shares of Series A Preferred and Shares of Common Stock to
nominate, appoint and elect as such director the nominee of KDS. With respect to
any proposal concerning the election of the director who is to be Stephen A.
Dukker, the Voting Holders hereby covenant and agree that each Voting Holder
shall vote its shares of Series A Preferred and Shares of Common Stock to
nominate, appoint and elect as such initial director Stephen A. Dukker. With
respect to any proposal concerning the election of the director who is to be
elected by the holders of a majority of the outstanding shares of the Series A
Preferred and Shares of Common Stock, voting together as a class, the Voting
Holders hereby covenant and agree that each Voting Holder shall vote its shares
of Series A Preferred and Shares of Common Stock to nominate, appoint and elect
as the initial such director Nathan Morton. With respect to any proposal
concerning the election of the director who is to be elected by the holders of a
majority of the outstanding shares of the Series A Preferred, voting together as
a class, the Voting Holders hereby covenant and agree that each Voting Holder
shall vote its shares of Series A Preferred and Shares of Common Stock to
nominate, appoint and elect as such director the nominee of TCV, and as such
initial director to nominate, appoint and elect C. Toms Newby III.
18.3 No Revocation. The voting agreements contained herein are
-------------
coupled with an interest and may not be revoked during the term of this Section
18.
-23-
<PAGE>
18.4 Stock Splits, Stock Dividends, etc. In the event of any stock
----------------------------------
split, stock dividend, recapitalization, reorganization, or the like, any
securities issued as a result thereof with respect to the Voting Holders" Shares
or shares of Series A Preferred shall become Voting Holders" Shares or shares of
Series A Preferred, as the case may be, for purposes of this Section 18 and
shall be endorsed with the legend set forth in Section 2 hereof.
18.5 Waivers. Any term hereof may be amended and the observance of
-------
any term hereof may be waived either generally or in a particular instance and
either retroactively or prospectively only with the written consent of the
Company and the holders of a majority of the outstanding Shares of Common Stock
and a majority of the outstanding shares of Series A Preferred, voting as
separate classes. No term hereof with respect to the director who is to be
elected by the holders of a majority of the outstanding shares of the Series A
Preferred, voting together as a class, shall be amended without the written
consent of TCV.
18.6 Board Observer Rights. For so long as the Industrial Investor
---------------------
owns at least 1,000,000 Shares of Common Stock, on an as if converted basis
(adjusted for stock splits, combinations and the like), the Industrial Investor
shall be entitled to designate, upon written notice to the Company, one (1)
individual reasonably acceptable to the Company (such designee, the "Observer")
who shall be entitled to notice of, to attend, and to any documentation
distributed to the directors before, during or after, all meetings (including
any action to be taken by written consent) of the Board and all committees
thereof; provided, however, that the Company reserves the right to withhold any
information and to exclude such Observer from any meeting or portion thereof if
access to such information or attendance at such meeting could
(i) in the judgment of the Company's outside counsel, adversely affect the
attorney-client privilege between the Company and its counsel or cause
the Board to breach its fiduciary duties, or
(ii) in the good faith determination of a majority of the Board, result in
a conflict between the interests of the Company and those of such
Observer, the Industrial Investor or any of their affiliates.
The Observer shall not be permitted to vote at any meeting of the Board or be
counted for purposes of determining whether there is sufficient quorum for the
Board to conduct its business. The Industrial Investor and Observer shall
maintain the confidentiality of all financial, confidential and proprietary
information of the Company obtained by them as a result of the rights granted
pursuant to this Section 18.6. By designating an Observer, the Industrial
Investor agrees to cause such Observer upon the Company's request to execute an
agreement providing for nondisclosure of the Company's proprietary information
consistent with such agreements signed by the Company's employees. The parties
hereto hereby acknowledge and agree that, except as set forth in this Section
18.6, an Observer shall not owe any fiduciary or other duties to the
shareholders of the Company or otherwise have any directorial or other duties or
liabilities to the Company or its shareholders as a result of the Observer's
exercise of his rights hereunder. The Industrial Investor shall designate, and
may replace, its Observer with or without cause in its sole discretion by
providing written notice to the Company at least five (5) business days prior to
any such action taking effect. In addition to the
-24-
<PAGE>
events of termination set forth in Section 18.7, any rights granted to an
Observer under this Section 18.6 shall immediately terminate if the Industrial
Investor no longer owns at least 1,000,000 shares of Common Stock, on an as if
converted basis (adjusted for stock splits, combinations and the like). Exercise
of the observer rights granted in this Section 18.6 shall not be transferable to
a transferee or assignee of shares of the Company's capital stock.
Notwithstanding anything contained herein to the contrary, the Company's failure
to comply with any provision of this Section 18.6 shall not affect the validity
of any action taken (whether at a meeting or by written consent) by the Board,
or any committee thereof, or by any or all of the Company's stockholders.
18.7 Termination. All parties" rights under this Section 18 will
-----------
terminate upon the earliest to occur of (i) the IPO, (ii) the dissolution of the
Company, or (iii) the effective date of a Change of Control.
19. Miscellaneous.
19.1 Governing Law. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE
-------------
WITH, AND GOVERNED IN ALL RESPECTS BY, THE LAWS OF THE STATE OF CALIFORNIA, AS
APPLIED TO AGREEMENTS ENTERED INTO, AND TO BE PERFORMED ENTIRELY IN SUCH STATE,
BETWEEN RESIDENTS OF SUCH STATE. THE PARTIES HERETO (I) AGREE TO SUBMIT TO THE
JURISDICTION OF THE FEDERAL AND STATE COURTS SITTING IN THE COUNTIES OF ORANGE,
SANTA CLARA OR SAN FRANCISCO OF THE STATE OF CALIFORNIA WITH RESPECT TO THE
BREACH OR INTERPRETATION OF THIS AGREEMENT OR THE ENFORCEMENT OF ANY AND ALL
RIGHTS, DUTIES, LIABILITIES, OBLIGATIONS, POWERS, AND OTHER RELATIONS BETWEEN
THE PARTIES ARISING UNDER THIS AGREEMENT, (II) WAIVE, TO THE FULLEST EXTENT EACH
MAY EFFECTIVELY DO SO, ANY OBJECTION EACH PARTY MAY NOW OR HEREAFTER HAVE TO THE
LAYING OF VENUE OF ANY SUCH PROCEEDING AND (III) SUBMIT TO THE EXCLUSIVE
JURISDICTION OF SUCH COURTS IN ANY SUCH SUIT, ACTION OR PROCEEDING. THE PARTIES
HERETO IRREVOCABLY WAIVE ANY IMMUNITY TO JURISDICTION TO WHICH THEY MAY
OTHERWISE BE ENTITLED OR BECOME ENTITLED (INCLUDING SOVEREIGN IMMUNITY, IMMUNITY
TO PRE-JUDGMENT ATTACHMENT, POST-JUDGMENT ATTACHMENT AND EXECUTION) IN ANY LEGAL
SUIT, ACTION OR PROCEEDING ARISING OUT OF OR BASED ON THIS AGREEMENT OR THE
TRANSACTIONS CONTEMPLATED HEREBY WHICH IS INSTITUTED IN ANY CALIFORNIA COURT.
19.2 Survival. The representations, warranties, covenants and
--------
agreements made herein shall survive any investigation made by any Shareholder
and the closing of the transactions contemplated hereby.
19.3 Successors and Assigns. Except as otherwise provided herein, the
----------------------
provisions hereof shall inure to the benefit of, and be binding upon, the
successors, assigns, heirs, executors and administrators of the parties hereto.
-25-
<PAGE>
19.4 Entire Agreement. This Agreement and the other agreements
----------------
referenced herein constitute the full and entire understanding and agreement
between the parties with regard to the subject matter hereof and thereof.
19.5 Amendment. Except as expressly provided herein, neither this
---------
Agreement nor any provision hereof may be amended, waived, discharged or
terminated other than by written consent of the Company, of Investors holding at
least a majority of Series A Preferred (voting on an as if converted basis) and
Shares issued on conversion of Series A Preferred, and of Holders holding at
least a majority of the Shares of Common Stock, except in the case of the
provisions of Sections 16, 17 and 18.6 of this Agreement, each of which may only
be amended, waived, discharged or modified with the written consent of the
Company and the Holders of at least 80% of the Shares (excluding Shares issued
upon conversion of shares of Series A Preferred) then outstanding and at least
80% of the sum of the shares of Series A Preferred (voting on an as-if-converted
basis) then outstanding and the Shares of Common Stock then outstanding and
issued upon conversion of the Series A Preferred. Notwithstanding the foregoing:
(i) any amendment hereto that would adversely affect the holders of a specific
class or series of the Company's capital stock in a manner different than the
holders of other shares of capital stock shall also require the consent of the
holders of a majority of the shares of such class or series so affected; and
(ii) any amendment that would adversely affect any of the Investors, Founders,
or Additional Rightsholders in a manner different than the holders of other
shares of capital stock shall also require the consent of, if the Investors are
so affected, the Investors (or their assignees to whom Investors have expressly
assigned their rights in compliance with Section 14 hereof) who then hold at
least fifty percent (50%) of the Investor Registrable Securities then held by
persons entitled to registration rights hereunder and, if the Founders are so
affected, the Founders (or their assignees to whom they have expressly assigned
their rights in compliance with Section 14 hereof) who then hold at least fifty
percent (50%) of the Founder Registrable Securities then held by persons
entitled to registration rights hereunder and, if the Additional Rightsholders
are so affected, the Additional Rightsholders (or their assignees to whom
Additional Rightsholders have expressly assigned their rights in compliance with
Section 14 hereof) who then hold at least fifty percent (50%) of the Additional
Registrable Securities then held by persons entitled to registration rights
hereunder; provided, however, that any Investor, Founder, or Additional
------------------
Rightsholder, or any such assignee thereof may waive hereunder any of such
holder's rights or the Company's obligations hereunder without obtaining the
consent of any other Investor, Founder, Additional Rightsholder or assignee. Any
amendment or waiver effected in accordance with this paragraph shall be binding
upon each party hereto or upon each Holder of shares of the consenting class or
series of capital stock or upon each Investor, Founder, Additional Rightsholder
or assignee, as the case may be; provided, however, that no such amendment or
-----------------
waiver shall reduce the percentage of Shares (excluding Shares issued upon
conversion of shares of Series A Preferred) necessary to amend this Agreement
without the consent of the holders of at least 80% of the Shares (excluding
Shares issued upon conversion of shares of Series A Preferred), and no such
amendment or waiver shall reduce the percentage of shares of Series A Preferred
(voting on an as-if-converted basis) and Shares of Common Stock then outstanding
issued upon conversion of the Series A Preferred without the consent of all
shares of Series A Preferred (voting on an as-if-converted basis) and all Shares
of Common Stock then outstanding issued upon conversion of the Series A
Preferred.
-26-
<PAGE>
19.6 Notices, etc. All notices and other communications required or
------------
permitted hereunder shall be in writing and shall be mailed by registered or
certified mail, postage prepaid, or otherwise delivered by hand or by messenger,
addressed (a) if to a Shareholder, at such person's address as set forth on
Schedule A, or at such other address as such person shall have furnished to the
- ----------
Company in writing, or (b) if to any other Shareholder of any Shares, at such
address as such Shareholder shall have furnished the Company in writing, or,
until any such Shareholder so furnishes an address to the Company, then to and
at the address of the last Shareholder of such Shares who has so furnished an
address to the Company, or (c) if to the Company, one copy should be sent to its
address set forth below and addressed to the attention of the Corporate
Secretary, or at such other address as the Company shall have furnished to the
Shareholders.
Each such notice or other communication shall for all purposes of this
Agreement be treated as effective or having been given when delivered if
delivered personally, or, if sent by mail, at the earlier of its receipt or 72
hours after the same has been deposited in a regularly maintained receptacle for
the deposit of the United States mail, addressed and mailed as aforesaid.
19.7 Delays or Omissions. Except as expressly provided herein, no
-------------------
delay or omission to exercise any right, power or remedy accruing to any
Shareholder of any Shares, upon any breach or default of the Company under this
Agreement, shall impair any such right, power or remedy of such Shareholder nor
shall it be construed to be a waiver of any such breach or default, or an
acquiescence therein, or of or in any similar breach or default thereafter
occurring; nor shall any waiver of any single breach or default be deemed a
waiver of any other breach or default theretofore or thereafter occurring. Any
waiver, permit, consent or approval of any kind or character on the part of any
Shareholder of any breach or default under this Agreement, or any waiver on the
part of any Shareholder of any provisions or conditions of this agreement, must
be in writing and shall be effective only to the extent specifically set forth
in such writing. All remedies, either under this Agreement or by law or
otherwise afforded to any Shareholder, shall be cumulative and not alternative.
19.8 Expenses. Except as otherwise provided in Section 9, the Company
--------
and each Shareholder shall bear their own respective expenses incurred on their
behalf with respect to this Agreement and the transactions contemplated hereby.
19.9 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which may be executed by less than all of the
Shareholders, each of which shall be enforceable against the parties actually
executing such counterparts, and all of which together shall constitute one
instrument. Upon execution of a counterpart of this Agreement by an Additional
Rightsholder, such Additional Rightsholder shall become a party hereto for all
purposes, and this Agreement shall be enforceable against such Additional
Rightsholder in all respects.
19.10 Severability. In the event that any provision of this Agreement
------------
becomes or is declared by a court of competent jurisdiction to be illegal,
unenforceable or void, this Agreement shall continue in full force and effect
without said provision; provided that no such severability shall be effective if
it materially changes the economic benefit of this Agreement to any party.
-27-
<PAGE>
19.11 Titles and Subtitles. The titles and subtitles used in this
--------------------
Agreement are used for convenience only and are not considered in construing or
interpreting this Agreement.
19.12 Aggregation. All shares of capital stock of the Company held or
-----------
acquired by affiliated persons or entities shall be aggregated together for
purposes of determining the availability of rights under this Agreement, except
as otherwise set forth herein.
-28-
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
day and year first set forth above.
eMachines, Inc.
By: /s/ Steven H. Miller
_______________________________________
Name: Steven H. Miller
Title: Vice President and Chief Financial
Officer
FOUNDERS
TriGem Corporation
By: /s/ Joong Sik Lee
_______________________________________
Name: Joong Sik Lee
Title: President and Chief Executive Officer
Korea Data Systems America, Inc.
By: /s/ Kwang Rae Park
_______________________________________
Name: Kwang Rae Park
Title: President
/s/ Chul Chung
__________________________________________
Chul Chung
/s/ Stephen A. Dukker
__________________________________________
Stephen A. Dukker
/s/ Lap Shun Hui
__________________________________________
Lap Shun Hui
/s/ Dae Soo Koh
__________________________________________
Dae Soo Koh
/s/ Jung Koh
__________________________________________
Jung Koh
/s/ Hong Soon Lee
__________________________________________
Hong Soon Lee
/s/ Hong Sun Lee
__________________________________________
Hong Sun Lee
<PAGE>
INVESTORS:
AMERICA ONLINE, INC.
a Delaware corporation
By: /s/ Lennert Lescher
________________________
Name: Lennert Lescher
Title: President, AOL Investments
<PAGE>
TCV III (GP)
a Delaware General Partnership
By: Technology Crossover Management III, L.L.C.,
Its: General Partner
By: /s/ Robert C. Bensky
_____________________________________
Name: Robert C. Bensky
Title: Chief Financial Officer
TCV III, L.P.
a Delaware Limited Partnership
By: Technology Crossover Management III, L.L.C.,
Its: General Partner
By: /s/ Robert C. Bensky
_____________________________________
Name: Robert C. Bensky
Title: Chief Financial Officer
TCV III (Q), L.P.
a Delaware Limited Partnership
By: Technology Crossover Management III, L.L.C.,
Its: General Partner
By: /s/ Robert C. Bensky
_____________________________________
Name: Robert C. Bensky
Title: Chief Financial Officer
TCV III Strategic Partners, L.P.
a Delaware Limited Partnership
By: Technology Crossover Management III, L.L.C.,
Its: General Partner
By: /s/ Robert C. Bensky
_____________________________________
Name: Robert C. Bensky
Title: Chief Financial Officer
<PAGE>
FRANKLIN SMALL CAP GROWTH FUND
By: /s/ Michael P. McCarthy
_____________________________________
Name: Michael P. McCarthy
Title: Portfolio Manager/Analyst
FRANKLIN CALIFORNIA GROWTH FUND
By: /s/ Michael P. McCarthy
_____________________________________
Name: Michael P. McCarthy
Title: Portfolio Manager/Analyst
FRANKLIN AGGRESSIVE GROWTH FUND
By: /s/ Michael P. McCarthy
_____________________________________
Name: Michael P. McCarthy
Title: Portfolio Manager/Analyst
<PAGE>
HIKARI TSUSHIN, INC.
By: /s/ Masahide Saito
_____________________________________
Masahide Saito, Director
<PAGE>
VAN WAGONER CAPITAL
By: /s/ Garret Van Wagoner
_____________________________________
Name: Garret Van Wagoner
Title: President
<PAGE>
ATGF II
By: /s/ Gary A. Tanaka
______________________________________
Name: Gary A. Tanaka
Title: Director
VERTEX CAPITAL II LLC
By: /s/ Matthew O. Fitzmaurice
_____________________________________
Name: Matthew O. Fitzmaurice
Title: Manager
WILLIAM SLATTERY
/s/ William Slattery
________________________________________
JAMES STABLEFORD
/s/ James Stableford
________________________________________
LITTON MASTER TRUST
By: /s/ Gary A. Tanaka
_____________________________________
Name: Gary A. Tanaka
Title: Attorney in fact
JOAQUIN GARCIA-LARRIEU
/s/ Joaquin Garcia-Larrieu
________________________________________
<PAGE>
NEW MILLENNIUM PARTNERS - EMACHINES, L.P.
By: New Millennium Venture Partners, LLC
Its: General Partner
By: /s/ Robert Senoff
_____________________________________
Robert Senoff, Managing Member
<PAGE>
RHO MANAGEMENT TRUST I
By: RHO MANAGEMENT COMPANY, INC.
as Investment Adviser
By: [signature illegible]
_____________________________________
Name:
Title:
<PAGE>
RRE INVESTORS, L.P.
By: /s/ Andrew L. Zalasin
_____________________________________
Andrew L. Zalasin, General Partner
RRE INVESTORS FUND, L.P.
By: /s/ Andrew L. Zalasin
_____________________________________
Andrew L. Zalasin, General Partner
<PAGE>
PARIBAS NORTH AMERICA, INC.
By: /s/ Patricia Lau
_____________________________________
Patricia Lau, Assistant Controller
<PAGE>
OMEGA VENTURES III, L.L.C.
By: RS Omega III Holdings, L.L.C., Authorized Signatory
By: /s/ Michael Stark
_____________________________________
Managing Member
RS & CO. OFFSHORE OMEGA VENTURES III
By: RS Omega III Holdings, L.L.C., Authorized Signatory
By: /s/ Michael Stark
_____________________________________
Managing Member
OMEGA BAYVIEW, L.L.C.
By: [signature illegible]
_____________________________________
Authorized Signatory
CROSSOVER FUND II, L.P.
By: Crossover Investment Management, L.L.C.,
Its: General Partner
By: /s/ Michael Stark
_____________________________________
Michael J. Stark, Managing Member
<PAGE>
WILLIAM JAMES BELL 1993 TRUST
By: /s/ William James Bell
_____________________________________
William James Bell, Trustee
<PAGE>
STANDARD GLOBAL EQUITY PARTNERS LP
By: Standard Pacific Capital LLC
Its: General Partner
By: /s/ Ralph J. Long, Jr.
_____________________________________
Ralph J. Long, Jr., Chief Financial Officer
SCORPION OFFSHORE INVESTMENT FUND LTD.
By: Standard Pacific Capital LLC
Its: Investment Advisor
By: /s/ Ralph J. Long, Jr.
_____________________________________
Ralph J. Long, Jr., Chief Financial Officer
STANDARD PACIFIC CAPITAL OFFSHORE
INVESTMENT FUND LTD.
By: Standard Pacific Capital LLC
Its: Investment Advisor
By: /s/ Ralph J. Long, Jr.
_____________________________________
Ralph J. Long, Jr., Chief Financial Officer
<PAGE>
AB&T SALES CORP
a Delaware corporation
By: /s/ J. Richard Monarch
_____________________________________
Name: J. Richard Monarch
Title: V.P. Operations
<PAGE>
BNK INVESTMENT INC.
By: /s/ Betty Ho
_____________________________________
Name: Betty Ho
Title:
<PAGE>
MERCHANT CAPITAL, INC.
By: /s/ John M. Carroll
_____________________________________
John M. Carroll
Vice President
<PAGE>
W.I. HARPER GROUP
By: /s/ Peter Liu
_____________________________________
Peter Liu, Chairman
<PAGE>
Schedule A
----------
Shareholders
Name Common Stock Series A Preferred Options
- --------------------------------------------------------------------------------
TriGem Corporation
14350 Myford Road
Irvine, CA 92606 29,200,000
Korea Data Systems America, Inc.
12300 Edison Way
Garden Grove, CA 92841 28,819,538
Stephen A. Dukker
2830 Buchanan Street
San Francisco, CA 94123 8,000,000 227,897
Lap Shun Hui
12350 Edison Way
Garden Grove, CA 1,600,000
Jung Koh
Korea World Trade Center Bldg.
Rm. #204
159, Samsung-dong
Kangnam-gu
Seoul,
KOREA 2,400,000
Dae Soo Koh
Korea World Trade Center Bldg.
Rm. #204
159, Samsung-dong
Kangnam-gu
Seoul,
KOREA 1,600,000
Hong Soon Lee
45-2 YOIDO
Youngdeungpo,
Seoul
KOREA 2,400,000
<PAGE>
Name Common Stock Series A Preferred Options
- --------------------------------------------------------------------------------
Chul Chung
45-2 YOIDO
Youngdeungpo, Seoul
KOREA 2,400,000
Hong Sun Lee
45-2 YOIDO
Youngdeungpo,
Seoul
KOREA 1,600,000
America Online, Inc. 7,832,079
22000 AOL Way (2,271,303 at Closing,
Dulles, VA 20166 5,560,776 at Second
Attention: Ron Peele AOL Closing)
Phone: (703) 265-2225
with a copy to:
Orrick, Herrington & Sutcliffe LLP
666 Fifth Avenue
New York, NY 10103
Attention: Martin H. Levenglick, Esq.
TCV III (GP) 26,161
TCV III, L.P. 124,263
TCV III (Q), L.P. 3,302,768
TCV III Strategic Partners, L.P. 149,565
Technology Crossover Ventures
56 Main Street, Suite 210
Millburn, NJ 07041
Attention: Robert Bensky
Phone: (973) 467-5320
Fax: (973) 467-532
<PAGE>
Name Common Stock Series A Preferred Options
- --------------------------------------------------------------------------------
With a copy to:
Technology Crossover Ventures
575 High Street, Suite 400
Palo Alto, CA 94301
Attention: C. Toms Newby III
Phone: (650) 614-8207
Fax: (650) 614-8222
Franklin Small Cap Growth Fund 1,378,446
Franklin California Growth Fund 783,208
Franklin Aggressive Growth Fund 31,328
Franklin Templeton Group
777 Mariner's Island Blvd., 6/th/ Floor
San Mateo, CA 94404
Attention: Mike McCarthy
Phone: (650) 312-5421
Hikari Tsushin, Inc. 2,192,982
Ohtemachi Nomura Bldg. 2-1-1
Ohtemachi, Chiyoda-ku, Tokyo, 100-0004
Attention: Masahide Saito, Director
Phone: (408) 348-0687
Van Wagoner Capital 2,192,982
345 California St., Suite 2450
San Francisco, CA 94104
Attention: Garrett Van Wagoner
Phone: (415) 835-5000
ATGF II 800,208
Amerindo Investment Advisors Inc.
399 Park Avenue
18/th/ Floor
New York, NY 10022
Attention: Jessica Caruso
Vertex Capital II LLC 15,664
1771 James Avenue South
Minneapolis, MN 55403
Attention: Matthew Fitzmaurice
<PAGE>
Name Common Stock Series A Preferred Options
- --------------------------------------------------------------------------------
William Slattery 783
c/o Amerindo Investment Advisors Inc.
399 Park Avenue
18/th/ Floor
New York, NY 10022
James Stableford 3,760
c/o Amerindo Investment Advisors Inc.
43 Upper Grovernor Street
London WIX9PG
Joaquin Garcia-Larrieu 1,880
Amerindo Investment Advisors Inc.
399 Park Avenue
18/th/ Floor
New York, NY 10022
Litton Master Trust 195,802
Amerindo Investment Advisors Inc.
399 Park Avenue
18/th/ Floor
New York, NY 10022
Attention: Amy Caruso
New Millennium Partners, L.P. 783,208
New Millennium Partners "emachines, L.P.
150 North Hill Drive, Suite 40,
Brisbane, CA 94005
Attention: Robert Senoff
Phone: (415) 656-2586
Fax: (415) 656-2587
Rho Management 783,208
Rho Management Trust
767 5/th/ Avenue, 43/rd/ Floor
New York, NY 10153
Attention: Ben Terk, Greg Todd
Phone: (212) 847-0411
<PAGE>
Name Common Stock Series A Preferred Options
- --------------------------------------------------------------------------------
RRE Investors, L.P. 505,118
RRE Investors Fund, L.P. 278,090
126 East 56/th/ Street
New York, NY 10022
Attention: Andrew L. Zalasin
Phone: (212) 418-5105
Paribas North America Inc. 626,566
The Equitable Tower
787 Seventh Avenue
New York, NY 10019
Attention: John G. Martinez
Phone: (212) 841-3300
With a copy to:
Paribas Affaires Industrielles
3, rue D'ANTIN
75002 Paris
FRANCE
Attention: Jean-Paul BERNARDINI and Lionel MESTRE
Phone: 1 42 98 00 53
Omega Ventures III, L.L.C. 159,119
RS & Co. Offshore Omega Ventures III 248,131
Omega Bayview, L.L.C. 21,938
Crossover Fund II, L.P. 40,736
Mailing Address:
Omega Venture Partners
c/o Michael Stark
555 California St., Suite 2350
San Francisco, CA 94104
with a copy to:
Omega Venture Partners
c/o Stephen Perkins
555 California Street, Suite 2350
San Francisco, CA 94104
<PAGE>
<TABLE>
<CAPTION>
Name Common Stock Series A Preferred Options
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Bill Bell 313,283
William James Bell 1993 Trust
c/o Bill Bell
10539 Bellagio Road
Los Angeles, CA 90077
Standard Global Equity Partnership 153,629
Scorpion Offshore Investment Fund Ltd. 61,458
Standard Pacific Capital Offshore Investment Fund Ltd. 98,196
Mailing Address:
Standard Pacific Capital LLC
425 California Street , 26/th/ Floor
San Francisco, CA 94104
Attention: Ralph J. Long, Jr.
Phone: (415) 352-7123
AB&T Sales Corp. 78,320
7905A Cessna Ave.
Gaithersburg, MD 20879
Attention: Emmet Tydings
(301) 948-8161
BNK Investment Inc. 156,641
33 Lunau Lane
Thornhill, Ontario, Canada L3T 5N1
Attention: Ky Ho
Phone: (905) 882-2601
Merchant Capital, Inc. 156,641
11 Madison Avenue
New York, New York 10010
Attention: John Carroll
Phone: (212) 325-7652
International Network Capital Corp. 46,993
International Network Capital LDC 31,328
Bejing Technology Development Fund 469,925
(Cayman) LDC
S.Y. Ltd. 234,962
</TABLE>
<PAGE>
Name Common Stock Series A Preferred Options
- --------------------------------------------------------------------------------
Mailing Address For:
International Network Capital Corp.
International Network Capital LDC
Bejing Technology Development Fund (Cayman) LDC
S.Y. Ltd.
Attention: Peter Liu
50 California St., Ste. 2920
San Francisco, CA 94111
<PAGE>
EXHIBIT 10.4
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS
OF ANY STATE OR OTHER JURISDICTION. NEITHER THIS NOTE NOR ANY
INTEREST OR PARTICIPATION HEREIN MAY BE OFFERED, SOLD, ASSIGNED,
TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE
ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT
FROM, OR NOT SUBJECT TO, REGISTRATION.
emachines, Inc.
SUBORDINATED PROMISSORY NOTE
Due June 7, 2004
Irvine, California
$270,000.00 June 7, 1999
FOR VALUE RECEIVED, the undersigned, emachines, Inc., a Delaware
corporation (the "Company"), hereby promises to pay to the order of TriGem
Corporation, a California corporation (together with its successors and assigns,
"Holder"), the principal sum of Two Hundred Seventy Thousand Dollars
($270,000.00) on June 7, 2004 with interest from December 18, 1998 (or the last
interest payment date as to which interest has been paid, if earlier) on the
unpaid balance at a rate of five and seventy-nine hundredths percent (5.79%) per
annum, subject to Section 2 hereof. Accrued interest shall be payable semi-
annually in arrears as provided in Section 2.1 hereof. Interest shall be
calculated based on a 365/366-day year and the actual days elapsed. Payments of
both principal and interest are to be made in lawful money of the United States
of America as provided herein.
The Note is not transferrable other than in its entirety to the
Company or to a corporation or other business entity controlled by or
controlling the Holder.
The Note shall be dated the date of its issuance and shall bear
interest from its date of issuance stated herein (or the last interest payment
date as to which interest had been paid, if earlier) in the manner provided in
Section 2. The Note may have such letters, numbers or other marks of
identification and such legends or endorsements not included hereon placed
thereon as may be required to comply with any law or with any rules made
pursuant thereto or with the rules of any governmental agency or as may,
consistently herewith, be determined by the Company, as conclusively evidenced
by its execution of the Note.
<PAGE>
The following is a statement of the rights of the Holder of this Note
and the conditions to which this Note is subject, and to which the Holder
hereof, by the acceptance of this Note, agrees:
1. Definitions. The following terms, as used herein, have the following
-----------
meanings:
"Bankruptcy Code" means Title 11 of the United States Code.
"Bankruptcy, Insolvency or Liquidation Proceeding" means (i) any case
commenced by or against the Company under any chapter of the Bankruptcy Code,
any other proceeding for the reorganization, recapitalization or adjustment or
marshaling of the assets or liabilities of the Company, any receivership or
assignment for the benefit of creditors relating to the Company or any similar
case or proceeding relative to the Company or its creditors, as such, in each
case whether or not voluntary, (ii) any liquidation, dissolution, marshaling of
assets or liabilities or other winding up of or relating to the Company, in each
case whether or not voluntary and whether or not involving bankruptcy or
insolvency, and (iii) any other proceeding of any type or nature in which Claims
against the Company generally are determined, proven or paid.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and
Friday, which is not a day in which banking institutions in Irvine, California
or New York, New York are authorized or obligated by law or executive order to
close.
"Claim" is used as defined in the Bankruptcy Code, whether or not, in
the context in which it appears, a case under the Bankruptcy Code is pending.
"Designated Senior Debt" means the Company's obligations under any
particular Senior Debt in which the instrument creating or evidencing the same
or the assumption or guarantee thereof (or related agreements or documents to
which the Company is a party) expressly provides that such Senior Debt shall be
"Designated Senior Debt" for purposes of this Note (provided that such
instrument, agreement or other document may place limitations and conditions on
the right of such Senior Debt to exercise the rights of Designated Senior Debt).
"Holder" has the meaning given in the first paragraph hereof.
"Note" has the meanings given in the preamble hereto.
"Person" shall mean and include an individual, a partnership, a
corporation (including a business trust), a joint stock company, a limited
liability company, an unincorporated association, a joint venture or other
entity or a governmental authority.
"Securities Act" means the Securities Act of 1933, as amended.
-2-
<PAGE>
"Senior Debt" means the principal of (and premium, if any) and
interest, if any (including interest accruing on or after the filing of any
petition in bankruptcy or for reorganization relating to the Company whether or
not such claim for post-petition interest is allowed in such proceeding), on,
rent with respect to, and all fees and other amounts payable in connection with,
the following, whether absolute or contingent, secured or unsecured, due or to
become due, outstanding on the date hereof or hereafter created, incurred or
assumed: (a) indebtedness of the Company evidenced by a credit or loan
agreement, note, bond, debenture or other written obligation, (b) all
obligations of the Company for money borrowed, (c) all obligations of the
Company evidenced by a note or similar instrument given in connection with the
acquisition of any businesses, properties or assets of any kind, (d) obligations
of the Company (i) as lessee under leases required to be capitalized on the
balance sheet of the lessee under generally accepted accounting principles, (ii)
as lessee under other leases for facilities, equipment or related assets,
whether or not capitalized, entered into or leased after the date hereof for
financing purposes (as determined by the Company), (iii) under any lease or
related document (including a purchase agreement) that provides that the Company
is contractually obligated to purchase or cause a third party to purchase the
leased property, and (iv) under such lease or related document to purchase or to
cause a third party to purchase such leased property, (e) all obligations of the
Company under interest rate and currency swaps, caps, floors, collars, hedge
agreements, forward contracts, or similar agreements or arrangements, (f) all
obligations of the Company with respect to letters of credit, bankers'
acceptances or similar facilities (including reimbursement obligations and
standby or commitment fees with respect to any of the foregoing), (g) all
obligations of the Company issued or assumed as the deferred purchase price of
property or services (but excluding trade accounts payable arising in the
ordinary course of business), (h) all obligations of the type referred to in
clauses (a) through (g) above of another Person and all dividends of another
Person, the payment of which, in either case, the Company has assumed or
guaranteed (or in effect guaranteed through an agreement to purchase or
otherwise (including, without limitation, "take or pay" and similar
arrangements)), or for which the Company is responsible or liable, directly or
indirectly, jointly or severally, as obligor, guarantor or otherwise, or which
is secured by a lien on property of the Company, and all obligations of the
Company with respect thereto, and (i) renewals, extensions, modifications,
replacements, restatements and refundings of, or any indebtedness or obligation
issued in exchange for, any such indebtedness or obligation described in clauses
(a) through (h) of this paragraph; provided, however, that Senior Debt shall not
-------- -------
include the Note or any indebtedness or obligation subordinated on the same
basis as the Note or any such indebtedness or obligation if the terms of such
indebtedness or obligation (or the terms of the instrument under which, or
pursuant to which it is issued) expressly provide that such indebtedness or
obligation is not superior in right of payment to the Note.
"Subordinated Claims" means all present and future indebtedness and
obligations of every type and description arising under or in respect of the
Note or other instrument, agreement, transaction, act or event in respect
thereof and all other Claims in any manner based on, arising from or related to
any such indebtedness or obligation, whether based on a contract or quasi-
contract or founded on a tort or arising by law or otherwise.
-3-
<PAGE>
2. Repayments and Payments of Principal and Interest on Note.
---------------------------------------------------------
2.1 Interest. Subject to the provisions of Section 6 and Section 2.6,
--------
interest is payable in arrears in cash on the last business day of each May and
November, beginning November 30, 1999. Payment of all amounts due under the Note
shall be made by mail to the registered address of the Holder, or if the Holder
shall elect, by wire transfer to the account designated by the Holder of
immediately available funds; provided, however, that for the Holder to receive
-------- -------
interest or principal payments by wire transfer, the Company must receive the
Holder's written bank wire transfer instructions by the record date (as defined
below) for such payment. The Person in whose name the Note is registered at the
close of business on the third business day prior to any interest or principal
payment date (the "record date") shall be entitled to receive the interest, if
any, payable on such interest payment date notwithstanding any transfer or
exchange of the Note subsequent to the record date and prior to such interest or
principal payment date.
2.2 Optional Prepayments of Note. Subject to the provisions of
----------------------------
Section 6, the Company may at any time, at its option, prepay all or, from time
to time, part of the principal amount of the Note, without penalty or premium,
together with interest on the principal amount so prepaid accrued to (but not
including) the date fixed for such prepayment (the "prepayment date").
2.3 Notice of Prepayment to Holders. Not less than three (3) nor
-------------------------------
more than ten (10) days prior to the prepayment date, the Company shall give
notice thereof to the registered Holder of the Note, specifying the prepayment
date and the aggregate principal amount to be prepaid on the prepayment date.
Such notice shall also contain instructions for the delivery of the Note by the
Holder to the Company. Subject to the provisions of Section 6, such notice shall
be irrevocable.
2.4 Legal Holidays. In any case where any interest payment date or
--------------
prepayment date or maturity date is not a Business Day, then (notwithstanding
any other provision of the Note), payment of interest or principal, as
applicable, with respect to the Note need not be made on such date, but may be
made on the next succeeding Business Day with the same force and effect as if
made on the interest payment date or prepayment date or maturity date, as the
case may be.
2.6 Option to Extend Interest Payment Period.
----------------------------------------
(a) The Company shall have the right at any time during the term
of the Note to defer interest payments (an "Extension Period"); provided, no
--------
Extension Period may extend beyond the maturity date of the Note. At the end of
each Extension Period, the Company shall be responsible for the payment of, and
the Company shall pay to the Person in whose name the Note is registered on the
close of business on the record date, all interest then accrued and unpaid,
together with interest compounded semi-annually at the rate specified in the
Note to the extent permitted by applicable law. Prior to the termination of any
such Extension Period, the Company may further extend such Extension Period;
provided that such extension may not extend beyond the maturity of the Note.
- --------
Upon the termination of any Extension Period and the payment of all amounts then
due, the Company may commence a new Extension Period, provided that such
--------
extension may not extend
-4-
<PAGE>
beyond the maturity of the Note. No interest during an Extension Period, except
at the end thereof, shall be due and payable.
3. Certain Covenants of the Company.
--------------------------------
3.1 Existence. The Company will do or cause to be done all things
---------
necessary to preserve and keep in full force and effect its existence, provided
that this Section 3.1 shall not apply to a consolidation or merger of the
Company with or into another Person in which the Company is not the surviving
Person or conveyance, transfer or lease of the properties and assets of the
Company substantially as an entirety to another Person provided that the
transferee Person expressly assumes the due and punctual payment of the
principal and interest on the Note and the performance or observance of every
covenant set forth in the Note on the part of the Company to be performed or
observed.
4. Events of Default; Acceleration.
-------------------------------
4.1 Events of Default. The occurrence of any of the following events
-----------------
shall constitute an "Event of Default" with respect to the Note:
(a) the Company defaults in the payment of the principal of the
Note when the same becomes due and payable at maturity or otherwise (other than
a default in the payment of principal resulting from application of Section 6
hereof); or
(b) the Company defaults in the payment of interest on the Note
(other than a failure to pay interest resulting from application of Section 6 or
Section 2.6 hereof) for 30 days after the same becomes due and payable; or
(c) the Company defaults in the performance of or breaches any
covenant or warranty of the Company in this Note (other than a covenant or
warranty a default in whose performance or whose breach is elsewhere in this
Section specifically dealt with), and continuance of such default or breach for
a period of 60 days after there has been given, by registered or certified mail,
to the Company by the Holder specifying such default or breach and requiring it
to be remedied;
(d) the entry by a court having jurisdiction in the premises of
(A) a decree or order for relief in respect of the Company in an involuntary
case or proceeding under any applicable Federal or State bankruptcy, insolvency,
reorganization or other similar law or (B) a decree or order adjudging the
Company a bankrupt or insolvent, or approving as properly filed a petition
seeking reorganization, arrangement, adjustment or composition of or in respect
of the Company under any applicable Federal or State law, or appointing a
custodian, receiver, liquidator, assignee, trustee, sequestrator or other
similar official of the Company or of any substantial part of its property, or
ordering the winding up or liquidation of its affairs, and the continuance of
any such
-5-
<PAGE>
decree or order for relief or any such other decree or order unstayed and in
effect for a period of 90 consecutive days; or
(e) the commencement by the Company of a voluntary case or
proceeding under any applicable Federal or State bankruptcy, insolvency,
reorganization or other similar law or of any other case or proceeding to be
adjudicated a bankrupt or insolvent, or the consent by it to the entry of a
decree or order for relief in respect of the Company in an involuntary case or
proceeding under any applicable Federal or State bankruptcy, insolvency,
reorganization or other similar law or to the commencement of any bankruptcy or
insolvency case or proceeding against it, or the filing by it of a petition or
answer or consent seeking reorganization or relief under any applicable Federal
or State law, or the consent by it to the filing of such petition or to the
appointment of or taking possession by a custodian, receiver, liquidator,
assignee, trustee, sequestrator or other similar official of the Company or of
any substantial part of its property, or the making by it of an assignment for
the benefit of creditors, or the admission by it in writing of its inability to
pay its debts generally as they become due, or the taking of corporate action by
the Company in furtherance of any such action.
4.2 Acceleration. In the event an Event of Default has occurred and
------------
is continuing, subject to the provisions of Section 6, the Holder at its option
may, by written notice to the Company, declare the Note due and payable,
whereupon the same shall forthwith mature and become due and payable together
with interest accrued thereon, without presentment, demand, protest or notice,
all of which are hereby waived; provided, however, that such acceleration shall
be automatic without the necessity of any such notice in the case of Events of
Default under clause (d) or (e) above.
4.3 Waiver of Past Defaults. The Holder may waive any past default
-----------------------
on the Note and its consequences. Upon any such waiver, such default shall cease
to exist, and any Event of Default arising therefrom shall be deemed to have
been cured, for all purposes; but no such waiver shall extend to any subsequent
or other default or impair any right consequent thereon.
4.4 Rescission and Annulment. At any time after a declaration of
------------------------
acceleration with respect to the Note has been made and before a judgment or
decree for payment of the money due has been obtained, the Holder, by written
notice to the Company, may rescind and annul such declaration and its
consequences if the Company has paid all overdue interest on the Note and the
principal which has become due otherwise than by such declaration of
acceleration and all Events of Default with respect to the Note, other than the
non-payment of the principal of Note which have become due solely by such
declaration of acceleration, have been cured or waived as provided in Section
4.3.
5. Remedies. Subject to the provisions of Section 6 hereof, upon the
--------
acceleration of the amounts due under the Note in accordance with Section 4 or
if such amounts remain unpaid after the maturity date of the Note, the Holder
may, upon written consent of holder of any Senior Debt then outstanding, proceed
to protect and enforce any right, power or remedy granted to it under
-6-
<PAGE>
applicable law. If any Holder or holder of any other indebtedness of the Company
gives any notice or takes any other action in respect of a claimed default, the
Company will forthwith give written notice thereof to the Holder describing the
notice or action and the nature of the claimed default. No course of dealing and
no delay on the part of the Holder in exercising any right, power or remedy will
operate as a waiver thereof or otherwise prejudice the Holder's rights, powers
or remedies. No right, power or remedy conferred hereby is exclusive of any
other right, power or remedy referred to herein or now or hereafter available at
law, in equity, by statute or otherwise.
6. Note Subordination.
-------------------
6.1 Subordination. The Company hereby agrees and the Holder by its
-------------
acceptance of this Note agrees that the Subordinated Claims are and shall be
postponed, subordinated and junior in right of payment to the prior payment in
full of all Senior Debt on the terms and conditions herein set forth.
6.2 Permitted Payments; Deferral of Payments. So long as there shall
----------------------------------------
not have occurred and be continuing (i) a default in the payment of principal,
premium, if any, or interest (including a default under any repurchase or
redemption obligation) or other amounts with respect to any Senior Debt or (ii)
any other event of default which has been declared in writing, or is
automatically effective in the case of Bankruptcy, Insolvency or Liquidation
Proceedings, with respect to any Designated Senior Debt (as such event of
default is defined therein or in the instrument under which it is outstanding)
and of which the Company has received a notice (a "Blockage Notice") from the
holders of such Designated Senior Debt (each of the events specified in clause
(i) or clause (ii), a "Senior Default"), the Company shall be permitted to make,
and the Holder to accept and receive, regularly scheduled payments of principal
and accrued interest under this Note and any prepayment of principal that the
Company has decided to make, as heretofore set forth. Notwithstanding any
provision to the contrary contained in this Note, the Company shall not make,
and the Holder shall not demand, accept, receive or retain, any payment or
distribution of any kind or character, whether in cash, property, securities or
otherwise, on account or in respect of any Subordinated Claim after a Senior
Default has occurred for a period of time (a "Deferral Period") in accordance
with the terms thereof has occurred. Payments due under the Note may be resumed
(x) in the case of a deferral of interest, after the end of a Deferral Period
(such payment to resume as set forth in the next paragraph of this Note), and
(y) in the case of defaults referred to in clauses (i) and (ii) above, upon the
earlier of:
(A) the date upon which the default is cured or waived or ceases to exist,
or
(B) in the case of a default referred to in clause (ii) above, the date
which is 179 days after the Blockage Notice is received,
unless this Section 6.2 otherwise prohibits the payment at the time of such
payment (including, without limitation, as a result of a payment default with
respect to the applicable Senior Debt as a consequence of the acceleration of
the maturity thereof or otherwise).
-7-
<PAGE>
If a Deferral Period shall occur, interest payable on the Note on regular
payment dates occurring during such Deferral Period shall be deferred and the
Company shall be responsible for the payment of, and the Company shall pay to
the Person in whose name this Note is registered at the close of business on the
record date immediately preceding the regular payment date hereunder next
occurring after the termination of the Deferral Period, all interest then
accrued and unpaid together with, to the extent permitted by law, interest
thereon (compounded semi-annually on regular payment dates) at the rate
specified for the Note.
6.3 Prior Payment to Senior Debt Upon Acceleration. In the event that
----------------------------------------------
the Note is declared due and payable before its stated maturity, then and in
such event the holders of the Senior Debt outstanding at the time the Note so
become due and payable shall be entitled to receive payment in full in cash or
other payment satisfactory to the holders of Senior Debt of all amounts due or
to become due on or in respect of all Senior Debt before the Holder is entitled
to receive any payment by the Company on account of any Subordinated Claim. If
the payment of Note is accelerated because of an Event of Default, the Company
shall promptly notify holders of Senior Debt of the acceleration. The Company
shall promptly notify the Holder of any event which would prohibit the Company
from making any such payments pursuant to this Section 6.
The provisions of this Section 6.3 shall not apply to any payment
with respect to which Section 6.4 would be applicable.
6.4 Bankruptcy, Insolvency or Liquidation Proceedings. In the event
-------------------------------------------------
of any Bankruptcy, Insolvency or Liquidation Proceeding:
(a) Priority of Payment. All Senior Debt shall be paid in full
-------------------
in cash (but excluding indemnification obligations which are then contingent and
as to which no payment is then due and no claim or demand has then been made)
before the Holder shall be entitled to receive any payment or distribution of
any kind or character, whether in cash, property, securities or otherwise, in
respect of this Note in such Bankruptcy, Insolvency or Liquidation Proceeding.
(b) Payments and Distributions on Subordinated Claims. Each
-------------------------------------------------
holder of Senior Debt shall be entitled to receive any payment or distribution
of any kind or character, whether in cash, property, securities or otherwise
(including, without limitation, any such payment or distribution which may
become payable or deliverable by reason of the payment of any other claim
against the Company being subordinated to the payment of the Subordinated
Claims), that may become payable or deliverable to the Holder on account or in
respect of any Subordinated Claim, for application to the payment of all Senior
Debt, until all holders of Senior Debt have received payment in full in cash of
all Senior Debt (but excluding indemnification obligations which are then
contingent and as to which no payment is then due and no claim or demand has
then been made).
(c) Delivery and Application. All such payments and
------------------------
distributions on account or in respect of Subordinated Claims shall be delivered
by the debtor, trustee, receiver, disbursing agent or other Person making such
payment or distribution in such Bankruptcy,
-8-
<PAGE>
Insolvency or Liquidation Proceeding directly to the holders of Senior Debt. If
such payment or distribution consists of any property or securities other than
cash, (i) such payment or distribution shall not be deemed applied to the
payment of Senior Debt at any adjudicated or imputed value and (ii) such payment
or distribution and all other and future non-cash payments and distributions on
account or in respect of Subordinated Claims shall be delivered to and held by
the holders of Senior Debt, until cash proceeds from such non-cash payments and
distributions have been received by the holders of Senior Debt in an amount
sufficient (with any other cash paid or distributed to them by or on behalf of
the Company) to pay, in full and in cash, all of the Senior Debt (but excluding
indemnification obligations which are then contingent and as to which no payment
is then due and no claim or demand has then been made).
(d) Proof of Claim.
--------------
(1) If the Holder fails to file a proof of claim or other
statement or demand in respect of its Subordinated Claims in such Bankruptcy,
Insolvency or Liquidation Proceeding prior to the 30th day preceding any bar
date or other deadline for filing a proof of claim or other such statement or
demand therein, or if any such proof of claim, statement or demand filed by the
Holder prior to such day is in any respect inadequate or insufficient (in the
good faith opinion of any holder of Senior Debt), then each holder of Senior
Debt shall have the right, but not the obligation, to execute and deliver (in
the name of the Holder or in its own name but on behalf of the Holder, as such
holder of Senior Debt may elect) and file in such Bankruptcy, Insolvency or
Liquidation Proceeding any proof of claim, statement or demand which such holder
of Senior Debt may determine to be required or appropriate in respect of such
Subordinated Claim.
(2) To the extent necessary or reasonably appropriate to
permit the holders of Senior Debt to exercise the right granted to them under
this Section 6.4(d), the Holder hereby constitutes and appoints each holder of
Senior Debt as the Holder's attorney-in-fact and agent, with full power of
substitution and delegation, to execute, deliver and file any such proof of
claim, statement or demand as herein provided, and the power of attorney granted
herein (being coupled with an interest) is and shall be in all respects
irrevocable.
(3) No holder of Senior Debt shall, by executing,
delivering or filing any such proof of claim, statement or demand, become liable
or responsible in any respect for the legality, adequacy or sufficiency thereof.
(4) Each holder of Senior Debt filing any such proof of
claim, statement or demand shall deliver or mail a copy thereof to the Company
at least 10 days prior to filing such proof of claim, statement or demand, but
the failure to deliver or mail such copy shall not in any respect (i) impose any
liability on such holder or upon any other holder of Senior Debt or (ii)
destroy, affect or impair the subordination provided hereby or any right, power
or benefit hereby granted to any holder of Senior Debt. The Company shall,
promptly after its receipt thereof, deliver or mail a copy of such proof of
claim, statement or demand to the Holder.
-9-
<PAGE>
6.5 Enforcement Rights. The Holder shall not have any right to
------------------
enforce any Subordinated Claim, institute or attempt to institute any
Bankruptcy, Insolvency or Liquidation Proceeding against the Company or
otherwise to take any action against the Company or the Company's property
during any periods payments on or distributions in respect of Subordinated
Claims are prohibited under Section 6.2, 6.3 or 6.4 hereof.
6.6 Turnover. If and in each instance that the Holder receives any
--------
payment or distribution of any kind or character, whether in cash, property,
securities or otherwise (including, without limitation, any such payment or
distribution which may become payable or deliverable by reason of the payment of
any other Claim against the Company being subordinated to the payment of any
Subordinated Claim) on account or in respect of any Subordinated Claim which
payment or distribution is prohibited by Section 6.2, 6.3 or 6.4, at any time
when any Senior Debt or any commitment to extend credit which would constitute
Senior Debt is outstanding, then and in each such event:
(a) Transfer and Delivery. The Holder shall forthwith pay over,
---------------------
transfer and deliver such payment or distribution to the holders of Senior Debt,
whether or not any Bankruptcy, Insolvency or Liquidation Proceeding is then
pending, until the holders of Senior Debt have received payment in full and in
cash of all outstanding Senior Debt (but excluding indemnification obligations
which are then contingent and as to which no payment is then due and no claim or
demand has then been made).
(b) Held in Trust. The Holder hereby agrees to hold in trust
-------------
for the holders of Senior Debt, in the identical form received (except for any
necessary endorsement to the holders of Senior Debt) and as trustee of an
express trust, all payments and distributions required to be paid over,
transferred and delivered pursuant to this Section 6.6.
6.7 Subrogation. Subject to the prior payment in full and cash of
-----------
any and all Senior Debt (but excluding indemnification obligations which are
then contingent and as to which no payment is then due and no claim or demand
has then been made), the Holder shall be subrogated to the rights of the holders
of such Senior Debt to receive payments and distributions, whether in cash,
property, securities or otherwise, applicable to the Senior Debt until the
Holder's Subordinated Claim is paid in full. For such purposes:
(a) Postponement of Subrogation. No right of subrogation shall
---------------------------
be available to or may be enforced by the Holder, unless and until the payment
in full and in cash of all outstanding Senior Debt (but excluding
indemnification obligations which are then contingent and as to which no payment
is then due and no claim or demand has then been made).
(b) No Representation, Warranty or Responsibility. No holder
---------------------------------------------
of any Senior Debt makes any representation or warranty, or shall otherwise have
any responsibility, as to whether any such right of subrogation is accorded or
available to the Holder or is enforceable by it in any particular circumstance.
-10-
<PAGE>
(c) No Duty; No Exoneration. No holder of any Senior Debt shall
-----------------------
have any duty to the Holder to ensure, perfect, protect, enforce or maintain any
right of subrogation that might otherwise be accorded or available to or
enforceable by the Holder. The subordination provided herein and the rights of
the holders of Senior Debt hereunder shall remain fully enforceable on the terms
set forth herein, regardless of any act, omission or circumstance (whether or
not attributable to any holder of any Senior Debt and whether or not wrongful)
which does or might in any manner or in any respect destroy, limit, reduce,
affect or impair any right of subrogation otherwise accorded or available to or
enforceable by the Holder. Each holder of any Senior Debt shall remain utterly
free to take or fail to take any and all actions in respect of any Senior Debt
or any Person liable therefor or any collateral security therefor (including,
without limitation, each and all of the acts, omissions and matters described in
Section 6.8), without exonerating the Holder, even if any right of subrogation
is destroyed, limited, reduced, affected or impaired thereby.
(d) Disallowed Senior Debt. The subordination provided herein
----------------------
and the rights of the holders of Senior Debt hereunder shall be fully
enforceable as to all Senior Debt which is not allowed, allowable or enforceable
in any Bankruptcy, Insolvency or Liquidation Proceeding, even if and even though
no right of subrogation is available in respect of such Senior Debt.
(e) Payment of Senior Debt. For purposes of enforcing any right
----------------------
of subrogation on the terms set forth in this Section 6.7, no payment or
distribution on account of any Subordinated Claim arising in respect of this
Note applied to the payment of Senior Debt shall, as between the Company and
Holder and to the extent of the payment or distribution so applied, discharge
the liability of the Company for the payment of such Senior Debt and, to this
end, the Company shall remain obligated to pay such Senior Debt in full
notwithstanding any such application.
6.8 Subordination Not Prejudiced, Affected or Impaired. No right of
--------------------------------------------------
any present or future holder of any Senior Debt to enforce subordination as
provided in this Note shall at any time in any way be prejudiced, affected or
impaired by any act or failure to act on the part of the Company or by any act
or failure to act on the part of any holder of Senior Debt or by any breach or
default by the Company in the performance or observance of any promise, covenant
or obligation enforceable by the Holder, regardless of any knowledge thereof
that any holder of Senior Debt may have or otherwise be charged with.
(a) Certain Acts, Omissions and Events. Without in any way
----------------------------------
limiting the generality of the foregoing, each holder of any Senior Debt may at
any time and from time to time, without the consent of or notice to the Holder,
without incurring any responsibility or liability to any Holder and without in
any manner prejudicing, affecting or impairing the subordination provided herein
or the obligations of the Holder to the holders of Senior Debt:
(1) Make loans and advances to the Company or issue,
guaranty or obtain letters of credit for the account of the Company or otherwise
extend credit to the Company,
-11-
<PAGE>
in any amount and on any terms, whether pursuant to a commitment or as a
discretionary advance and whether or not any default or event of default or
failure of condition is then continuing;
(2) Change the manner, place or terms of payment or extend
the time of payment of, or renew or alter, compromise, accelerate, extend or
refinance, any Senior Debt or any agreement, guaranty, lien or obligation of the
Company or any other Person in any manner related thereto, or otherwise amend,
supplement or change in any manner any Senior Debt or any such agreement,
guaranty, lien or obligation;
(3) Increase or reduce the amount of any Senior Debt or the
interest accruing thereon;
(4) Release or discharge any Senior Debt or any guaranty
thereof or any agreement or obligation of the Company or any other Person with
respect thereto;
(5) Take or fail to take any collateral security for any
Senior Debt or take or fail to take any action which may be necessary or
appropriate to ensure that any lien upon any property securing any Senior Debt
is duly enforceable or perfected or entitled to priority as against any other
lien or to ensure that any proceeds of any property subject to any lien are
applied to the payment of any Senior Debt;
(6) Release, discharge or permit the lapse of any or all
liens upon any property at any time securing any Senior Debt;
(7) Exercise or enforce, in any manner, order or sequence,
or fail to exercise or enforce, any right or remedy against the Company or any
collateral security or any other Person or property in respect of any Senior
Debt or lien securing any Senior Debt or any right under this Note; or
(8) Sell, exchange, release, foreclose upon or otherwise
deal with any property that may at any time be subject to any lien securing any
Senior Debt.
(b) No Release or Exoneration. No exercise, delay in exercising
-------------------------
or failure to exercise any right arising under this Section 6, no act or
omission of any holder of any Senior Debt in respect of the Company or any other
Person or any collateral security for any Senior Debt or any right arising under
this Section 6, no change, impairment, or suspension of any right or remedy of
any holder of any Senior Debt, and no other act, failure to act, circumstance,
occurrence or event which, but for this provision, would or could act as a
release or exoneration of the obligations of the Holder hereunder shall in any
way affect, decrease, diminish or impair any of the obligations of the Holder
under this Note or give the Holder or any other Person any recourse or defense
against any holder of Senior Debt in respect of any right arising under this
Section 6.
-12-
<PAGE>
6.9 Reinstatement. If any payment or distribution at any time made
-------------
on account or in respect of any Senior Debt is thereafter rescinded, recovered,
set aside, avoided or required to be returned, then such Senior Debt and all
rights of the holder of such Senior Debt to enforce subordination as set forth
herein shall be automatically and unconditionally reinstated, as fully as if
such payment or distribution had never been made.
7. Amendments and Waivers. Neither this Note nor any term hereof may be
----------------------
amended or waived orally or in writing, except that any term of the Note may be
amended and the observance of any term of the Note may be waived (either
generally or in a particular instance and either retroactively or prospectively)
upon the approval of the Company and the Holder. The Holder of this Note by its
acceptance hereof acknowledges and agrees that the subordination provisions of
this instrument are for the benefit of the holders of the Senior Debt and that,
accordingly, no provision of Section 6 hereof may be amended or otherwise
modified without the prior written consent of each holder of Senior Debt at such
time outstanding.
8. Notices. Any notice or communication to the Company shall be given in
-------
writing and delivered in person or by overnight courier or mailed by certified
or registered mail, return receipt requested, addressed as follows:
emachines, Inc.
14350 Myford Road, Suite 150
Irvine, CA 92606
Attention: Stephen Dukker
Telephone: (714) 481-2828
Facsimile: (714) 505-5048
Any notice or communication to the Holder shall be given in writing and
delivered by telecopier, in person or by overnight courier or mailed by
certified or registered mail, return receipt requested, addressed to the address
of the Holder in the Note Register on the date of such notice or communication.
The address of the original Holder is as follows:
TriGem Corporation
14350 Myford Road, Suite 150
Irvine, CA 92606
U.S.A.
Attention: Cris Moon
Facsimile: (714) 481-3630
-13-
<PAGE>
with a copy to:
TriGem Computer, Inc.
TriGem Computer Building
45-2 Yoido-Dong, Youngdeungpo-Ku
Seoul, 150-010 Korea
P.O. Box Yoido 269
Attention: Paul Lee
Facsimile: 82-2-784-3362
Any such notice or communication shall be effective (x) when received, if
delivered in person, (y) on the next business day, if delivered by overnight
courier and (z) when received, if delivered by mail.
9. Restrictions on Transfer. This Note has not been registered under the
------------------------
Securities Act, or the securities laws of any state or other jurisdiction.
Neither this Note nor any interest or participation herein may be reoffered,
sold, assigned, transferred, pledged, encumbered or otherwise disposed of in the
absence of such registration or unless such transaction is exempt from, or not
subject to, registration, and the Holder by its acceptance of this Note agrees
that it shall offer, sell, assign, transfer, pledge, encumber or otherwise
dispose of this Note in its entirety and not in part only (a) to the Company or
(b) to a corporation or other business entity controlled by or controlling the
Holder.
10. Transfer Agent and Registrar; Transfers of Note.
------------------------------------------------
10.1 Company Own Transfer Agent and Note Registrar. The Company shall
---------------------------------------------
serve as its own agent for the transfer and exchange of the Note and registrar
to keep a register in which, subject to such reasonable regulations as it may
prescribe, the Company will provide for the registration of the Note and the
registration of any transfers of Note in whole but not in part (the "Note
Register") in accordance with Section 9. The Note Register will be maintained at
the office of the Company set forth in Section 8 hereof.
10.2 Transfer of Note. Upon presentation of the Note for registration
----------------
of transfer at the office of the Company set forth in Section 8 hereof
accompanied by (i) certification by the transferor that such transfer is in
compliance with the terms hereof and (ii) by a written instrument of transfer in
a form approved by the Company executed by the registered Holder, in person or
by such holder's attorney thereunto duly authorized in writing, and including
the name, address and telephone and fax numbers of the transferee and name of
the contact person of the transferee, such Note shall be transferred on the Note
Register, and a new Note of like tenor and bearing the same legends shall be
issued in the name of the transferee and sent to the transferee at the address
and c/o the contact person so indicated. Transfers and exchanges of the Note
shall be subject to such additional restrictions as are set forth in the legends
on the Note and to such additional reasonable regulations as may be prescribed
by the Company. Successive registrations of transfers as aforesaid
-14-
<PAGE>
may be made from time to time as desired, and each such registration shall be
noted on the Note Register. No service charge shall be made for any registration
of transfer or exchange of the Note, but the Company may require payment of a
sum sufficient to cover any stamp or other tax or governmental charge in
connection therewith.
10.3 Registered Holder Treated as Absolute Owner. The Company may
-------------------------------------------
deem and treat the Person in whose name the Note is registered on the Note
Register as the absolute owner of the Note (whether or not the Note shall be
overdue and notwithstanding any notation of ownership or other writing thereon)
for the purpose of receiving payment of or on account of the principal of and,
subject to the provisions of this Note, interest on the Note and for all other
purposes; and neither the Company nor any agent of the Company shall be affected
by any notice to the contrary. All such payments so made to any such Person, or
upon such Person's order, shall be valid, and, to the extent of the sum or sums
so paid, effectual to satisfy and discharge the liability for moneys payable on
the Note.
10.4 Loss, Theft, Destruction or Mutilation of Note. Upon receipt by
----------------------------------------------
the Company of evidence reasonably satisfactory to it of the loss, theft,
destruction or mutilation of the Note, and in the case of loss, theft or
destruction, receipt of indemnity or security reasonably satisfactory to the
Company, and upon reimbursement to the Company of all reasonable expenses
incidental thereto, and upon surrender and cancellation of the Note, if
mutilated, the Company will deliver a new Note of like tenor and dated as of
such cancellation, in lieu of the Note.
11. Holder Representations. By its acceptance hereof, the Holder
----------------------
represents and warrants that the Holder has been advised that this Note has not
been registered under the Securities Act, or any state securities laws and,
therefore, cannot be transferred unless it is registered under the Securities
Act and applicable state securities laws or unless an exemption from such
registration requirements is available and is subject to restrictions on
transfer set forth in Section 9. Such Holder is aware that the Company is under
no obligation to effect any such registration or to file for or comply with any
exemption from registration. The Holder has not been formed solely for the
purpose of making this investment and is acquiring the Note for its own account,
for investment, and not with a view to, or for resale in connection with, the
distribution thereof.
12. General. This Note shall be governed by and shall be construed and
-------
enforced in accordance with the laws of the State of New York, without regard to
conflicts of laws principles.
emachines, Inc.
By: /s/ Steven H. Miller
_______________________________
Name: Steven H. Miller
Title: CFO
-15-
<PAGE>
EXHIBIT 10.5
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE OR
OTHER JURISDICTION. NEITHER THIS NOTE NOR ANY INTEREST OR PARTICIPATION
HEREIN MAY BE OFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR
OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH
TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION.
emachines, Inc.
SUBORDINATED PROMISSORY NOTE
Due June 7, 2004
Irvine, California
$290,000.00 June 7, 1999
FOR VALUE RECEIVED, the undersigned, emachines, Inc., a Delaware
corporation (the "Company"), hereby promises to pay to the order of Korea Data
Systems America, Inc., a California corporation (together with its successors
and assigns, "Holder"), the principal sum of Two Hundred Ninety Thousand Dollars
($290,000.00) on June 7, 2004 with interest from December 18, 1998 (or the last
interest payment date as to which interest has been paid, if earlier) on the
unpaid balance at a rate of five and seventy-nine hundredths percent (5.79%) per
annum, subject to Section 2 hereof. Accrued interest shall be payable semi-
annually in arrears as provided in Section 2.1 hereof. Interest shall be
calculated based on a 365/366-day year and the actual days elapsed. Payments of
both principal and interest are to be made in lawful money of the United States
of America as provided herein.
The Note is not transferrable other than in its entirety to the
Company or to a corporation or other business entity controlled by or
controlling the Holder.
The Note shall be dated the date of its issuance and shall bear
interest from its date of issuance stated herein (or the last interest payment
date as to which interest had been paid, if earlier) in the manner provided in
Section 2. The Note may have such letters, numbers or other marks of
identification and such legends or endorsements not included hereon placed
thereon as may be required to comply with any law or with any rules made
pursuant thereto or with the rules of any governmental agency or as may,
consistently herewith, be determined by the Company, as conclusively evidenced
by its execution of the Note.
<PAGE>
The following is a statement of the rights of the Holder of this Note
and the conditions to which this Note is subject, and to which the Holder
hereof, by the acceptance of this Note, agrees:
1. Definitions. The following terms, as used herein, have the following
-----------
meanings:
"Bankruptcy Code" means Title 11 of the United States Code.
"Bankruptcy, Insolvency or Liquidation Proceeding" means (i) any case
commenced by or against the Company under any chapter of the Bankruptcy Code,
any other proceeding for the reorganization, recapitalization or adjustment or
marshaling of the assets or liabilities of the Company, any receivership or
assignment for the benefit of creditors relating to the Company or any similar
case or proceeding relative to the Company or its creditors, as such, in each
case whether or not voluntary, (ii) any liquidation, dissolution, marshaling of
assets or liabilities or other winding up of or relating to the Company, in each
case whether or not voluntary and whether or not involving bankruptcy or
insolvency, and (iii) any other proceeding of any type or nature in which Claims
against the Company generally are determined, proven or paid.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and
Friday, which is not a day in which banking institutions in Irvine, California
or New York, New York are authorized or obligated by law or executive order to
close.
"Claim" is used as defined in the Bankruptcy Code, whether or not, in
the context in which it appears, a case under the Bankruptcy Code is pending.
"Designated Senior Debt" means the Company's obligations under any
particular Senior Debt in which the instrument creating or evidencing the same
or the assumption or guarantee thereof (or related agreements or documents to
which the Company is a party) expressly provides that such Senior Debt shall be
"Designated Senior Debt" for purposes of this Note (provided that such
instrument, agreement or other document may place limitations and conditions on
the right of such Senior Debt to exercise the rights of Designated Senior Debt).
"Holder" has the meaning given in the first paragraph hereof.
"Note" has the meanings given in the preamble hereto.
"Person" shall mean and include an individual, a partnership, a
corporation (including a business trust), a joint stock company, a limited
liability company, an unincorporated association, a joint venture or other
entity or a governmental authority.
"Securities Act" means the Securities Act of 1933, as amended.
-2-
<PAGE>
"Senior Debt" means the principal of (and premium, if any) and
interest, if any (including interest accruing on or after the filing of any
petition in bankruptcy or for reorganization relating to the Company whether or
not such claim for post-petition interest is allowed in such proceeding), on,
rent with respect to, and all fees and other amounts payable in connection with,
the following, whether absolute or contingent, secured or unsecured, due or to
become due, outstanding on the date hereof or hereafter created, incurred or
assumed: (a) indebtedness of the Company evidenced by a credit or loan
agreement, note, bond, debenture or other written obligation, (b) all
obligations of the Company for money borrowed, (c) all obligations of the
Company evidenced by a note or similar instrument given in connection with the
acquisition of any businesses, properties or assets of any kind, (d) obligations
of the Company (i) as lessee under leases required to be capitalized on the
balance sheet of the lessee under generally accepted accounting principles, (ii)
as lessee under other leases for facilities, equipment or related assets,
whether or not capitalized, entered into or leased after the date hereof for
financing purposes (as determined by the Company), (iii) under any lease or
related document (including a purchase agreement) that provides that the Company
is contractually obligated to purchase or cause a third party to purchase the
leased property, and (iv) under such lease or related document to purchase or to
cause a third party to purchase such leased property, (e) all obligations of the
Company under interest rate and currency swaps, caps, floors, collars, hedge
agreements, forward contracts, or similar agreements or arrangements, (f) all
obligations of the Company with respect to letters of credit, bankers'
acceptances or similar facilities (including reimbursement obligations and
standby or commitment fees with respect to any of the foregoing), (g) all
obligations of the Company issued or assumed as the deferred purchase price of
property or services (but excluding trade accounts payable arising in the
ordinary course of business), (h) all obligations of the type referred to in
clauses (a) through (g) above of another Person and all dividends of another
Person, the payment of which, in either case, the Company has assumed or
guaranteed (or in effect guaranteed through an agreement to purchase or
otherwise (including, without limitation, "take or pay" and similar
arrangements)), or for which the Company is responsible or liable, directly or
indirectly, jointly or severally, as obligor, guarantor or otherwise, or which
is secured by a lien on property of the Company, and all obligations of the
Company with respect thereto, and (i) renewals, extensions, modifications,
replacements, restatements and refundings of, or any indebtedness or obligation
issued in exchange for, any such indebtedness or obligation described in clauses
(a) through (h) of this paragraph; provided, however, that Senior Debt shall not
-------- -------
include the Note or any indebtedness or obligation subordinated on the same
basis as the Note or any such indebtedness or obligation if the terms of such
indebtedness or obligation (or the terms of the instrument under which, or
pursuant to which it is issued) expressly provide that such indebtedness or
obligation is not superior in right of payment to the Note.
"Subordinated Claims" means all present and future indebtedness and
obligations of every type and description arising under or in respect of the
Note or other instrument, agreement, transaction, act or event in respect
thereof and all other Claims in any manner based on, arising from or related to
any such indebtedness or obligation, whether based on a contract or quasi-
contract or founded on a tort or arising by law or otherwise.
-3-
<PAGE>
2. Repayments and Payments of Principal and Interest on Note.
---------------------------------------------------------
2.1 Interest. Subject to the provisions of Section 6 and Section 2.6,
--------
interest is payable in arrears in cash on the last business day of each May and
November, beginning November 30, 1999. Payment of all amounts due under the Note
shall be made by mail to the registered address of the Holder, or if the Holder
shall elect, by wire transfer to the account designated by the Holder of
immediately available funds; provided, however, that for the Holder to receive
-------- -------
interest or principal payments by wire transfer, the Company must receive the
Holder's written bank wire transfer instructions by the record date (as defined
below) for such payment. The Person in whose name the Note is registered at the
close of business on the third business day prior to any interest or principal
payment date (the "record date") shall be entitled to receive the interest, if
any, payable on such interest payment date notwithstanding any transfer or
exchange of the Note subsequent to the record date and prior to such interest or
principal payment date.
2.2 Optional Prepayments of Note. Subject to the provisions of
----------------------------
Section 6, the Company may at any time, at its option, prepay all or, from time
to time, part of the principal amount of the Note, without penalty or premium,
together with interest on the principal amount so prepaid accrued to (but not
including) the date fixed for such prepayment (the "prepayment date").
2.3 Notice of Prepayment to Holders. Not less than three (3) nor
-------------------------------
more than ten (10) days prior to the prepayment date, the Company shall give
notice thereof to the registered Holder of the Note, specifying the prepayment
date and the aggregate principal amount to be prepaid on the prepayment date.
Such notice shall also contain instructions for the delivery of the Note by the
Holder to the Company. Subject to the provisions of Section 6, such notice shall
be irrevocable.
2.4 Legal Holidays. In any case where any interest payment date or
--------------
prepayment date or maturity date is not a Business Day, then (notwithstanding
any other provision of the Note), payment of interest or principal, as
applicable, with respect to the Note need not be made on such date, but may be
made on the next succeeding Business Day with the same force and effect as if
made on the interest payment date or prepayment date or maturity date, as the
case may be.
2.6 Option to Extend Interest Payment Period.
----------------------------------------
(a) The Company shall have the right at any time during the term
of the Note to defer interest payments (an "Extension Period"); provided, no
--------
Extension Period may extend beyond the maturity date of the Note. At the end of
each Extension Period, the Company shall be responsible for the payment of, and
the Company shall pay to the Person in whose name the Note is registered on the
close of business on the record date, all interest then accrued and unpaid,
together with interest compounded semi-annually at the rate specified in the
Note to the extent permitted by applicable law. Prior to the termination of any
such Extension Period, the Company may further extend such Extension Period;
provided that such extension may not extend beyond the maturity of the Note.
- --------
Upon the termination of any Extension Period and the payment of all amounts then
due, the Company may commence a new Extension Period, provided that such
--------
extension may not extend
-4-
<PAGE>
beyond the maturity of the Note. No interest during an Extension Period, except
at the end thereof, shall be due and payable.
3. Certain Covenants of the Company.
--------------------------------
3.1 Existence. The Company will do or cause to be done all things
---------
necessary to preserve and keep in full force and effect its existence, provided
that this Section 3.1 shall not apply to a consolidation or merger of the
Company with or into another Person in which the Company is not the surviving
Person or conveyance, transfer or lease of the properties and assets of the
Company substantially as an entirety to another Person provided that the
transferee Person expressly assumes the due and punctual payment of the
principal and interest on the Note and the performance or observance of every
covenant set forth in the Note on the part of the Company to be performed or
observed.
4. Events of Default; Acceleration.
-------------------------------
4.1 Events of Default. The occurrence of any of the following events
-----------------
shall constitute an "Event of Default" with respect to the Note:
(a) the Company defaults in the payment of the principal of the
Note when the same becomes due and payable at maturity or otherwise (other than
a default in the payment of principal resulting from application of Section 6
hereof); or
(b) the Company defaults in the payment of interest on the Note
(other than a failure to pay interest resulting from application of Section 6 or
Section 2.6 hereof) for 30 days after the same becomes due and payable; or
(c) the Company defaults in the performance of or breaches any
covenant or warranty of the Company in this Note (other than a covenant or
warranty a default in whose performance or whose breach is elsewhere in this
Section specifically dealt with), and continuance of such default or breach for
a period of 60 days after there has been given, by registered or certified mail,
to the Company by the Holder specifying such default or breach and requiring it
to be remedied;
(d) the entry by a court having jurisdiction in the premises of
(A) a decree or order for relief in respect of the Company in an involuntary
case or proceeding under any applicable Federal or State bankruptcy, insolvency,
reorganization or other similar law or (B) a decree or order adjudging the
Company a bankrupt or insolvent, or approving as properly filed a petition
seeking reorganization, arrangement, adjustment or composition of or in respect
of the Company under any applicable Federal or State law, or appointing a
custodian, receiver, liquidator, assignee, trustee, sequestrator or other
similar official of the Company or of any substantial part of its property, or
ordering the winding up or liquidation of its affairs, and the continuance of
any such
-5-
<PAGE>
decree or order for relief or any such other decree or order unstayed and in
effect for a period of 90 consecutive days; or
(e) the commencement by the Company of a voluntary case or
proceeding under any applicable Federal or State bankruptcy, insolvency,
reorganization or other similar law or of any other case or proceeding to be
adjudicated a bankrupt or insolvent, or the consent by it to the entry of a
decree or order for relief in respect of the Company in an involuntary case or
proceeding under any applicable Federal or State bankruptcy, insolvency,
reorganization or other similar law or to the commencement of any bankruptcy or
insolvency case or proceeding against it, or the filing by it of a petition or
answer or consent seeking reorganization or relief under any applicable Federal
or State law, or the consent by it to the filing of such petition or to the
appointment of or taking possession by a custodian, receiver, liquidator,
assignee, trustee, sequestrator or other similar official of the Company or of
any substantial part of its property, or the making by it of an assignment for
the benefit of creditors, or the admission by it in writing of its inability to
pay its debts generally as they become due, or the taking of corporate action by
the Company in furtherance of any such action.
4.2 Acceleration. In the event an Event of Default has occurred and
------------
is continuing, subject to the provisions of Section 6, the Holder at its option
may, by written notice to the Company, declare the Note due and payable,
whereupon the same shall forthwith mature and become due and payable together
with interest accrued thereon, without presentment, demand, protest or notice,
all of which are hereby waived; provided, however, that such acceleration shall
be automatic without the necessity of any such notice in the case of Events of
Default under clause (d) or (e) above.
4.3 Waiver of Past Defaults. The Holder may waive any past default on
-----------------------
the Note and its consequences. Upon any such waiver, such default shall cease to
exist, and any Event of Default arising therefrom shall be deemed to have been
cured, for all purposes; but no such waiver shall extend to any subsequent or
other default or impair any right consequent thereon.
4.4 Rescission and Annulment. At any time after a declaration of
------------------------
acceleration with respect to the Note has been made and before a judgment or
decree for payment of the money due has been obtained, the Holder, by written
notice to the Company, may rescind and annul such declaration and its
consequences if the Company has paid all overdue interest on the Note and the
principal which has become due otherwise than by such declaration of
acceleration and all Events of Default with respect to the Note, other than the
non-payment of the principal of Note which have become due solely by such
declaration of acceleration, have been cured or waived as provided in Section
4.3.
5. Remedies. Subject to the provisions of Section 6 hereof, upon the
--------
acceleration of the amounts due under the Note in accordance with Section 4 or
if such amounts remain unpaid after the maturity date of the Note, the Holder
may, upon written consent of holder of any Senior Debt then outstanding, proceed
to protect and enforce any right, power or remedy granted to it under
-6-
<PAGE>
applicable law. If any Holder or holder of any other indebtedness of the Company
gives any notice or takes any other action in respect of a claimed default, the
Company will forthwith give written notice thereof to the Holder describing the
notice or action and the nature of the claimed default. No course of dealing and
no delay on the part of the Holder in exercising any right, power or remedy will
operate as a waiver thereof or otherwise prejudice the Holder's rights, powers
or remedies. No right, power or remedy conferred hereby is exclusive of any
other right, power or remedy referred to herein or now or hereafter available at
law, in equity, by statute or otherwise.
6. Note Subordination.
-------------------
6.1 Subordination. The Company hereby agrees and the Holder by its
-------------
acceptance of this Note agrees that the Subordinated Claims are and shall be
postponed, subordinated and junior in right of payment to the prior payment in
full of all Senior Debt on the terms and conditions herein set forth.
6.2 Permitted Payments; Deferral of Payments. So long as there shall
----------------------------------------
not have occurred and be continuing (i) a default in the payment of principal,
premium, if any, or interest (including a default under any repurchase or
redemption obligation) or other amounts with respect to any Senior Debt or (ii)
any other event of default which has been declared in writing, or is
automatically effective in the case of Bankruptcy, Insolvency or Liquidation
Proceedings, with respect to any Designated Senior Debt (as such event of
default is defined therein or in the instrument under which it is outstanding)
and of which the Company has received a notice (a "Blockage Notice") from the
holders of such Designated Senior Debt (each of the events specified in clause
(i) or clause (ii), a "Senior Default"), the Company shall be permitted to make,
and the Holder to accept and receive, regularly scheduled payments of principal
and accrued interest under this Note and any prepayment of principal that the
Company has decided to make, as heretofore set forth. Notwithstanding any
provision to the contrary contained in this Note, the Company shall not make,
and the Holder shall not demand, accept, receive or retain, any payment or
distribution of any kind or character, whether in cash, property, securities or
otherwise, on account or in respect of any Subordinated Claim after a Senior
Default has occurred for a period of time (a "Deferral Period") in accordance
with the terms thereof has occurred. Payments due under the Note may be resumed
(x) in the case of a deferral of interest, after the end of a Deferral Period
(such payment to resume as set forth in the next paragraph of this Note), and
(y) in the case of defaults referred to in clauses (i) and (ii) above, upon the
earlier of:
(A) the date upon which the default is cured or waived or ceases to exist,
or
(B) in the case of a default referred to in clause (ii) above, the date
which is 179 days after the Blockage Notice is received,
unless this Section 6.2 otherwise prohibits the payment at the time of such
payment (including, without limitation, as a result of a payment default with
respect to the applicable Senior Debt as a consequence of the acceleration of
the maturity thereof or otherwise).
-7-
<PAGE>
If a Deferral Period shall occur, interest payable on the Note on regular
payment dates occurring during such Deferral Period shall be deferred and the
Company shall be responsible for the payment of, and the Company shall pay to
the Person in whose name this Note is registered at the close of business on the
record date immediately preceding the regular payment date hereunder next
occurring after the termination of the Deferral Period, all interest then
accrued and unpaid together with, to the extent permitted by law, interest
thereon (compounded semi-annually on regular payment dates) at the rate
specified for the Note.
6.3 Prior Payment to Senior Debt Upon Acceleration. In the event that
----------------------------------------------
the Note is declared due and payable before its stated maturity, then and in
such event the holders of the Senior Debt outstanding at the time the Note so
become due and payable shall be entitled to receive payment in full in cash or
other payment satisfactory to the holders of Senior Debt of all amounts due or
to become due on or in respect of all Senior Debt before the Holder is entitled
to receive any payment by the Company on account of any Subordinated Claim. If
the payment of Note is accelerated because of an Event of Default, the Company
shall promptly notify holders of Senior Debt of the acceleration. The Company
shall promptly notify the Holder of any event which would prohibit the Company
from making any such payments pursuant to this Section 6.
The provisions of this Section 6.3 shall not apply to any payment
with respect to which Section 6.4 would be applicable.
6.4 Bankruptcy, Insolvency or Liquidation Proceedings. In the event
-------------------------------------------------
of any Bankruptcy, Insolvency or Liquidation Proceeding:
(a) Priority of Payment. All Senior Debt shall be paid in full
-------------------
in cash (but excluding indemnification obligations which are then contingent and
as to which no payment is then due and no claim or demand has then been made)
before the Holder shall be entitled to receive any payment or distribution of
any kind or character, whether in cash, property, securities or otherwise, in
respect of this Note in such Bankruptcy, Insolvency or Liquidation Proceeding.
(b) Payments and Distributions on Subordinated Claims. Each
-------------------------------------------------
holder of Senior Debt shall be entitled to receive any payment or distribution
of any kind or character, whether in cash, property, securities or otherwise
(including, without limitation, any such payment or distribution which may
become payable or deliverable by reason of the payment of any other claim
against the Company being subordinated to the payment of the Subordinated
Claims), that may become payable or deliverable to the Holder on account or in
respect of any Subordinated Claim, for application to the payment of all Senior
Debt, until all holders of Senior Debt have received payment in full in cash of
all Senior Debt (but excluding indemnification obligations which are then
contingent and as to which no payment is then due and no claim or demand has
then been made).
(c) Delivery and Application. All such payments and
------------------------
distributions on account or in respect of Subordinated Claims shall be delivered
by the debtor, trustee, receiver, disbursing agent or other Person making such
payment or distribution in such Bankruptcy,
-8-
<PAGE>
Insolvency or Liquidation Proceeding directly to the holders of Senior Debt. If
such payment or distribution consists of any property or securities other than
cash, (i) such payment or distribution shall not be deemed applied to the
payment of Senior Debt at any adjudicated or imputed value and (ii) such payment
or distribution and all other and future non-cash payments and distributions on
account or in respect of Subordinated Claims shall be delivered to and held by
the holders of Senior Debt, until cash proceeds from such non-cash payments and
distributions have been received by the holders of Senior Debt in an amount
sufficient (with any other cash paid or distributed to them by or on behalf of
the Company) to pay, in full and in cash, all of the Senior Debt (but excluding
indemnification obligations which are then contingent and as to which no payment
is then due and no claim or demand has then been made).
(d) Proof of Claim.
--------------
(1) If the Holder fails to file a proof of claim or other
statement or demand in respect of its Subordinated Claims in such Bankruptcy,
Insolvency or Liquidation Proceeding prior to the 30th day preceding any bar
date or other deadline for filing a proof of claim or other such statement or
demand therein, or if any such proof of claim, statement or demand filed by the
Holder prior to such day is in any respect inadequate or insufficient (in the
good faith opinion of any holder of Senior Debt), then each holder of Senior
Debt shall have the right, but not the obligation, to execute and deliver (in
the name of the Holder or in its own name but on behalf of the Holder, as such
holder of Senior Debt may elect) and file in such Bankruptcy, Insolvency or
Liquidation Proceeding any proof of claim, statement or demand which such holder
of Senior Debt may determine to be required or appropriate in respect of such
Subordinated Claim.
(2) To the extent necessary or reasonably appropriate to
permit the holders of Senior Debt to exercise the right granted to them under
this Section 6.4(d), the Holder hereby constitutes and appoints each holder of
Senior Debt as the Holder's attorney-in-fact and agent, with full power of
substitution and delegation, to execute, deliver and file any such proof of
claim, statement or demand as herein provided, and the power of attorney granted
herein (being coupled with an interest) is and shall be in all respects
irrevocable.
(3) No holder of Senior Debt shall, by executing,
delivering or filing any such proof of claim, statement or demand, become liable
or responsible in any respect for the legality, adequacy or sufficiency thereof.
(4) Each holder of Senior Debt filing any such proof of
claim, statement or demand shall deliver or mail a copy thereof to the Company
at least 10 days prior to filing such proof of claim, statement or demand, but
the failure to deliver or mail such copy shall not in any respect (i) impose any
liability on such holder or upon any other holder of Senior Debt or (ii)
destroy, affect or impair the subordination provided hereby or any right, power
or benefit hereby granted to any holder of Senior Debt. The Company shall,
promptly after its receipt thereof, deliver or mail a copy of such proof of
claim, statement or demand to the Holder.
-9-
<PAGE>
6.5 Enforcement Rights. The Holder shall not have any right to
------------------
enforce any Subordinated Claim, institute or attempt to institute any
Bankruptcy, Insolvency or Liquidation Proceeding against the Company or
otherwise to take any action against the Company or the Company's property
during any periods payments on or distributions in respect of Subordinated
Claims are prohibited under Section 6.2, 6.3 or 6.4 hereof.
6.6 Turnover. If and in each instance that the Holder receives any
--------
payment or distribution of any kind or character, whether in cash, property,
securities or otherwise (including, without limitation, any such payment or
distribution which may become payable or deliverable by reason of the payment of
any other Claim against the Company being subordinated to the payment of any
Subordinated Claim) on account or in respect of any Subordinated Claim which
payment or distribution is prohibited by Section 6.2, 6.3 or 6.4, at any time
when any Senior Debt or any commitment to extend credit which would constitute
Senior Debt is outstanding, then and in each such event:
(a) Transfer and Delivery. The Holder shall forthwith pay over,
---------------------
transfer and deliver such payment or distribution to the holders of Senior Debt,
whether or not any Bankruptcy, Insolvency or Liquidation Proceeding is then
pending, until the holders of Senior Debt have received payment in full and in
cash of all outstanding Senior Debt (but excluding indemnification obligations
which are then contingent and as to which no payment is then due and no claim or
demand has then been made).
(b) Held in Trust. The Holder hereby agrees to hold in trust
-------------
for the holders of Senior Debt, in the identical form received (except for any
necessary endorsement to the holders of Senior Debt) and as trustee of an
express trust, all payments and distributions required to be paid over,
transferred and delivered pursuant to this Section 6.6.
6.7 Subrogation. Subject to the prior payment in full and cash of any
-----------
and all Senior Debt (but excluding indemnification obligations which are then
contingent and as to which no payment is then due and no claim or demand has
then been made), the Holder shall be subrogated to the rights of the holders of
such Senior Debt to receive payments and distributions, whether in cash,
property, securities or otherwise, applicable to the Senior Debt until the
Holder's Subordinated Claim is paid in full. For such purposes:
(a) Postponement of Subrogation. No right of subrogation shall
---------------------------
be available to or may be enforced by the Holder, unless and until the payment
in full and in cash of all outstanding Senior Debt (but excluding
indemnification obligations which are then contingent and as to which no payment
is then due and no claim or demand has then been made).
(b) No Representation, Warranty or Responsibility. No holder
---------------------------------------------
of any Senior Debt makes any representation or warranty, or shall otherwise have
any responsibility, as to whether any such right of subrogation is accorded or
available to the Holder or is enforceable by it in any particular circumstance.
-10-
<PAGE>
(c) No Duty; No Exoneration. No holder of any Senior Debt shall
-----------------------
have any duty to the Holder to ensure, perfect, protect, enforce or maintain any
right of subrogation that might otherwise be accorded or available to or
enforceable by the Holder. The subordination provided herein and the rights of
the holders of Senior Debt hereunder shall remain fully enforceable on the terms
set forth herein, regardless of any act, omission or circumstance (whether or
not attributable to any holder of any Senior Debt and whether or not wrongful)
which does or might in any manner or in any respect destroy, limit, reduce,
affect or impair any right of subrogation otherwise accorded or available to or
enforceable by the Holder. Each holder of any Senior Debt shall remain utterly
free to take or fail to take any and all actions in respect of any Senior Debt
or any Person liable therefor or any collateral security therefor (including,
without limitation, each and all of the acts, omissions and matters described in
Section 6.8), without exonerating the Holder, even if any right of subrogation
is destroyed, limited, reduced, affected or impaired thereby.
(d) Disallowed Senior Debt. The subordination provided herein
----------------------
and the rights of the holders of Senior Debt hereunder shall be fully
enforceable as to all Senior Debt which is not allowed, allowable or enforceable
in any Bankruptcy, Insolvency or Liquidation Proceeding, even if and even though
no right of subrogation is available in respect of such Senior Debt.
(e) Payment of Senior Debt. For purposes of enforcing any right
----------------------
of subrogation on the terms set forth in this Section 6.7, no payment or
distribution on account of any Subordinated Claim arising in respect of this
Note applied to the payment of Senior Debt shall, as between the Company and
Holder and to the extent of the payment or distribution so applied, discharge
the liability of the Company for the payment of such Senior Debt and, to this
end, the Company shall remain obligated to pay such Senior Debt in full
notwithstanding any such application.
6.8 Subordination Not Prejudiced, Affected or Impaired. No right of
--------------------------------------------------
any present or future holder of any Senior Debt to enforce subordination as
provided in this Note shall at any time in any way be prejudiced, affected or
impaired by any act or failure to act on the part of the Company or by any act
or failure to act on the part of any holder of Senior Debt or by any breach or
default by the Company in the performance or observance of any promise, covenant
or obligation enforceable by the Holder, regardless of any knowledge thereof
that any holder of Senior Debt may have or otherwise be charged with.
(a) Certain Acts, Omissions and Events. Without in any way
----------------------------------
limiting the generality of the foregoing, each holder of any Senior Debt may at
any time and from time to time, without the consent of or notice to the Holder,
without incurring any responsibility or liability to any Holder and without in
any manner prejudicing, affecting or impairing the subordination provided herein
or the obligations of the Holder to the holders of Senior Debt:
(1) Make loans and advances to the Company or issue,
guaranty or obtain letters of credit for the account of the Company or otherwise
extend credit to the Company,
-11-
<PAGE>
in any amount and on any terms, whether pursuant to a commitment or as a
discretionary advance and whether or not any default or event of default or
failure of condition is then continuing;
(2) Change the manner, place or terms of payment or extend
the time of payment of, or renew or alter, compromise, accelerate, extend or
refinance, any Senior Debt or any agreement, guaranty, lien or obligation of the
Company or any other Person in any manner related thereto, or otherwise amend,
supplement or change in any manner any Senior Debt or any such agreement,
guaranty, lien or obligation;
(3) Increase or reduce the amount of any Senior Debt or the
interest accruing thereon;
(4) Release or discharge any Senior Debt or any guaranty
thereof or any agreement or obligation of the Company or any other Person with
respect thereto;
(5) Take or fail to take any collateral security for any
Senior Debt or take or fail to take any action which may be necessary or
appropriate to ensure that any lien upon any property securing any Senior Debt
is duly enforceable or perfected or entitled to priority as against any other
lien or to ensure that any proceeds of any property subject to any lien are
applied to the payment of any Senior Debt;
(6) Release, discharge or permit the lapse of any or all
liens upon any property at any time securing any Senior Debt;
(7) Exercise or enforce, in any manner, order or sequence,
or fail to exercise or enforce, any right or remedy against the Company or any
collateral security or any other Person or property in respect of any Senior
Debt or lien securing any Senior Debt or any right under this Note; or
(8) Sell, exchange, release, foreclose upon or otherwise
deal with any property that may at any time be subject to any lien securing any
Senior Debt.
(b) No Release or Exoneration. No exercise, delay in exercising
-------------------------
or failure to exercise any right arising under this Section 6, no act or
omission of any holder of any Senior Debt in respect of the Company or any other
Person or any collateral security for any Senior Debt or any right arising under
this Section 6, no change, impairment, or suspension of any right or remedy of
any holder of any Senior Debt, and no other act, failure to act, circumstance,
occurrence or event which, but for this provision, would or could act as a
release or exoneration of the obligations of the Holder hereunder shall in any
way affect, decrease, diminish or impair any of the obligations of the Holder
under this Note or give the Holder or any other Person any recourse or defense
against any holder of Senior Debt in respect of any right arising under this
Section 6.
-12-
<PAGE>
6.9 Reinstatement. If any payment or distribution at any time made on
-------------
account or in respect of any Senior Debt is thereafter rescinded, recovered, set
aside, avoided or required to be returned, then such Senior Debt and all rights
of the holder of such Senior Debt to enforce subordination as set forth herein
shall be automatically and unconditionally reinstated, as fully as if such
payment or distribution had never been made.
7. Amendments and Waivers. Neither this Note nor any term hereof may be
----------------------
amended or waived orally or in writing, except that any term of the Note may be
amended and the observance of any term of the Note may be waived (either
generally or in a particular instance and either retroactively or prospectively)
upon the approval of the Company and the Holder. The Holder of this Note by its
acceptance hereof acknowledges and agrees that the subordination provisions of
this instrument are for the benefit of the holders of the Senior Debt and that,
accordingly, no provision of Section 6 hereof may be amended or otherwise
modified without the prior written consent of each holder of Senior Debt at such
time outstanding.
8. Notices. Any notice or communication to the Company shall be given in
-------
writing and delivered in person or by overnight courier or mailed by certified
or registered mail, return receipt requested, addressed as follows:
emachines, Inc.
14350 Myford Road, Suite 150
Irvine, CA 92606
Attention: Stephen Dukker
Telephone: (714) 481-2828
Facsimile: (714) 505-5048
Any notice or communication to the Holder shall be given in writing and
delivered by telecopier, in person or by overnight courier or mailed by
certified or registered mail, return receipt requested, addressed to the address
of the Holder in the Note Register on the date of such notice or communication.
The address of the original Holder is as follows:
TriGem Corporation
14350 Myford Road, Suite 150
Irvine, CA 92606
U.S.A.
Attention: Cris Moon
Facsimile: (714) 481-3630
-13-
<PAGE>
with a copy to:
TriGem Computer, Inc.
TriGem Computer Building
45-2 Yoido-Dong, Youngdeungpo-Ku
Seoul, 150-010 Korea
P.O. Box Yoido 269
Attention: Paul Lee
Facsimile: 82-2-784-3362
Any such notice or communication shall be effective (x) when received, if
delivered in person, (y) on the next business day, if delivered by overnight
courier and (z) when received, if delivered by mail.
9. Restrictions on Transfer. This Note has not been registered under
------------------------
the Securities Act, or the securities laws of any state or other jurisdiction.
Neither this Note nor any interest or participation herein may be reoffered,
sold, assigned, transferred, pledged, encumbered or otherwise disposed of in the
absence of such registration or unless such transaction is exempt from, or not
subject to, registration, and the Holder by its acceptance of this Note agrees
that it shall offer, sell, assign, transfer, pledge, encumber or otherwise
dispose of this Note in its entirety and not in part only (a) to the Company or
(b) to a corporation or other business entity controlled by or controlling the
Holder.
10. Transfer Agent and Registrar; Transfers of Note.
-----------------------------------------------
10.1 Company Own Transfer Agent and Note Registrar. The Company shall
---------------------------------------------
serve as its own agent for the transfer and exchange of the Note and registrar
to keep a register in which, subject to such reasonable regulations as it may
prescribe, the Company will provide for the registration of the Note and the
registration of any transfers of Note in whole but not in part (the "Note
Register") in accordance with Section 9. The Note Register will be maintained at
the office of the Company set forth in Section 8 hereof.
10.2 Transfer of Note. Upon presentation of the Note for registration
----------------
of transfer at the office of the Company set forth in Section 8 hereof
accompanied by (i) certification by the transferor that such transfer is in
compliance with the terms hereof and (ii) by a written instrument of transfer in
a form approved by the Company executed by the registered Holder, in person or
by such holder's attorney thereunto duly authorized in writing, and including
the name, address and telephone and fax numbers of the transferee and name of
the contact person of the transferee, such Note shall be transferred on the Note
Register, and a new Note of like tenor and bearing the same legends shall be
issued in the name of the transferee and sent to the transferee at the address
and c/o the contact person so indicated. Transfers and exchanges of the Note
shall be subject to such additional restrictions as are set forth in the legends
on the Note and to such additional reasonable regulations as may be prescribed
by the Company. Successive registrations of transfers as aforesaid
-14-
<PAGE>
may be made from time to time as desired, and each such registration shall be
noted on the Note Register. No service charge shall be made for any registration
of transfer or exchange of the Note, but the Company may require payment of a
sum sufficient to cover any stamp or other tax or governmental charge in
connection therewith.
10.3 Registered Holder Treated as Absolute Owner. The Company may deem
-------------------------------------------
and treat the Person in whose name the Note is registered on the Note Register
as the absolute owner of the Note (whether or not the Note shall be overdue and
notwithstanding any notation of ownership or other writing thereon) for the
purpose of receiving payment of or on account of the principal of and, subject
to the provisions of this Note, interest on the Note and for all other purposes;
and neither the Company nor any agent of the Company shall be affected by any
notice to the contrary. All such payments so made to any such Person, or upon
such Person's order, shall be valid, and, to the extent of the sum or sums so
paid, effectual to satisfy and discharge the liability for moneys payable on the
Note.
10.4 Loss, Theft, Destruction or Mutilation of Note. Upon receipt by
----------------------------------------------
the Company of evidence reasonably satisfactory to it of the loss, theft,
destruction or mutilation of the Note, and in the case of loss, theft or
destruction, receipt of indemnity or security reasonably satisfactory to the
Company, and upon reimbursement to the Company of all reasonable expenses
incidental thereto, and upon surrender and cancellation of the Note, if
mutilated, the Company will deliver a new Note of like tenor and dated as of
such cancellation, in lieu of the Note.
11. Holder Representations. By its acceptance hereof, the Holder
----------------------
represents and warrants that the Holder has been advised that this Note has not
been registered under the Securities Act, or any state securities laws and,
therefore, cannot be transferred unless it is registered under the Securities
Act and applicable state securities laws or unless an exemption from such
registration requirements is available and is subject to restrictions on
transfer set forth in Section 9. Such Holder is aware that the Company is under
no obligation to effect any such registration or to file for or comply with any
exemption from registration. The Holder has not been formed solely for the
purpose of making this investment and is acquiring the Note for its own account,
for investment, and not with a view to, or for resale in connection with, the
distribution thereof.
12. General. This Note shall be governed by and shall be construed and
-------
enforced in accordance with the laws of the State of New York, without regard to
conflicts of laws principles.
emachines, Inc.
By: /s/ Steven H. Miller
__________________________________
Name: Steven H. Miller
Title: CFO
-15-
<PAGE>
EXHIBIT 10.6
EMACHINES, INC.
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is effective as of August
_____, 1999 by and between emachines, Inc., a Delaware corporation (the
"Company"), and __________________________________, ("Indemnitee").
WHEREAS, the Company desires to attract and retain the services of highly
qualified individuals, such as Indemnitee, to serve the Company and its related
entities;
WHEREAS, in order to induce Indemnitee to continue to provide services to
the Company, the Company wishes to provide for the indemnification of, and the
advancement of expenses to, Indemnitee to the maximum extent permitted by law;
WHEREAS, the Company and Indemnitee recognize the continued difficulty in
obtaining liability insurance for the Company's directors, officers, employees,
agents and fiduciaries, the significant increases in the cost of such insurance
and the general reductions in the coverage of such insurance;
WHEREAS, the Company and Indemnitee further recognize the substantial
increase in corporate litigation in general, subjecting directors, officers,
employees, agents and fiduciaries to expensive litigation risks at the same time
as the availability and coverage of liability insurance has been severely
limited; and
WHEREAS, the Company and Indemnitee desire to continue to have in place the
additional protection provided by an indemnification agreement to provide
indemnification and advancement of expenses to the Indemnitee to the maximum
extent permitted by Delaware law;
WHEREAS, in view of the considerations set forth above, the Company desires
that Indemnitee shall be indemnified and advanced expenses by the Company as set
forth herein;
NOW, THEREFORE, the Company and Indemnitee hereby agree as set forth below.
1. Certain Definitions.
-------------------
(a) "Change in Control" shall mean, and shall be deemed to have
occurred if, on or after the date of this Agreement, (i) any "person" (as such
term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934,
as amended) (the "Exchange Act"), other than a trustee or other fiduciary
holding securities under an employee benefit plan of the Company acting in such
capacity or a corporation owned directly or indirectly by the stockholders of
the Company in substantially the same proportions as their ownership of stock of
the Company, becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the Company representing
more than 50% of the total voting power represented by the
<PAGE>
Company's then outstanding Voting Securities (as defined below), (ii) during any
period of two consecutive years, individuals who at the beginning of such period
constitute the Board of Directors of the Company and any new director whose
election by the Board of Directors or nomination for election by the Company's
stockholders was approved by a vote of at least two thirds (2/3) of the
directors then still in office who either were directors at the beginning of the
period or whose election or nomination for election was previously so approved,
cease for any reason to constitute a majority thereof, (iii) the stockholders of
the Company approve a merger or consolidation of the Company with any other
corporation other than a merger or consolidation which would result in the
Voting Securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into Voting Securities of the surviving entity) at least 80% of the total voting
power represented by the Voting Securities of the Company or such surviving
entity outstanding immediately after such merger or consolidation, or (iv) the
stockholders of the Company approve a plan of complete liquidation of the
Company or an agreement for the sale or disposition by the Company of (in one
transaction or a series of related transactions) all or substantially all of the
Company's assets.
(b) "Claim" shall mean with respect to a Covered Event (as defined
below): any threatened, pending or completed action, suit, proceeding or
alternative dispute resolution mechanism, or any hearing, inquiry or
investigation that Indemnitee in good faith believes might lead to the
institution of any such action, suit, proceeding or alternative dispute
resolution mechanism, whether civil, criminal, administrative, investigative or
other.
(c) References to the "Company" shall include, in addition to
emachines, Inc., any constituent corporation (including any constituent of a
constituent) absorbed in a consolidation or merger to which emachines, Inc. (or
any of its wholly-owned subsidiaries) is a party which, if its separate
existence had continued, would have had power and authority to indemnify its
directors, officers, employees, agents or fiduciaries, so that if Indemnitee is
or was a director, officer, employee, agent or fiduciary of such constituent
corporation, or is or was serving at the request of such constituent corporation
as a director, officer, employee, agent or fiduciary of another corporation,
partnership, joint venture, employee benefit plan, trust or other enterprise,
Indemnitee shall stand in the same position under the provisions of this
Agreement with respect to the resulting or surviving corporation as Indemnitee
would have with respect to such constituent corporation if its separate
existence had continued.
(d) "Covered Event" shall mean any event or occurrence related to the
fact that Indemnitee is or was a director, officer, employee, agent or fiduciary
of the Company, or any subsidiary of the Company, or is or was serving at the
request of the Company as a director, officer, employee, agent or fiduciary of
another corporation, partnership, joint venture, trust or other enterprise, or
by reason of any action or inaction on the part of Indemnitee while serving in
such capacity.
(e) "Expenses" shall mean any and all expenses (including attorneys'
fees and all other costs, expenses and obligations incurred in connection with
investigating, defending, being a witness in or participating in (including on
appeal), or preparing to defend, to be a witness in or to
2
<PAGE>
participate in, any action, suit, proceeding, alternative dispute resolution
mechanism, hearing, inquiry or investigation), judgments, fines, penalties and
amounts paid in settlement (if such settlement is approved in advance by the
Company, which approval shall not be unreasonably withheld), actually and
reasonably incurred, of any Claim and any federal, state, local or foreign taxes
imposed on the Indemnitee as a result of the actual or deemed receipt of any
payments under this Agreement.
(f) "Expense Advance" shall mean a payment to Indemnitee pursuant to
Section 3 of Expenses in advance of the settlement of or final judgement in any
action, suit, proceeding or alternative dispute resolution mechanism, hearing,
inquiry or investigation which constitutes a Claim.
(g) "Independent Legal Counsel" shall mean an attorney or firm of
attorneys, selected in accordance with the provisions of Section 2(d) hereof,
who shall not have otherwise performed services for the Company or Indemnitee
within the last three years (other than with respect to matters concerning the
rights of Indemnitee under this Agreement, or of other indemnitees under similar
indemnity agreements).
(h) References to "other enterprises" shall include employee benefit
plans; references to "fines" shall include any excise taxes assessed on
Indemnitee with respect to an employee benefit plan; and references to "serving
at the request of the Company" shall include any service as a director, officer,
employee, agent or fiduciary of the Company which imposes duties on, or involves
services by, such director, officer, employee, agent or fiduciary with respect
to an employee benefit plan, its participants or its beneficiaries; and if
Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to
be in the interest of the participants and beneficiaries of an employee benefit
plan, Indemnitee shall be deemed to have acted in a manner "not opposed to the
best interests of the Company" as referred to in this Agreement.
(i) "Reviewing Party" shall mean, subject to the provisions of
Section 2(d), any person or body appointed by the Board of Directors in
accordance with applicable law to review the Company's obligations hereunder and
under applicable law, which may include a member or members of the Company's
Board of Directors, Independent Legal Counsel or any other person or body not a
party to the particular Claim for which Indemnitee is seeking indemnification.
(j) "Section" refers to a section of this Agreement unless otherwise
indicated.
(k) "Voting Securities" shall mean any securities of the Company that
vote generally in the election of directors.
2. Indemnification.
---------------
(a) Indemnification of Expenses. Subject to the provisions of Section
---------------------------
2(b) below, the Company shall indemnify Indemnitee for Expenses to the fullest
extent permitted by law if Indemnitee was or is or becomes a party to or witness
or other participant in, or is threatened to be made a party to or witness or
other participant in, any Claim (whether by reason of or arising in part
3
<PAGE>
out of a Covered Event), including all interest, assessments and other charges
paid or payable in connection with or in respect of such Expenses.
(b) Review of Indemnification Obligations. Notwithstanding the
-------------------------------------
foregoing, in the event any Reviewing Party shall have determined (in a written
opinion, in any case in which Independent Legal Counsel is the Reviewing Party)
that Indemnitee is not entitled to be indemnified hereunder under applicable
law, (i) the Company shall have no further obligation under Section 2(a) to make
any payments to Indemnitee not made prior to such determination by such
Reviewing Party, and (ii) the Company shall be entitled to be reimbursed by
Indemnitee (who hereby agrees to reimburse the Company) for all Expenses
theretofore paid in indemnifying Indemnitee; provided, however, that if
-------- -------
Indemnitee has commenced or thereafter commences legal proceedings in a court of
competent jurisdiction to secure a determination that Indemnitee is entitled to
be indemnified hereunder under applicable law, any determination made by any
Reviewing Party that Indemnitee is not entitled to be indemnified hereunder
under applicable law shall not be binding and Indemnitee shall not be required
to reimburse the Company for any Expenses theretofore paid in indemnifying
Indemnitee until a final judicial determination is made with respect thereto (as
to which all rights of appeal therefrom have been exhausted or lapsed).
Indemnitee's obligation to reimburse the Company for any Expenses shall be
unsecured and no interest shall be charged thereon.
(c) Indemnitee Rights on Unfavorable Determination; Binding Effect.
--------------------------------------------------------------
If any Reviewing Party determines that Indemnitee substantively is not entitled
to be indemnified hereunder in whole or in part under applicable law, Indemnitee
shall have the right to commence litigation seeking an initial determination by
the court or challenging any such determination by such Reviewing Party or any
aspect thereof, including the legal or factual bases therefor, and, subject to
the provisions of Section 14, the Company hereby consents to service of process
and to appear in any such proceeding. Absent such litigation, any determination
by any Reviewing Party shall be conclusive and binding on the Company and
Indemnitee.
(d) Selection of Reviewing Party; Change in Control. If there has not
-----------------------------------------------
been a Change in Control, any Reviewing Party shall be selected by the Board of
Directors, and if there has been such a Change in Control (other than a Change
in Control which has been approved by a majority of the Company's Board of
Directors who were directors immediately prior to such Change in Control), any
Reviewing Party with respect to all matters thereafter arising concerning the
rights of Indemnitee to indemnification of Expenses under this Agreement or any
other agreement or under the Company's certificate of incorporation or bylaws as
now or hereafter in effect, or under any other applicable law, if desired by
Indemnitee, shall be Independent Legal Counsel selected by Indemnitee and
approved by the Company (which approval shall not be unreasonably withheld).
Such counsel, among other things, shall render its written opinion to the
Company and Indemnitee as to whether and to what extent Indemnitee would be
entitled to be indemnified hereunder under applicable law and the Company agrees
to abide by such opinion. The Company agrees to pay the reasonable fees of the
Independent Legal Counsel referred to above and to indemnify fully such counsel
against any and all expenses (including attorneys' fees), claims, liabilities
and damages arising out of or relating to this Agreement or its engagement
pursuant hereto. Notwithstanding any other provision of this Agreement, the
Company shall not be required to pay Expenses of more than one Independent Legal
4
<PAGE>
Counsel in connection with all matters concerning a single Indemnitee, and such
Independent Legal Counsel shall be the Independent Legal Counsel for any or all
other Indemnitees unless (i) the employment of separate counsel by one or more
Indemnitees has been previously authorized by the Company in writing, or (ii) an
Indemnitee shall have provided to the Company a written statement that such
Indemnitee has reasonably concluded that there may be a conflict of interest
between such Indemnitee and the other Indemnitees with respect to the matters
arising under this Agreement.
(e) Mandatory Payment of Expenses. Notwithstanding any other
-----------------------------
provision of this Agreement other than Section 10 hereof, to the extent that
Indemnitee has been successful on the merits or otherwise, including, without
limitation, the dismissal of an action without prejudice, in defense of any
Claim, Indemnitee shall be indemnified against all Expenses incurred by
Indemnitee in connection therewith.
3. Expense Advances.
----------------
(a) Obligation to Make Expense Advances. The Company shall make
-----------------------------------
Expense Advances to Indemnitee upon receipt of a written undertaking by or on
behalf of the Indemnitee to repay such amounts if it shall ultimately be
determined that the Indemnitee is not entitled to be indemnified therefore by
the Company.
(b) Form of Undertaking. Any obligation to repay any Expense Advances
-------------------
hereunder pursuant to a written undertaking by the Indemnitee shall be unsecured
and no interest shall be charged thereon.
(c) Determination of Reasonable Expense Advances. The parties agree
--------------------------------------------
that for the purposes of any Expense Advance for which Indemnitee has made
written demand to the Company in accordance with this Agreement, all Expenses
included in such Expense Advance that are certified by affidavit of Indemnitee's
counsel as being reasonable shall be presumed conclusively to be reasonable.
4. Procedures for Indemnification and Expense Advances.
---------------------------------------------------
(a) Timing of Payments. All payments of Expenses (including without
------------------
limitation Expense Advances) by the Company to the Indemnitee pursuant to this
Agreement shall be made to the fullest extent permitted by law as soon as
practicable after written demand by Indemnitee therefor is presented to the
Company, but in no event later than forty-five (45) business days after such
written demand by Indemnitee is presented to the Company, except in the case of
Expense Advances, which shall be made no later than forty-five (45) business
days after such written demand by Indemnitee is presented to the Company.
(b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a
--------------------------------
condition precedent to Indemnitee's right to be indemnified or Indemnitee's
right to receive Expense Advances under this Agreement, give the Company notice
in writing as soon as practicable of any Claim made against Indemnitee for which
indemnification will or could be sought under this Agreement. Notice to the
Company shall be directed to the Chief Executive Officer of the Company at the
address shown on
5
<PAGE>
the signature page of this Agreement (or such other address as the Company shall
designate in writing to Indemnitee). In addition, Indemnitee shall give the
Company such information and cooperation as it may reasonably require and as
shall be within Indemnitee's power.
(c) No Presumptions; Burden of Proof. For purposes of this Agreement,
--------------------------------
the termination of any Claim by judgment, order, settlement (whether with or
without court approval) or conviction, or upon a plea of nolo contendere,
---------------
or its equivalent, shall not create a presumption that Indemnitee did not meet
any particular standard of conduct or have any particular belief or that a court
has determined that indemnification is not permitted by this Agreement or
applicable law. In addition, neither the failure of any Reviewing Party to have
made a determination as to whether Indemnitee has met any particular standard of
conduct or had any particular belief, nor an actual determination by any
Reviewing Party that Indemnitee has not met such standard of conduct or did not
have such belief, prior to the commencement of legal proceedings by Indemnitee
to secure a judicial determination that Indemnitee should be indemnified under
this Agreement or applicable law, shall be a defense to Indemnitee's claim or
create a presumption that Indemnitee has not met any particular standard of
conduct or did not have any particular belief. In connection with any
determination by any Reviewing Party or otherwise as to whether the Indemnitee
is entitled to be indemnified hereunder the burden of proof shall be on the
Company to establish that Indemnitee is not so entitled.
(d) Notice to Insurers. If, at the time of the receipt by the Company
------------------
of a notice of a Claim pursuant to Section 4(b) hereof, the Company has
liability insurance in effect which may cover such Claim, the Company shall give
prompt notice of the commencement of such Claim to the insurers in accordance
with the procedures set forth in the respective policies. The Company shall
thereafter take all necessary or desirable action to cause such insurers to pay,
on behalf of the Indemnitee, all amounts payable as a result of such Claim in
accordance with the terms of such policies.
(e) Selection of Counsel. In the event the Company shall be obligated
--------------------
hereunder to provide indemnification for or make any Expense Advances with
respect to the Expenses of any Claim, the Company, if appropriate, shall be
entitled to assume the defense of such Claim with counsel approved by Indemnitee
(which approval shall not be unreasonably withheld) upon the delivery to
Indemnitee of written notice of the Company's election to do so. After delivery
of such notice, approval of such counsel by Indemnitee and the retention of such
counsel by the Company, the Company will not be liable to Indemnitee under this
Agreement for any fees or expenses of separate counsel subsequently retained by
or on behalf of Indemnitee with respect to the same Claim; provided, however,
that, (i) Indemnitee shall have the right to employ Indemnitee's separate
counsel in any such Claim at Indemnitee's expense and (ii) if (A) the employment
of separate counsel by Indemnitee has been previously authorized by the Company,
(B) Indemnitee shall have reasonably concluded that there may be a conflict of
interest between the Company and Indemnitee in the conduct of any such defense,
or (C) the Company shall not continue to retain such counsel to defend such
Claim, then the fees and expenses of Indemnitee's separate counsel shall be
Expenses for which Indemnitee may receive indemnification or Expense Advances
hereunder.
6
<PAGE>
5. Additional Indemnification Rights; Nonexclusivity.
-------------------------------------------------
(a) Scope. The Company hereby agrees to indemnify the Indemnitee to
-----
the fullest extent permitted by law, notwithstanding that such indemnification
is not specifically authorized by the other provisions of this Agreement, the
Company's certificate of incorporation, the Company's bylaws or by statute. In
the event of any change after the date of this Agreement in any applicable law,
statute or rule which expands the right of a Delaware corporation to indemnify a
member of its board of directors or an officer, employee, agent or fiduciary, it
is the intent of the parties hereto that Indemnitee shall enjoy by this
Agreement the greater benefits afforded by such change. In the event of any
change in any applicable law, statute or rule which narrows the right of a
Delaware corporation to indemnify a member of its board of directors or an
officer, employee, agent or fiduciary, such change, to the extent not otherwise
required by such law, statute or rule to be applied to this Agreement, shall
have no effect on this Agreement or the parties' rights and obligations
hereunder except as set forth in Section 10(a) hereof.
(b) Nonexclusivity. The indemnification and the payment of Expense
--------------
Advances provided by this Agreement shall be in addition to any rights to which
Indemnitee may be entitled under the Company's certificate of incorporation, its
bylaws, any other agreement, any vote of stockholders or disinterested
directors, the General Corporation Law of the State of Delaware, or otherwise.
The indemnification and the payment of Expense Advances provided under this
Agreement shall continue as to Indemnitee for any action taken or not taken
while serving in an indemnified capacity even though subsequent thereto
Indemnitee may have ceased to serve in such capacity.
6. No Duplication of Payments. The Company shall not be liable under this
--------------------------
Agreement to make any payment in connection with any Claim made against
Indemnitee to the extent Indemnitee has otherwise actually received payment
(under any insurance policy, provision of the Company's certificate of
incorporation, bylaws or otherwise) of the amounts otherwise payable hereunder.
7. Partial Indemnification. If Indemnitee is entitled under any provision
-----------------------
of this Agreement to indemnification by the Company for some or a portion of
Expenses incurred in connection with any Claim, but not, however, for all of the
total amount thereof, the Company shall nevertheless indemnify Indemnitee for
the portion of such Expenses to which Indemnitee is entitled.
8. Mutual Acknowledgment. Both the Company and Indemnitee acknowledge
---------------------
that in certain instances, federal law or applicable public policy may prohibit
the Company from indemnifying its directors, officers, employees, agents or
fiduciaries under this Agreement or otherwise. Indemnitee understands and
acknowledges that the Company has undertaken or may be required in the future to
undertake with the Securities and Exchange Commission to submit the question of
indemnification to a court in certain circumstances for a determination of the
Company's right under public policy to indemnify Indemnitee.
9. Liability Insurance. To the extent the Company maintains liability
-------------------
insurance applicable to directors, officers, employees, agents or fiduciaries,
Indemnitee shall be covered by
7
<PAGE>
such policies in such a manner as to provide Indemnitee the same rights and
benefits as are provided to the most favorably insured of the Company's
directors, if Indemnitee is a director; or of the Company's officers, if
Indemnitee is not a director of the Company but is an officer; or of the
Company's key employees, agents or fiduciaries, if Indemnitee is not an officer
or director but is a key employee, agent or fiduciary.
10. Exceptions. Notwithstanding any other provision of this Agreement, the
----------
Company shall not be obligated pursuant to the terms of this Agreement:
(a) Excluded Action or Omissions. To indemnify Indemnitee for
----------------------------
Expenses resulting from acts, omissions or transactions for which Indemnitee is
prohibited from receiving indemnification under this Agreement or applicable
law, provided, however, that notwithstanding any limitation set forth in this
Section 10(a) regarding the Company's obligation to provide indemnification,
Indemnitee shall be entitled under Section 3 to receive Expense Advances
hereunder with respect to any such Claim unless and until a court having
jurisdiction over the Claim shall have made a final judicial determination (as
to which all rights of appeal therefrom have been exhausted or lapsed) that
Indemnitee has engaged in acts, omissions or transactions for which Indemnitee
is prohibited from receiving indemnification under this Agreement or applicable
law.
(b) Claims Initiated by Indemnitee. To indemnify or make Expense
------------------------------
Advances to Indemnitee with respect to Claims initiated or brought voluntarily
by Indemnitee and not by way of defense, counterclaim or crossclaim, except (i)
with respect to actions or proceedings brought to establish or enforce a right
to indemnification under this Agreement or any other agreement or insurance
policy or under the Company's certificate of incorporation or bylaws now or
hereafter in effect relating to Claims for Covered Events, (ii) in specific
cases if the Board of Directors has approved the initiation or bringing of such
Claim, or (iii) as otherwise required under Section 145 of the Delaware General
Corporation Law, regardless of whether Indemnitee ultimately is determined to be
entitled to such indemnification, or insurance recovery, as the case may be.
(c) Lack of Good Faith. To indemnify Indemnitee for any Expenses
------------------
incurred by the Indemnitee with respect to any action instituted (i) by
Indemnitee to enforce or interpret this Agreement, if a court having
jurisdiction over such action determines as provided in Section 13 that each of
the material assertions made by the Indemnitee as a basis for such action was
not made in good faith or was frivolous, or (ii) by or in the name of the
Company to enforce or interpret this Agreement, if a court having jurisdiction
over such action determines as provided in Section 13 that each of the material
defenses asserted by Indemnitee in such action was made in bad faith or was
frivolous.
(d) Claims Under Section 16(b). To indemnify Indemnitee for expenses
--------------------------
and the payment of profits arising from the purchase and sale by Indemnitee of
securities in violation of Section 16(b) of the Exchange Act, or any similar
successor statute; provided, however, that notwithstanding any limitation set
forth in this Section 10(d) regarding the Company's obligation to provide
indemnification, Indemnitee shall be entitled under Section 3 to receive Expense
Advances hereunder with respect to any such Claim unless and until a court
having jurisdiction over the Claim
8
<PAGE>
shall have made a final judicial determination (as to which all rights of appeal
therefrom have been exhausted or lapsed) that Indemnitee has violated said
statute.
11. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall constitute an original.
12. Binding Effect; Successors and Assigns. This Agreement shall be
--------------------------------------
binding upon and inure to the benefit of and be enforceable by the parties
hereto and their respective successors, assigns (including any direct or
indirect successor by purchase, merger, consolidation or otherwise to all or
substantially all of the business or assets of the Company), spouses, heirs and
personal and legal representatives. The Company shall require and cause any
successor (whether direct or indirect, and whether by purchase, merger,
consolidation or otherwise) to all, substantially all, or a substantial part, of
the business or assets of the Company, by written agreement in form and
substance satisfactory to Indemnitee, expressly to assume and agree to perform
this Agreement in the same manner and to the same extent that the Company would
be required to perform if no such succession had taken place. This Agreement
shall continue in effect regardless of whether Indemnitee continues to serve as
a director, officer, employee, agent or fiduciary (as applicable) of the Company
or of any other enterprise at the Company's request.
13. Expenses Incurred in Action Relating to Enforcement or Interpretation.
--------------------------------------------------------------------
In the event that any action is instituted by Indemnitee under this Agreement or
under any liability insurance policies maintained by the Company to enforce or
interpret any of the terms hereof or thereof, Indemnitee shall be entitled to be
indemnified for all Expenses incurred by Indemnitee with respect to such action
(including without limitation attorneys' fees), regardless of whether Indemnitee
is ultimately successful in such action, unless as a part of such action a court
having jurisdiction over such action makes a final judicial determination (as to
which all rights of appeal therefrom have been exhausted or lapsed) that each of
the material assertions made by Indemnitee as a basis for such action was not
made in good faith or was frivolous; provided, however, that until such final
judicial determination is made, Indemnitee shall be entitled under Section 3 to
receive payment of Expense Advances hereunder with respect to such action. In
the event of an action instituted by or in the name of the Company under this
Agreement to enforce or interpret any of the terms of this Agreement, Indemnitee
shall be entitled to be indemnified for all Expenses incurred by Indemnitee in
defense of such action (including without limitation costs and expenses incurred
with respect to Indemnitee's counterclaims and cross-claims made in such
action), unless as a part of such action a court having jurisdiction over such
action makes a final judicial determination (as to which all rights of appeal
therefrom have been exhausted or lapsed) that each of the material defenses
asserted by Indemnitee in such action was made in bad faith or was frivolous;
provided, however, that until such final judicial determination is made,
Indemnitee shall be entitled under Section 3 to receive payment of Expense
Advances hereunder with respect to such action.
14. Notice. All notices, requests, demands and other communications under
------
this Agreement shall be in writing and shall be deemed duly given (i) if
delivered by hand and signed for by the party addressed, on the date of such
delivery, or (ii) if mailed by domestic certified or registered mail with
postage prepaid, on the third business day after the date postmarked. Addresses
9
<PAGE>
for notice to either party are as shown on the signature page of this Agreement,
or as subsequently modified by written notice.
15. Consent to Jurisdiction. The Company and Indemnitee each hereby
-----------------------
irrevocably consent to the jurisdiction of the courts of the State of Delaware
for all purposes in connection with any action or proceeding which arises out of
or relates to this Agreement and agree that any action instituted under this
Agreement shall be commenced, prosecuted and continued only in the Court of
Chancery of the State of Delaware in and for New Castle County, which shall be
the exclusive and only proper forum for adjudicating such a claim.
16. Severability. The provisions of this Agreement shall be severable in
------------
the event that any of the provisions hereof (including any provision within a
single section, paragraph or sentence) are held by a court of competent
jurisdiction to be invalid, void or otherwise unenforceable, and the remaining
provisions shall remain enforceable to the fullest extent permitted by law.
Furthermore, to the fullest extent possible, the provisions of this Agreement
(including without limitation each portion of this Agreement containing any
provision held to be invalid, void or otherwise unenforceable, that is not
itself invalid, void or unenforceable) shall be construed so as to give effect
to the intent manifested by the provision held invalid, illegal or
unenforceable.
17. Choice of Law. This Agreement, and all rights, remedies, liabilities,
-------------
powers and duties of the parties to this Agreement, shall be governed by and
construed in accordance with the laws of the State of Delaware without regard to
principles of conflicts of laws.
18. Subrogation. In the event of payment under this Agreement, the
-----------
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all documents required and shall do
all acts that may be necessary to secure such rights and to enable the Company
effectively to bring suit to enforce such rights.
19. Amendment and Termination. No amendment, modification, termination or
-------------------------
cancellation of this Agreement shall be effective unless it is in writing signed
by both the parties hereto. No waiver of any of the provisions of this
Agreement shall be deemed to be or shall constitute a waiver of any other
provisions hereof (whether or not similar), nor shall such waiver constitute a
continuing waiver.
20. Integration and Entire Agreement. This Agreement sets forth the
--------------------------------
entire understanding between the parties hereto and supersedes and merges all
previous written and oral negotiations, commitments, understandings and
agreements relating to the subject matter hereof between the parties hereto.
21. No Construction as Employment Agreement. Nothing contained in this
---------------------------------------
Agreement shall be construed as giving Indemnitee any right to be retained in
the employ of the Company or any of its subsidiaries or affiliated entities.
10
<PAGE>
EXHIBIT 10.9
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
-----------------------------------------
This AMENDED AND RESTATED EMPLOYMENT AGREEMENT, dated as of August 18,
1999, is by and between eMachines, Inc., a Delaware corporation (the "Company")
with its principal executive offices located at 14350 Myford Road, Suite 100,
Irvine, California 93606-1002, and Stephen A. Dukker (the "Executive").
WHEREAS, the Company and the Executive entered into an Employment Agreement
dated as of June 14, 1998 (the "Old Employment Agreement");
WHEREAS, the Company and the Executive desire to amend and restate the Old
Employment Agreement as set forth herein.
NOW, THEREFORE, in consideration of the foregoing recital and the
respective covenants and agreements of the parties contained in this document,
the Company and the Executive agree as follows:
1. Employment and Duties. During the Employment Period (as defined in
---------------------
paragraph 2 below), the Executive will serve as President and Chief Executive
Officer of the Company. The duties and responsibilities of the Executive shall
include the duties and responsibilities for the Executive's corporate offices
and positions as set forth in the Company's bylaws from time to time in effect
and such other duties and responsibilities as the board of directors of the
Company (the "Board of Directors") may from time to time reasonably assign to
the Executive, in all cases to be consistent with the Executive's corporate
offices and positions. The Executive shall perform faithfully the executive
duties assigned to him to the best of his ability.
2. Employment Period.
-----------------
(a) Basic Rule. The employment period commenced on September 18, 1998
----------
(the "Commencement Date") and shall continue thereafter for three (3) years (the
"Employment Period"), unless sooner terminated pursuant to the provisions of
this Agreement.
(b) Early Termination. The Company may terminate the Executive's
-----------------
employment prior to the end of the Employment Period by giving the Executive 30
days' advance notice in writing. If the Company terminates the Executive's
employment prior to the end of the Employment Period for any reason other than
Cause, as defined below, or if the Executive terminates his employment for Good
Reason, as defined below, the provisions of paragraphs 11(a)(I), 11(b) and 11(c)
shall apply. The Executive may terminate his employment prior to the end of the
Employment Period by giving the Company 30 days advance written notice. If the
Executive terminates his employment prior to the end of the Employment Period
other than for Good Reason, the provisions of paragraph 11(a)(ii) shall apply.
Upon termination of the Executive's employment with the Company, the Executive's
rights under any applicable benefit plans shall be determined under the
provisions of those plans. Any waiver of notice shall be valid only if it is
made in writing and expressly refers to the applicable notice requirement of
this subparagraph 2(b).
<PAGE>
(c) Death. The Executive's employment shall terminate in the event of
-----
his death. The Company shall have no obligation to pay or provide any
compensation or benefits under this Agreement on account of the Executive's
death, or for periods following the Executive's death; provided however that the
Company's obligations under paragraphs 11(a)(I), 11(b) and 11(c) shall not be
interrupted as a result of the Executive's death, and the Executive's estate or
its representative(s) shall be entitled to exercise all the rights of the
Executive under such Sections. The Executive's rights (and the rights of his
estate) under the benefit plans of the Company in the event of the Executive's
death shall be determined under the provisions of those plans.
(d) Cause. The Company may terminate the Executive's employment for
-----
cause by giving the Executive 30 days' advance notice in writing. For all
purposes under this Agreement, "Cause" shall mean a willful act by the Executive
which constitutes gross misconduct and which is injurious to the Company. No
act, or failure to act, by the Executive shall be considered "willful" unless
committed without good faith without a reasonable belief that the act or
omission was in the Company's best interest. No compensation or benefits will be
paid or provided to the Executive under this Agreement on account of a
termination for Cause for periods following the date when such a termination of
employment is effective. The Executive's rights under the benefit plans of the
Company in the event of a termination for Cause shall be determined under the
provisions of those plans.
(e) Disability. The Company may terminate the Executive's employment
----------
for Disability by giving the Executive 30 days advance notice in writing. For
all purposes under this Agreement, "Disability" shall mean that the Executive,
at the time notice is given, has been unable to substantially perform his duties
under this Agreement for a period of not less than six (6) consecutive months as
the result of his incapacity due to physical or mental illness. In the event
that the Executive resumes the performance of substantially all of his duties
hereunder before the termination of his employment under this subparagraph (e)
becomes effective, the notice of termination shall automatically be deemed to
have been revoked. No compensation or benefits will be paid or provided to the
Executive under this Agreement on account of termination for Disability for
periods following the date when such a termination of employment is effective;
provided however that the Company's obligations under paragraphs 11(a)(I), 11(b)
and 11(c) shall not be interrupted as a result of the Executive's Disability,
and the Executive or his guardian(s) or other representative(s) shall be
entitled to exercise all the rights of the Executive under such Sections. The
Executive's rights under the benefit plans of the Company in the event of his
Disability shall be determined under the provisions of those plans.
(f) Good Reason. Employment with the Company may be regarded as
-----------
having been constructively terminated by the Company, and the Executive may
therefore terminate his employment for Good Reason and thereupon become entitled
to the benefits of paragraphs 11(a)(i) and 11(b) below, if, before the end of
the Employment Period, one or more of the following events shall occur:
(i) without the Executive's express written consent, the
assignment to the Executive of any duties or the reduction of the Executive's
duties, either of which results in a significant diminution in the Executive's
position or responsibilities with the Company in effect
-2-
<PAGE>
immediately prior to such assignment, or the removal of the Executive from such
position and responsibilities;
(ii) without the Executive's express written consent, a
substantial reduction, without good business reasons, of the facilities and
perquisites (including office space and location) available to the Executive
immediately prior to such reduction;
(iii) a material reduction by the Company in the Base Salary of
the Executive as in effect immediately prior to such reduction;
(iv) a material reduction by the Company in the kind or level
of employee benefits to which the Executive is entitled immediately prior to
such reduction with the result that the Executive's overall benefits package is
significantly reduced;
(v) the relocation of the Executive to a facility or a
location more than 50 miles from the Executive's then present location or from
the Company's principal executive offices, without the Executive's express
written consent;
(vi) any purported termination of the Executive's employment by
the Company which is not effected for death, Disability or for Cause, or any
purported termination for which the grounds relied upon are not valid;
(vii) the failure of the Company to obtain the assumption of
this Agreement by any successor; or
(viii) any material breach by the Company of any material
provision of this Agreement.
3. Place of Employment. The Executive's services shall be performed at
-------------------
the Company's principal executive offices in Irvine, California. In the event
that the Executive chooses to maintain his principal residence in San Francisco,
California, the Company shall reimburse the Executive for expenses incurred by
travel to and from Irvine, California and by intermittent living expenses
(including rent or equivalent hotel costs) in connection with the performance of
his duties hereunder.
4. Base Salary. For all services to be rendered by the Executive pursuant
-----------
to this Agreement, the Company agrees to pay the Executive during the Employment
Period a base salary (the "Base Salary") at an annual rate of not less than
$300,000. The Base Salary shall be paid in periodic installments in accordance
with the Company's regular payroll practices. The Company agrees solely for the
purpose of considering possible salary increases to review the Base Salary at
least annually as of November of each year (beginning in 1999) and to make such
increases as the Board of Directors may approve.
5. Bonus. For all services rendered by the Executive pursuant to this
-----
Agreement during the period ("Initial Bonus Period") beginning on September 18,
1998 and ending on June 30, 1999, the Executive was (or shall be if any such
amount shall not have been paid before the date hereof) paid a bonus (the
"Initial Bonus"). The Initial Bonus was payable on a monthly basis for each
month during the Initial Bonus Period at a rate equal to the product of (a)
$1.00 and (b) the number of
-3-
<PAGE>
CPUs shipped by the Company during the preceding month. For all services to be
rendered by the Executive pursuant to this Agreement during the period ("Second
Bonus Period") beginning on July 1, 1999 and ending on November 30, 1999, the
Company agrees to issue in favor of the Executive a fully-vested option (the
"Second Bonus") to purchase 227,897 shares of common stock of the Company at the
price of $1.61 per share pursuant to an option agreement in the form of Exhibit
A, such option to be delivered on or prior to August 18, 1999. For all services
to be rendered by the Executive pursuant to this Agreement during the Employment
Period subsequent to the Second Bonus Period, the Executive shall be paid a
bonus which shall be achievable, progressive, of a magnitude comparable in
aggregate to the magnitude of the Initial Bonus and the Second Bonus, as
adjusted to reflect the growth in the Company's sales of products (i.e.
increased if such sales increase and decreased if they decrease) and based on
appropriate measures of success based on Company Business Plans as adopted and
modified by the Board of Directors of the Company. In addition, at all times
during the Employment Period the bonus payable to the Executive will include a
sum equal to the interest (the "Interest") due to the Company during each fiscal
year on the promissory note issued in connection with the purchase of stock
pursuant to that certain Initial Capitalization Agreement dated as of June 10,
1999.
Any bonus payable hereunder by reference to the financial results of the
Company (such as the Initial Bonus) shall be verified in accordance with the
Company's normal practices and policies and shall be conclusively determined on
the basis of audited financial statements. No adjustments in the amount of any
such Bonus previously paid shall be made in any circumstance whatever except as
a result of such audit revealing arithmetic errors in amounts paid. Such
amounts shall be paid by the Executive or the Company, as then case may be,
within 30 days after such statements have been finally delivered to the Board of
Directors or as otherwise agreed by the Board of Directors and the Executive.
Any bonus payable hereunder in equity of the Company or other securities of the
Company (such as the Second Bonus) shall be treated as a negotiated and agreed
amount not subject to adjustment after such amount has been established by the
Board of Directors of the Company, notwithstanding any subsequent event.
6. Stock Options. The Executive shall be entitled to participate in any
-------------
stock option grant programs established by the Company for the benefit of its
key employees. The terms of any individual grant shall be determined pursuant to
a stock option agreement or restricted stock purchase agreement between the
Company and the Executive entered into at the time of grant, subject to the
provisions of Section 11(c) hereof.
7. Expenses. The Executive shall be entitled to prompt reimbursement by
--------
the Company for all reasonable ordinary and necessary travel (including travel
and living expenses pursuant to Section 3 hereof), entertainment, and other
expenses incurred by the Executive during the Employment Period (in accordance
with the policies and procedures established by the Company for its senior
executive officers) in the performance of his duties and responsibilities under
this Agreement; provided, that the Executive shall properly account for such
expenses in accordance with Company policies and procedures. The parties agree
that for purposes of this paragraph, the Executive's air travel shall be coach
class domestically and business class internationally.
8. Other Benefits. During the Employment Period, the Executive shall be
--------------
entitled to participate in employee benefit plans or programs of the Company, if
any, to the extent that his
-4-
<PAGE>
position, tenure, salary, age, health and other qualifications make him eligible
to participate, subject to the rules and regulations applicable thereto.
9. Vacations and Holidays. The Executive shall be entitled to four (4)
----------------------
weeks paid vacation and Company holidays in accordance with the Company's
policies in effect from time to time for its senior executive officers.
10. Other Activities. The Executive shall devote substantially all of his
----------------
working time and efforts during the Company's normal business hours to the
business and affairs of the Company and its subsidiaries and to the diligent and
faithful performance of the duties and responsibilities duly assigned to him
pursuant to this Agreement, except for vacations, holidays and sickness.
However, the Executive may devote a reasonable amount of his time to civic,
community, or charitable activities and, with the prior written approval of the
Board of Directors, to serve as a director of other corporations and of other
types of business or public activities not expressly mentioned in this
paragraph.
11. Termination Benefits. In the event the Executive's employment
--------------------
terminates prior to the end of the Employment Period, then the Executive shall
be entitled to receive severance and other benefits as follows:
(a) Severance.
---------
(i) Involuntary Termination. If the Company terminates the
-----------------------
Executive's employment other than for Cause, or if the Executive terminates his
employment for Good Reason, or if the Executive's employment terminates by
reason of his death or Disability then, in lieu of any severance benefits to
which the Executive may otherwise be entitled under any Company severance plan
or program, the Executive shall be entitled to payment of his Base Salary until
the end of the Employment Period or, if earlier, until a breach by the Executive
of his obligations under paragraphs 12 or 13 hereof.
(ii) Other Termination. In the event the Executive's employment
-----------------
terminates for any reason other than as described in paragraph 11(a)(i) above,
including by reason of the Executive's resignation other than for Good Reason
and the Company's termination of the Executive for Cause, then the Executive
shall be entitled to receive severance and any other benefits only as may then
be established under the Company's existing severance and benefit plans and
policies at the time of such termination.
(b) Bonuses. In the event the Executive's employment is terminated as
-------
described in paragraph 11(a)(i) above, then the Executive shall be entitled to
receive continuing bonuses as described in paragraph 5 as though he had remained
an employee through the end of the Employment Period. In the event the
Executive's employment terminates for any other reason during the Employment
Period (other than for Cause), then the Executive shall be entitled to payment
of a portion of subsequent bonuses determined, after the end of the fiscal year
of the Company in which such termination occurs, by multiplying the amount of
the most recent bonus established by the Board of Directors of the Company for
Executive prior to such termination (if in cash, calculated according to the
applicable formula approved by the Board, and if in equity,
-5-
<PAGE>
calculated by valuing the equity granted to Executive upon such date of
termination) by a fraction, the numerator of which will be the number of days in
which he was employed by the Company (or any of its subsidiaries) in such fiscal
year, and the denominator of which shall be the number of days in such fiscal
year. To the extent all or any portion of the Bonus is payable to the Executive
pursuant to the preceding sentence, such amount shall be paid in accordance with
paragraph 5. In the event the Executive's employment is terminated by the
Company for Cause, then the Executive shall not be entitled to receive any
bonuses hereunder with respect to any period subsequent to such termination, but
shall receive any unpaid bonus with respect the period prior to such termination
and shall not in any event have any obligation to refund or reimburse any bonus
paid or granted to him prior to such termination.
(c) Options and Restricted Stock. Notwithstanding anything to the
----------------------------
contrary contained in any Option Agreement or Restricted Stock Purchase
Agreement that the Executive may sign, upon any involuntary or involuntary
termination of Executive's employment with the Company, including without
limitation termination by the Company for Cause: (i) all unvested options to
purchase shares of the capital stock of the Company then held by the Executive
shall immediately and without further action on the part of the Executive or the
Company become fully vested in the Executive, who may exercise them at any time
or from time to time during the three months following the date of such
termination; and (ii) repurchase rights with respect any shares of the capital
stock of the Company then held by the Executive shall immediately and without
further action on the part of the Executive or the Company expire on the date of
such termination.
12. Proprietary Information. During the Employment Period and thereafter,
-----------------------
the Executive shall not, without the prior written consent of the Board of
Directors, disclose or use for any purpose (except in the course of his
employment under this Agreement and in furtherance of the business of the
Company or any of its affiliates or subsidiaries) any confidential information
or proprietary data of the Company. As an express condition of the Executive's
employment with the Company, the Executive agrees to execute confidentiality
agreements as requested by the Company.
13. Non-Solicit. The Executive covenants and agrees with the Company that
-----------
during his employment with the Company and for a period expiring one (1) year
after the date of termination of such employment, he will not solicit any of the
Company's then-current employees to terminate their employment with the Company
or to become employed by any firm, company or other business enterprise with
which the Executive may then be connected.
14. Right to Advice of Counsel. The Executive acknowledges that he has had
--------------------------
the right to consult with counsel and is fully aware of his rights and
obligations under this Agreement.
15. Successors. The Company will require any successor (whether direct or
----------
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. Failure of the Company to obtain such assumption agreement
prior to the effectiveness of any such succession shall entitle the Executive to
the benefits described in paragraphs 11(a)(i), 11(b) and 11(c) of this
Agreement, subject to the terms and conditions therein.
-6-
<PAGE>
16. Arbitration. Any dispute or controversy arising under or in connection
-----------
with this Agreement shall be settled exclusively by arbitration in Irvine,
California, in accordance with the rules of the American Arbitration Association
then in effect by an arbitrator selected by both parties within 10 days after
either party has notified the other in writing that it desires a dispute between
them to be settled by arbitration. In the event the parties cannot agree on such
arbitrator within such 10-day period, each party shall select an arbitrator and
inform the other party in writing of such arbitrator's name and address within 5
days after the end of such 10-day period and the two arbitrators so selected
shall select a third arbitrator within 15 days thereafter; provided, however,
that in the event of a failure by either party to select an arbitrator and
notify the other party of such selection within the time period provided above,
the arbitrator selected by the other party shall be the sole arbitrator of the
dispute. Each party shall pay its own expenses associated with such arbitration,
including the expense of any arbitrator selected by such party and the Company
will pay the expenses of the jointly selected arbitrator. The decision of the
arbitrator or a majority of the panel of arbitrators shall be binding upon the
parties and judgment in accordance with that decision may be entered in any
court having jurisdiction thereover. Punitive damages shall not be awarded .
17. Absence of Conflict. The Executive represents and warrants that his
-------------------
employment by the Company as described herein shall not conflict with and will
not be constrained by any prior employment or consulting agreement or
relationship.
18. Assignment. This Agreement and all rights under this Agreement shall
----------
be binding upon and inure to the benefit of and be enforceable by the parties
hereto and their respective personal or legal representatives, executors,
administrators, heirs, distributees, devisees, legatees, successors and assigns.
This Agreement is personal in nature, and neither of the parties to this
Agreement shall, without the written consent of the other, assign or transfer
this Agreement or any right or obligation under this Agreement to any other
person or entity; except that the Company may assign this Agreement to any of
its affiliates or wholly-owned subsidiaries, provided, that such assignment will
--------
not relieve the Company of its obligations hereunder. If the Executive should
die while any amounts are still payable to the Executive hereunder, all such
amounts, unless otherwise provided herein, shall be paid in accordance with the
terms of this Agreement to the Executive's devisee, legatee, or other designee
or, if there be no such designee, to the Executive's estate.
19. Notices. For purposes of this Agreement, notices and other
-------
communications provided for in this Agreement shall be in writing and shall be
delivered personally or sent by United States certified mail, return receipt
requested, postage prepaid, addressed as follows:
If to the Executive:
Stephen A. Dukker
c/o eMachines, Inc.
14350 Myford Road, Suite 100
Irvine, California 92606
-7-
<PAGE>
If to the Company:
eMachines, Inc.
14350 Myford Road, Suite 100
Irvine, California 92606
or to such other address or the attention of such other person as the
recipient party has previously furnished to the other party in writing in
accordance with this paragraph. Such notices or other communications shall be
effective upon delivery or, if earlier, three days after they have been mailed
as provided above.
20. Integration. This Agreement represents the entire agreement and
-----------
understanding between the parties as to the subject matter hereof and supersedes
all prior or contemporaneous agreements whether written or oral. No waiver,
alteration, or modification of any of the provisions of this Agreement shall be
binding unless in writing and signed by duly authorized representatives of the
parties hereto.
21. Waiver. Failure or delay on the part of either party hereto to enforce
------
any right, power, or privilege hereunder shall not be deemed to constitute a
waiver thereof. Additionally, a waiver by either party or a breach of any
promise hereof by the other party shall not operate as or be construed to
constitute a waiver of any subsequent waiver by such other party.
22. Severability. Whenever possible, each provision of this Agreement will
------------
be interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement is held to be invalid, illegal or
unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or any other jurisdiction, but this Agreement will be
construed and enforced in such jurisdiction as if such invalid, illegal or
unenforceable provision had never been contained herein.
23. Headings. The headings of the paragraphs contained in this Agreement
--------
are for reference purposes only and shall not in any way affect the meaning or
interpretation of any provision of this Agreement.
24. Applicable Law. This Agreement shall be governed by and construed in
--------------
accordance with the internal substantive laws, and not the choice of law rules,
of the State of California.
25. Counterparts. This Agreement may be executed in one or more
------------
counterparts, none of which need contain the signature of more than one party
hereto, and each of which shall be deemed to be an original, and all of which
together shall constitute a single agreement.
-8-
<PAGE>
IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the
case of the Company by its duly authorized officer, as of the day and year first
above written.
eMachines, Inc.
By: /s/ Steven H. Miller
___________________________________
Title: CFO
________________________________
Executive
/s/ Stephen A. Dukker
_______________________________________
Stephen A. Dukker
-9-
<PAGE>
EXHIBIT A
---------
TO
--
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
-----------------------------------------
THIS OPTION AND THE SHARES OF COMMON STOCK WHICH MAY BE PURCHASED UPON THE
EXERCISE OF THIS OPTION HAVE BEEN ACQUIRED SOLELY FOR INVESTMENT AND HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY
STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD, OFFERED FOR SALE,
PLEDGED OR HYPOTHECATED IN THE ABSENCE OF SUCH REGISTRATION OR AN OPINION OF
COUNSEL SATISFACTORY TO THE COMPANY AND ITS COUNSEL THAT SUCH SALE, OFFER,
PLEDGE OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY
REQUIREMENTS OF THE ACT AND OF ANY APPLICABLE STATE SECURITIES LAWS.
EMACHINES, INC.
OPTION TO PURCHASE COMMON STOCK
-------------------------------
Void after August _, 2009
THIS CERTIFIES THAT, for value received, Stephen Dukker (the "Holder") is
------
entitled to subscribe for and purchase 227,897 shares (as such number of shares
shall be adjusted pursuant to Section 3 hereof, thus adjusting the per share
Exercise Price) of the fully paid and nonassessable Common Stock, $0.0000125 par
value (the "Shares"), of eMachines, Inc., a Delaware corporation (the
------
"Company"), at the exercise price of $1.61 per share (the "Exercise Price"),
------- --------------
subject to the provisions and upon the terms and conditions hereinafter set
forth.
1. Method of Exercise; Payment.
---------------------------
(a) Cash Exercise. The purchase rights represented by this Option may
-------------
be exercised by the Holder, in whole or in part, by the surrender of this Option
(with the notice of exercise form attached hereto as Exhibit A duly executed) at
---------
the principal office of the Company, and by the payment to the Company, by
certified, cashier's or other check acceptable to the Company or by wire
transfer to an account designated by the Company, of an amount equal to the
aggregate Exercise Price of the Shares being purchased.
(b) Net Issue Exercise. In lieu of exercising this Option, the Holder
------------------
may elect to receive Shares equal to the value of this Option (or the portion
thereof being canceled) by surrender of this Option at the principal office of
the Company together with notice of such election, in which event the Company
shall issue to the Holder a number of Shares computed using the following
formula:
<PAGE>
X = Y (A-B)
-------
A
Where X = the number of the Shares to be issued to the Holder.
Y = the number of the Shares purchasable under this Option.
A = the fair market value of one Share on the date of determination.
B = the per share Exercise Price (as adjusted to the date of such
calculation).
(c) Fair Market Value. For purposes of this Section 1, the per share
-----------------
fair market value of the Shares shall mean:
(i) If the Company's Common Stock is publicly traded, the per
share fair market value of the Shares shall be the average of the closing prices
of the Common Stock as quoted on the Nasdaq National Market or the principal
exchange on which the Common Stock is listed, or if not so listed then the fair
market value shall be the average of the closing bid prices of the Common Stock
as published in The Wall Street Journal, in each case for the fifteen trading
-----------------------
days ending five trading days prior to the date of determination of fair market
value ;
(ii) If the Company's Common Stock is not so publicly traded, the
per share fair market value of the Shares shall be such fair market value as is
determined in good faith by the Board of Directors of the Company after taking
into consideration factors it deems appropriate, including, without limitation,
recent sale and offer prices of the capital stock of the Company in private
transactions negotiated at arm's length.
(d) Stock Certificates. In the event of any exercise of the rights
------------------
represented by this Option, certificates for the Shares so purchased shall be
delivered to the Holder within a reasonable time and, unless this Option has
been fully exercised or has expired, a new Option representing the shares with
respect to which this Option shall not have been exercised shall also be issued
to the Holder within such time.
2. Stock Fully Paid; Reservation of Shares. All of the Shares issuable
---------------------------------------
upon the exercise of the rights represented by this Option will, upon issuance
and receipt of the Exercise Price therefor, be fully paid and no nassessable,
and free from all taxes, liens and charges with respect to the issue thereof.
During the period within which the rights represented by this Option may be
exercised, the Company shall at all times have authorized and reserved for
issuance sufficient shares of its Common Stock to provide for the exercise of
the rights represented by this Option.
3. Adjustments. Subjet to te provisions of Section 11 hereof, the number
-----------
and kind of securities purchasable upon the exercise of this Option and the
Exercise Price therefor shall be subject to adjustment from time to time upon
the occurence of certain events, as follows:
(a) Reclassification. In the case of any reclassification or change
----------------
of securities of the class issuable upon exercise of this Option (other than a
change in par value, or from par value to no par value, or from no par value to
par value, or as a result of a subdivision or combination), or in
-2-
<PAGE>
case of any merger of the Company with or into another corporation (other than a
merger with another corporation in which the Company is the acquiring and the
surviving corporation and which does not result in any reclassification or
change of outstanding securities issuable upon exercise of this Option), or in
case of any sale of all or substantially all of the assets of the Company, the
Company, or such successor or purchasing corporation, as the case may be, shall
duly execute and deliver to the holder of this Option a new Option (in form and
substance reasonably satisfactory to the holder of this Option), or the Company
shall make appropriate provision without the issuance of a new Option, so that
the holder of this Option shall have the right to receive, at a total purchase
price not to exceed that payable upon the exercise of the unexercised portion of
this Option, and in lieu of the shares of Common Stock theretofore issuable upon
exercise of this Option, (i) the kind and amount of shares of stock, other
securities, money and property receivable upon such reclassification, change,
merger or sale by a holder of the number of shares of Common Stock then
purchasable under this Option, or (ii) in the case of such a merger or sale in
which the consideration paid consists all or in part of assets other than
securities of the successor or purchasing corporation, at the option of the
Holder of this Option, the securities of the successor or purchasing corporation
having a value at the time of the transaction equivalent to the fair market
value of the Common Stock at the time of the transaction. The provisions of this
subparagraph (a) shall similarly apply to successive reclassifications, changes,
mergers and transfers.
(b) Stock Splits, Dividends and Combinations. In the event that the
----------------------------------------
Company shall at any time subdivide the outstanding shares of Common Stock or
shall issue a stock dividend on its outstanding shares of Common Stock the
number of Shares issuable upon exercise of this Option immediately prior to such
subdivision or to the issuance of such stock dividend shall be proportionately
increased, and the Exercise Price shall be proportionately decreased, and in the
event that the Company shall at any time combine the outstanding shares of
Common Stock the number of Shares issuable upon exercise of this Option
immediately prior to such combination shall be proportionately decreased, and
the Exercise Price shall be proportionately increased, effective at the close of
business on the date of such subdivision, stock dividend or combination, as the
case may be.
4. Notice of Adjustments. Whenever the number of Shares purchasable
---------------------
hereunder or the Exercise Price thereof shall be adjusted pursuant to Section 3
hereof, the Company shall provide notice to the Holder setting forth, in
reasonable detail, the event requiring the adjustment, the amount of the
adjustment, the method by which such adjustment was calculated, and the number
and class of shares which may be purchased thereafter and the Exercise Price
therefor after giving effect to such adjustment.
(a) Fractional Shares. This Option may not be exercised for
-----------------
fractional shares. In lieu of fractional shares the Company shall make a cash
payment therefor based upon the Exercise Price then in effect and the fair
market value of the shares then obtaining (calculated in accordance with Section
1(c) hereof as if the shares were the Shares referred to in such Section).
5. Restrictive Legend.
------------------
The Shares (unless registered under the Act) shall be stamped or imprinted
with a legend in substantially the following form:
-3-
<PAGE>
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR
DISTRIBUTION THEREOF, AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED. SUCH SHARES MAY NOT BE SOLD OR TRANSFERRED IN THE
ABSENCE OF SUCH REGISTRATION OR UNLESS THE COMPANY RECEIVES AN OPINION OF
COUNSEL REASONABLY ACCEPTABLE TO IT STATING THAT SUCH SALE OR TRANSFER IS
EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF THE
ACT.
6. Restrictions Upon Transfer and Removal of Legend.
------------------------------------------------
(a) The Company need not register a transfer of this Option or Shares
bearing the restrictive legend set forth in Section 5 hereof, unless the
conditions specified in such legend are satisfied. The Company may also instruct
its transfer agent not to register the transfer of the Shares, unless one of the
conditions specified in the legend referred to in Section 5 hereof is satisfied.
(b) Notwithstanding the provisions of paragraph (a) above, no opinion
of counsel shall be necessary for a transfer without consideration by any holder
(i) if such holder is a partnership, to a partner or retired partner of such
partnership who retires after the date hereof or to the estate of any such
partner or retired partner, or (ii) if such holder is a corporation, to a
shareholder of such corporation, or to any other corporation under common
control, direct or indirect, with such holder.
(c) The holder agrees not to sell, make any short sale of, loan,
grant any option for the purchase of, or otherwise transfer or dispose of any
shares of Common Stock (or other securities) of the Company held by such holder
during a period of time determined by the Company and its underwriters (not to
exceed 180 days in the event of the Company's initial public offering and 90
days in the event of any other public offering) following the effective date of
a registration statement of the Company filed under the Securities Act, as
amended. The Company may impose stop-transfer instructions with respect to the
Common Stock (or other securities) subject to the foregoing restriction until
the end of said period.
7. Rights of Shareholders. No holder of this Option shall be entitled, as
----------------------
a Option holder, to vote or receive dividends or be deemed the holder of any
Shares or any other securities of the Company which may at any time be issuable
on the exercise hereof for any purpose, nor shall anything contained herein be
construed to confer upon the holder of this Option, as such, any of the rights
of a stockholder of the Company or any right to vote for the election of
directors or upon any matter submitted to shareholders at any meeting thereof,
or to give or withhold consent to any corporate action (whether upon any
recapitalization, issuance of stock, reclassification of stock, change of par
value, consolidation, merger, conveyance, or otherwise) or to receive notice of
meetings, or to receive dividends or subscription rights or otherwise until the
Option shall have been exercised and the Shares purchasable upon the exercise
hereof shall have become deliverable, as provided herein. The holder of this
Option will not be entitled to share in the assets of the Company in the event
of a liquidation, dissolution or the winding up of the Company.
-4-
<PAGE>
8. Notices. All notices and other communications required or permitted
-------
hereunder shall be in writing, shall be effective when given, and shall in any
event be deemed to be given upon receipt or, if earlier, (a) five (5) days after
deposit with the U.S. Postal Service or other applicable postal service, if
delivered by first class mail, postage prepaid, (b) upon delivery, if delivered
by hand, (c) one business day after the business day of deposit with Federal
Express or similar overnight courier, freight prepaid or (d) one business day
after the business day of facsimile transmission, if delivered by facsimile
transmission with copy by first class mail, postage prepaid, and shall be
addressed (i) if to the Holder, at the Holder's address as set forth on the
books of the Company, and (ii) if to the Company, at the address of its
principal corporate offices (attention: Steve Miller, CFO), with a copy to John
A. Fore, Wilson Sonsini Goodrich & Rosati, P.C., 650 Page Mill Road, Palo Alto,
California 94304 or at such other address as a party may designate by ten days
advance written notice to the other party pursuant to the provisions above.
9. Governing Law. This Option and all actions arising out of or in
-------------
connection with this Agreement shall be governed by and construed in accordance
with the laws of the State of California, without regard to the conflicts of law
provisions of the State of California or of any other state.
Issued this __ day of August, 1999.
EMACHINES, INC.
By:___________________________
Title:________________________
-5-
<PAGE>
EXHIBIT A
---------
NOTICE OF EXERCISE
------------------
TO: eMachines, Inc.
14350 Myford Road, Suite 100
Irvine, California 92606
Attention: CFO
1. The undersigned hereby elects to purchase __________ Shares of
eMachines, Inc. pursuant to the terms of the attached Option.
2. Method of Exercise (Please initial the applicable blank):
___ The undersigned elects to exercise the attached Option by means
of a cash payment, and tenders herewith or by concurrent wire
transfer payment in full for the purchase price of the shares
being purchased, together with all applicable transfer taxes, if
any.
___ The undersigned elects to exercise the attached Option by means
of the net exercise provisions of Section 1(b) of the Option.
3. Please issue a certificate or certificates representing said Shares in
the name of the undersigned or in such other name as is specified below:
_________________________________
(Name)
_________________________________
_________________________________
(Address)
_______________________________
(Signature)
Title:_________________________
________________________________
(Date)
<PAGE>
EXHIBIT 10.10
emachines, Inc.
TRADEMARK ASSIGNMENT AGREEMENT
This TRADEMARK ASSIGNMENT AGREEMENT (the "Agreement"), dated as of June 10,
1999, by and between Korea Data Systems America, Inc., a California corporation
having its principal offices at 12300 Edison Way, Garden Grove, California
92841, U.S.A. (hereinafter referred to as "Assignor"), and emachines, Inc., a
Delaware corporation having its principal offices at 14350 Myford Road, Suite
100, Irvine, CA 92606, U.S.A. (hereinafter referred to as "Assignee").
A. Assignor owns the trademark "E-MACHINES" with respect to fully and
partially completed or assembled computer equipment (including CPUs and
monitors) and computer related products and parts (including spare parts) of any
thereof, the marketing, advertising, selling, distribution, maintenance and
servicing thereof, and all business and activities incidental thereto, together
with United States Trademark Registration No. 1,758,158 (collectively, the
"Trademark") and has the right to assign all right, title and interest in and to
the Trademark;
B. Assignee desires to obtain all of Assignor's right, title and
interest in and to the Trademark; and
NOW, THEREFORE, in consideration of the mutual covenants and agreements
hereinafter contained and other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged by each party hereto, it is understood
and agreed between the parties herein as follows:
1. Promise to Assign. Assignor hereby agrees to assign to Assignee all right,
-----------------
title and interest worldwide in the Trademark by executing the form of
assignment attached to this Agreement as Exhibit A (the "Assignment").
---------
2. License Back for Korea. In partial consideration of the assignment of the
----------------------
Trademark, Assignee and Assignor agree to grant, after the Assignment, a
perpetual exclusive royalty-free license in favor of Assignor, without
warranties, to use the mark in the Republic of Korea, subject to advice of
Korean counsel with respect to the timing and the form of a license, taking into
account availability of the Trademark in the Republic of Korea and the need for
a trademark application to be perfected for the license to be effective.
3. Payment. As consideration for the Assignment, Assignee shall pay to
-------
Assignor eight million dollars (U.S.) (U.S.$8,000,000) upon the earlier of
either: (i) within thirty (30) days of the successful closing of an initial
public offering of the common stock of Assignor; or (ii) within a two year
period commencing upon the execution of this Agreement.
4. Reconveyance. If Assignee fails to make payment when due, and fails to cure
------------
its payment breach within thirty (30) days after notice to Assignee by Assignor,
then Assignee shall immediately reconvey to Assignor all its right, title and
interest worldwide in the Trademark and
<PAGE>
registrations and applications for registration anywhere in the world. Upon a
reconveyance from Assignee to Assignor pursuant to this section, Assignor and
Assignee shall enter into a license agreement by executing the form of
agreement attached to this Agreement as Exhibit B, updated as necessary to
---------
reflect current party details and trademark registration information as of the
time of the license.
A reconveyance from Assignee to Assignor pursuant to this section shall
constitute the sole remedy available to Assignor under this Agreement for
failure of Assignee to make the payment provided for in this Agreement.
5. Representations and Warranties of Assignor.
------------------------------------------
(a) Assignor represents and warrants that it owns valid and subsisting
rights in the Trademark and its U.S. registration that are capable of being
assigned to Assignee.
(b) Assignor knows of no adverse claims of ownership to the Trademark or
of any existing state of facts that would support a claim that use by Assignee
of the Trademark anywhere in the world infringes or otherwise violates any
trademark right of any other person.
(c) Assignor is a corporation duly organized, validly existing and in
good standing under the laws of the State of California and has the requisite
corporate power and authority to execute and deliver this Agreement and to
perform its obligations hereunder.
(d) The execution and delivery by Assignor of this Agreement, the
performance and observance by Assignor of its obligations hereunder and the
consummation by Assignor of the transactions contemplated hereby have been
duly authorized by all necessary corporate action on the part of Assignor.
This Agreement has been duly executed and delivered by a duly authorized
officer of Assignor and constitutes the valid and legally binding obligation
of Assignor, enforceable against Assignor in accordance with its terms.
(e) To Assignor's knowledge, no consents or agreements of any third
party or governmental body are necessary for the execution, delivery,
performance or observance by Assignor of its obligations under this Agreement.
6. Assignment. Assignee agrees not to assign, or otherwise encumber its rights
----------
to, the Trademark and any associated trademark registrations, before it has
rendered to Assignor the full payment provided for in this Agreement. Any
assignment or other encumbrance contrary to this provision shall be void.
7. Entire Agreement. This Agreement contains the entire agreement between the
----------------
parties concerning the subject matter herein.
8. Waivers and Amendments. This Agreement shall not be modified except upon
----------------------
written agreement of the parties hereto. All amendments and other modifications
hereof shall be in writing and signed by each of the parties hereto. The delay
or failure by any party to insist, in any one instance or more, upon strict
performance of any of the terms or conditions of this Agreement, or to exercise
any right or privilege herein conferred shall not be construed as a waiver of
any such
-2-
<PAGE>
terms, conditions, rights or privileges, but the same shall continue and
remain in full force and effect. All rights and remedies are cumulative.
9. Notices. All notices, requests, demands and other communications hereunder
-------
shall be given in writing and shall be: (a) personally delivered; (b) sent by
telecopier, facsimile transmission or other electronic means of transmitting
written documents; or (c) sent to the parties at their respective addresses
indicated herein by registered or certified U.S. mail, return receipt requested
and postage prepaid, or by a major private overnight mail courier service. The
respective addresses to be used for all such notices, demands or requests are as
follows:
If to Assignor: 12300 Edison Way
Garden Grove
California 92841
U.S.A.
Attention: John Hui
Telephone: 714-379-5599
Facsimile: 714-379-5595
with copies to: White & Case,
9th Floor
Gloucester Tower
The Landmark
11 Pedder Street
Hong Kong
Attention: Eric S. Yoon
Telephone: 852-2822-8700
Facsimile: 852-2845-9070
If to Licensee: emachines, Inc.
14350 Myford Road, Suite 100
Irvine, CA 92606
U.S.A.
Attention: Stephen A. Dukker
Telephone: 714-481-2828
Facsimile: 714-505-5048
If personally delivered, such communication shall be deemed delivered upon
actual receipt; if electronically transmitted pursuant to this paragraph, such
communication shall be deemed delivered on the day transmitted unless it is
received after 5:00 p.m., California time, or on a day which is not a business
day, in which case it shall be deemed delivered on the next business day after
transmission (and sender shall bear the burden of proof of deliver); if sent by
overnight courier pursuant to this paragraph, such communication shall be deemed
delivered upon receipt; and if sent by U.S. mail pursuant to this paragraph,
such communication shall be deemed delivered as of the
-3-
<PAGE>
date of delivery indicated on the receipt issued by the relevant postal
service, or, if the addressee fails or refuses to accept delivery, as of the
date of such failure or refusal. Any party may change its address for the
purposes of this Agreement by giving notice thereof in accordance with this
Section.
10. Governing Law. This Agreement shall be governed, construed and interpreted
-------------
according to the internal laws of the State of California, excluding any choice
of law rules. Each of Assignor and Assignee hereby expressly and irrevocably
agrees and consents that any action, suit or proceeding arising out of or
relating to this Agreement and the transactions contemplated hereby that cannot
be settled amicably through good faith discussions between Assignor and Assignee
may be instituted and maintained in any state or federal court sitting in the
Counties of Orange, Los Angeles, Santa Clara, or San Francisco of the State of
California and, by execution of this Agreement, each of Assignor and Assignee
expressly waives any objection that it may have now or hereafter to the venue or
jurisdiction of any such action, suit or proceeding and irrevocably submits to
the jurisdiction of any such court in any such action, suit or proceeding and
further waives a right to a jury trial of any claim or cause of action based
upon or arising out of this Agreement.
11. Severability. The unenforceability or invalidity of any article, section,
------------
subsection or provision of this Agreement shall not affect the enforceability or
validity of the balance of this Agreement.
12. Counterparts. This Agreement may be executed in one or more counterparts,
------------
none of which need contain the signature of more than one party hereto and each
of which shall be deemed to be an original, and all of which together shall
constitute a single agreement.
-4-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by an authorized representative as of the day and year first written above.
KOREA DATA SYSTEMS AMERICA, INC.
By: /s/ Kwang Rae Park
------------------
Name: Kwang Rae Park
------------------
Title: President
-----------------
EMACHINES, INC.
By: /s/ Steven H. Miller
--------------------
Name: Steven H. Miller
--------------------
Title: CFO
-------------------
[Trademark Assignment]
-5-
<PAGE>
EXHIBIT A
FORM OF ASSIGNMENT OF TRADEMARK AND REGISTRATION
WHEREAS Korea Data Systems America, Inc., a California corporation with its
principal offices at 12300 Edison Way, Garden Grove, California 92841, owns the
trademark E-MACHINES and the corresponding U.S. registration no. 1,758,158; and
WHEREAS, emachines, Inc., a Delaware corporation having its principal
offices at 14350 Myford Road, Suite 100, Irvine California 92606, wishes to
acquire the trademark and its registration;
THEREFORE, for good and valuable consideration, the receipt of which is
hereby acknowledged, Korea Data Systems America, Inc. hereby assigns to
emachines, Inc. all right, title, and interest worldwide in the trademark, and
in its U.S. registration, together with the goodwill of the business symbolized
by the mark and together with the right to sue for past, present, and future
infringements or other violations of the mark.
Executed this ___ day of ________________, 1999.
KOREA DATA SYSTEMS AMERICA, INC.
By:
--------------------------
Print Name:
------------------
Title:
-----------------------
State of California
County of
----------------
On ________, before me, ____________, Notary Public, personally appeared
________________, [_] personally known to me - OR - [_] proved to me on the
basis of satisfactory evidence to be the person(s) whose name(s) is/are
subscribed to the within instrument and acknowledged to me that he/she/they
executed the same in his/her/their authorized capacity(ies), and that by
his/her/their signature(s) on the instrument the person(s), or the entity upon
behalf of which the person(s) acted, executed the instrument.
WITNESS my hand and official seal.
Signature: Seal
------------------------
Notary Public
<PAGE>
EXHIBIT B
FORM OF LICENSE AGREEMENT
This LICENSE AGREEMENT (the "Agreement") is entered into as of
_______________, by and between Korea Data Systems America, Inc., a California
corporation having its principal offices at 12300 Edison Way, Garden Grove,
California 92841, U.S.A. (hereinafter referred to as "Licensor" or "KDS"), and
emachines, Inc., a Delaware corporation having its principal offices at
emachines, Inc., 14350 Myford Road, Suite 100, Irvine, CA 92606, U.S.A.
(hereinafter referred to as "Licensee").
WHEREAS, Licensor has the right to grant licenses in and to the trademark
"E-MACHINES", together with United States Trademark Registration No. 1,758,158;
WHEREAS, Licensee desires to obtain a license to use the trademark in
accordance with the terms and conditions of the License set forth in this
Agreement; and
WHEREAS, Licensor is willing to license to Licensee the trademark subject
to the terms and conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
hereinafter contained and other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged by each party hereto, it is understood
and agreed between the parties herein as follows:
1. Definitions. For purposes of this Agreement, the following definitions
-----------
shall be operative:
(a) "Licensed Products and Services" are fully and partially completed or
assembled computer equipment (including CPUs and monitors) and computer
related products and parts (including spare parts) of any thereof, the
marketing, advertising, selling, distribution, maintenance and servicing
thereof, and all business and activities incidental thereto.
(b) "Licensed Trademark" is the trademark "E-MACHINES" and all trade or
service mark registrations (and applications therefor) of the mark.
(c) "Term" shall mean the period commencing on the date hereof and
terminating on the date on which this Agreement is terminated in accordance
with the provisions of Section 10 hereof.
(d) "Territory" shall mean all countries and territories in the world,
except Republic of Korea.
2. Grant of License. Licensor hereby grants to Licensee, during the Term and
----------------
in accordance with the provisions of this Agreement, a royalty-free exclusive
(even as to Licensor) license to use the Licensed Trademark on and in connection
with the Licensed Products and Services
<PAGE>
within the Territory. Licensee covenants and agrees to use the Licensed
Trademark strictly in accordance with the terms of this Agreement and shall
not engage in any activities in circumvention of this Agreement. Licensor
retains all rights with respect to the Licensed Trademark not expressly
granted to Licensee by this Agreement.
3. Quality. Licensor shall have the right, at reasonable times and on
-------
reasonable notice, to monitor the quality of the products bearing, and the
services marketed under, the Licensed Trademark, including inspection of the
premises at which said products are manufactured, completed or assembled and
such services performed.
4. Packaging and Promotional Materials. All products bearing the Licensed
-----------------------------------
Trademark which have not been manufactured, completed or assembled by Licensor
shall be individually labeled by Licensee with a lot code identifying the date
of manufacture, completion or assembly, as the case may be. All packaging,
displays and advertisements bearing the Licensed Trademark shall at all times be
in compliance with applicable federal and state laws, shall be of good quality
and workmanship, and shall meet high standards of propriety and good taste so as
not to be of a character which could bring discredit upon Licensor or upon the
Licensed Trademark. Licensor shall have the right to receive from Licensee,
from time to time and with reasonable notice, without charge, samples of
packaging, displays or advertisements using the Licensed Trademark.
5. Trademark Notice. Licensee shall display on each item incorporating the
----------------
Licensed Trademark an appropriate notice that the mark is registered in one or
more jurisdictions. Licensee shall not represent that the Licensed Trademark is
owned by Licensee, except that Licensee may exhaust inventories of products that
bear representations that Licensee owns the mark after Licensee ceases to own
the mark.
6. Ownership of Licensed Trademark. Licensee recognizes Licensor's rights in
-------------------------------
the Licensed Trademark and shall not at any time do or suffer to be done any act
or thing which may in any way impair the rights of Licensor in and to the
Licensed Trademark. It is understood that Licensee shall not acquire and shall
not claim any title to the Licensed Trademark adverse to Licensor by virtue of
the license granted hereby or through use of the Licensed Trademark by Licensee,
it being the intention of the parties that the use of the Licensed Trademark
shall at all times inure to the benefit of the owner of the Licensed Trademark.
Licensor shall not at any time do or suffer to be done any act or thing that
causes the Licensed Trademark to be abandoned, or to be associated with inferior
or substandard products, or otherwise to be brought into disrepute.
7. Trademark Registration Maintenance. Licensor, at no expense to Licensee,
----------------------------------
shall cause all existing and subsequently issued registrations of the Licensed
Trademark to be diligently and timely maintained to the extent permitted by law.
Licensor shall not permit any registrations of the Licensed Trademark to expire
or become canceled, or the Licensed Trademark to be abandoned, unless it first
gives Licensee sixty (60) days written notice thereof and the right to continue
such registration of the Licensed Trademark in Licensee's name and for its sole
benefit. Licensee and Licensor shall cooperate with each other in this
undertaking by supplying such evidence and documentation which may be required
to cause the maintenance, prosecution, renewal, registration and assignment of
the Licensed Trademark and any associated registrations.
<PAGE>
8. Third-Party Misconduct. In the event that any use by any unauthorized party
----------------------
of any mark or trade name identical or similar to the Licensed Trademark for
identical or similar products or services comes to Licensee's attention,
Licensee shall forthwith report such fact to Licensor. In the event the
Licensed Trademark is infringed or diluted by any third party, or used in
connection with a product or service similar to any of the Licensed Products and
Services, Licensee will cooperate with Licensor in determining the validity of
an infringement or dilution claim. Licensor, at no expense to Licensee, shall,
in the first instance, have the sole right to decide whether to prosecute a
cause of action. Any monetary recovery obtained as a result of a claim based on
the Licensed Trademark shall first be used to pay the costs of any proceeding,
including attorney's fees, and any remainder shall be paid to Licensor.
9. Prosecution and Defense of Trademark Litigation. Licensee shall promptly
-----------------------------------------------
notify Licensor of any claim, demand or litigation known to it, and instituted
by any third party involving the Licensed Trademark, as used in connection with
one or more of the Licensed Products and Services. Licensee shall cooperate
with Licensor in determining the validity of such claim, demand or litigation.
Licensor shall have the right to control the conduct of such defense with
counsel of its choice, provided that Licensee shall have the right to
participate in such defense with counsel of its choice, at its sole cost and
expense.
10. Termination. This Agreement is terminable only as follows:
-----------
(a) by Licensee, for any or no reason, upon 30 days' prior notice to
Licensor;
(b) by Licensor immediately upon Licensee's failure to cure any material
breach of this Agreement within sixty (60) days after notice of breach is
received by Licensee;
(c) automatically upon sale or other transfer of the Licensed Trademark
from Licensor to Licensee. Upon termination of this License Agreement (except
pursuant to subparagraph (c) of this paragraph) Licensee shall exhaust
inventories and to discontinue all use of the Licensed Trademark within a
reasonable time, and Licensee shall not, directly or indirectly, register,
attempt to register, or use any trademark or trade name confusingly similar to
the Licensed Trademark.
11. Sublicense. Licensee may not sublicense the rights herein granted to any
----------
party other than a majority owned or wholly owned subsidiary without the prior
written consent of Licensor, which consent shall not be unreasonably withheld.
12. Assignment.
----------
(a) This Agreement may not be assigned by Licensee without the prior
written consent of Licensor, which consent shall not be unreasonably withheld.
(b) This Agreement may be assigned, in whole or in part, by Licensor upon
not less than ten (10) days prior notice to Licensee.
13. Relationship Between Parties. This Agreement does not in any way create
----------------------------
the relationship of principal and agent between Licensor and Licensee, and in no
circumstances shall Licensee be considered the agent of Licensor, or Licensor be
considered the agent of Licensee.
<PAGE>
Licensee shall not act or attempt to act or represent itself, directly or by
implication, as the agent of Licensor, or in any manner construe or create or
attempt to assume or create any obligation or make any contract, agreement,
representation or warranty on behalf of or in the name of Licensor.
14. Entire Agreement. This Agreement contains the entire agreement between the
----------------
parties concerning the subject matter herein.
15. Waivers and Amendments. This Agreement shall not be modified except upon
----------------------
written agreement of the parties hereto. All amendments and other modifications
hereof shall be in writing and signed by each of the parties hereto. The delay
or failure by any party to insist, in any one instance or more, upon strict
performance of any of the terms or conditions of this Agreement, or to exercise
any right or privilege herein conferred shall not be construed as a waiver of
any such terms, conditions, rights or privileges, but the same shall continue
and remain in full force and effect. All rights and remedies are cumulative.
16. Representations and Warranties of Licensor.
------------------------------------------
(a) Licensor knows of no adverse claims of ownership in the United
States of America to the Licensed Trademark or of any existing state of facts
that would support a claim that use by Licensor of the Licensed Trademark in the
United States of America infringes or otherwise violates any trademark right of
any other person.
(b) Licensor is a corporation duly organized, validly existing and in
good standing under the laws of the State of California and has the requisite
corporate power and authority to execute and deliver this Agreement and to
perform its obligations hereunder.
(c) The execution and delivery by Licensor of this Agreement, the
performance and observance by Licensor of its obligations hereunder and the
consummation by Licensor of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of Licensor. This
Agreement has been duly executed and delivered by a duly authorized officer of
Licensor and constitutes the valid and legally binding obligation of Licensor,
enforceable against Licensor in accordance with its terms.
(d) To Licensor's knowledge, no consents or agreements of any third
party or governmental body are necessary for the execution, delivery,
performance or observance by Licensor of its obligations under this Agreement.
17. Representations and Warranties of Licensee.
------------------------------------------
(a) Licensee is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware and has the requisite
corporate power and authority to execute and deliver this Agreement and to
perform its obligations hereunder.
(b) The execution and delivery by Licensee of this Agreement, the
performance and observance by Licensee of its obligations hereunder and the
consummation by Licensee of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of Licensee. This
Agreement has been duly executed and delivered by a duly authorized officer
<PAGE>
of Licensee and constitutes the valid and legally binding obligation of
Licensee, enforceable against Licensee in accordance with its terms.
(c) To Licensee's knowledge, no consents or agreements of any third party
or governmental body are necessary for the execution, delivery, performance or
observance by Licensee of its obligations under this Agreement.
18. Limitation. Except as expressly set forth in Sections 16 and 17 herein,
----------
neither party makes any representation or warranty of any kind, express,
implied, or statutory, including but not limited to warranties of
merchantability and fitness for a particular purpose with respect to the
license. Neither party shall be liable for consequential, indirect, or special
damages, lost profits or similar measures of injury even if apprised of such
risk, except in the case of willful misconduct.
19. Indemnification.
---------------
(a) Licensor shall indemnify and hold harmless Licensee, and its
respective officers, directors, employees, representatives, agents or
trustees, from any loss, liability, damages, costs, expense, claim, lien or
other obligation, including reasonable attorney's fees, incurred by Licensee,
to the extent arising from, relating to or otherwise in respect of the
business of Licensor conducted prior to the date first set forth above, as a
result of (i) actual or alleged trademark infringement, (ii) trademark
dilution, (iii) unfair competition by virtue of passing off, (iv) false
designation of origin, or (v) any other actual or alleged claim that is based
on confusion as to origin, as a result of the Licensed Trademark.
(b) Licensee shall indemnify and hold harmless Licensor, its officers,
directors, agents and employees from any loss, liability, damages, costs,
expense, claim, lien or other obligation, including reasonable attorney's fees,
Licensor incurred as a result of any breach or non-performance of Licensee's
obligations hereunder, or any act or default or omission of the Licensee arising
out of or connected with the License hereby granted, or arising out of the
manufacture, completion, assembly, marketing, advertising, selling,
distribution, maintenance, servicing or other use of the Licensed Products and
Services.
(c) Licensor agrees to give Licensee written notice of any event or
assertion of which it has knowledge concerning any loss, liability, damages,
costs, expense, claim, lien or other obligation as to which it may request
indemnification under this Agreement within sixty (60) days after acquiring such
knowledge; provided, however, that failure to give such notice shall not affect
Licensee's indemnification obligations hereunder except to the extent of any
actual prejudice to Licensee caused thereby.
20. Notices. All notices, requests, demands and other communications hereunder
-------
shall be given in writing and shall be: (a) personally delivered; (b) sent by
telecopier, facsimile transmission or other electronic means of transmitting
written documents; or (c) sent to the parties at their respective addresses
indicated herein by registered or certified U.S. mail, return receipt requested
and postage prepaid, or by a major private overnight mail courier service. The
respective addresses to be used for all such notices, demands or requests are as
follows:
<PAGE>
If to Licensor: 12300 Edison Way
Garden Grove
California 92841
U.S.A.
Attention : John Hui
Telephone : 714-379-5599
Facsimile : 714-379-5595
with copies to: White & Case,
9th Floor
Gloucester Tower
The Landmark
11 Pedder Street
Hong Kong
Attention : Eric S. Yoon
Telephone : 852-2822-8700
Facsimile : 852-2845-9070
If to Licensee: emachines, Inc.
14350 Myford Road, Suite #150
Irvine, CA 92606
U.S.A.
Attention : Stephen Dukker
Telephone : 714-481-2828
Facsimile : 714-505-5048
with copies to: TriGem Computer, Inc.
TriGem Computer Bldg.
45-2 Yoido-Dong,
Youngdeungpo-Ku Seoul, 150-110 Korea
P.O. Box Yoido 269
Attention : Paul Lee
Telephone : 82-2-3774-4003
Facsimile : 82-2-784-3362
If personally delivered, such communication shall be deemed delivered upon
actual receipt; if electronically transmitted pursuant to this paragraph, such
communication shall be deemed delivered on the day transmitted unless it is
received after 5:00 p.m., California time, or on a day which is not a business
day, in which case it shall be deemed delivered on the next business day after
transmission (and sender shall bear the burden of proof of deliver); if sent by
overnight courier pursuant to this paragraph, such communication shall be deemed
delivered upon receipt; and if sent
<PAGE>
by U.S. mail pursuant to this paragraph, such communication shall be deemed
delivered as of the date of delivery indicated on the receipt issued by the
relevant postal service, or, if the addressee fails or refuses to accept
delivery, as of the date of such failure or refusal. Any party may change its
address for the purposes of this Agreement by giving notice thereof in
accordance with this Section.
21. Governing Law. This Agreement shall be governed, construed and interpreted
-------------
according to the internal laws of the State of California, excluding any choice
of law rules. Each of Licensor and Licensee hereby expressly and irrevocably
agrees and consents that any action, suit or proceeding arising out of or
relating to this Agreement and the transactions contemplated hereby that cannot
be settled amicably through good faith discussions between Licensor and Licensee
may be instituted and maintained in any state or federal court sitting in the
Counties of Orange, Los Angeles, Santa Clara, or San Francisco of the State of
California and, by execution of this Agreement, each of Licensor and Licensee
expressly waives any objection that it may have now or hereafter to the venue or
jurisdiction of any such action, suit or proceeding and irrevocably submits to
the jurisdiction of any such court in any such action, suit or proceeding and
further waives a right to a jury trial of any claim or cause of action based
upon or arising out of this Agreement.
22. Severability. The unenforceability or invalidity of any article, section,
------------
subsection or provision of this Agreement shall not affect the enforceability or
validity of the balance of this Agreement.
23. Counterparts. This Agreement may be executed in one or more counterparts,
------------
none of which need contain the signature of more than one party hereto and each
of which shall be deemed to be an original, and all of which together shall
constitute a single agreement.
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by an authorized representative as of the day and year first written above.
KOREA DATA SYSTEMS AMERICA, INC.
By:
-------------------------
Title:
----------------------
EMACHINES, INC.
By:
-------------------------
Title:
----------------------
<PAGE>
EXHIBIT 10.11
eMachines, Inc.
AGREEMENT
(amending Trademark Assignment)
This AGREEMENT (the "Agreement"), dated as of August 16, 1999, by and
between Korea Data Systems America, Inc., a California corporation having its
principal offices at 12300 Edison Way, Garden Grove, California 92841, U.S.A.
(hereinafter referred to as "Assignor"), and eMachines, Inc., a Delaware
corporation having its principal offices at 14350 Myford Road, Suite 100,
Irvine, CA 92606, U.S.A. (hereinafter referred to as "Assignee").
A. Assignor and Assignee have previously entered into a Trademark
Assignment Agreement dated as of June 10, 1999 (the "Assignment Agreement")
pursuant to which Assignor assigned to Assignee, by means of an Assignment of
Trademark and Registration attested to on June 14, 1999, the trademark "E-
MACHINES" with respect to fully and partially completed or assembled computer
equipment (including CPUs and monitors) and computer related products and parts
(including spare parts) of any thereof, the marketing, advertising, selling,
distribution, maintenance and servicing thereof, and all business and activities
incidental thereto, together with United States Trademark Registration No.
1,758,158 (collectively, the "Trademark"); and
B. Assignor and Assignee desire to amend certain terms of the Assignment
Agreement.
NOW, THEREFORE, it is understood and agreed between the parties herein as
follows:
1. Section 3 of the Assignment Agreement is hereby deleted in its
entirety and replaced by the following new Section 3:
"3. Payment. As consideration for the Assignment, Assignee shall
-------
issue in favor of Assignor 419,538 shares of Common Stock of Assignee.
Assignee hereby represents to Assignor that such shares are fully paid
and nonassessable."
2. Representations and Warranties of Assignor.
------------------------------------------
Without modifying in any way the representations and warranties of Assignor
set forth in the Assignment Agreement, Assignor hereby makes the following
representations and warranties effective as of the date hereof:
(a) Assignor knows of no adverse claims of ownership to the Trademark
or of any existing state of facts that would support a claim that use by
Assignee of the Trademark anywhere in the world infringes or otherwise violates
any trademark right of any other person.
(b) Assignor is a corporation duly organized, validly existing and in
good standing under the laws of the State of California and has the requisite
corporate power and authority to execute and deliver this Amendment and to
perform its obligations hereunder.
<PAGE>
(c) The execution and delivery by Assignor of this Amendment, the
performance and observance by Assignor of its obligations hereunder and the
consummation by Assignor of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of Assignor. This
Amendment has been duly executed and delivered by a duly authorized officer of
Assignor and constitutes the valid and legally binding obligation of Assignor,
enforceable against Assignor in accordance with its terms.
(d) To Assignor's knowledge, no consents or agreements of any third
party or governmental body are necessary for the execution, delivery,
performance or observance by Assignor of its obligations under this Amendment.
3. Assignment Agreement. Except as explicitly modified hereby, the
--------------------
Assignment Agreement remains in full force and effect.
4. Counterparts. This Amendment may be executed in one or more
------------
counterparts, none of which need contain the signature of more than one party
hereto and each of which shall be deemed to be an original, and all of which
together shall constitute a single agreement.
-2-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by an authorized representative as of the day and year first written above.
KOREA DATA SYSTEMS AMERICA, INC.
By: /s/ Kwang Rae Park
__________________________
Name: Kwang Rae Park
________________________
Title: President
_______________________
EMACHINES, INC.
By: /s/ Stephen A. Dukker
__________________________
Name: Stephen A. Dukker
________________________
Title: CEO
_______________________
<PAGE>
EXHIBIT 10.12
INDUSTRIAL LEASE
(Multi-Tenant; Net)
BETWEEN
THE IRVINE COMPANY
AND
E-MACHINES, INC.
<PAGE>
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I. BASIC LEASE PROVISIONS........................................ 1
ARTICLE II. PREMISES..................................................... 3
SECTION 2.1 LEASED PREMISES...................................... 3
SECTION 2.2 ACCEPTANCE OF PREMISES............................... 3
SECTION 2.3 BUILDING NAME AND ADDRESS............................ 3
SECTION 2.4 LANDLORD'S RESPONSIBILITIES.......................... 3
ARTICLE III. TERM........................................................ 4
SECTION 3.1 GENERAL.............................................. 4
SECTION 3.2 DELAY IN POSSESSION.................................. 4
SECTION 3.3 RIGHT TO EXTEND LEASE................................ 4
ARTICLE IV. RENT AND OPERATING EXPENSES.................................. 5
SECTION 4.1 BASIC RENT........................................... 5
SECTION 4.2 OPERATING EXPENSES................................... 5
SECTION 4.3 SECURITY DEPOSIT..................................... 7
ARTICLE V. USES.......................................................... 8
SECTION 5.1 USE.................................................. 8
SECTION 5.2 SIGNS................................................ 8
SECTION 5.3 HAZARDOUS MATERIALS.................................. 9
ARTICLE VI. COMMON AREAS; SERVICES....................................... 11
SECTION 6.1 UTILITIES AND SERVICES............................... 11
SECTION 6.2 OPERATION AND MAINTENANCE OF COMMON AREAS............ 11
SECTION 6.3 USE OF COMMON AREAS.................................. 12
SECTION 6.4 PARKING.............................................. 12
SECTION 6.5 CHANGES AND ADDITIONS BY LANDLORD.................... 12
ARTICLE VII. MAINTAINING THE PREMISES.................................... 13
SECTION 7.1 TENANT'S MAINTENANCE AND REPAIR...................... 13
SECTION 7.2 LANDLORD'S MAINTENANCE AND REPAIR.................... 13
SECTION 7.3 ALTERATIONS.......................................... 13
SECTION 7.4 MECHANIC'S LIENS..................................... 14
SECTION 7.5 ENTRY AND INSPECTION................................. 14
SECTION 7.6 TENANT'S SELF-HELP................................... 14
ARTICLE VIII. TAXES AND ASSESSMENTS ON TENANT'S PROPERTY................. 15
ARTICLE IX. ASSIGNMENT AND SUBLETTING.................................... 15
SECTION 9.1 RIGHTS OF PARTIES.................................... 15
SECTION 9.2 EFFECT OF TRANSFER................................... 16
SECTION 9.3 SUBLEASE REQUIREMENTS................................ 17
SECTION 9.4 CERTAIN TRANSFERS.................................... 17
ARTICLE X. INSURANCE AND INDEMNITY....................................... 17
SECTION 10.1 TENANT'S INSURANCE................................... 17
SECTION 10.2 LANDLORD'S INSURANCE................................. 17
SECTION 10.3 JOINT INDEMNITY...................................... 18
SECTION 10.4 LANDLORD'S NONLIABILITY.............................. 19
SECTION 10.5 WAIVER OF SUBROGATION................................ 19
</TABLE>
-i-
<PAGE>
INDEX
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE XI. DAMAGE OR DESTRUCTION........................................ 19
SECTION 11.1 RESTORATION.......................................... 19
SECTION 11.2 LEASE GOVERNS........................................ 20
ARTICLE XII. EMINENT DOMAIN.............................................. 20
SECTION 12.1 TOTAL OR PARTIAL TAKING.............................. 20
SECTION 12.2 TEMPORARY TAKING..................................... 21
SECTION 12.3 TAKING OF PARKING AREA............................... 21
ARTICLE XIII. SUBORDINATION; ESTOPPEL CERTIFICATE; FINANCIALS............ 21
SECTION 13.1 SUBORDINATION........................................ 21
SECTION 13.2 ESTOPPEL CERTIFICATE................................. 21
SECTION 13.3 FINANCIALS........................................... 21
ARTICLE XIV. DEFAULTS AND REMEDIES....................................... 22
SECTION 14.1 TENANT'S DEFAULTS.................................... 22
SECTION 14.2 LANDLORD'S REMEDIES.................................. 23
SECTION 14.3 LATE PAYMENTS........................................ 24
SECTION 14.4 RIGHT OF LANDLORD TO PERFORM......................... 24
SECTION 14.5 DEFAULT BY LANDLORD.................................. 24
SECTION 14.6 EXPENSES AND LEGAL FEES.............................. 24
SECTION 14.7 WAIVER OF JURY TRIAL................................. 25
SECTION 14.8 SATISFACTION OF JUDGMENT............................. 25
SECTION 14.9 LIMITATION OF ACTIONS AGAINST LANDLORD............... 25
ARTICLE XV. END OF TERM.................................................. 25
SECTION 15.1 HOLDING OVER......................................... 25
SECTION 15.2 MERGER ON TERMINATION................................ 25
SECTION 15.3 SURRENDER OF PREMISES; REMOVAL OF PROPERTY........... 25
ARTICLE XVI. PAYMENTS AND NOTICES........................................ 26
ARTICLE XVII. RULES AND REGULATIONS...................................... 26
ARTICLE XVIII. BROKER'S COMMISSION....................................... 26
ARTICLE XIX. TRANSFER OF LANDLORD'S INTEREST............................. 26
ARTICLE XX. INTERPRETATION............................................... 27
SECTION 20.1 GENDER AND NUMBER.................................... 27
SECTION 20.2 HEADINGS............................................. 27
SECTION 20.3 JOINT AND SEVERAL LIABILITY.......................... 27
SECTION 20.4 SUCCESSORS........................................... 27
SECTION 20.5 TIME OF ESSENCE...................................... 27
SECTION 20.6 CONTROLLING LAW...................................... 27
SECTION 20.7 SEVERABILITY......................................... 27
SECTION 20.8 WAIVER AND CUMULATIVE REMEDIES....................... 27
SECTION 20.9 INABILITY TO PERFORM................................. 27
SECTION 20.10 ENTIRE AGREEMENT..................................... 28
SECTION 20.11 QUIET ENJOYMENT...................................... 28
SECTION 20.12 SURVIVAL............................................. 28
</TABLE>
-ii-
<PAGE>
INDEX
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE XXI. EXECUTION AND RECORDING..................................... 28
SECTION 21.1 COUNTERPARTS......................................... 28
SECTION 21.2 CORPORATE AND PARTNERSHIP AUTHORITY.................. 28
SECTION 21.3 EXECUTION OF LEASE; NO OPTION OR OFFER............... 28
SECTION 21.4 RECORDING............................................ 28
SECTION 21.5 AMENDMENTS........................................... 28
SECTION 21.6 EXECUTED COPY........................................ 28
SECTION 21.7 ATTACHMENTS.......................................... 28
ARTICLE XXII. MISCELLANEOUS.............................................. 28
SECTION 22.1 NONDISCLOSURE OF LEASE TERMS......................... 28
SECTION 22.2 GUARANTY............................................. 29
SECTION 22.3 CHANGES REQUESTED BY LENDER.......................... 29
SECTION 22.4 MORTGAGEE PROTECTION................................. 29
SECTION 22.5 [INTENTIONALLY DELETED].............................. 29
SECTION 22.6 SECURITY MEASURES.................................... 29
SECTION 22.7 JAMS................................................. 29
SECTION 22.8 APPROVALS............................................ 29
</TABLE>
EXHIBITS
Exhibit A Description of Premises
Exhibit B Environmental Questionnaire
Exhibit C Landlord's Disclosures
Exhibit D Insurance Requirements
Exhibit E Rules and Regulations
Exhibit X Work Letter
Exhibit Y Project Site Plan
<PAGE>
INDUSTRIAL LEASE
----------------
(Multi-Tenant; Net)
THIS LEASE is made as of the 30 day of November, 1998, by and between THE
IRVINE COMPANY, hereafter called "Landlord," and E-MACHINES, INC., a Delaware
corporation, hereinafter called "Tenant."
ARTICLE I. BASIC LEASE PROVISIONS
Each reference in this Lease to the "Basic Lease Provisions" shall mean and
refer to the following collective terms, the application of which shall be
governed by the provisions in the remaining Articles of this Lease.
1. Premises: The Premises are more particularly described in Section 2.1.
Address of Building: 14350 Myford Road, Irvine, California
2. Project Description (if applicable): Jamboree Business Center
3. Use of Premises: General office, light manufacturing, research and
development, warehousing, sales, distribution and other uses permitted by
law, provided, however, that in no event shall the retail sale of products
or services be permitted.
4. Estimated Commencement Date: March 1, 1999
5. Lease Term: Sixty (60) months, plus such additional days as may be required
to cause this Lease to terminate on the final day of the calendar month.
6. Basic Rent: Eighty-Three Thousand Eight Hundred Sixty-Eight Dollars
($83,868.00) per month, based on $.57 per rentable square foot.
Basic Rent is subject to adjustment as follows:
Commencing on the first day of the thirteenth (13th) month of the Term,
Basic Rent shall be increased to Eighty-Six Thousand Eight Hundred Ten
Dollars ($86,810.00) per month, based on $.59 per rentable square foot.
Commencing on the first day of the twenty-fifth (25th) month of the Lease
Term, the Basic Rent shall be Ninety-One Thousand Two Hundred Twenty-Four
Dollars ($91,224.00), based on $.62 per rentable square foot.
Commencing on the first day of the thirty-seventh (37th) month of the Lease
Term, the Basic Rent shall be Ninety-Four Thousand One Hundred Sixty-Seven
Dollars ($94,167.00), based on $.64 per rentable square foot.
Commencing on the first day of the forty-ninth (49th) month of the Lease
Term, the Basic Rent shall be Ninety-Seven Thousand One Hundred Ten Dollars
($97,110.00), based on $.66 per rentable square foot.
7. Guarantor(s): Korea Data Systems (America), Inc., a California corporation,
and TriGem Computer Inc., a Korea corporation
8. Floor Area of Premises: Approximately 147,136 rentable square feet
<PAGE>
9. Security Deposit: $250,000.00
10. Broker(s): Travers Realty Corporation
11. Additional Insureds: Insignia\ESG of California, Inc.
12. Address for Payments and Notices:
LANDLORD TENANT
INSIGNIA/ESG OF CALIFORNIA, INC. E-MACHINES, INC.
1 Ada, Suite 270 14350 Myford Road
Irvine, CA 92618 Irvine, CA
Attention: John Ham
President
with a copy of notices to:
IRVINE INDUSTRIAL COMPANY
P.O. Box 6370
Newport Beach, CA 92658-6370
Attn: Vice President, Industrial Operations
13. Tenant's Liability Insurance Requirement: $ 2,000,000.00
14. Vehicle Parking Spaces: Two Hundred Ninety-Four (294)
-2-
<PAGE>
ARTICLE II. PREMISES
SECTION 2.1 LEASED PREMISES. Landlord leases to Tenant and Tenant leases
from Landlord the premises shown in Exhibit A (the "Premises"), containing
---------
approximately the floor area set forth in Item 8 of the Basic Lease Provisions
and known by the suite number identified in Item 1 of the Basic Lease
Provisions. The Premises consist of all the rentable square footage of and are
located within the interior of, the building identified in Item 1 of the Basic
Lease Provisions (which together with the underlying real property, is called
the "Building"). The Building is a portion of the project shown in Exhibit Y
---------
(the "Project"). Tenant understands that the floor area set forth in Item 8 of
the Basic Lease Provisions may include, at Landlord's option, a factor
approximating the total square footage of any common lobby or internal common
features of the Building times the ratio of the actual square footage of the
Premises to the total square footage of the Building.
SECTION 2.2 ACCEPTANCE OF PREMISES. Except as expressly provided in this
Lease, Tenant acknowledges that neither Landlord nor any representative of
Landlord has made any representation or warranty with respect to the Premises or
the Building or the suitability or fitness of either for any purpose, including
without limitation any representations or warranties regarding zoning or other
land use matters, and that neither Landlord nor any representative of Landlord
has made any representations or warranties regarding (i) what other tenants or
uses may be permitted or intended in the Building and the Project, or (ii) any
exclusivity of use by Tenant with respect to its permitted use of the Premises
as set forth in Item 3 of the Basic Lease Provisions. Tenant further
acknowledges that neither Landlord nor any representative of Landlord has agreed
to undertake any alterations or additions or construct any improvements to the
Premises except as expressly provided in this Lease. The taking of possession or
use of the Premises by Tenant for any purpose other than construction shall
conclusively establish that the Premises and the Building were in satisfactory
condition and in conformity with the provisions of this Lease in all respects,
subject to Landlord's responsibilities set forth in Section 2.4 below and except
for those matters which Tenant shall have brought to Landlord's attention on a
written punch list. The list shall be limited to any items required to be
accomplished by Landlord under the Work Letter attached as Exhibit X, and shall
---------
be delivered to Landlord within thirty (30) days after the term ("Term") of this
Lease commences as provided in Article III below. Nothing contained in this
Section shall affect the commencement of the Term or the obligation of Tenant to
pay rent. Landlord shall diligently complete all punch list items of which it is
notified as provided above.
SECTION 2.3 BUILDING NAME AND ADDRESS. Tenant shall not utilize any name
selected by Landlord from time to time for the Building and/or the Project as
any part of Tenant's corporate or trade name. Landlord shall have the right to
change the name, address, number or designation of the Building or Project
without liability to Tenant.
SECTION 2.4 LANDLORD'S RESPONSIBILITIES. Notwithstanding anything to the
contrary contained in this Lease, Landlord agrees: (i) that the Premises
(including, without limitation, the "Tenant Improvements" constructed pursuant
to the Work Letter attached hereto) shall be in good and clean operating
condition and repair as of the Commencement Date, and that the plumbing,
electrical and mechanical systems serving the Building, including, without
limitation, the HVAC systems, shall be in good operating condition as of the
Commencement Date, and (ii) that Landlord, at its sole cost and expense, shall
correct, repair or restore the integrity of the slabs, foundations, footings,
load-bearing walls and structural components of the roof of the Building during
the initial Term of the Lease. Landlord shall, promptly after receipt of the
written notice from Tenant setting forth the nature and extent of the need of
any repairs referred to in the foregoing, rectify same at Landlord's sole cost
and expense. Further, Landlord shall correct, repair or replace, at Landlord's
sole cost and expense and not as a Project Cost, any non-compliance of the
Building (including, without limitation, the Tenant Improvements constructed
therein) and/or the Common Areas of the Project with all applicable building
permits and codes in effect as of the Commencement Date, including without
limitation, the provisions of Title III of the Americans With Disabilities Act
("ADA") in effect as of the Commencement Date. Subject to the provisions for
Landlord's construction and rehabilitation and the inclusion of the amortized
costs thereof in "Project Costs" as provided in Section 5.1 of this Lease, all
other ADA compliance issues regarding the Premises, including without
limitation, Tenant's construction of any alterations or other improvements in
the Premises and in connection with the operation of Tenant's business and
employment practices in the Premises, shall be the responsibility of Tenant at
its sole cost and expense. The repairs, corrections or replacements required of
Landlord under this Section 2.4 in connection with noncompliance with permits
and codes shall be made promptly following notice of noncompliance from any
applicable governmental agency. Tenant shall promptly forward any such notice
that Tenant receives to Landlord.
-3-
<PAGE>
ARTICLE III. TERM
SECTION 3.1 GENERAL. The Term shall be for the period shown in Item 5 of
the Basic Lease Provisions. Subject to the provisions of Section 3.2 below, the
Term shall commence ("Commencement Date") on the later of: (i) January 1, 1999
or (ii) the date by which all of the following have occurred: (a) Landlord has
substantially completed the Tenant Improvements in accordance with Exhibit X,
(b) Landlord has tendered delivery of possession of the Premises to Tenant, and
(c) Landlord has obtained all permits and approvals required by the appropriate
governmental authorities for the legal occupancy of the Premises. Within ten
(10) days after the Commencement Date has occurred, the parties shall
memorialize on a form provided by Landlord the actual Commencement Date and the
expiration date ("Expiration Date") of this Lease. Tenant's failure to execute
that form shall not affect the validity of Landlord's determination of those
dates.
SECTION 3.2 DELAY IN POSSESSION. If Landlord, for any reason whatsoever,
cannot deliver possession of the Premises to Tenant on or before the Estimated
Commencement Date, this Lease shall not be void or voidable nor shall Landlord
be liable to Tenant for any resulting loss or damage. However, Tenant shall not
be liable for any rent and the Commencement Date shall not occur until Landlord
delivers possession of the Premises and the Premises are in fact available for
Tenant's occupancy with any Tenant Improvements that have been approved as per
Section 3.1(a) above, except that if Landlord's failure to so deliver possession
on the Estimated Commencement Date is attributable to any "Tenant Delay" as
defined in the Work Letter attached to this Lease, then the Commencement Date
shall not be advanced to the date on which possession of the Premises is
tendered to Tenant, and Landlord shall be entitled to full performance by Tenant
(including the payment of rent) from the date Landlord would have been able to
deliver the Premises to Tenant but for Tenant's delay(s). Notwithstanding
anything to the contrary contained in this Section 3.2, if for any reason other
than Tenant Delays or other matters beyond Landlord's reasonable control, the
actual Commencement Date has not occurred by the date that is one hundred fifty
(150) days following the Estimated Commencement Date, then Tenant may, by
written notice to Landlord given at any time thereafter but prior to the actual
occurrence of the Commencement Date, elect to terminate this Lease.
Notwithstanding the foregoing, if at any time during the construction period,
Landlord reasonably believes that the Commencement Date will not occur on or
before one-hundred fifty (150) days following the Estimated Commencement Date,
Landlord may notify Tenant in writing of such fact and of a new outside date on
or before which the Commencement Date will occur, and Tenant must elect within
ten (10) days of receipt of such notice to either terminate this Lease or waive
its right to terminate this Lease provided the Commencement Date occurs on or
prior to the new outside date established by Landlord in such notice to Tenant.
Tenant's failure to elect to terminate this Lease within such ten (10) day
period shall be deemed Tenant's waiver of its right to terminate this Lease as
provided in this paragraph as to the previous outside date, but not as to the
new outside date established by said notice.
SECTION 3.3 RIGHT TO EXTEND LEASE. Provided that Tenant is not in Default
under any provision of this Lease, either at the time of exercise of the
extension right granted herein or at the time of the commencement of such
extension, and provided further that Tenant (and/or any "Tenant Affiliate" as
hereinafter defined) is occupying at least sixty-six and sixty-seven hundredths
percent (66.67%) of the floor area of these Premises, Tenant may extend the Term
of this Lease for one (1) period of sixty (60) months. Tenant shall exercise its
right to extend the Term by and only by delivering to Landlord, not less than
nine (9) months or more than twelve (12) months prior to the expiration date of
the Term, Tenant's irrevocable written notice of its commitment to extend (the
"Commitment Notice"). The Basic Rent payable under the Lease during any
extension of the Term shall be at the fair market rental, including subsequent
adjustments, for comparable industrial space being leased by Landlord in the
Project. In the event that the parties are not able to agree on the fair market
rental within one hundred twenty (120) days prior to the expiration date of the
Term, then said rental, including subsequent adjustments, to be determined by
appraisal as follows.
Within one hundred twenty (120) and ninety (90) days prior to the
expiration date of the Term, Landlord shall notify Tenant in writing of the
Basic Rent, including adjustments, that would reflect the prevailing market
rental rate for a 60-month renewal of comparable space in the Project as of the
commencement of the extension period ("Landlord's Determination"). Should Tenant
disagree with the Landlord's Determination, then Tenant shall, not later than
twenty (20) days thereafter, notify Landlord in writing of Tenant's
determination of those rental terms ("Tenant's Determination"). Within ten (10)
days following delivery of the Tenant's Determination, the parties shall attempt
to agree on an appraiser to determine the fair market rental. If the parties are
unable to agree in that time, then each party shall designate an appraiser
within ten (10) days thereafter. Should either party fail to so designate an
appraiser within that time, then the appraiser designated by the other party
shall determine the fair market rental. Should each of the parties timely
designate an appraiser, then the two appraisers so designated shall appoint a
third appraiser who shall, acting alone, determine the fair market rental for
the Premises. Any appraiser designated
-4-
<PAGE>
hereunder shall have an MAI certification with not less than five (5) years'
experience in the valuation of commercial industrial buildings in Orange County,
California.
Within thirty (30) days following the selection of the appraiser and
such appraiser's receipt of the Landlord's Determination and the Tenant's
Determination, the appraiser shall determine whether the rental rate determined
by Landlord or by Tenant more accurately reflects the fair market rental rate
for the 60-month renewal of the Lease for the Premises, as reasonably
extrapolated to the commencement of the extension period. Accordingly, either
the Landlord's Determination or the Tenant's Determination shall be selected by
the appraiser as the fair market rental rate for the extension period. Any time
before the decision of the appraiser is rendered, either party may, by written
notice to the other party, accept the rental terms submitted by the other party,
in which event such terms shall be deemed adopted as the agreed fair market
rental. The fees of the appraiser(s) shall be borne entirely by the party whose
determination of the fair market rental rate was not accepted by the appraiser.
Within twenty (20) days after the determination of the fair market
rental, Landlord shall prepare a reasonably appropriate amendment to this Lease
for the extension period and Tenant shall execute an return same to Landlord
within ten (10) days. Should the fair market rental not be established by the
commencement of the extension period, then Tenant shall continue paying rent at
the rate in effect during the last month of the initial Term, and a lump sum
adjustment shall be made promptly upon the determination of such new rental.
If Tenant fails to timely exercise its right to extend the Term as
herein provided, Tenant's right to extend the Term shall be extinguished and the
Lease shall automatically terminate as of the expiration date of the Term,
without any extension and without any liability to Landlord. Any attempt to
assign or transfer any right or interest created by this paragraph to any person
or entity other than a "Tenant Affiliate" (as hereinafter defined) shall be void
from its inception. Tenant shall have no other right to extend the Term beyond
the single sixty (60) month extension created by this paragraph. Unless agreed
to in a writing signed by Landlord and Tenant, any extension of the Term,
whether created by an amendment to this Lease or by a holdover of the Premises
by Tenant, or otherwise, shall be deemed a part of, and not in addition to, any
duly exercised extension period permitted by this paragraph.
ARTICLE IV. RENT AND OPERATING EXPENSES
SECTION 4.1 BASIC RENT. From and after the Commencement Date, Tenant
shall pay to Landlord without deduction or offset, Basic Rent for the Premises
in the total amount shown (including subsequent adjustments, if any) in Item 6
of the Basic Lease Provisions. Any rental adjustment shown in Item 6 shall be
deemed to occur on the specified monthly anniversary of the Commencement Date,
whether or not that date occurs at the end of a calendar month. The rent shall
be due and payable in advance commencing on the Commencement Date (as prorated
for any partial month) and continuing thereafter on the first day of each
successive calendar month of the Term. No demand, notice or invoice shall be
required for the payment of Basic Rent. An installment of rent in the amount of
one (1) full month's Basic Rent at the initial rate specified in Item 6 of the
Basic Lease Provisions shall be delivered to Landlord concurrently with Tenant's
execution of this Lease and shall be applied against the Basic Rent first due
hereunder.
SECTION 4.2 OPERATING EXPENSES.
(a) Tenant shall pay to Landlord, as additional rent, Tenant's Share
of "Operating Expenses", as defined below, incurred by Landlord in the operation
of the Building and Project. The term "Tenant's Share" means that portion of an
Operating Expense determined by multiplying the cost of such item by a fraction,
the numerator of which is the floor area of the Premises and the denominator of
which is the total square footage of the floor area of the Building or the
Project, as applicable, as of the date on which the computation is made, to be
charged with such Operating Expense.
(b) Commencing prior to the start of the first full "Expense Recovery
Period" (as defined below) of the Lease, and prior to the start of each full or
partial Expense Recovery Period thereafter, Landlord shall give Tenant a written
estimate of the amount of Tenant's Share of Operating Expenses for the Expense
Recovery Period. Tenant shall pay the estimated amounts to Landlord in equal
monthly installments, in advance, with Basic Rent. If Landlord has not furnished
its written estimate for any Expense Recovery Period by the time set forth
above, Tenant shall continue to pay cost reimbursements at the rates established
for the prior Expense Recovery Period, if any; provided that when the new
estimate is delivered to Tenant, Tenant shall, at the next monthly payment date,
pay any accrued cost reimbursements based upon the new estimate. For purposes
hereof, "Expense Recovery Period" shall mean every twelve month period during
the Term (or portion thereof for the first and last lease years) commencing July
1 and ending June 30.
-5-
<PAGE>
(c) Within one hundred twenty (120) days after the end of each
Expense Recovery Period, Landlord shall furnish to Tenant a statement showing in
reasonable detail the actual or prorated Operating Expenses incurred by Landlord
during the period, and the parties shall within thirty (30) days thereafter make
any payment or allowance necessary to adjust Tenant's estimated payments, if
any, to the actual Tenant's Share as shown by the annual statement. Any delay or
failure by Landlord in delivering any statement hereunder shall not constitute a
waiver of Landlord's right to require Tenant to pay Tenant's Share of Operating
Expenses pursuant hereto. Any amount due Tenant shall be credited against
installments next coming due under this Section 4.2, and any deficiency shall be
paid by Tenant together with the next installment. If Tenant has not made
estimated payments during the Expense Recovery Period, any amount owing by
Tenant pursuant to subsection (a) above shall be paid to Landlord in accordance
with Article XVI. Should Tenant fail to object in writing to Landlord's
determination of actual Operating Expenses within one hundred eighty (180) days
following delivery of Landlord's expense statement, Landlord's determination of
actual Operating Expenses for the applicable Expense Recovery Period shall be
conclusive and binding on the parties and any future claims to the contrary
shall be barred.
Provided Tenant is not then in Default hereunder, Tenant shall have
the right to cause a trained accountant to audit Landlord's Operating Expenses.
In no event, however, shall such accountant be compensated by Tenant on a
"contingency" basis, or on any other basis tied to the results of said audit.
Tenant shall give notice to Landlord of Tenant's intent to audit within one
hundred eighty (180) days after Tenant's receipt of Landlord's expense statement
which sets forth Landlord's actual Operating Expenses. Such audit shall be
conducted at a mutually agreeable time during normal business hours at the
office of Landlord or its management agent where the records are maintained. If
Tenant's audit determines that actual Operating Expenses have been overstated by
more than five percent (5%), then subject to Landlord's right to review and/or
contest the audit results, Landlord shall reimburse Tenant for the reasonable
out-of-pocket costs of such audit. Tenant's rent shall be appropriately adjusted
to reflect any overstatement in Operating Expenses. In the event of a dispute
between Landlord and Tenant regarding the results of such audit, either party
may elect to submit the matter for binding arbitration with JAMS/ENDISPUTE or
its successor in Orange County, California.
All of the information obtained by Tenant and/or its auditor in
connection with such audit, as well as any compromise, settlement, or adjustment
reached between Landlord and Tenant as a result thereof (except to the extent
that Tenant shall prove that such information, compromise, settlement or
adjustment was otherwise available in the public domain), shall be held in
strict confidence and, except as may be required pursuant to litigation or court
order and except for inadvertent disclosures despite Tenant's reasonable efforts
to keep the disclosed information confidential, shall not be disclosed to any
third party, directly or indirectly, by Tenant or its auditor or any of their
officers, agents or employees. Landlord may require Tenant's auditor to execute
a separate confidentiality agreement in commercially reasonable form affirming
the foregoing as a condition precedent to any audit. In the event of a violation
of this confidentiality covenant in connection with any audit, then in addition
to any other legal or equitable remedy available to Landlord, Tenant shall
forfeit its right to any reconciliation or cost reimbursement payment from
Landlord due to said audit (and any such payment theretofore made by Landlord
shall be promptly returned by Tenant), and Tenant shall have no further audit
rights under this Lease.
(d) Even though the Lease has terminated and the Tenant has vacated
the Premises, when the final determination is made of Tenant's Share of
Operating Expenses for the Expense Recovery Period in which the Lease
terminates, Tenant shall within ten (10) days after receiving notice pay the
entire increase due over the estimated expenses paid. Conversely, any
overpayment made in the event expenses decrease shall be rebated by Landlord to
Tenant within ten (10) days following such final determination.
(e) If, at any time during any Expense Recovery Period, any one or
more of the Operating Expenses are increased to a rate(s) or amount(s) in excess
of the rate(s) or amount(s) used in calculating the estimated expenses for the
year, then the estimate of Tenant's Share of Operating Expenses shall be
increased for the month in which such rate(s) or amount(s) becomes effective and
for all succeeding months by an amount equal to Tenant's Share of the increase.
Landlord shall give Tenant written notice of the amount or estimated amount of
the increase, the month in which the increase will become effective, Tenant's
Share thereof and the month for which the payments are due. Tenant shall pay the
increase to Landlord as a part of Tenant's monthly payments of estimated
expenses as provided in paragraph (b) above, commencing with the month in which
effective.
(f) The term "Operating Expenses" shall mean and include all "Project
Costs" (as hereafter defined) and "Property Taxes" (as hereafter defined).
(g) The term "Project Costs" shall include all expenses of operation
and maintenance of the Building and the Project, together with all appurtenant
Common Areas (as defined in Section 6.2), and shall include the following
charges by way of illustration but not limitation: water and sewer charges;
-6-
<PAGE>
insurance premiums or reasonable premium equivalents should Landlord elect to
self-insure any risk that Landlord is authorized to insure hereunder; license,
permit and inspection fees; heat; light; power; janitorial services to any
interior Common Areas; air conditioning; supplies; materials; equipment; tools;
the cost of any environmental, insurance, tax or other consultant utilized by
Landlord in connection with the Building and/or Project; establishment of
reasonable reserves for replacements and/or repair of Common Area improvements,
equipment and supplies; costs incurred in connection with compliance of any laws
or changes in laws applicable to the Building or the Project; the cost of any
capital investments (other than tenant improvements for specific tenants) to the
extent of the amortized amount thereof over the useful life of such capital
investments (in accordance with generally accepted accounting principles,
consistently applied) calculated at a market cost of funds, as reasonably
determined by Landlord, for each such year of useful life during the Term; costs
associated with the procurement and maintenance of an air conditioning, heating
and ventilation service agreement; labor; reasonably allocated wages and
salaries, fringe benefits, and payroll taxes for administrative and other
personnel directly applicable to the Building and/or Project, including both
Landlord's personnel and outside personnel; any expense incurred pursuant to
Sections 6.1, 6.2, 6.4, 7.2, and 10.2; and a reasonable and reasonably allocated
overhead/management fee for the professional operation of the Project which
shall be competitive with fees charged for the management of similar projects in
the Irvine Spectrum area. It is understood that Project Costs shall include
competitive charges for direct services provided by any subsidiary or division
of Landlord.
Notwithstanding anything to the contrary in this Section 4.2(g),
"Project Costs" shall not include and Tenant shall not have any obligation to
perform or to pay for the following (collectively, "Costs"): (a) Costs
occasioned by the violation of any law by Landlord or its authorized agents,
contractors or employees; (b) Costs of repair or restoration as the result of
damage to the Building occasioned by a casualty governed by the provisions of
Article XI of this Lease, and Costs of restoration as the result of the exercise
of the power of eminent domain and governed by the provisions of Article XII of
this Lease; (c) Costs for which Landlord has received reimbursement from others;
(d) Costs for which Landlord is responsible pursuant to Section 2.4 of this
Lease; (e) fees, commissions, attorneys' fees, costs or other disbursements
incurred in connection with negotiations or disputes with any other occupant of
the Project or arising from the violation by Landlord or any occupant of the
Project (other than Tenant) of the terms and conditions of any lease or other
agreement; (f) depreciation or amortization; (g) interest, charges and fees
incurred on debt, payments on mortgages and rent under ground leases encumbering
the Premises and/or the Project; (h) Costs incurred in connection with the
presence of any Hazardous Material in, on, under or about the Project, except to
the extent Tenant is responsible for such Costs as provided in Section 5.3 of
this Lease; (i) Costs and expenses for which Tenant reimburses Landlord directly
or which Tenant pays directly to a third person; (j) any salaries or other
compensation payable by Landlord at the "executive" level; (k) the cost of any
capital investments to the Project and of the Building except to the extent that
such costs are incurred either for the replacement or restoration of any
existing system component of the Building and/or the Project, or for a new
system or component that Landlord reasonably believes overall Project Costs
(provided that nothing contained in this Subsection (k) shall amend or
supersede the provisions of Section 5.1 of this Lease, nor amend or supersede
Tenant's responsibility for capital costs resulting from its particular use of
the Premises); and (l) Costs relating exclusively to other buildings in the
Project other than the Building.
(h) The term "Property Taxes" as used herein shall include the
following: (i) all real estate taxes or personal property taxes, as such
property taxes may be reassessed from time to time; and (ii) other taxes,
charges and assessments which are levied with respect to this Lease or to the
Building and/or the Project, and any improvements, fixtures and equipment and
other property of Landlord located in the Building and/or the Project, except
that general net income and franchise taxes imposed against Landlord shall be
excluded; and (iii) all assessments and fees for public improvements, services,
and facilities and impacts thereon, including without limitation arising out of
any Community Facilities Districts, "Mello Roos" districts, similar assessment
districts, and any traffic impact mitigation assessments or fees; (iv) any tax,
surcharge or assessment which shall be levied in addition to or in lieu of real
estate or personal property taxes, other than taxes covered by Article VIII; and
(v) costs and expenses incurred in contesting the amount or validity of any
Property Tax by appropriate proceedings. Notwithstanding anything to the
contrary in this Section 4.2(h), "Property Taxes" shall not include and Tenant
shall not be required to pay any portion of any tax or assessment expense or any
increase therein (a) levied on Landlord's rental income, unless such tax or
assessment expense is imposed in lieu of Property Taxes; (b) imposed on land and
improvements other than the Building or Project; or (c) attributable to
Landlord's net income, inheritance, gift, transfer, estate or state taxes; or
(d) taxes and/or assessments to the extent that such taxes or assessments were
paid in installments other than over the longest possible term.
SECTION 4.3 SECURITY DEPOSIT. Concurrently with Tenant's delivery of this
Lease, Tenant shall deposit with Landlord the sum, if any, stated in Item 9 of
the Basic Lease Provisions, to be held by Landlord as security for the full and
faithful performance of Tenant's obligations under this Lease (the "Security
Deposit"). Upon any Default by Tenant, including specifically Tenant's failure
to pay rent or to abide by its obligations under Sections 7.1 and 15.3 below,
whether or not Landlord is informed of or has
-7-
<PAGE>
knowledge of the Default, the Security Deposit shall be deemed to be
automatically and immediately applied, without waiver of any rights Landlord may
have under this Lease or at law or in equity as a result of the Default, as a
setoff for full or partial compensation for that Default. If any portion of the
Security Deposit is applied after a Default by Tenant, Tenant shall within five
(5) days after written demand by Landlord deposit cash with Landlord in an
amount sufficient to restore the Security Deposit to its original amount.
Landlord shall not be required to keep this Security Deposit separate from its
general funds, and Tenant shall not be entitled to interest on the Security
Deposit. The Security Deposit shall be returned to Tenant (or, at Landlord's
option, to the last assignee of Tenant's interest in this Lease) within sixty
(60) days after the expiration of the Term, provided that Landlord may, in its
reasonable discretion, retain all or a portion of the Security Deposit to the
extent and until such time as all amounts due from Tenant in accordance with
this Lease have been determined and paid in full, with any balance of the
Security Deposit being returned to Tenant within sixty (60) days after the
expiration of the Term. In the event that (i) Tenant has not been in Default
under the Lease at any time during the Term hereof, and (ii) Tenant has not at
any time been more than five (5) days late with respect to any payments of rent
due under the Lease more than twice during the Term, then: (A) an amount equal
to Fifty Thousand Dollars ($50,000.00) of the Security Deposit shall be credited
against Basic Rent due and payable for the thirteenth (13th) month of the Term,
(B) a further amount equal to Fifty Thousand Dollars ($50,000.00) of the
Security Deposit shall be credited against Basic Rent due and payable for the
twenty-fifth (25th) month of the Term, and (C) a further amount equal to Forty-
Three Thousand One Hundred Seventy-Nine Dollars ($43,179.00) of the Security
Deposit shall be credited against Basic Rent due and payable for the thirty-
seventh (37th) month of the Term.
ARTICLE V. USES
SECTION 5.1 USE. Tenant shall use the Premises only for the purposes
stated in Item 3 of the Basic Lease Provisions, all in accordance with
applicable laws and restrictions and pursuant to approvals to be obtained by
Tenant from all relevant and required governmental agencies and authorities. The
parties agree that any contrary use shall be deemed to cause material and
irreparable harm to Landlord and shall entitle Landlord to injunctive relief in
addition to any other available remedy. Tenant, at its expense, shall procure,
maintain and make available for Landlord's inspection throughout the Term, all
governmental approvals, licenses and permits, if any, required for the proper
and lawful conduct of Tenant's business in the Premises. Tenant shall not do or
permit anything to be done in or about the Premises which will in any way
interfere with the rights of other occupants of the Building or the Project, or
use or allow the Premises to be used for any unlawful purpose, nor shall Tenant
permit any nuisance or commit any waste in the Premises or the Project. Tenant
shall not perform any work or conduct any business whatsoever in the Project
other than inside the Premises. Tenant shall not do or permit to be done
anything which will invalidate or increase the cost of any insurance policy(ies)
covering the Building, the Project and/or their contents (unless Tenant agrees
to pay for such increases), and shall comply with all applicable insurance
underwriters rules. Tenant shall comply at its expense with all present and
future laws, ordinances, restrictions, regulations, orders, rules and
requirements of all governmental authorities that pertain to Tenant or its use
of the Premises, including without limitation all federal and state occupational
health and safety requirements, whether or not Tenant's compliance will
necessitate expenditures or interfere with its use and enjoyment of the
Premises. Notwithstanding the foregoing or anything in this Lease to the
contrary, to the extent that construction or rehabilitation is required in
connection with the foregoing compliance, Landlord shall perform such
construction or rehabilitation and the costs thereof, subject to the limitations
on capital investments contained in Section 4.2(g), shall be considered as part
of "Project Costs" (except to the extent that such compliance results from
Tenant's particular use of the Premises [including, without limitation, ADA
compliance by Tenant in connection with its business and employment practices in
the Premises], in which event Tenant shall perform all required construction
and/or rehabilitation at its sole cost and expense). Tenant shall comply at its
expense with all present and future covenants, conditions, easements or
restrictions now or hereafter affecting or encumbering the Building and/or
Project, and any amendments or modifications thereto, including without
limitation the payment by Tenant of any periodic or special dues or assessments
charged against the Premises or Tenant which may be allocated to the Premises or
Tenant in accordance with the provisions thereof, provided that such compliance
with future covenants, conditions, easements or restrictions hereafter affecting
the Building and/or the Project, and/or compliance with amendments or
modifications to existing covenants, conditions, easements or restrictions, do
not unreasonably interfere with Tenant's business operations on the Premises or
materially increase the obligations or materially decrease the rights of Tenant
under this Lease. Tenant shall promptly upon demand reimburse Landlord for any
additional insurance premium charged by reason of Tenant's failure to comply
with the provisions of this Section, and shall indemnify Landlord from any
liability and/or expense resulting from Tenant's noncompliance.
SECTION 5.2 SIGNS. Tenant shall have the right to two (2) exterior
Building top signs, subject to Landlord's right of prior approval that such
exterior signage is in compliance with the Signage Criteria (defined below).
Except as provided in the foregoing or as otherwise approved in writing by
-8-
<PAGE>
Landlord, in its sole discretion, Tenant shall have no right to maintain
identification signs in any location in, on or about the Premises, the Building
or the Project and shall not place or erect any signs, displays or other
advertising materials that are visible from the exterior of the Building. The
size, design, graphics, material, style, color and other physical aspects of any
permitted sign shall be subject to Landlord's written approval prior to
installation (which approval may be withheld in Landlord's discretion), any
covenants, conditions or restrictions encumbering the Premises, Landlord's
signage program for the Project, as in effect from time to time and approved by
the City in which the Premises are located ("Signage Criteria"), and any
applicable municipal or other governmental permits and approvals. Tenant
acknowledges having received and reviewed a copy of the current Signage Criteria
for the Project. Tenant shall be responsible for the cost of any permitted sign,
including the fabrication, installation, maintenance and removal thereof. If
Tenant fails to maintain its sign, or if Tenant fails to remove same upon
termination of this Lease and repair any damage caused by such removal, Landlord
may do so at Tenant's expense.
SECTION 5.3 HAZARDOUS MATERIALS.
(a) For purposes of this Lease, the term "Hazardous Materials"
includes (i) any "hazardous materials" as defined in Section 25501(n) of the
California Health and Safety Code, (ii) any other substance or matter which
results in liability to any person or entity from exposure to such substance or
matter under any statutory or common law theory, and (iii) any substance or
matter which is in excess of permitted levels set forth in any federal,
California or local law or regulation pertaining to any hazardous or toxic
substance, material or waste.
(b) Tenant shall not cause or permit any Hazardous Materials to be
brought upon, stored, used, generated, released or disposed of on, under, from
or about the Premises (including without limitation the soil and groundwater
thereunder) without the prior written consent of Landlord. Notwithstanding the
foregoing, Tenant shall have the right, without obtaining prior written consent
of Landlord, to utilize within the Premises standard office products that may
contain Hazardous Materials (such as photocopy toner, "White Out", and the
like), provided however, that (i) Tenant shall maintain such products in their
-------- -------
original retail packaging, shall follow all instructions on such packaging with
respect to the storage, use and disposal of such products, and shall otherwise
comply with all applicable laws with respect to such products, and (ii) all of
the other terms and provisions of this Section 5.3 shall apply with respect to
Tenant's storage, use and disposal of all such products. Landlord may, in its
sole discretion, place such commercially reasonable conditions as Landlord deems
appropriate with respect to any such Hazardous Materials, and may further
require that Tenant demonstrate that any such Hazardous Materials are necessary
or useful to Tenant's business and will be generated, stored, used and disposed
of in a manner that complies with all applicable laws and regulations pertaining
thereto and with good business practices. Tenant understands that Landlord may
utilize an environmental consultant to assist in determining conditions of
approval in connection with the storage, generation, release, disposal or use of
Hazardous Materials by Tenant on or about the Premises, and/or to conduct
periodic inspections of the storage, generation, use, release and/or disposal of
such Hazardous Materials by Tenant on and from the Premises, and Tenant agrees
that any costs incurred by Landlord in connection therewith shall be reimbursed
by Tenant to Landlord as additional rent hereunder upon demand.
(c) Prior to the execution of this Lease, Tenant shall complete,
execute and deliver to Landlord an Environmental Questionnaire and Disclosure
Statement (the "Environmental Questionnaire") in the form of Exhibit B attached
---------
hereto. The completed Environmental Questionnaire shall be deemed incorporated
into this Lease for all purposes, and Landlord shall be entitled to rely fully
on the information contained therein. On each anniversary of the Commencement
Date until the expiration or sooner termination of this Lease, Tenant shall
disclose to Landlord in writing the names and amounts of all Hazardous Materials
which were stored, generated, used, released and/or disposed of on, under or
about the Premises for the twelve-month period prior thereto, and which Tenant
desires to store, generate, use, release and/or dispose of on, under or about
the Premises for the succeeding twelve-month period. In addition, to the extent
Tenant is permitted to utilize Hazardous Materials upon the Premises, Tenant
shall promptly provide Landlord with complete and legible copies of all the
following environmental documents relating thereto: reports filed pursuant to
any self-reporting requirements; permit applications, permits, monitoring
reports, workplace exposure and community exposure warnings or notices and all
other reports, disclosures, plans or documents (even those which may be
characterized as confidential) relating to water discharges, air pollution,
waste generation or disposal, and underground storage tanks for Hazardous
Materials; orders, reports, notices, listings and correspondence (even those
which may be considered confidential) of or concerning the release,
investigation of, compliance, cleanup, remedial and corrective actions, and
abatement of Hazardous Materials; and all complaints, pleadings and other legal
documents filed by or against Tenant related to Tenant's use, handling, storage,
release and/or disposal of Hazardous Materials.
(d) Landlord and its agents shall have the right, but not the
obligation, to inspect, sample and/or monitor the Premises and/or the soil or
groundwater thereunder at any time to determine whether
-9-
<PAGE>
Tenant is complying with the terms of this Section 5.3, and in connection
therewith Tenant shall provide Landlord with full access to all relevant
facilities, records and personnel. If Tenant is not in compliance with any of
the provisions of this Section 5.3, or in the event of a release of any
Hazardous Material on, under or about the Premises caused or permitted by
Tenant, its agents, employees, contractors, licensees or invitees, Landlord and
its agents shall have the right, but not the obligation, without limitation upon
any of Landlord's other rights and remedies under this Lease, to immediately
enter upon the Premises without notice and to discharge Tenant's obligations
under this Section 5.3 at Tenant's expense, including without limitation the
taking of emergency or long-term remedial action. Landlord and its agents shall
endeavor to minimize interference with Tenant's business in connection
therewith, but shall not be liable for any such interference. In addition,
Landlord, at Tenant's expense, shall have the right, but not the obligation, to
join and participate in any legal proceedings or actions initiated in connection
with any claims arising out of the storage, generation, use, release and/or
disposal by Tenant or its agents, employees, contractors, licensees or invitees
of Hazardous Materials on, under, from or about the Premises.
(e) If the presence of any Hazardous Materials on, under, from or
about the Premises or the Project caused or permitted by Tenant or its agents,
employees, contractors, licensees or invitees results in (i) injury to any
person, (d) injury to or any contamination of the Premises or the Project, or
(iii) injury to or contamination of any real or personal property wherever
situated, Tenant, at its expense, shall promptly take all actions necessary to
return the Premises and the Project and any other affected real or personal
property owned by Landlord to the condition existing prior to the introduction
of such Hazardous Materials and to remedy or repair any such injury or
contamination, including without limitation, any cleanup, remediation, removal,
disposal, neutralization or other treatment of any such Hazardous Materials.
Notwithstanding the foregoing, Tenant shall not, without Landlord's prior
written consent, take any remedial action in response to the presence of any
Hazardous Materials on, under or about the Premises or the Project or any other
affected real or personal property owned by Landlord or enter into any similar
agreement, consent, decree or other compromise with any governmental agency with
respect to any Hazardous Materials claims; provided however, Landlord's prior
written consent shall not be necessary in the event that the presence of
Hazardous Materials on, under or about the Premises or the Project or any other
affected real or personal property owned by Landlord (i) imposes an immediate
threat to the health, safety or welfare of any individual or (ii) is of such a
nature that an immediate remedial response is necessary and it is not possible
to obtain Landlord's consent before taking such action. To the fullest extent
permitted by law, Tenant shall indemnify, hold harmless, protect and defend
(with attorneys acceptable to Landlord) Landlord and any successors to all or
any portion of Landlord's interest in the Premises and the Project and any other
real or personal property owned by Landlord from and against any and all
liabilities, losses, damages, diminution in value, judgments, fines, demands,
claims, recoveries, deficiencies, costs and expenses (including without
limitation attorneys' fees, court costs and other professional expenses),
whether foreseeable or unforeseeable, arising directly or indirectly out of the
use, generation, storage, treatment, release, on- or off-site disposal or
transportation of Hazardous Materials on, into, from, under or about the
Premises, the Building and the Project and any other real or personal property
owned by Landlord caused or permitted by Tenant, its agents, employees,
contractors, licensees or invitees, specifically including without limitation
the cost of any required or necessary repair, restoration, cleanup or
detoxification of the Premises, the Building and the Project and any other real
or personal property owned by Landlord, and the preparation of any closure or
other required plans, whether or not such action is required or necessary during
the Term or after the expiration of this Lease. If Landlord at any time
discovers that Tenant or its agents, employees, contractors, licensees or
invitees may have caused or permitted the release of a Hazardous Material on,
under, from or about the Premises or the Project or any other real or personal
property owned by Landlord, Tenant shall, at Landlord's request, immediately
prepare and submit to Landlord a comprehensive plan, subject to Landlord's
approval, specifying the actions to be taken by Tenant to return the Premises or
the Project or any other real or personal property owned by Landlord to the
condition existing prior to the introduction of such Hazardous Materials. Upon
Landlord's approval of such cleanup plan, Tenant shall, at its expense, and
without limitation of any rights and remedies of Landlord under this Lease or at
law or in equity, immediately implement such plan and proceed to cleanup such
Hazardous Materials in accordance with all applicable laws and as required by
such plan and this Lease. The provisions of this subsection (e) shall expressly
survive the expiration or sooner termination of this Lease.
(f) Landlord hereby discloses to Tenant, and Tenant hereby
acknowledges, certain facts relating to Hazardous Materials at the Project known
by Landlord to exist as of the date of this Lease, as more particularly
described in Exhibit C attached hereto. Tenant shall have no liability or
---------
responsibility with respect to the Hazardous Materials facts described in
Exhibit C, nor with respect to any Hazardous Materials which were not caused or
- ---------
permitted by Tenant, its agents, employees, contractors, licensees or invitees.
Notwithstanding the preceding two sentences, Tenant agrees to notify its agents,
employees, contractors, licensees, and invitees of any exposure or potential
exposure to Hazardous Materials at the Premises that Landlord brings to Tenant's
attention.
-10-
<PAGE>
(g) To "Landlord's knowledge" (as hereinafter defined), except as
disclosed on Exhibit C attached hereto: (a) no Hazardous Material is present on
---------
the Project or the soil, surface water or groundwater thereof, (b) no
underground storage tanks are present on the Project, and (c) no action,
proceeding or claim is pending or threatened regarding the Project concerning
any Hazardous Material or pursuant to any environmental law. As used herein,
"Landlord's knowledge" shall mean the actual knowledge, as of the Commencement
Date of this Lease, of the current employees of Landlord charged with
responsibility for the environmental compliance of the Project with Hazardous
Materials laws, but without obligation whatsoever for on-or off-site inquiry,
investigation or inspection.
(h) Landlord shall take responsibility, at its sole cost and expense,
for any governmentally-ordered clean-up, remediation, removal, disposal,
neutralization, monitoring or other treatment of the Hazardous Materials
conditions disclosed on Exhibit C attached hereto, and in connection with other
---------
Hazardous Materials which were present in, on, under or about any part of the
Project as of the Commencement Date. The foregoing obligation on the part of
Landlord shall include the reasonable costs (including, without limitation,
reasonable attorney's fees) of defending Tenant (with attorneys reasonably
acceptable to Tenant) from and against any legal action or proceeding instituted
by any governmental agency in connection with such clean-up, remediation,
removal, disposal, neutralization or other treatment of such conditions,
provided that Tenant promptly tenders such defense to Landlord. The obligation
on the part of Landlord contained in this Section 5.3(h) is personal to The
Irvine Company and shall not be binding on, nor inure against any successor in
interest to The Irvine Company as of the owner of the Premises, including
without limitation, any lender acquiring the Premises by foreclosure of its
mortgage or deed of trust or deed in lieu of foreclosure. Subject to the
foregoing, and to the limitations contained elsewhere in this Lease, the
provisions of this subsection (h) shall expressly survive the expiration or
sooner termination of this Lease.
(i) The rights, obligations and duties of the parties contained in
this Section 5.3 shall supersede any contrary provisions contained in Sections
7.1, 7.2 and/or 10.3 of this Lease.
ARTICLE VI. COMMON AREAS; SERVICES
SECTION 6.1 UTILITIES AND SERVICES. Tenant shall pay promptly, directly to
the appropriate supplier, all charges for water, gas, electricity, sewer, heat,
light, power, telephone, refuse pickup, janitorial service, interior landscape
maintenance and all other utilities, materials and services furnished directly
to Tenant or the Premises or used by Tenant in, on or about the Premises during
the Term, together with any taxes thereon. If any utilities or services are not
separately metered or assessed to Tenant, Landlord shall make a reasonable
determination of Tenant's proportionate share of the cost of such utilities and
services and Tenant shall pay such amount to Landlord, as an item of additional
rent, within ten (10) days after receipt of Landlord's statement or invoice
therefor. Alternatively, Landlord may elect to include such cost in the
definition of Building Costs in which event Tenant shall pay Tenant's
proportionate share of such costs in the manner set forth in Section 4.2.
Landlord shall not be liable for damages or otherwise for any failure or
interruption of any utility or other service furnished to the Premises, and no
such failure or interruption shall be deemed an eviction or entitle Tenant to
terminate this Lease or withhold or abate any rent due hereunder. Landlord shall
at all reasonable times have free access to all electrical and mechanical
installations of Landlord, provided that Landlord shall interfere as little as
reasonably practicable with the conduct of Tenant's business in the Premises.
Notwithstanding the foregoing, if as a result of the actions of Landlord, its
authorized agents or employees, for more than three (3) consecutive business
days following written notice to Landlord there is no HVAC or electricity
services to all or a portion of the Premises, or such an interruption of other
essential utilities and building services, such as fire protection or water, so
that all or a portion of the Premises cannot be used by Tenant, then Tenant's
Basic Rent (or an equitable portion of such Basic Rent to the extent that less
than all of the Premises are affected) shall thereafter be abated until the
Premises are again usable by Tenant; provided, however, that if Landlord is
diligently pursuing the repair of such utilities or services and Landlord
provides substitute services reasonably suitable for Tenant's purposes, as for
example, bringing in portable air-conditioning equipment, then there shall not
be an abatement of Basic Rent. Any disputes concerning the foregoing shall be
submitted to and resolved by JAMS arbitration pursuant to Section 22.7 of this
Lease. The foregoing provisions shall not apply in case of damage to, or
destruction of the Premises, which shall be governed by the provisions of
Article XI of the Lease.
SECTION 6.2 OPERATION AND MAINTENANCE OF COMMON AREAS. During the Term,
Landlord shall operate all Common Areas within the Building and the Project. The
term "Common Areas" shall mean all areas within the exterior boundaries of the
Building and other buildings in the Project which are not held for exclusive use
by persons entitled to occupy space, and all other appurtenant areas and
improvements provided by Landlord for the common use of Landlord and tenants and
their respective employees and invitees, including without limitation parking
areas and structures, driveways, sidewalks, landscaped and planted areas,
hallways and interior stairwells not located within the premises of any tenant,
-11-
<PAGE>
common electrical rooms and roof access entries, common entrances and lobbies,
elevators, and restrooms not located within the premises of any tenant.
SECTION 6.3 USE OF COMMON AREAS. The occupancy by Tenant of the Premises
shall include the use of the Common Areas in common with Landlord and with all
others for whose convenience and use the Common Areas may be provided by
Landlord, subject, however, to compliance with all rules and regulations as are
prescribed from time to time by Landlord. Landlord shall operate and maintain
the Common Areas in the manner Landlord may determine to be appropriate as a
"first class" Project. All costs incurred by Landlord for the maintenance and
operation of the Common Areas shall be included in Project Costs unless any
particular cost incurred can be charged to a specific tenant of the Project.
Landlord shall at all times during the Term have exclusive control of the Common
Areas, and may restrain any use or occupancy, except as authorized by Landlord's
rules and regulations. Tenant shall keep the Common Areas clear of any
obstruction or unauthorized use related to Tenant's operations. Nothing in this
Lease shall be deemed to impose liability upon Landlord for any damage to or
loss of the property of, or for any injury to, Tenant, its invitees or
employees. Landlord may temporarily close any portion of the Common Areas for
repairs, remodeling and/or alterations, to prevent a public dedication or the
accrual of prescriptive rights, or for any other reason deemed reasonably
sufficient by Landlord, without liability to Landlord.
SECTION 6.4 PARKING. Tenant shall be entitled to the number of vehicle
parking spaces set forth in Item 14 of the Basic Lease Provisions, which spaces
shall be unreserved and unassigned, on those portions of the Common Areas
designated by Landlord for parking. Tenant shall not use more parking spaces
than such number. All parking spaces shall be used only for parking by vehicles
no larger than full size passenger automobiles, vans or pickup trucks. Tenant
shall not permit or allow any vehicles that belong to or are controlled by
Tenant or Tenant's employees, suppliers, shippers, customers or invitees to be
loaded, unloaded or parked in areas other than those designated by Landlord for
such activities. If Tenant permits or allows any of the prohibited activities
described above, then Landlord shall have the right, without notice, in addition
to such other rights and remedies that Landlord may have, to remove or tow away
the vehicle involved and charge the costs to Tenant. Parking within the Common
Areas shall be limited to striped parking stalls, and no parking shall be
permitted in any driveways, access ways or in any area which would prohibit or
impede the free flow of traffic within the Common Areas. There shall be no
overnight parking of any vehicles of any kind unless otherwise authorized by
Landlord, and vehicles which have been abandoned or parked in violation of the
terms hereof may be towed away at the owner's expense. Landlord shall have the
right to establish, and from time to time amend, and to enforce against all
users all reasonable rules and regulations (including the designation of areas
for employee parking) that Landlord may deem necessary and advisable for the
proper and efficient operation and maintenance of parking within the Common
Areas. Landlord shall have the right to construct, maintain and operate lighting
facilities within the parking areas; to change the area, level, location and
arrangement of the parking areas and improvements therein; to restrict parking
by tenants, their officers, agents and employees to employee parking areas; to
enforce parking charges (by operation of meters or otherwise); and to do and
perform such other acts in and to the parking areas and improvements therein as,
in the use of good business judgment, Landlord shall determine to be advisable.
Notwithstanding the foregoing, in no event shall Landlord enforce parking
charges (by operation of meters or otherwise): (i) during the initial 60-month
Term of this Lease, or (ii) during an extension of the Term if Tenant exercises
its right to extend the Term as provided in Section 3.3 of this Lease, unless
Landlord has expressly reserved the right to so enforce parking charges as part
of its "Landlord's Determination" (as provided in said Section 3.3). Any person
using the parking area shall observe all directional signs and arrows and any
posted speed limits. In no event shall Tenant interfere with the use and
enjoyment of the parking area by other tenants of the Building or their
employees or invitees. Parking areas shall be used only for parking vehicles.
Washing, waxing, cleaning or servicing of vehicles, or the storage of vehicles
for 24-hour periods, is prohibited unless otherwise authorized by Landlord.
Tenant shall be liable for any damage to the parking areas caused by Tenant or
Tenant's employees, suppliers, shippers, customers or invitees, including
without limitation damage from excess oil leakage. Tenant shall have no right to
install any fixtures, equipment or personal property in the parking areas.
SECTION 6.5 CHANGES AND ADDITIONS BY LANDLORD. Landlord reserves the
right to make alterations or additions to the Building or the Project, or to the
attendant fixtures, equipment and Common Areas. Landlord may at any time
relocate or remove any of the various buildings, parking areas, and other Common
Areas, and may add buildings and areas to the Project from time to time. No
change shall entitle Tenant to any abatement of rent or other claim against
Landlord, provided that the change does not deprive Tenant of reasonable access
to or use of the Premises. Notwithstanding anything to the contrary in this
Section 6.5, Landlord shall not make any modifications to or use of the Common
Areas if such modifications or use would unreasonably interfere with Tenant's
business operations on the Premises or materially increase the obligations or
materially decrease the rights of Tenant under the Lease. Landlord shall use its
reasonable diligence to minimize any disruption to Tenant's business operations
in connection with any such modifications to the Common Areas.
-12-
<PAGE>
ARTICLE VII. MAINTAINING THE PREMISES
SECTION 7.1 TENANT'S MAINTENANCE AND REPAIR. Except as expressly
otherwise provided in Sections 2.4, 5.1, 7.2 and in Articles XI and XII of this
Lease, Tenant at its sole expense shall make all repairs necessary to keep the
Premises in the condition as existed on the Commencement Date (or on any later
date that the improvements may have been installed), excepting ordinary wear and
tear, including without limitation all glass, windows, doors, door closures,
hardware, fixtures and fire extinguisher equipment. Any damage or deterioration
of the Premises shall not be deemed ordinary wear and tear if the same could
have been prevented by good maintenance practices by Tenant. As part of its
maintenance obligations hereunder, Tenant shall, at Landlord's request, provide
Landlord with copies of all maintenance schedules, reports and notices prepared
by, for or on behalf of Tenant. All repairs shall be at least equal in quality
to the original work, shall be made only by a licensed contractor approved in
writing in advance by Landlord. Any contractor utilized by Tenant shall be
subject to Landlord's reasonable requirements for contractors, as modified from
time to time. Landlord may impose reasonable restrictions and requirements with
respect to repairs, as provided in Section 7.3, and the provisions of Section
7.4 shall apply to all repairs. If Tenant fails to properly maintain and/or
repair the Premises as herein provided following Landlord's notice and the
expiration of the applicable cure period, then Landlord may elect to make any
repair or maintenance required hereunder on behalf of Tenant and at Tenant's
expense, and Tenant shall promptly reimburse Landlord for all reasonable costs
incurred within ten (10) days following submission of an invoice.
SECTION 7.2 LANDLORD'S MAINTENANCE AND REPAIR. Landlord shall provide
service, maintenance and repair with respect to any air conditioning,
ventilating or heating equipment which serve the Premises and shall maintain in
good repair the roof, foundations, footings, the exterior surfaces of the
exterior walls of the Building, and the structural, electrical, plumbing and
mechanical systems, except that Tenant at its expense shall make all repairs
which Landlord deems reasonably necessary as a result of the act or negligence
of Tenant, its agents, employees, invitees, subtenants or contractors. Landlord
shall have the right to employ or designate any reputable person or firm,
including any employee or agent of Landlord or any of Landlord's affiliates or
divisions, to perform any service, repair or maintenance function. Landlord need
not make any other improvements or repairs except as specifically required under
this Lease, and nothing contained in this Section shall limit Landlord's right
to reimbursement from Tenant for maintenance, repair costs and replacement costs
as provided elsewhere in this Lease. Except as expressly provided in Section 7.6
of this Lease, Tenant understands that it shall not make repairs at Landlord's
expense or by rental offset. Tenant further understands that Landlord shall not
be required to make any repairs to the roof, foundations, footings, structural,
electrical or mechanical systems unless and until Tenant has notified Landlord
in writing of the need for such repair and Landlord shall have a reasonable
period of time thereafter to commence and complete said repair, if warranted.
Subject to the provisions of Sections 2.4 and 4.2 of this Lease, all costs of
any maintenance and repairs on the part of Landlord provided hereunder shall be
considered part of Project Costs.
SECTION 7.3 ALTERATIONS. Tenant shall make no alterations, additions or
improvements to the Premises without the prior written consent of Landlord,
which consent may be given or withheld in Landlord's sole discretion.
Notwithstanding the foregoing, Landlord shall not unreasonably withhold its
consent to any alterations, additions or improvements to the Premises which cost
less than Three Hundred Thousand Dollars ($300,000.00), provided that such
alterations, additions or improvements do not (i) affect the exterior of the
Building or outside areas (or be visible from adjoining sites), or (ii) affect
or penetrate any of the structural portions of the Building, including but not
limited to the roof, or (iii) require any change to the basic floor plan of the
Premises, any change to any structural or mechanical systems of the Premises, or
any governmental permit as a prerequisite to the construction thereof, or (iv)
interfere in any manner with the proper functioning of or Landlord's access to
any mechanical, electrical, plumbing or HVAC systems, facilities or equipment
located in or serving the Building, or (v) diminish the value of the Premises.
Landlord may impose, as a condition to its consent, any requirements that
Landlord in its discretion may deem reasonable or desirable, including but not
limited to a requirement that any alteration project costing in excess of
Twenty-Five Thousand Dollars ($25,000.00) be covered by a lien and completion
bond satisfactory to Landlord, and requirements as to the manner, time, and
contractor for performance of the work. Tenant shall obtain all required permits
for the work and shall perform the work in compliance with all applicable laws,
regulations and ordinances, all covenants, conditions and restrictions affecting
the Project, and the Rules and Regulations (hereafter defined). Tenant
understands and agrees that Landlord shall be entitled to a supervision fee in
the amount of five percent (5%) of the cost of such work requiring a permit from
the City of Irvine. If any governmental entity requires, as a condition to any
proposed alterations, additions or improvements to the Premises by Tenant, that
improvements be made to the Common Areas, and if Landlord consents to such
improvements to the Common Areas, then Tenant shall, at Tenant's sole expense,
make such required improvements to the Common Areas in such manner, utilizing
such materials, and with such contractors (including, if required by Landlord,
Landlord's contractors) as Landlord may require in its reasonable discretion.
Under no circumstances shall Tenant make any improvement which incorporates any
Hazardous Materials, including without limitation asbestos-containing
construction materials into the
-13-
<PAGE>
Premises. Any request for Landlord's consent shall be made in writing and shall
contain architectural plans describing the work in detail reasonably
satisfactory to Landlord. Unless Landlord otherwise agrees in writing, all
alterations, additions or improvements affixed to the Premises (excluding trade
fixtures, personal property and furniture) shall become the property of Landlord
and shall be surrendered with the Premises at the end of the Term, except that
Landlord may, by notice to Tenant, require Tenant to remove by the Expiration
Date, or sooner termination date of this Lease, all or any alterations,
decorations, fixtures, additions and the like installed either by Tenant or by
Landlord at Tenant's request, and any "Non-Standard Improvements" installed by
Landlord pursuant to the Work Letter, and to repair any damage to the Premises
arising from that removal. Any notice to Tenant pursuant to the foregoing shall
be given by Landlord concurrently with its consent (following Tenant's request
for such consent) for all or any alterations, decorations, fixtures or additions
and the like, and concurrently with Landlord's consent (following Tenant's
request for such consent) for any Non-Standard Improvements installed by
Landlord pursuant to the Work Letter. If such consent for such alterations,
decorations, fixtures, additions or Non-Standard Improvements is either not
requested by Tenant or given by Landlord, then any such notice of removal may be
given at any time prior to sixty (60) days following the expiration or earlier
termination of the Term of this Lease. Except as otherwise provided in this
Lease or in any Exhibit to this Lease, should Landlord make any alteration or
improvement to the Premises for Tenant, Landlord shall be entitled to prompt
reimbursement from Tenant for all costs incurred.
SECTION 7.4 MECHANIC'S LIENS. Tenant shall keep the Premises free from
any liens arising out of any work performed, materials furnished, or obligations
incurred by or for Tenant. Upon request by Landlord, Tenant shall promptly cause
any such lien to be released by posting a bond in accordance with California
Civil Code Section 3143 or any successor statute. In the event that Tenant shall
not, within thirty (30) days following the imposition of any lien, cause the
lien to be released of record by payment or posting of a proper bond, Landlord
shall have, in addition to all other available remedies, the right to cause the
lien to be released by any means it deems proper, including payment of or
defense against the claim giving rise to the lien. All expenses so incurred by
Landlord, including Landlord's attorneys' fees, and any consequential or other
damages incurred by Landlord arising out of such lien, shall be reimbursed by
Tenant promptly following Landlord's demand, together with interest from the
date of payment by Landlord at the maximum rate permitted by law until paid.
Tenant shall give Landlord no less than twenty (20) days' prior notice in
writing before commencing construction of any kind on the Premises so that
Landlord may post and maintain notices of nonresponsibility on the Premises.
SECTION 7.5 ENTRY AND INSPECTION. Subject to Tenant's reasonable security
requirements, Landlord shall at all reasonable times, upon at least twenty-four
(24) hours' written or oral notice (except in emergencies, when no notice shall
be required) have the right to enter the Premises to inspect them, to supply
services in accordance with this Lease, to protect the interests of Landlord in
the Premises, and to submit the Premises to prospective or actual purchasers or
encumbrance holders (or, during the last one hundred and eighty (180) days of
the Term or when a Default exists, to prospective tenants), all without being
deemed to have caused an eviction of Tenant and without abatement of rent except
as provided elsewhere in this Lease. Landlord shall have the right, if desired,
to retain a key which unlocks all of the doors in the Premises, excluding
Tenant's vaults and safes, and Landlord shall have the right to use any and all
means which Landlord may deem proper to open the doors in an emergency in order
to obtain entry to the Premises, and any entry to the Premises obtained by
Landlord shall not under any circumstances be deemed to be a forcible or
unlawful entry into, or a detainer of, the Premises, or any eviction of Tenant
from the Premises.
SECTION 7.6 TENANT'S SELF-HELP. Notwithstanding anything to the contrary
contained in Section 7.2 of this Lease, if Landlord shall fail to perform any
repair obligations required under this Article VII within thirty (30) days
following Tenant's written request for such repairs, or if Landlord shall fail
to perform any repairs required under this Lease of an emergency condition
within 48 hours' written notice from Tenant, then Tenant may elect to make such
repairs at Landlord's expense by complying with the following provisions of this
Section 7.6. Before making any such repair, Tenant shall deliver to Landlord a
notice for the need for such repair ("Self-Help Notice"), which notice shall
specifically advise Landlord that Tenant intends to exercise its self-help right
hereunder. Should Landlord fail, within ten (10) days following receipt of the
Self-Help Notice (or within 48 hours following notice in the event of necessary
emergency repairs), to commence the necessary repair or to make other
arrangements reasonably satisfactory to Tenant, then Tenant shall have the right
to make such repair on behalf of Landlord. Landlord shall promptly reimburse
Tenant for the reasonable costs of such repairs, but in no event shall Tenant
have the right to offset rent against such costs. In the event that the work
could affect the Building's structural, mechanical, electrical, heating,
ventilating, air conditioning, life safety or plumbing components or systems,
then Tenant shall use only those contractors used by Landlord in the Project for
such work. The foregoing requirement shall not apply in cases of emergency if
Tenant is unable to obtain such contractors for emergency repair work. If those
contractors are unwilling or unable to perform the work, Tenant may retain the
services of qualified, reputable and licensed, bondable contractors with like
experience in similar building systems. Tenant shall be responsible
-14-
<PAGE>
for obtaining any necessary governmental permits before commencing the repair
work, and Tenant shall assume the risk of any damage, loss or injury resulting
from such work.
ARTICLE VIII. TAXES AND ASSESSMENTS ON TENANT'S PROPERTY
Tenant shall be liable for and shall pay, at least ten (10) days before
delinquency, all taxes and assessments levied against all personal property of
Tenant located in the Premises, against all improvements to the Premises made by
Landlord or Tenant which are above Landlord's Project standard in quality and/or
quantity for comparable space within the Project ("Above Standard
Improvements"), and against any alterations, additions or like improvements made
to the Premises by or on behalf of Tenant. When possible Tenant shall cause its
personal property, Above Standard Improvements and alterations to be assessed
and billed separately from the real property of which the Premises form a part.
If any taxes on Tenant's personal property, Above Standard Improvements and/or
alterations are levied against Landlord or Landlord's property and if Landlord
pays the same, or if the assessed value of Landlord's property is increased by
the inclusion of a value placed upon the personal property, Above Standard
Improvements and/or alterations of Tenant and if Landlord pays the taxes based
upon the increased assessment, Tenant shall pay to Landlord the taxes so levied
against Landlord or the proportion of the taxes resulting from the increase in
the assessment. In calculating what portion of any tax bill which is assessed
against Landlord separately, or Landlord and Tenant jointly, is attributable to
Tenant's Above Standard Improvements, alterations and personal property,
Landlord's reasonable determination shall be conclusive.
ARTICLE IX. ASSIGNMENT AND SUBLETTING
SECTION 9.1 RIGHTS OF PARTIES.
(a) Notwithstanding any provision of this Lease to the contrary,
Tenant will not, either voluntarily or by operation of law, assign, sublet,
encumber, or otherwise transfer all or any part of Tenant's interest in this
lease, or permit the Premises to be occupied by anyone other than Tenant,
without Landlord's prior written consent, which consent shall not unreasonably
be withheld in accordance with the provisions of Section 9.1(b). No assignment
(whether voluntary, involuntary or by operation of law) and no subletting shall
be valid or effective without Landlord's prior written consent and, at
Landlord's election, any such assignment or subletting shall constitute a
material Default of this Lease. Landlord shall not be deemed to have given its
consent to any assignment or subletting by any other course of action, including
its acceptance of any name for listing in the Building directory. To the extent
not prohibited by provisions of the Bankruptcy Code, 11 U.S.C. Section 101 et
seq. (the "Bankruptcy Code"), including Section 365(f)(1), Tenant on behalf of
itself and its creditors, administrators and assigns waives the applicability of
Section 365(e) of the Bankruptcy Code unless the proposed assignee of the
Trustee for the estate of the bankrupt meets Landlord's standard for consent as
set forth in Section 9.1(b) of this Lease. If this Lease is assigned to any
person or entity pursuant to the provisions of the Bankruptcy Code, any and all
monies or other considerations to be delivered in connection with the assignment
shall be delivered to Landlord, shall be and remain the exclusive property of
Landlord and shall not constitute property of Tenant or of the estate of Tenant
within the meaning of the Bankruptcy Code. Any person or entity to which this
Lease is assigned pursuant to the provisions of the Bankruptcy Code shall be
deemed to have assumed all of the obligations arising under this Lease on and
after the date of the assignment, and shall upon demand execute and deliver to
Landlord an instrument confirming that assumption.
(b) If Tenant desires to transfer an interest in this Lease, it shall
first notify Landlord of its desire and shall submit in writing to Landlord: (i)
the name and address of the proposed transferee; (ii) the nature of any proposed
subtenant's or assignee's business to be carried on in the Premises; (iii) the
terms and provisions of any proposed sublease or assignment, including a copy of
the proposed assignment or sublease form; (iv) evidence of insurance of the
proposed assignee or subtenant complying with the requirements of Exhibit D
---------
hereto; (v) a completed Environmental Questionnaire from the proposed assignee
or subtenant; and (vi) any other information requested by Landlord and
reasonably related to the transfer. Except as provided in Subsection (c) of this
Section, Landlord shall not unreasonably withhold its consent, provided: (1) the
use of the Premises will be consistent with the provisions of this Lease and
with Landlord's commitment to other tenants of the Building and Project; (2) the
proposed assignee or subtenant has not been required by any prior landlord,
lender or governmental authority to take remedial action in connection with
Hazardous Materials contaminating a property arising out of the proposed
assignee's or subtenant's actions or use of the property in question and is not
subject to any enforcement order issued by any governmental authority in
connection with the use, disposal or storage of a Hazardous Material; (3) at
Landlord's election, insurance requirements shall be brought into conformity
with Landlord's then current leasing practice; (4) any proposed subtenant or
assignee demonstrates that it is financially responsible by submission to
Landlord of all reasonable information as Landlord may request concerning the
proposed subtenant or assignee, including, but not limited to, a balance sheet
of the proposed subtenant or assignee as of a date within ninety (90) days of
the
-15-
<PAGE>
request for Landlord's consent, statements of income or profit and loss of the
proposed subtenant or assignee for the two-year period preceding the request for
Landlord's consent, and/or a certification signed by the proposed subtenant or
assignee that it has not been evicted or been in arrears in rent at any other
leased premises for the 3-year period preceding the request for Landlord's
consent; (5) any proposed subtenant or assignee demonstrates to Landlord's
reasonable satisfaction a record of successful experience in business; (6) the
proposed assignee or subtenant is not an existing tenant of the Building or
Project or a prospect with whom Landlord is negotiating to become a tenant at
the Building or Project; and (7) the proposed transfer will not impose
additional burdens or adverse tax effects on Landlord. If Tenant has any
exterior sign rights under this Lease, such rights are personal to Tenant and
may not be assigned or transferred to any assignee of this Lease or subtenant of
the Premises without Landlord's prior written consent which may be withheld in
Landlord's reasonable discretion, provided that such signage complies with the
provisions of Section 5.2 of this Lease, and provided that Landlord's sole and
absolute discretion shall apply to the assignee's or sublessee's name on said
signage.
If Landlord consents to the proposed transfer, Tenant may within
ninety (90) days after the date of the consent effect the transfer upon the
terms described in the information furnished to Landlord; provided that any
material change in the terms shall be subject to Landlord's consent as set forth
in this Section. Landlord shall approve or disapprove any requested transfer
within thirty (30) days following receipt of Tenant's written request, the
information set forth above, and the fee set forth below.
(c) Notwithstanding the provisions of Subsection (b) above, in the
event that Tenant shall determine to assign this Lease, or to sublease more than
thirty-three and thirty-three hundredths percent (33.33%) of the floor area of
the Premises in the aggregate, to any entity other than a Tenant Affiliate, then
Tenant shall give written notice of the basic economic terms upon which Tenant
purposes to so assign or sublet the Premises, including, without limitation, the
proposed consideration payable for such assignment or subrent payable under such
sublease, the proposed sublease term, and the amount of any improvement
allowances proposed by Tenant for such assignment or subletting (collectively,
the "Economic Terms"). Within thirty (30) days after the date of such notice,
Landlord shall elect whether or not to terminate this Lease in its entirety if
an assignment is proposed, or to terminate this Lease as to the portion of the
Premises proposed to be subleased with an abatement in the rent payable under
this Lease proportionate to the floor area proposed for sublease to the entire
floor area of the Premises. Any such termination shall be effective on that date
which is sixty (60) days following Landlord's notice of its election to so
terminate. Landlord's failure to so elect within said thirty (30) days shall
constitute Landlord's election not to so terminate. In the event of any such
termination, Landlord may thereafter, at its option, assign or re-let any space
so recaptured to any third party, including without limitation, any party with
whom Tenant is then negotiating to assign or sublet the Lease, and Tenant shall
surrender the Premises (or the portion of the Premises recaptured) to Landlord
as provided in Section 15.3 as of the effective date of such termination. In the
event that Landlord shall elect not to terminate the Lease as provided in the
foregoing, then Tenant may assign the Lease, or sublet that portion of the
Premises set forth in its notice to Landlord, as applicable, upon Economic Terms
which are not more favorable to the assignee or sublessee than those Economic
Terms offered to Landlord. In the event that Tenant shall not enter into a
binding assignment agreement or sublease agreement with an assignee or
subtenant, as applicable, which shall be effective within one hundred eighty
(180) days following the original offer notice to Landlord, then Tenant shall
repeat the procedures set forth in this Subsection 9.1(c).
(d) Tenant agrees that fifty percent (50%) of any amounts paid by the
assignee or subtenant, however described, in excess of (i) the Basic Rent
payable by Tenant hereunder, or in the case of a sublease of a portion of the
Premises, in excess of the Basic Rent reasonably allocable to such portion, plus
(ii) Tenant's direct out-of-pocket costs which Tenant certifies to Landlord have
been paid to provide occupancy related services to such assignee or subtenant of
a nature commonly provided by landlords of similar space, plus (iii) Tenant's
other reasonable out-of-pocket costs in connection with such assignment or
sublease including, without limitation, reasonable attorneys' fees, brokerage
fees and (subject to the provisions of Section 7.3 of this Lease) the
unamortized portion of improvements made to the Premises at the expense of
Tenant in connection with such assignment or sublease, shall be the property of
Landlord and such amounts shall be payable directly to Landlord by the assignee
or subtenant or, at Landlord's option, by Tenant. At Landlord's request, a
written agreement shall be entered into by and among Tenant, Landlord and the
proposed assignee or subtenant confirming the requirements of this subsection.
(e) Tenant shall pay to Landlord a fee of Five Hundred Dollars
($500.00) if and when any transfer hereunder is requested by Tenant. Such fee is
hereby acknowledged as a reasonable amount to reimburse Landlord for its costs
of review and evaluation of a proposed assignee/sublessee, and Landlord shall
not be obligated to commence such review and evaluation unless and until such
fee is paid.
SECTION 9.2 EFFECT OF TRANSFER. No subletting or assignment, even with
the consent of Landlord, shall relieve Tenant of its obligation to pay rent and
to perform all its other obligations under this Lease. Moreover, Tenant shall
indemnify and hold Landlord harmless, as provided in Section 10.3, for any
-16-
<PAGE>
act or omission by an assignee or subtenant as provided in said Section 10.3.
Each assignee, other than Landlord, shall be deemed to assume all obligations of
Tenant under this Lease and shall be liable jointly and severally with Tenant
for the payment of all rent, and for the due performance of all of Tenant's
obligations, under this Lease. No transfer shall be binding on Landlord unless
any document memorializing the transfer is delivered to Landlord and both the
assignee/subtenant and Tenant deliver to Landlord an executed consent to
transfer instrument prepared by Landlord and consistent with the requirements of
this Article. The acceptance by Landlord of any payment due under this Lease
from any other person shall not be deemed to be a waiver by Landlord of any
provision of this Lease or to be a consent to any transfer. Consent by Landlord
to one or more transfers shall not operate as a waiver or estoppel to the future
enforcement by Landlord of its rights under this Lease.
SECTION 9.3 SUBLEASE REQUIREMENTS. The following terms and conditions
shall apply to any subletting by Tenant of all or any part of the Premises and
shall be deemed included in each sublease:
(a) Any such subtenant's interest shall be subject to the terms and
provisions of this Lease.
(b) Tenant hereby irrevocably assigns to Landlord all of Tenant's
interest in all rentals and income arising from any sublease of the Premises,
and Landlord may collect such rent and income and apply same toward Tenant's
obligations under this Lease; provided, however, that until a Default occurs in
the performance of Tenant's obligations under this Lease, Tenant shall have the
right to receive and collect the sublease rentals. Landlord shall not, by reason
of this assignment or the collection of sublease rentals, be deemed liable to
the subtenant for the performance of any of Tenant's obligations under the
sublease. Tenant hereby irrevocably authorizes and directs any subtenant, upon
receipt of a written notice from Landlord stating that a Default exists in the
performance of Tenant's obligations under this Lease, to pay to Landlord all
sums then and thereafter due under the sublease. Tenant agrees that the
subtenant may rely on that notice without any duty of further inquiry and
notwithstanding any notice or claim by Tenant to the contrary. Tenant shall have
no right or claim against the subtenant or Landlord for any rentals so paid to
Landlord.
(c) In the event of the termination of this Lease, Landlord may, at
its sole option, take over Tenant's entire interest in any sublease and, upon
notice from Landlord, the subtenant shall attorn to Landlord. In no event,
however, shall Landlord be liable for any previous act or omission by Tenant
under the sublease or for the return of any advance rental payments or deposits
under the sublease that have not been actually delivered to Landlord, nor shall
Landlord be bound by any sublease modification executed without Landlord's
consent or for any advance rental payment by the subtenant in excess of one
month's rent. The general provisions of this Lease, including without limitation
those pertaining to insurance and indemnification, shall be deemed incorporated
by reference into the sublease despite the termination of this Lease.
SECTION 9.4 CERTAIN TRANSFERS. Notwithstanding anything to the contrary
contained in this Article IX, Landlord's consent shall not be required for the
assignment of this Lease, or to a subletting of the Premises, to (a) a
subsidiary, affiliate, division or corporation controlling, controlled by or
under common control with Tenant, (b) a successor corporation to Tenant by
merger, consolidation, nonbankruptcy reorganization, or government action, (c) a
purchaser of substantially all of Tenant's assets located in the Premises, or
(d) either of the Guarantors of this Lease (collectively, a "Tenant Affiliate"
herein), so long as (i) the net worth of the successor entity after any such
merger, consolidation, reorganization, action or assignment, is at least equal
to the net worth of Tenant immediately prior to the date of such merger,
consolidation, reorganization, action or assignment, evidence of which,
satisfactory to Landlord, shall be presented to Landlord prior thereto, (ii)
Tenant shall provide to Landlord, prior to such merger, consolidation,
reorganization, action or assignment, written notice thereof and such assignment
documentation and other information as Landlord may reasonably request in
connection therewith, and (iii) all of the other terms and requirements of this
Article shall apply with respect to such merger, consolidation, reorganization,
action or assignment, except for the terms and requirements of Section 9.1 which
shall not apply thereto.
ARTICLE X. INSURANCE AND INDEMNITY
SECTION 10.1 TENANT'S INSURANCE. Tenant, at its sole cost and expense,
shall provide and maintain in effect the insurance described in Exhibit D.
---------
Evidence of that insurance must be delivered to Landlord prior to the
Commencement Date.
SECTION 10.2 LANDLORD'S INSURANCE. Landlord shall provide the following
types of insurance, with or without deductible and in amounts and coverages as
may be determined by Landlord in its discretion: "all risk" property insurance,
subject to standard exclusions (such as, but not limited to, earthquake and
flood exclusions), covering the full replacement cost of the Building, the
Tenant Improvements and the
-17-
<PAGE>
Common Areas (the "All-Risk Policy"). In addition, Landlord may, at its
election, obtain insurance for such other risks as Landlord or its mortgagees
may from time to time deem appropriate, including without limitation, coverage
for earthquake, flood and commercial general liability. Landlord shall not be
required to carry insurance of any kind on Tenant's property, including
leasehold improvements, trade fixtures, furnishings, equipment, plate glass,
signs and all other items of personal property, and shall not be obligated to
repair or replace that property should damage occur. All proceeds of insurance
maintained by Landlord upon the Building and Project shall be the property of
Landlord, whether or not Landlord is obligated to or elects to make any repairs.
At Landlord's option, Landlord may self-insure all or any portion of the risks
for which Landlord elects or is required to provide insurance hereunder.
SECTION 10.3 JOINT INDEMNITY.
(a) Tenant's Indemnity. To the fullest extent permitted by law,
------------------
Tenant shall defend (with attorneys reasonably acceptable to Landlord),
indemnify, protect, save and hold harmless Landlord, its agents, and any and all
affiliates of Landlord, including, without limitation, any corporations or other
entities controlling, controlled by or under common control with Landlord, from
and against any and all claims, liabilities, costs or expenses arising from
Tenant's use or occupancy of the Premises or the Building, or from the conduct
of its business, or from any activity, work, or thing done, permitted or
suffered by Tenant or its agents, employees, invitees or licensees in or about
the Premises or the Building, or from any Default in the performance of any
obligation on Tenant's part to be performed under this Lease, or from any act or
negligence of Tenant or its agents, employees, visitors, patrons, guests,
invitees or licensees; provided Tenant shall have no obligation to indemnify,
save or hold harmless Landlord for any claims, liabilities, costs or expenses to
the extent the same is caused by the negligence or willful misconduct on the
part of Landlord, or its authorized agents, contractors or employees, or for
which Tenant is otherwise indemnified hereunder. In cases of alleged negligence
asserted by third parties against Landlord which arise out of, are occasioned
by, or in any way attributable to Tenant's, its agents, employees, contractors,
licensees or invitees use and occupancy of the Premises or the Building, or from
the conduct of its business or from any activity, work or thing done, permitted
or suffered by Tenant or its agents, employees, invitees or licensees on
Tenant's part to be performed under this Lease, or from any act of negligence of
Tenant, its agents, employees, licensees or invitees, Tenant shall accept any
tender of defense for Landlord and shall, notwithstanding any allegation of
negligence or willful misconduct on the part of the Landlord, defend Landlord
and protect and hold Landlord harmless and pay all costs expenses and attorneys'
fees incurred in connection with such litigation, provided that Tenant shall not
be liable for any such injury or damage, and Landlord shall reimburse Tenant for
the reasonable attorney's fees and costs for the attorney representing both
parties, all to the extent and in the proportion that such injury or damage is
ultimately determined by a court of competent jurisdiction (or in connection
with any negotiated settlement agreed to by Landlord) to be attributable to the
negligence or willful misconduct of Landlord. Upon Landlord's request, Tenant
shall at Tenant's sole cost and expense, retain a separate attorney selected by
Landlord to represent Landlord in any such suit if Landlord determines that the
representation of both Tenant and Landlord by the same attorney would cause a
conflict of interest; provided, however, that to the extent and in the
proportion that the injury or damage which is the subject of the suit is
ultimately determined by a court of competent jurisdiction (or in connection
with any negotiated settlement agreed to by Landlord) to be attributable to the
negligence or willful misconduct of Landlord, Landlord shall reimburse Tenant
for the reasonable legal fees and costs of the separate attorney retained by
Tenant. The provisions of this Subsection 10.3(a) shall expressly survive the
expiration or sooner termination of this Lease.
(b) Landlord's Indemnity. To the fullest extent permitted by law, but
--------------------
subject to the express limitations on liability contained in this Lease
(including, without limitation, the provisions of Sections 10.4, 10.5 and 14.8
of this Lease), Landlord shall defend (with attorneys reasonably acceptable to
Tenant), indemnify, protect, save and hold harmless Tenant, its agents and any
and all affiliates of Tenant, including, without limitation, any corporations,
or other entities controlling, controlled by or under common control with
Tenant, from and against any and all claims, liabilities, costs or expenses
arising from the maintenance or repair of the Common Areas, the Project and/or
the Building by Landlord or its employees, authorized agents or contractors;
provided that Landlord shall have no obligation to indemnify, save or hold
harmless Tenant for any claims, liabilities, costs or expenses to the extent the
same is caused by the negligence or willful misconduct on the part of Tenant, or
its agents, employees, licensees or invitees, or for which Landlord is otherwise
indemnified hereunder. In cases of alleged negligence asserted by third parties
against Tenant which arise out of, are occasioned by, or in any way attributable
to the maintenance or repair of the Common Areas, the Project or the Building by
Landlord or its contractors, authorized agents or employees, Landlord shall
accept any tender defense for Tenant and shall, notwithstanding any allegation
of negligence or willful misconduct on the part of Tenant, defend Tenant and
protect and hold Tenant harmless and pay all cost, expense and attorneys' fees
incurred in connection with such litigation, provided that Landlord shall not be
liable for any such injury or damage, and Tenant shall reimburse Landlord for
the reasonable attorney's fees and costs for the attorney representing both
parties, all to the extent and in the proportion that such injury or damage is
ultimately determined by a court of competent jurisdiction (or in
-18-
<PAGE>
connection with any negotiated settlement agreed to by Tenant) to be
attributable to the negligence or willful misconduct of Tenant. Upon Tenant's
request, Landlord shall at Landlord's sole cost and expense, retain a separate
attorney selected by Tenant to represent Tenant in any such suit if Tenant
determines that the representation of both Tenant and Landlord by the same
attorney would cause conflict of interest; provided, however, that to the extent
and the proportion that the injury or damage which is the subject of the suit is
ultimately determined by a court of competent jurisdiction (or in connection
with any negotiated settlement agreed to by Tenant) to be attributable to the
negligence or willful misconduct of Tenant, Tenant shall reimburse Landlord for
the reasonable legal fees and costs of the separate attorney retained by
Landlord. The provisions of this Subsection 10.3(b) shall expressly survive the
expiration or sooner termination of this Lease.
SECTION 10.4 LANDLORD'S NONLIABILITY. Except as expressly provided by the
indemnity obligations contained in Section 10.3(b) of this Lease, Landlord shall
not be liable to Tenant, its employees, agents and invitees, and Tenant hereby
waives all claims against Landlord, for loss of or damage to any property, or
any injury to any person, or any other loss, cost, damage, injury or liability
whatsoever resulting from fire, explosion, failing plaster, steam, gas,
electricity, water or rain which may leak or flow from or into any part of the
Building or from the breakage, leakage, obstruction or other defects of the
pipes, sprinklers, wires, appliances, plumbing, air conditioning, electrical
works or other fixtures in the Building, whether the damage or injury results
from conditions arising in the Premises or in other portions of the Project.
Notwithstanding any provision of this Lease to the contrary, including, without
limitation, the provisions of Section 10.3(b) of this Lease, Landlord shall in
no event be liable to Tenant, its employees, agents, and invitees, and Tenant
hereby waives all claims against Landlord, for loss or interruption of Tenant's
business or income (including, without limitation, any consequential damages and
lost profit or opportunity costs), or any other loss, cost, damage, injury or
liability resulting from, but not limited to, Acts of God, acts of civil
disobedience or insurrection, acts of omissions (criminal or otherwise) of any
third parties, including without limitation, any other tenants within the
Project or their agents, employees, contractors, guests or invitees. It is
understood that any such condition may require the temporary evacuation or
closure of all or a portion of the Building. Except as expressly provided in
this Lease, there shall be no abatement of rent and no liability of Landlord
by reason of any injury to or interference with Tenant's business (including
without limitation consequential damages and lost profit or opportunity costs)
arising from the making of any repairs, alterations or improvements to any
portion of the Building, including repairs to the premises, nor shall any
related activity by Landlord constitute an actual or constructive eviction,
provided, however, that in making repairs, alterations or improvements,
Landlord shall interfere as little as reasonably practicable with the conduct
of Tenant's business in the Premises. Neither Landlord nor its agents shall be
liable for interference with light or other similar intangible interests.
Tenant shall immediately notify Landlord in case of fire or accident in the
Premises, the Building or the Project and of defects in any improvements or
equipment.
SECTION 10.5 WAIVER OF SUBROGATION. Notwithstanding anything to the
contrary contained in this Lease, Landlord and Tenant each hereby waives all
rights of recovery against the other and the other's agents on account of loss
and damage occasioned to the property of such waiving party to the extent only
that such loss or damage is required to be insured against under any "all risk"
property insurance policies required by this Article X (including, without
limitation, the All-Risk Policy carried by Landlord, whether or not Landlord
chooses to self-insure such coverage); provided however, that the foregoing
waiver shall not apply to the extent of Tenant's obligations to pay deductibles
under any such policies and this Lease. By this waiver it is the intent of the
parties that neither Landlord nor Tenant shall be liable to any insurance
company (by way of subrogation or otherwise) insuring the other party for any
loss or damage insured against under any "all-risk" property insurance policies
required by this Article, even though such loss or damage might be occasioned by
the negligence of such party, its agents, employees, contractors, guests or
invitees. All of the parties' repair and maintenance and indemnity obligations
under this Lease shall be subject to the waiver of subrogation contained in this
Section 10.5. The parties hereto shall cause each property insurance policy it
obtains to include a waiver of subrogation regarding the liabilities released
hereby.
ARTICLE XI. DAMAGE OR DESTRUCTION
SECTION 11.1 RESTORATION.
(a) If the Building of which the Premises are a part is damaged,
Landlord shall repair that damage as soon as reasonably possible, at its
expense, unless: (i) Landlord reasonably determines that the cost of repair is
greater than Fifty Thousand Dollars ($50,000.00) and is not covered by
Landlord's All-Risk Policy (whether or not Landlord chooses to self-insure such
coverage) or by Landlord's other insurance coverages, plus such additional
amounts Tenant elects, at its option, to contribute, excluding however the
deductible (for which Tenant shall be responsible for Tenant's Share); (ii)
Landlord reasonably determines that the Premises cannot, with reasonable
diligence, be fully repaired by Landlord (or cannot be safely
-19-
<PAGE>
repaired because of the presence of hazardous factors, including without
limitation Hazardous Materials, earthquake faults, and other similar dangers)
within two hundred seventy (270) days after the date of the damage; (iii) a
Default by Tenant has occurred at the time of such damage; or (iv) the damage
costs more than Fifty Thousand Dollars ($50,000.00) to repair and occurs during
the final nine (9) months of the Term (unless Tenant has validly exercised its
option to extend the Term contained in Section 3.3 of this Lease). Should
Landlord elect not to repair the damage for one of the preceding reasons,
Landlord shall so notify Tenant in writing within sixty (60) days after the
damage occurs and this Lease shall terminate as of the date of that notice.
Tenant's responsibility for the reimbursement of deductibles contained in this
Lease shall be subject to the following limitations: (A) Tenant shall have no
responsibility for so-called "co-insurance" requirements for any deficiencies in
Landlord's All-Risk Policy coverage; and (B) in no event shall Tenant's
obligation for payment or reimbursement of any deductible exceed the amount of
One Hundred Thousand Dollars ($100,000.00) for any single casualty. Further, in
the event that Landlord terminates this Lease pursuant to this Section 11.1(a),
Tenant shall have no responsibility for reimbursement of any deductible.
(b) Unless Landlord elects to terminate this Lease in accordance with
subsection (a) above, this Lease shall continue in effect for the remainder of
the Term; provided that so long as Tenant is not in Default under this Lease, if
the damage is so extensive that Landlord reasonably determines that the Premises
cannot, with reasonable diligence, be repaired by Landlord (or cannot be safely
repaired because of the presence of hazardous factors, earthquake faults, and
other similar dangers) so as to allow Tenant's substantial use and enjoyment of
the Premises, or are not in fact repaired by Landlord, within two hundred
seventy (270) days after the date of damage, then Tenant may elect to terminate
this Lease by written notice to Landlord either within the sixty (60) day period
stated in subsection (a), or within sixty (60) days following Landlord's failure
to so repair the Premises within two hundred seventy (270) days after the date
of damage.
(c) Commencing on the date of any damage to the Building, and ending
on the sooner of the date the damage is repaired or the date this Lease is
terminated, the rental to be paid under this Lease shall be abated in the same
proportion that the floor area of the Premises that is rendered unusable by the
damage from time to time bears to the total floor area of the Premises, provided
that Tenant is then carrying the business interruption insurance required in
Exhibit D.
- ---------
(d) The provisions of this Section 11.1 shall not be deemed to
require Landlord to repair any improvements or fixtures that Tenant is obligated
to repair or insure pursuant to any other provision of this Lease.
(e) Tenant shall fully cooperate with Landlord in removing Tenant's
personal property and any debris from the Premises to facilitate all inspections
of the Premises and the making of any repairs. Notwithstanding anything to the
contrary contained in this Lease, if Landlord in good faith believes there is a
risk of injury to persons or damage to property from entry into the Building or
Premises following any damage or destruction thereto, Landlord may restrict
entry into the Building or the Premises by Tenant, its employees, agents and
contractors in a non-discriminatory manner, without being deemed to have
violated Tenant's rights of quiet enjoyment to, or made an unlawful detainer of,
or evicted Tenant from, the Premises. Upon request, Landlord shall consult with
Tenant to determine if there are safe methods of entry into the Building or the
Premises solely in order to allow Tenant to retrieve files, data in computers,
and necessary inventory, subject however to all indemnities and waivers of
liability from Tenant to Landlord contained in this Lease and any additional
indemnities and waivers of liability which Landlord may reasonably require.
SECTION 11.2 LEASE GOVERNS. Tenant agrees that the provisions of this
Lease, including without limitation Section 11.1, shall govern any damage or
destruction and shall accordingly supersede any contrary statute or rule of law.
ARTICLE XII. EMINENT DOMAIN
SECTION 12.1 TOTAL OR PARTIAL TAKING. If all or a material portion of the
Premises is taken by any lawful authority by exercise of the right of eminent
domain, or sold to prevent a taking, either Tenant or Landlord may terminate
this Lease effective as of the date possession is required to be surrendered to
the authority. In the event either: (i) title to a portion of the Building or
Project, other than the Premises, is taken or sold in lieu of taking, and if
Landlord elects to restore the Building in such a way as to alter the Premises
materially, or (ii) Landlord fails to restore the Building within two hundred
seventy (270) days following the effective date of such taking, then Tenant may
terminate this Lease, by written notice to Landlord given within thirty (30)
days thereafter, effective on the date of vesting of title. In the event neither
party has elected to terminate this Lease as provided above, then Landlord shall
promptly, after receipt of a sufficient condemnation award, proceed to restore
the Premises to substantially their condition prior to the taking, and a
proportionate allowance shall be made to Tenant for the rent corresponding to
the time during which, and to the part of the Premises of which, Tenant is
deprived on account of the taking and restoration. In the event of a taking,
Landlord shall be entitled to the entire amount of the condemnation award
without
-20-
<PAGE>
deduction for any estate or interest of Tenant; provided that nothing in this
Section shall be deemed to give Landlord any interest in, or prevent Tenant from
seeking any award against the taking authority for, the taking of personal
property and fixtures belonging to Tenant or for relocation or business
interruption expenses or loss of good will recoverable from the taking
authority.
SECTION 12.2 TEMPORARY TAKING. No temporary taking of the Premises shall
terminate this Lease or give Tenant any right to abatement of rent, and any
award specifically attributable to a temporary taking of the Premises shall
belong entirely to Tenant. A temporary taking shall be deemed to be a taking of
the use or occupancy of the Premises for a period of not to exceed one hundred
eighty (180) days.
SECTION 12.3 TAKING OF PARKING AREA . In the event there shall be a
taking of the parking area such that Landlord can no longer provide sufficient
parking to comply with this Lease, Landlord may substitute reasonably equivalent
parking in a location reasonably close to the Building; provided that if
Landlord fails to make that substitution within sixty (60) days following the
taking and if the taking materially impairs Tenant's use and enjoyment of the
Premises, Tenant may, at its option, terminate this Lease by written notice to
Landlord. If this Lease is not so terminated by Tenant, there shall be no
abatement of rent and this Lease shall continue in effect.
ARTICLE XIII. SUBORDINATION; ESTOPPEL CERTIFICATE; FINANCIALS
SECTION 13.1 SUBORDINATION. At the option of Landlord, this Lease shall
be either superior or subordinate to all ground or underlying leases, mortgages
and deeds of trust, if any, which may hereafter affect the Building, and to all
renewals, modifications, consolidations, replacements and extensions thereof;
provided, that so long as Tenant is not in Default under this Lease, this Lease
shall not be terminated or Tenant's quiet enjoyment of the Premises disturbed in
the event of termination of any such ground or underlying lease, or the
foreclosure of any such mortgage or deed of trust. In the event of a termination
or foreclosure, Tenant shall become a tenant of and attorn to the successor-in-
interest to Landlord upon the same terms and conditions as are contained in this
Lease, and shall execute any instrument reasonably required by Landlord's
successor for that purpose. Tenant shall also, upon written request of Landlord,
execute and deliver all instruments as may be required from time to time to
subordinate the rights of Tenant under this Lease to any ground or underlying
lease or to the lien of any mortgage or deed of trust (provided that such
instruments include the nondisturbance and attornment provisions set forth
above), or, if requested by Landlord, to subordinate, in whole or in part, any
ground or underlying lease or the lien of any mortgage or deed of trust to this
Lease. Prior to the Commencement Date, Landlord shall obtain from any lenders or
ground lessors of the Building or Project a written agreement, in form
reasonably satisfactory to Tenant, providing that Tenant's rights and interest
shall not be disturbed in the event of any foreclosure of any such ground or
underlying lease, mortgage or deed of trust.
SECTION 13.2 ESTOPPEL CERTIFICATE.
(a) Tenant shall, at any time upon not less than fifteen (15) days'
prior written notice from Landlord, execute, acknowledge and deliver to
Landlord, in any form that Landlord may reasonably require, a statement in
writing (i) certifying that this Lease is unmodified and in full force and
effect (or, if modified, stating the nature of the modification and certifying
that this Lease, as modified, is in full force and effect) and the dates to
which the rental, additional rent and other charges have been paid in advance,
if any, and (ii) acknowledging that, to Tenant's knowledge, there are no uncured
defaults on the part of Landlord, or specifying each default if any are claimed,
and (iii) setting forth all further information that Landlord may reasonably
require. Tenant's statement may be relied upon by any prospective purchaser or
encumbrancer of all or any portion of the Building or Project.
(b) Notwithstanding any other rights and remedies of Landlord,
Tenant's failure to deliver any estoppel statement within the provided time
shall be conclusive upon Tenant that (i) this Lease is in full force and effect,
without modification except as may be represented by Landlord, (ii) there are no
uncured defaults in Landlord's performance, and (iii) not more than one month's
rental has been paid in advance.
SECTION 13.3 FINANCIALS.
(a) Tenant shall deliver to Landlord, prior to the execution of this
Lease and thereafter at any time upon Landlord's request, Tenant's current tax
returns and financial statements, certified true, accurate and complete by the
chief financial officer of Tenant, including a balance sheet and profit and loss
statement for the most recent prior year (collectively, the "Statements"), which
Statements shall accurately and completely reflect the financial condition of
Tenant. Landlord agrees that it will keep the Statements confidential, except
that Landlord shall have the right to deliver the same to any proposed purchaser
of the Building or Project (provided that any such purchaser shall be required
to keep such Statements confidential),
-21-
<PAGE>
and to any encumbrancer of all or any portion of the Building or Project
(provided that Landlord shall request that any such encumbrancer keep such
Statements confidential).
(b) Tenant acknowledges that Landlord is relying on the Statements in
its determination to enter into this Lease, and Tenant represents to Landlord,
which representation shall be deemed made on the date of this Lease and again on
the Commencement Date, that no material change in the financial condition of
Tenant, as reflected in the Statements, has occurred since the date Tenant
delivered the Statements to Landlord. The Statements are represented and
warranted by Tenant to be correct and to accurately and fully reflect Tenant's
true financial condition as of the date of submission by any Statements to
Landlord.
ARTICLE XIV. DEFAULTS AND REMEDIES
SECTION 14.1 TENANT'S DEFAULTS. The occurrence of any one or more of the
following events, following notice by Landlord and the expiration of the
applicable cure period, if any, without cure by Tenant, shall constitute a
default by Tenant (a "Default" as used in this Lease):
(a) The failure by Tenant to make any payment of rent or additional
rent required to be made by Tenant, as and when due, where the failure continues
for a period of five (5) days after written notice from Landlord to Tenant;
provided, however, that any such notice shall be in lieu of, and not in addition
to, any notice required under California Code of Civil Procedure Section 1161
and 1161(a) as amended, provided such notice is served in the manner required
under Code of Civil Procedure Section 1162. For purposes of these default and
remedies provisions, the term "additional rent" shall be deemed to include all
amounts of any type whatsoever other than Basic Rent to be paid by Tenant
pursuant to the terms of this Lease.
(b) Assignment, sublease, encumbrance or other transfer of the Lease
by Tenant, either voluntarily or by operation of law, whether by judgment,
execution, transfer by intestacy or testacy, or other means, without the prior
written consent of Landlord.
(c) The discovery by Landlord that any financial statement provided
by Tenant, or by any affiliate, successor or guarantor of Tenant, was materially
false.
(d) The failure of Tenant to timely and fully provide any
subordination agreement, estoppel certificate or financial statements in
accordance with the requirements of Article XIII, where the failure continues
for a period of ten (10) days after written notice from Landlord to Tenant;
provided, however, that any such notice shall be in lieu of, and not in addition
to, any notice required under California Code of Civil Procedure Section 1161
and 1161(a) as amended, provided such notice is served in the manner required
under Code of Civil Procedure Section 1162.
(e) The failure or inability by Tenant to observe or perform any of
the express or implied covenants or provisions of this Lease to be observed or
performed by Tenant, other than as specified in any other subsection of this
Section, where the failure continues for a period of thirty (30) days after
written notice from Landlord to Tenant or such shorter period as is specified in
any other provision of this Lease; provided, however, that any such notice shall
be in lieu of, and not in addition to, any notice required under California Code
of Civil Procedure Section 1161 and 1161(a) as amended, provided such notice is
served in the manner required under Code of Civil Procedure Section 1162.
However, if the nature of the failure is such that more than thirty (30) days
are reasonably required for its cure, then Tenant shall not be deemed to be in
Default if Tenant commences the cure within thirty (30) days, and thereafter
diligently pursues the cure to completion.
(f) (i) The making by Tenant of any general assignment for the
benefit of creditors; (ii) the filing by or against Tenant of a petition to have
Tenant adjudged a Chapter 7 debtor under the Bankruptcy Code or to have debts
discharged or a petition for reorganization or arrangement under any law
relating to bankruptcy (unless, in the case of a petition filed against Tenant,
the same is dismissed within thirty (30) days); (iii) the appointment of a
trustee or receiver to take possession of substantially all of Tenant's assets
located at the Premises or of Tenant's interest in this Lease, if possession is
not restored to Tenant within thirty (30) days; or (iv) the attachment,
execution or other judicial seizure of substantially all of Tenant's assets
located at the Premises or of Tenant's interest in this Lease, where the seizure
is not discharged within thirty (30) days. Landlord shall not be deemed to have
knowledge of any event described in this subsection unless notification in
writing is received by Landlord, nor shall there be any presumption attributable
to Landlord of Tenant's insolvency. In the event that any provision of this
subsection is contrary to applicable law, the provision shall be of no force or
effect.
-22-
<PAGE>
SECTION 14.2 LANDLORD'S REMEDIES.
(a) In the event of any Default by Tenant, or in the event of the
abandonment of the Premises by Tenant, then in addition to any other remedies
available to Landlord, Landlord may exercise the following remedies:
(i) Landlord may terminate Tenant's right to possession of the
Premises by any lawful means, in which case this Lease shall terminate and
Tenant shall immediately surrender possession of the Premises to Landlord. Such
termination shall not affect any accrued obligations of Tenant under this Lease.
Upon termination, Landlord shall have the right to reenter the Premises and
remove all persons and property. Landlord shall also be entitled to recover from
Tenant:
(1) The worth at the time of award of the unpaid rent and
additional rent which had been earned at the time of termination;
(2) The worth at the time of award of the amount by which
the unpaid rent and additional rent which would have been earned after
termination until the time of award exceeds the amount of such loss that Tenant
proves could have been reasonably avoided;
(3) The worth at the time of award of the amount by which
the unpaid rent and additional rent for the balance of the Term after the time
of award exceeds the amount of such loss that Tenant proves could be reasonably
avoided;
(4) Any other amount necessary to compensate Landlord for
all the detriment proximately caused by Tenant's failure to perform its
obligations under this Lease or which in the ordinary course of things would be
likely to result from Tenant's Default, including, but not limited to, the cost
of recovering possession of the Premises, refurbishment of the Premises,
marketing costs, commissions and other expenses of reletting, including
necessary repair, the unamortized portion of any tenant improvements and
brokerage commissions funded by Landlord in connection with this Lease,
reasonable attorneys' fees, and any other reasonable costs; and
(5) At Landlord's election, all other amounts in addition
to or in lieu of the foregoing as may be permitted by law. The term "rent" as
used in this Lease shall be deemed to mean the Basic Rent and all other sums
required to be paid by Tenant to Landlord pursuant to the terms of this Lease.
Any sum, other than Basic Rent, shall be computed on the basis of the average
monthly amount accruing during the twenty-four (24) month period immediately
prior to Default, except that if it becomes necessary to compute such rental
before the twenty-four (24) month period has occurred, then the computation
shall be on the basis of the average monthly amount during the shorter period.
As used in subparagraphs (1) and (2) above, the "worth at the time of award"
shall be computed by allowing interest at the rate of ten percent (10%) per
annum. As used in subparagraph (3) above, the "worth at the time of award" shall
be computed by discounting the amount at the discount rate of the Federal
Reserve Bank of San Francisco at the time of award plus one percent (1%).
(ii) Landlord may elect not to terminate Tenant's right to
possession of the Premises, in which event Landlord may continue to enforce all
of its rights and remedies under this Lease, including the right to collect all
rent as it becomes due. Efforts by the Landlord to maintain, preserve or relet
the Premises, or the appointment of a receiver to protect the Landlord's
interests under this Lease, shall not constitute a termination of the Tenant's
right to possession of the Premises. In the event that Landlord elects to avail
itself of the remedy provided by this subsection (ii), Landlord shall not
unreasonably withhold its consent to an assignment or subletting of the Premises
subject to the reasonable standards for Landlord's consent as are contained in
this Lease.
(b) The various rights and remedies reserved to Landlord in this
Lease or otherwise shall be cumulative and, except as otherwise provided by
California law, Landlord may pursue any or all of its rights and remedies at the
same time.
(c) No delay or omission of Landlord to exercise any right or remedy
shall be construed as a waiver of the right or remedy or of any Default by
Tenant. The acceptance by Landlord of rent shall not be a (i) waiver of any
preceding breach or Default by Tenant of any provision of this Lease, other than
the failure of Tenant to pay the particular rent accepted, regardless of
Landlord's knowledge of the preceding breach or default at the time of
acceptance of rent, or (ii) a waiver of Landlord's right to exercise any remedy
available to Landlord by virtue of the breach or default. The acceptance of any
payment from a debtor in possession, a trustee, a receiver or any other person
acting on behalf of Tenant or Tenant's estate shall not waive or cure a default
under Section 14.1. No payment by Tenant or receipt by Landlord of a lesser
amount than the rent required by this Lease shall be deemed to be other than a
partial payment on account of the earliest due stipulated rent, nor shall any
endorsement or statement on any check or letter be deemed an
-23-
<PAGE>
accord and satisfaction and Landlord shall accept the check or payment without
prejudice to Landlord's right to recover the balance of the rent or pursue any
other remedy available to it. No act or thing done by Landlord or Landlord's
agents during the Term shall be deemed an acceptance of a surrender of the
Premises, and no agreement to accept a surrender shall be valid unless in
writing and signed by Landlord. No employee of Landlord or of Landlord's agents
shall have any power to accept the keys to the Premises prior to the termination
of this Lease, and the delivery of the keys to any employee shall not operate as
a termination of the Lease or a surrender of the Premises.
SECTION 14.3 LATE PAYMENTS.
(a) Any rent due under this Lease that is not received by Landlord
within five (5) days of the date when due shall bear interest at the maximum
rate permitted by law from the date due until fully paid. The payment of
interest shall not cure any Default by Tenant under this Lease. In addition,
Tenant acknowledges that the late payment by Tenant to Landlord of rent will
cause Landlord to incur costs not contemplated by this Lease, the exact amount
of which will be extremely difficult and impracticable to ascertain. Those costs
may include, but are not limited to, administrative, processing and accounting
charges, and late charges which may be imposed on Landlord by the terms of any
ground lease, mortgage or trust deed covering the Premises. Accordingly, if any
rent due from Tenant shall not be received by Landlord or Landlord's designee
within five (5) days after the date due, then Tenant shall pay to Landlord, in
addition to the interest provided above, a late charge in a sum equal to the
greater of five percent (5%) of the amount overdue or Two Hundred Fifty Dollars
($250.00) for each delinquent payment. The foregoing late charge shall not be
charged, however, in connection with the initial payment of rent not paid by
Tenant within five (5) days after the date due. Acceptance of a late charge by
Landlord shall not constitute a waiver of Tenant's Default with respect to the
overdue amount, nor shall it prevent Landlord from exercising any of its other
rights and remedies.
(b) Following each second consecutive installment of rent that is not
paid within five (5) days following notice of nonpayment from Landlord, Landlord
shall have the option (i) to require that beginning with the first payment of
rent next due, rent shall no longer be paid in monthly installments but shall be
payable quarterly three (3) months in advance and/or (ii) to require that Tenant
increase the amount, if any, of the Security Deposit by one hundred percent
(100%). Should Tenant deliver to Landlord, at any time during the Term, two (2)
or more insufficient checks, the Landlord may require that all monies then and
thereafter due from Tenant be paid to Landlord by cashiers check.
SECTION 14.4 RIGHT OF LANDLORD TO PERFORM. All covenants and agreements
to be performed by Tenant under this Lease shall be performed at Tenant's sole
cost and expense and without any abatement of rent or right of set-off except as
specifically set forth in this Lease. If Tenant fails to pay any sum of money,
other than rent, or fails to perform any other act on its part to be performed
under this Lease, and the failure continues beyond any applicable grace period
set forth in Section 14.1, then in addition to any other available remedies,
Landlord may, at its election make the payment or perform the other act on
Tenant's part. Landlord's election to make the payment or perform the act on
Tenant's part shall not give rise to any responsibility of Landlord to continue
making the same or similar payments or performing the same or similar acts.
Tenant shall, promptly upon demand by Landlord, reimburse Landlord for all sums
paid by Landlord and all necessary incidental costs, together with interest at
the maximum rate permitted by law from the date of the payment by Landlord.
Landlord shall have the same rights and remedies if Tenant fails to pay those
amounts as Landlord would have in the event of a Default by Tenant in the
payment of rent.
SECTION 14.5 DEFAULT BY LANDLORD. Landlord shall not be deemed to be in
default in the performance of any obligation under this Lease unless and until
it has failed to perform the obligation within thirty (30) days after written
notice by Tenant to Landlord specifying in reasonable detail the nature and
extent of the failure; provided, however, that if the nature of Landlord's
obligation is such that more than thirty (30) days are required for its
performance, then Landlord shall not be deemed to be in default if it commences
performance within the thirty (30) day period and thereafter diligently pursues
the cure to completion. Except as expressly provided in this Lease, no delay or
omission of Tenant to exercise any right or remedy shall be construed as a
waiver of the right or remedy or of any default by Landlord.
SECTION 14.6 EXPENSES AND LEGAL FEES. All sums reasonably incurred by
Landlord in connection with any Default by Tenant under this Lease or holding
over of possession by Tenant after the expiration or earlier termination of this
Lease, including without limitation all costs, expenses and actual accountants,
appraisers, attorneys and other professional fees, and any collection agency or
other collection charges, shall be due and payable by Tenant to Landlord on
demand, and shall bear interest at the rate of ten percent (10%) per annum.
Should either Landlord or Tenant bring any action in connection with this Lease,
the prevailing party shall be entitled to recover as a part of the action its
reasonable attorneys' fees, and all other costs. The prevailing party for the
purpose of this paragraph shall be determined by the trier of the facts.
-24-
<PAGE>
SECTION 14.7 WAIVER OF JURY TRIAL. LANDLORD AND TENANT EACH ACKNOWLEDGES
THAT IT IS AWARE OF AND HAS HAD THE ADVICE OF COUNSEL OF ITS CHOICE WITH RESPECT
TO ITS RIGHTS TO TRIAL BY JURY, AND EACH PARTY DOES HEREBY EXPRESSLY AND
KNOWINGLY WAIVE AND RELEASE ALL SUCH RIGHTS TO TRIAL BY JURY IN ANY ACTION,
PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER PARTY HERETO AGAINST THE OTHER
(AND/OR AGAINST ITS OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, OR SUBSIDIARY OR
AFFILIATED ENTITIES) ON ANY MATTERS WHATSOEVER ARISING OUT OF OR IN ANY WAY
CONNECTED WITH THIS LEASE, TENANT'S USE OR OCCUPANCY OF THE PREMISES, AND/OR ANY
CLAIM OF INJURY OR DAMAGE.
SECTION 14.8 SATISFACTION OF JUDGMENT. The obligations of Landlord and
Tenant under this Lease do not constitute the personal obligations of the
individual partners, trustees, directors, officers or shareholders of Landlord
or Tenant, or their respective constituent partners. Should Tenant recover a
money judgment against Landlord, such judgment shall be satisfied only out of
the proceeds of sale received upon execution of such judgment and levied thereon
against the right, title and interest of Landlord in the Project and out of the
rent or other income from such property receivable by Landlord or out of
consideration received by Landlord from the sale or other disposition of all or
any part of Landlord's right, title or interest in the Project and no action for
any deficiency may be sought or obtained by Tenant.
SECTION 14.9 LIMITATION OF ACTIONS AGAINST LANDLORD. Any claim or demand
arising in tort or in contract against Landlord based upon or arising in
connection with this Lease (except those arising in connection with Sections
10.3(b), 5.3(g) and 5.3(h) of this Lease) shall be barred unless Tenant
commences an action thereon within twelve (12) months after the date that the
occurrence of the act, omission, event or default upon which the claim, demand
or right arises is discovered by Tenant. Nothing contained in this Section 14.9,
however, shall extend the operation of any applicable statute of limitations
binding on Tenant.
ARTICLE XV. END OF TERM
SECTION 15.1 HOLDING OVER. This Lease shall terminate without further
notice upon the expiration of the Term, and any holding over by Tenant after the
expiration shall not constitute a renewal or extension of this Lease, or give
Tenant any rights under this Lease, except when in writing signed by both
parties. If Tenant holds over for any period after the expiration (or earlier
termination) of the Term without the prior written consent of Landlord, such
possession shall constitute a tenancy at sufferance only; such holding over with
the prior written consent of Landlord shall constitute a month-to-month tenancy
commencing on the first (1st) day following the termination of this Lease. In
either of such events, possession shall be subject to all of the terms of this
Lease, except that the monthly Basic Rent shall be the greater of (a) one
hundred fifty percent (150%) of the Basic Rent for the month immediately
preceding the date of termination for the initial month of hold over and one
hundred seventy-five percent (175%) of the Basic Rent for the month immediately
preceding the date of termination for each month of hold over thereafter, or (b)
the then currently scheduled Basic Rent for comparable space in the Project. If
Tenant fails to surrender the Premises upon the expiration of this Lease despite
demand to do so by Landlord, Tenant shall indemnify and hold Landlord harmless
from all loss or liability, including without limitation, any claims made by any
succeeding tenant relating to such failure to surrender. Acceptance by Landlord
of rent after the termination shall not constitute a consent to a holdover or
result in a renewal of this Lease. The foregoing provisions of this Section are
in addition to and do not affect Landlord's right of re-entry or any other
rights of Landlord under this Lease or at law.
SECTION 15.2 MERGER ON TERMINATION. The voluntary or other surrender of
this Lease by Tenant, or a mutual termination of this Lease, shall terminate any
or all existing subleases unless Landlord, at its option, elects in writing to
treat the surrender or termination as an assignment to it of any or all
subleases affecting the Premises.
SECTION 15.3 SURRENDER OF PREMISES; REMOVAL OF PROPERTY. Upon the
Expiration Date or upon any earlier termination of this Lease, Tenant shall quit
and surrender possession of the Premises to Landlord in as good order, condition
and repair as when received or as hereafter may be improved by Landlord or
Tenant, reasonable wear and tear, casualty, Hazardous Materials (except to the
extent Tenant is responsible therefor as provided in Section 5.3 of this Lease)
and repairs which are Landlord's obligation excepted, and shall, without expense
to Landlord, remove or cause to be removed from the Premises all personal
property and debris, except for any items that Landlord may by written
authorization allow to remain. Tenant shall repair all damage to the Premises
resulting from the removal, which repair shall include the patching and filling
of holes and repair of structural damage, provided that Landlord may instead
elect to repair any structural damage at Tenant's expense. If Tenant shall fail
to comply with the provisions of
-25-
<PAGE>
this Section, Landlord may effect the removal and/or make any repairs, and the
cost to Landlord shall be additional rent payable by Tenant upon demand. If
Tenant fails to remove Tenant's personal property from the Premises upon the
expiration of the Term, Landlord may remove, store, dispose of and/or retain
such personal property, at Landlord's option, in accordance with then applicable
laws, all at the expense of Tenant. Upon the expiration of the Term, if
requested by Landlord, Tenant shall execute, acknowledge and deliver to Landlord
an instrument in writing releasing and quitclaiming to Landlord all right, title
and interest of Tenant in the Premises.
ARTICLE XVI. PAYMENTS AND NOTICES
All sums payable by Tenant to Landlord shall be paid, without deduction or
offset, in lawful money of the United States to Landlord at its address set
forth in Item 12 of the Basic Lease Provisions, or at any other place as
Landlord may designate in writing. Unless this Lease expressly provides
otherwise, as for example in the payment of rent pursuant to Section 4.1, all
payments shall be due and payable within twenty (20) days after demand. All
payments requiring proration shall be prorated on the basis of a thirty (30) day
month and a three hundred sixty (360) day year. Any notice, election, demand,
consent, approval or other communication to be given or other document to be
delivered by either party to the other may be delivered in person or by courier
or overnight delivery service to the other party, or may be deposited in the
United States mail, duly registered or certified, postage prepaid, return
receipt requested, and addressed to the other party at the address set forth in
Item 12 of the Basic Lease Provisions, or if to Tenant, at that address or, from
and after the Commencement Date, at the Premises (whether or not Tenant has
departed from, abandoned or vacated the Premises). Either party may, by written
notice to the other, served in the manner provided in this Article, designate a
different address. If any notice or other document is sent by mail, it shall be
deemed served or delivered three (3) business days after mailing. If more than
one person or entity is named as Tenant under this Lease, service of any notice
upon any one of them shall be deemed as service upon all of them.
ARTICLE XVII. RULES AND REGULATIONS
Tenant agrees to observe faithfully and comply strictly with the Rules and
Regulations, attached as Exhibit E, and any reasonable and nondiscriminatory
---------
amendments, modifications and/or additions as may be adopted and published by
written notice to tenants by Landlord for the safety, care, security, good
order, or cleanliness of the Premises, Building, Project and Common Areas.
Landlord shall not be liable to Tenant for any violation of the Rules and
Regulations or the breach of any covenant or condition in any lease by any other
tenant or such tenant's agents, employees, contractors, guests or invitees. One
or more waivers by Landlord of any breach of the Rules and Regulations by Tenant
or by any other tenant(s) shall not be a waiver of any subsequent breach of that
rule or any other. Tenant's failure to keep and observe the Rules and
Regulations following notice from Landlord and the expiration of the applicable
cure period, shall constitute a Default under this Lease. In the case of any
conflict between the Rules and Regulations and this Lease, this Lease shall be
controlling. Notwithstanding anything to the contrary in this Article XVII,
Tenant shall not be required to comply with any rule or regulation unless the
same applies non-discriminatorily to all occupants of the Project.
ARTICLE XVIII. BROKER'S COMMISSION
The parties recognize as the broker(s) who negotiated this Lease the
firm(s), if any, whose name(s) is (are) stated in Item 10 of the Basic Lease
Provisions, and agree that Landlord shall be responsible for the payment of
brokerage commissions to those broker(s) unless otherwise provided in this
Lease. Tenant warrants that it has had no dealings with any other real estate
broker or agent in connection with the negotiation of this Lease, and Tenant
agrees to indemnify and hold Landlord harmless from any cost, expense or
liability (including reasonable attorneys' fees) for any compensation,
commissions or charges claimed by any other real estate broker or agent employed
or claiming to represent or to have been employed by Tenant in connection with
the negotiation of this Lease. The foregoing agreement shall survive the
termination of this Lease. If this Lease terminates prior to the Expiration Date
as the result of failure of performance by Tenant, Landlord shall be entitled to
recover from Tenant the unamortized portion of any brokerage commission funded
by Landlord in addition to any other damages to which Landlord may be entitled.
ARTICLE XIX. TRANSFER OF LANDLORD'S INTEREST
In the event of any transfer of Landlord's interest in the Premises, the
transferor shall be automatically relieved of all obligations on the part of
Landlord accruing under this Lease from and after the date of the transfer,
provided that the transferee assumes in writing all of such obligations and any
funds held by the
-26-
<PAGE>
transferor in which Tenant has an interest shall be turned over, subject to that
interest, to the transferee and Tenant is notified of the transfer as required
by law. No holder of a mortgage and/or deed of trust to which this Lease is or
may be subordinate, and no landlord under a so-called sale-leaseback, shall be
responsible in connection with the Security Deposit, unless the mortgagee or
holder of the deed of trust or the landlord actually receives the Security
Deposit. It is intended that the covenants and obligations contained in this
Lease on the part of Landlord shall, subject to the foregoing, be binding on
Landlord, its successors and assigns, only during and in respect to their
respective successive periods of ownership. Nothing contained in the foregoing
sentence, however, shall be deemed to release The Irvine Company from any
obligation under Section 5.3(h) of this Lease from and after its period of
ownership.
ARTICLE XX. INTERPRETATION
SECTION 20.1 GENDER AND NUMBER. Whenever the context of this Lease
requires, the words "Landlord" and "Tenant" shall include the plural as well as
the singular, and words used in neuter, masculine or feminine genders shall
include the others.
SECTION 20.2 HEADINGS. The captions and headings of the articles and
sections of this Lease are for convenience only, are not a part of this Lease
and shall have no effect upon its construction or interpretation.
SECTION 20.3 JOINT AND SEVERAL LIABILITY. If more than one person or
entity is named as Tenant, the obligations imposed upon each shall be joint and
several and the act of or notice from, or notice or refund to, or the signature
of, any one or more of them shall be binding on all of them with respect to the
tenancy of this Lease, including, but not limited to, any renewal, extension,
termination or modification of this Lease.
SECTION 20.4 SUCCESSORS. Subject to Articles IX and XIX, all rights and
liabilities given to or imposed upon Landlord and Tenant shall extend to and
bind their respective heirs, executors, administrators, successors and assigns.
Nothing contained in this Section is intended, or shall be construed, to grant
to any person other than Landlord and Tenant and their successors and assigns
any rights or remedies under this Lease.
SECTION 20.5 TIME OF ESSENCE. Time is of the essence with respect to the
performance of every provision of this Lease.
SECTION 20.6 CONTROLLING LAW. This Lease shall be governed by and
interpreted in accordance with the laws of the State of California.
SECTION 20.7 SEVERABILITY. If any term or provision of this Lease, the
deletion of which would not adversely affect the receipt of any material benefit
by either party or the deletion of which is consented to by the party adversely
affected, shall be held invalid or unenforceable to any extent, the remainder of
this Lease shall not be affected and each term and provision of this Lease shall
be valid and enforceable to the fullest extent permitted by law.
SECTION 20.8 WAIVER AND CUMULATIVE REMEDIES. One or more waivers by
Landlord or Tenant of any breach of any term, covenant or condition contained in
this Lease shall not be a waiver of any subsequent breach of the same or any
other term, covenant or condition. Consent to any act by one of the parties
shall not be deemed to render unnecessary the obtaining of that party's consent
to any subsequent act. No breach by Tenant of this Lease shall be deemed to have
been waived by Landlord unless the waiver is in a writing signed by Landlord.
The rights and remedies of Landlord under this Lease shall be cumulative and in
addition to any and all other rights and remedies which Landlord may have.
SECTION 20.9 INABILITY TO PERFORM. In the event that either party shall
be delayed or hindered in or prevented from the performance of any work or in
performing any act required under this Lease by reason of any cause beyond the
reasonable control of that party, then the performance of the work or the doing
of the act shall be excused for the period of the delay and the time for
performance shall be extended for a period equivalent to the period of the
delay. The provisions of this Section shall not operate to excuse Tenant from
the prompt payment of rent. Further, the provisions of this Section 20.9 shall
not operate to extend the time at which Tenant is entitled to an abatement of
rent as provided by the express terms of this Lease, nor to extend by more than
ninety (90) days in the aggregate Tenant's right to terminate this Lease as
provided by the express terms of Articles XI and XII of this Lease.
-27-
<PAGE>
SECTION 20.10 ENTIRE AGREEMENT. This Lease and its exhibits and other
attachments cover in full each and every agreement of every kind between the
parties concerning the Premises, the Building, and the Project, and all
preliminary negotiations, oral agreements, understandings and/or practices,
except those contained in this Lease, are superseded and of no further effect.
Tenant waives its rights to rely on any representations or promises made by
Landlord or others which are not contained in this Lease. No verbal agreement or
implied covenant shall be held to modify the provisions of this Lease, any
statute, law, or custom to the contrary notwithstanding.
SECTION 20.11 QUIET ENJOYMENT. Upon the observance and performance of all
the covenants, terms and conditions on Tenant's part to be observed and
performed, and subject to the other provisions of this Lease, Tenant shall
peaceably and quietly hold and enjoy the Premises for the Term without hindrance
or interruption by Landlord or any other person claiming by or through Landlord.
SECTION 20.12 SURVIVAL. All covenants of Landlord or Tenant which
reasonably would be intended to survive the expiration or sooner termination of
this Lease, including without limitation any warranty or indemnity hereunder,
shall so survive and continue to be binding upon and inure to the benefit of the
respective parties and their successors and assigns.
ARTICLE XXI. EXECUTION AND RECORDING
SECTION 21.1 COUNTERPARTS. This Lease may be executed in one or more
counterparts, each of which shall constitute an original and all of which shall
be one and the same agreement.
SECTION 21.2 CORPORATE AND PARTNERSHIP AUTHORITY. If Tenant is a
corporation or partnership, each individual executing this Lease on behalf of
the corporation or partnership represents and warrants that he is duly
authorized to execute and deliver this Lease on behalf of the corporation or
partnership, and that this Lease is binding upon the corporation or partnership
in accordance with its terms. Tenant shall, at Landlord's request, deliver a
certified copy of its board of directors' resolution or partnership agreement or
certificate authorizing or evidencing the execution of this Lease.
SECTION 21.3 EXECUTION OF LEASE; NO OPTION OR OFFER. The submission of
this Lease to Tenant shall be for examination purposes only, and shall not
constitute an offer to or option for Tenant to lease the Premises. Execution of
this Lease by Tenant and its return to Landlord shall not be binding upon
Landlord, notwithstanding any time interval, until Landlord has in fact executed
and delivered this Lease to Tenant, it being intended that this Lease shall only
become effective upon execution by Landlord and delivery of a fully executed
counterpart to Tenant.
SECTION 21.4 RECORDING. Tenant shall not record this Lease without the
prior written consent of Landlord. Tenant, upon the request of Landlord, shall
execute and acknowledge a "short form" memorandum of this Lease for recording
purposes.
SECTION 21.5 AMENDMENTS. No amendment or termination of this Lease shall
be effective unless in writing signed by authorized signatories of Tenant and
Landlord, or by their respective successors in interest. No actions, policies,
oral or informal arrangements, business dealings or other course of conduct by
or between the parties shall be deemed to modify this Lease in any respect.
SECTION 21.6 EXECUTED COPY. Any fully executed photocopy or similar
reproduction of this Lease shall be deemed an original for all purposes.
SECTION 21.7 ATTACHMENTS. All exhibits, amendments, riders and addenda
attached to this Lease are hereby incorporated into and made a part of this
Lease.
ARTICLE XXII. MISCELLANEOUS
SECTION 22.1 NONDISCLOSURE OF LEASE TERMS. Tenant acknowledges and agrees
that the terms of this Lease are confidential and constitute proprietary
information of Landlord. Disclosure of the terms could adversely affect the
ability of Landlord to negotiate other leases and impair Landlord's relationship
with other tenants. Accordingly, Tenant agrees that it, and its partners,
officers, directors, employees and attorneys, shall not intentionally and
voluntarily disclose the terms and conditions of this Lease to any other tenant
or apparent prospective tenant of the Building or Project, either directly or
indirectly, without the prior written consent of Landlord, provided, however,
that Tenant may disclose the terms to prospective subtenants or assignees under
this Lease, and as required for any security filings, financings or sales,
reorganizations or consolidations of Tenant's business.
-28-
<PAGE>
SECTION 22.2 GUARANTY. As a condition to the execution of this Lease by
Landlord, the obligations, covenants and performance of the Tenant as herein
provided shall be guaranteed in writing by the Guarantor(s) listed in Item 7 of
the Basic Lease Provisions, if any, on a form of guaranty provided by Landlord.
SECTION 22.3 CHANGES REQUESTED BY LENDER. If, in connection with
obtaining financing for the Project, the lender shall request reasonable
modifications in this Lease as a condition to the financing, Tenant will not
unreasonably withhold or delay its consent, provided that the modifications do
not materially increase the obligations of Tenant or materially and adversely
affect the leasehold interest created by this Lease.
SECTION 22.4 MORTGAGEE PROTECTION. No act or failure to act on the part
of Landlord which would otherwise entitle Tenant to be relieved of its
obligations hereunder or to terminate this Lease shall result in such a release
or termination unless (a) Tenant has given notice by registered or certified
mail to any beneficiary of a deed of trust or mortgage covering the Building
whose address has been furnished to Tenant in writing and (b) such beneficiary
is afforded a reasonable opportunity to cure the default by Landlord (which in
no event shall be less than sixty (60) days), including, if necessary to effect
the cure, time to obtain possession of the Building by power of sale or judicial
foreclosure provided that such foreclosure remedy is diligently pursued. Tenant
agrees that each beneficiary of a deed of trust or mortgage covering the
Building is an express third party beneficiary hereof, Tenant shall have no
right or claim for the collection of any deposit from such beneficiary or from
any purchaser at a foreclosure sale unless such beneficiary or purchaser shall
have actually received and not refunded the deposit, and Tenant shall comply
with any written directions by any beneficiary to pay rent due hereunder
directly to such beneficiary without determining whether an event of default
exists under such beneficiary's deed of trust.
SECTION 22.5 [INTENTIONALLY DELETED]
SECTION 22.6 SECURITY MEASURES. Tenant hereby acknowledges that Landlord
shall have no obligation whatsoever to provide guard service or other security
measures for the benefit of the Premises or the Project. Tenant assumes all
responsibility for the protection of Tenant, its agents, invitees and property
from acts of third parties. Nothing herein contained shall prevent Landlord, at
its sole option, from providing security protection for the Project or any part
thereof, in which event the cost thereof shall be included within the definition
of Project Costs.
SECTION 22.7 JAMS. Should a dispute arise between the parties regarding
any matter which is expressly authorized by a provision hereof to submit to
arbitration, then either party may cause the dispute to be submitted to
Jams/Endispute or its successor ("JAMS") in Orange County, California for
binding arbitration before a single arbitrator. However, each party reserves the
right to seek any equitable remedy by judicial action. No arbitration election
by either party pursuant to this subsection shall be effective if made later
than thirty (30) days following service of a judicial summons and complaint by
or upon such party concerning the dispute. The arbitration shall be conducted in
accordance with the rules of practice and procedure of JAMS and otherwise
pursuant to the California Arbitration Act (Code of Civil Procedure Sections
1280 et seq.). Notwithstanding the foregoing, the arbitrator is specifically
directed to limit discovery to that which is essential to the effective
prosecution or defense of the action, and in no event shall such discovery by
either parry include more than one non-expert witness deposition unless both
parties otherwise agree. The arbitrator shall apportion the costs of the
arbitration, together with the attorneys fees of the parties, in the manner
deemed equitable by the arbitrator, it being the intention of the parties that
the prevailing party ordinarily be entitled to recover its reasonable costs and
fees. Judgment upon any award rendered by the arbitrator may be entered by any
court having jurisdiction.
SECTION 22.8 APPROVALS. Subject to Landlord's rights to consent or
approve in its "discretion" or "sole discretion" as provided in this Lease,
whenever the Lease requires an approval, consent, designation, determination,
discretion or judgment by either Landlord or Tenant, such approval, consent,
designation, determination, discretion or judgment (including, without limiting
the generality of the foregoing, those required in connection with assignment
and subletting) shall not be unreasonable or unreasonably withheld or delayed
and in exercising any right or remedy hereunder, each party shall at all times
act reasonably and in good faith.
[Signatures on following page.]
-29-
<PAGE>
LANDLORD: TENANT:
THE IRVINE COMPANY E-MACHINE, INC.
A Delaware corporation
By: /s/ Clarence W. Barker By: /s/ Stephen Dukker
--------------------------------------- -----------------------
Clarence W. Barker, Name: Stephen Dukker
-----------------
President, Irvine Industrial Company, Title: CEO
-----------------
a division of The Irvine Company
By: /s/ Gary A. Vaccaro By: /s/ John Hahm
--------------------------------------- -----------------------
Gary A. Vaccaro, Name: John Hahm
------------------
Assistant Secretary Title: Vice President
-----------------
-30-
<PAGE>
EXHIBIT A
MANUFACTURING - BLDG. 1 - FLOOR PLAN
[GRAPH]
<PAGE>
EXHIBIT B
---------
THE IRVINE COMPANY - INVESTMENT PROPERTIES GROUP
HAZARDOUS MATERIAL SURVEY FORM
The purpose of this form is to obtain information regarding the use of
hazardous substances on Investment Properties Group ("IPG") property.
Prospective tenants and contractors should answer the questions in light of
their proposed activities on the premises. Existing tenants and contractors
should answer the questions as they relate to ongoing activities on the premises
and should update any information previously submitted.
If additional space is needed to answer the questions, you may attach
separate sheets of paper to this form. When completed, the form should be sent
to the following address:
INSIGNIA COMMERCIAL GROUP, INC.
1 Ada, Suite 270
Irvine, CA 92618
Your cooperation in this matter is appreciated. If you have any
questions, please call your property manager at (714) 753-4744 for assistance.
1. GENERAL INFORMATION
-------------------
Name of Responding Company:_________________________________________
Check all that apply: Tenant ( ) Contractor ( )
Prospective ( ) Existing ( )
Mailing Address:____________________________________________________
Contact Person & Title:_____________________________________________
Telephone Number: ( ) ___________-______
Current TIC Tenant(s):
---------------------
Address of Lease Premises:__________________________________________
Length of Lease or Contract Term:___________________________________
Prospective TIC Tenant(s):
-------------------------
Address of Proposed Lease Premises:_________________________________
Address of Current Operations:______________________________________
Describe the proposed operations to take place on the property,
including principal products manufactured or services to be conducted.
Existing tenants and contractors should describe any proposed changes
to ongoing operations. ______________________________________________
_____________________________________________________________________
2. HAZARDOUS MATERIALS. For the purposes of this Survey Form, the term
-------------------
"hazardous material" means any raw material, product or agent
considered hazardous under any state or federal law. The term does not
include wastes which are intended to be discarded.
2.1 Will any hazardous materials be used or stored on site?
Chemical Products Yes ( ) No ( )
Biological Hazards/
Infectious Wastes Yes ( ) No ( )
Radioactive Materials Yes ( ) No ( )
Petroleum Products Yes ( ) No ( )
2.2 List any hazardous materials to be used or stored, the
quantities that will be on-site at any given time, and the
location and method of storage (e.g., bottles in storage
closet on the premises).
<PAGE>
Location and Method
-------------------
Hazardous Materials of Storage Quantity
------------------- ---------- --------
___________________ ___________________ _____________
___________________ ___________________ _____________
___________________ ___________________ _____________
___________________ ___________________ _____________
2.3 Is any underground storage of hazardous materials proposed or
currently conducted on the premises? Yes ( ) No ( )
If yes, describe the materials to be stored, and the size and
construction of the tank. Attach copies of any permits
obtained for the underground storage of such substances. ____
_____________________________________________________________
3. HAZARDOUSWASTE. For the purposes of this Survey Form, the term
--------------
"hazardous waste" means any waste (including biological, infectious or
radioactive waste) considered hazardous under any state or federal
law, and which is intended to be discarded.
3.1 List any hazardous waste generated or to be generated on the
premises, and indicate the quantity generated on a monthly
basis.
Location and Method
-------------------
of Storage Prior to
-------------------
Hazardous Waste Disposal Quantity
--------------- -------- --------
___________________ ___________________ _____________
___________________ ___________________ _____________
___________________ ___________________ _____________
___________________ ___________________ _____________
3.2 Describe the method(s) of disposal (including recycling) for
each waste. Indicate where and how often disposal will take
place.
Location of Disposal
--------------------
Hazardous Materials Site Disposal Method
------------------- ---- ---------------
___________________ ___________________ _____________
___________________ ___________________ _____________
___________________ ___________________ _____________
___________________ ___________________ _____________
3.3 Is any treatment or processing of hazardous, infections or
radioactive wastes currently conducted or proposed to be
conducted on the premise? Yes ( ) No ( )
If yes, please describe any existing or proposed treatment
methods. __________________________________________________
___________________________________________________________
3.4 Attach copies of any hazardous waste permits or licenses
issued to your company with respect to its operations on the
premises.
4. SPILLS
------
4.1 During the past year, have any spills or releases of hazardous
materials occurred on the premises? Yes ( ) No ( )
If so, please describe the spill and attach the results of any
testing conducted to determine the extent of such spills.
_________________________________________________________
_________________________________________________________
4.2 Were any agencies notified in connection with such spills? Yes
( ) No ( )
If so, attach copies of any spill reports or other
correspondence with regulatory agencies.
4.3 Were any clean-up actions undertaken in connection with the
spills? Yes ( ) No ( )
-2-
<PAGE>
If so, briefly describe the actions taken. Attach copies of any
clearance letters obtained from any regulatory agencies involved
and the results of any final soil or groundwater sampling done
upon completion of the clean-up work.__________________________
_______________________________________________________________
5. WASTEWATER TREATMENT/DISCHARGE
------------------------------
5.1 Do you discharge industrial wastewater to:
_____storm drain? _____sewer?
_____surface water? _____no industrial discharge
5.2 Is your industrial wastewater treated before discharge? Yes ( )
No( )
If yes, describe the type of treatment conducted. ___________
_____________________________________________________________
5.2 Attach copies of any wastewater discharge permits issued to your
company with respect to its operations on the premises.
6. AIR DISCHARGES
--------------
6.1 Do you have any air filtration systems or stacks that discharge
into the air? Yes ( ) No ( )
6.2 Do you operate any equipment that require air emissions permits?
Yes ( ) No ( )
6.3 Attach copies of any air discharge permits pertaining to these
operations.
7. HAZARDOUS MATERIALS DISCLOSURES
-------------------------------
7.1 Does your company handle an aggregate of at least 500 pounds, 55
gallons or 200 cubic feet of hazardous material at any given
time? Yes ( ) No ( )
7.2 Has your company prepared a Hazardous Materials Disclosure -
Chemical Inventory and Business Emergency Plan or similar
disclosure document pursuant to state or county requirements?
Yes ( ) No ( )
If so, attach a copy.
7.3 Are any of the chemicals used in your operations regulated under
Proposition 65?
If so, describe the procedures followed to comply with these
requirements. __________________________________________________
________________________________________________________________
7.4 Is your company subject to OSHA Hazard Communication Standard
Requirements? Yes ( ) No ( )
If so, describe the procedures followed to comply with these
requirements. ___________________________________________________
_________________________________________________________________
8. ANIMAL TESTING
8.1. Does your company bring or intend to bring live animals onto the
premises for research or development purposes? Yes ( ) No ( )
If so, describe the activity. __________________________________
________________________________________________________________
8.2 Does your company bring or intend to bring animal body parts or
bodily fluids onto the premises for research or development
purposes? Yes ( ) No ( )
If so, describe the activity. __________________________________
________________________________________________________________
-3-
<PAGE>
9. ENFORCEMENT ACTIONS, COMPLAINTS
-------------------------------
9.1 Has your company ever been subject to any agency enforcement actions,
administrative orders, lawsuits, or consent orders/decrees regarding
environmental compliance or health and safety? Yes ( ) No ( )
If so, describe the actions and any continuing obligations imposed as
a result of these actions. __________________________________________
_____________________________________________________________________
9.2 Has your company ever received any request for information, notice of
violation or demand letter, complaint, or inquiry regarding
environmental compliance or health and safety? Yes ( ) No ( )
9.3 Has an environmental audit ever been conducted which concerned
operations or activities on premises occupied by you? Yes ( ) No ( )
9.3 If you answered "yes" to any questions in this section, describe the
environmental action or complaint and any continuing compliance
obligation imposed as a result of the same. __________________________
______________________________________________________________________
____________________________
____________________________
By:_________________________
Name:___________________
Title:__________________
Date:___________________
-4-
<PAGE>
EXHIBIT C
---------
HAZARDOUS MATERIALS DISCLOSURE
Tustin Annex Area
-----------------
Byran Avenue, Tustin Ranch Road, El Camino Real, Myford, Road
Tustin, California
March, 1997
Within an approximate one mile radius of the Premises, The Irvine Company is
aware of the following properties which have experienced a Hazardous Materials
contamination problem. These are identified and discussed below:
Tustin Marine Corps Air Station
- -------------------------------
Tustin, California
The Tustin Air Station is identified in regulatory agency files as having
experienced a variety of contamination problems including underground storage
tank leaks. The full extent of contamination in soils and groundwater has not
yet been fully defined. Assessment and remediation activities are currently
being conducted under regulatory agency oversight. Additional information
concerning the status of this site may be obtained from regulatory agencies.
Treasure Farms Main Yard
- ------------------------
Jamboree Road / Irvine Blvd.
Irvine, California
Discharges from former underground fuel tanks have impacted soils and
groundwater at this property. The site is currently in assessment / remediation
under regulatory agency oversight.
Additional Study
Other properties in the area may have been impacted by hazardous substances
contamination. It is recommended that the Tenant satisfy itself as to the effect
of the above-described sites (or any other sites) on the condition of the
Premises.
<PAGE>
EXHIBIT D
---------
TENANT'S INSURANCE
The following standards for Tenant's insurance shall be in effect at the
Building. Landlord reserves the right to adopt reasonable nondiscriminatory
modifications and additions to those standards. Tenant agrees to obtain and
present evidence to Landlord that it has fully complied with the insurance
requirements.
1. Tenant shall, at its sole cost and expense, commencing on the date
Tenant is given access to the Premises for any purpose and during the entire
Term, procure, pay for and keep in full force and effect: (i) commercial general
liability insurance with respect to the Premises and the operations of or on
behalf of Tenant in, on or about the Premises, including but not limited to
personal injury, owned and nonowned automobile, blanket contractual, independent
contractors, broad form property damage (with an exception to any pollution
exclusion with respect to damage arising out of heat, smoke or fumes from a
hostile fire), fire and water legal liability, products liability (if a product
is sold from the Premises), liquor law liability (if alcoholic beverages are
sold, served or consumed within the Premises), and severability of interest,
which policy(ies) shall be written on an "occurrence" basis and for not less
than the amount set forth in Item 13 of the Basic Lease Provisions, with a
combined single limit (with a $50,000 minimum limit on fire legal liability) per
occurrence for bodily injury, death, and property damage liability, or the
current limit of liability carried by Tenant, whichever is greater, and subject
to such increases in amounts as Landlord may determine from time to time; (ii)
workers' compensation insurance coverage as required by law, together with
employers' liability insurance; (iii) with respect to improvements, alterations,
and the like required or permitted to be made by Tenant under this Lease,
builder's all-risk insurance, in an amount equal to the replacement cost of the
work; (iv) insurance against fire, vandalism, malicious mischief and such other
additional perils as may be included in a standard "all risk" form in general
use in the county in which the Premises are situated, insuring Tenant's
leasehold improvements, trade fixtures, furnishings, equipment and items of
personal property of Tenant located in the Premises, in an amount equal to not
less than ninety percent (90%) of their actual replacement cost (with
replacement cost endorsement); and (v) business interruption insurance in
amounts satisfactory to cover one (1) year of loss. In no event shall the limits
of any policy be considered as limiting the liability of Tenant under this
Lease.
2. In the event Landlord consents to Tenant's use, generation or storage
of Hazardous Materials on, under or about the Premises pursuant to Section 5.3
of this Lease, Landlord shall have the continuing right to require Tenant, at
Tenant's sole cost and expense (provided the same is available for purchase upon
commercially reasonable terms), to purchase insurance specified and approved by
Landlord, with coverage not less than Five Million Dollars ($5,000,000.00),
insuring (i) any Hazardous Materials shall be removed from the Premises, (ii)
the Premises shall be restored to a clean, healthy, safe and sanitary condition,
and (iii) any liability of Tenant, Landlord and Landlord's officers, directors,
shareholders, agents, employees and representatives, arising from such Hazardous
Materials.
3. All policies of insurance required to be carried by Tenant pursuant to
this Exhibit D containing a deductible exceeding Five Thousand Dollars
---------
($5,000.00) per occurrence must be approved in writing by Landlord prior to the
issuance of such policy. Tenant shall be solely responsible for the payment of
all deductibles.
4. All policies of insurance required to be carried by Tenant pursuant to
this Exhibit D shall be written by responsible insurance companies authorized to
---------
do business in the State of California and with a Best's rating of not less than
"A" subject to final acceptance and approval by Landlord. Any insurance required
of Tenant may be furnished by Tenant under any blanket policy carried by it or
under a separate policy, so long as (i) the Premises are specifically covered
(by rider, endorsement or otherwise), (ii) the limits of the policy are
applicable on a "per location" basis to the Premises and provide for restoration
of the aggregate limits, and (iii) the policy otherwise complies with the
provisions of this Exhibit D. A true and exact copy of each paid up policy
---------
evidencing the insurance (appropriately authenticated by the insurer) or a
certificate of insurance, certifying that the policy has been issued, provides
the coverage required by this Exhibit D and contains the required provisions,
---------
shall be delivered to Landlord prior to the date Tenant is given the right of
possession of the Premises. Proper evidence of the renewal of any insurance
coverage shall also be delivered to Landlord not less than thirty (30) days
prior to the expiration of the coverage. Landlord may at any time, and from time
to time, inspect and/or copy any and all insurance policies required by this
Lease.
5. Each policy evidencing insurance required to be carried by Tenant
pursuant to this Exhibit D shall contain the following provisions and/or clauses
---------
satisfactory to Landlord: (i) a provision that the policy and the coverage
provided shall be primary and that any coverage carried by Landlord shall be
noncontributory with respect to any policies carried by Tenant except as to
workers' compensation insurance; (ii) a provision including Landlord, the
Additional Insureds identified in Item 11 of the Basic Lease
<PAGE>
Provisions, and any other parties in interest designated by Landlord as an
additional insured, except as to workers' compensation insurance; (iii) a waiver
by the insurer of any right to subrogation against Landlord, its agents,
employees, contractors and representatives which arises or might arise by reason
of any payment under the policy or by reason of any act or omission of Landlord,
its agents, employees, contractors or representatives; and (iv) a provision that
the insurer will not cancel or change the coverage provided by the policy
without first giving Landlord thirty (30) days prior written notice.
6. In the event that Tenant fails to procure, maintain and/or pay for, at
the times and for the durations specified in this Exhibit D, any insurance
---------
required by this Exhibit D, or fails to carry insurance required by any
---------
governmental authority, Landlord may at its election procure that insurance and
pay the premiums, in which event Tenant shall repay Landlord all sums paid by
Landlord, together with interest at the maximum rate permitted by law and any
related costs or expenses incurred by Landlord, within ten (10) days following
Landlord's written demand to Tenant.
-2-
<PAGE>
EXHIBIT E
---------
RULES AND REGULATIONS
This Exhibit sets forth the rules and regulations governing Tenant's use of
the Premises leased to Tenant pursuant to the terms, covenants and conditions of
the Lease to which this Exhibit is attached and therein made part thereof. In
the event of any conflict or inconsistency between this Exhibit and the Lease,
the Lease shall control.
1. Tenant shall not place anything or allow anything to be placed near
the glass of any window, door, partition or wall which may appear unsightly from
outside the Premises.
2. The walls, walkways, sidewalks, entrance passages, courts and
vestibules shall not be obstructed or used for any purpose other than ingress
and egress of pedestrian travel to and from the Premises, and shall not be used
for loitering or gathering, or to display, store or place any merchandise,
equipment or devices, or for any other purpose. The walkways, entrance
passageways, courts, vestibules and roof are not for the use of the general
public and Landlord shall in all cases retain the right to control and prevent
access thereto by all persons whose presence in the judgment of the Landlord
shall be prejudicial to the safety, character, reputation and interests of the
Building and its tenants, provided that nothing herein contained shall be
construed to prevent such access to persons with whom Tenant normally deals in
the ordinary course of Tenant's business unless such persons are engaged in
illegal activities. No tenant or employee or invitee of any tenant shall be
permitted upon the roof of the Building.
3. No awnings or other projection shall be attached to the outside walls
of the Building. No security bars or gates, curtains, blinds, shades or screens
shall be attached to or hung in, or used in connection with, any window or door
of the Premises without the prior written consent of Landlord. Neither the
interior nor exterior of any windows shall be coated or otherwise sunscreened
without the express written consent of Landlord.
4. Tenant shall not mark, nail, paint, drill into, or in any way deface
any part of the Premises or the Building. Tenant shall not lay linoleum, tile,
carpet or other similar floor covering so that the same shall be affixed to the
floor of the Premises in any manner except as approved by the Landlord in
writing. The expense of repairing any damage resulting from a violation of this
rule or removal of any floor covering shall be borne by Tenant.
5. The toilet rooms, urinals, wash bowls and other plumbing apparatus
shall not be used for any purpose other than that for which they were
constructed and no foreign substance of any kind whatsoever shall be thrown
therein. The expense of any breakage, stoppage or damage resulting from the
violation of this rule shall be borne by the tenant who, or whose employees or
invitees, caused it.
6. Landlord shall direct electricians as to the manner and location of
any future telephone wiring. No boring or cutting for wires will be allowed
without the prior consent of Landlord. The locations of the telephones, call
boxes and other office equipment affixed to the Premises shall be subject to the
prior written approval of Landlord.
7. The Premises shall not be used for manufacturing or for the storage of
merchandise except as such storage may be incidental to the permitted use of the
Premises. No exterior storage shall be allowed at any time without the prior
written approval of Landlord. The Premises shall not be used for cooking or
washing clothes without the prior written consent of Landlord, or for lodging or
sleeping or for any immoral or illegal purposes.
8. Tenant shall not make, or permit to be made, any unseemly or
disturbing noises or disturb or interfere with occupants of this or neighboring
buildings or premises or those having business with them, whether by the use of
any musical instrument, radio, phonograph, noise, or otherwise. Tenant shall not
use, keep or permit to be used, or kept, any foul or obnoxious gas or substance
in the Premises or permit or suffer the Premises to be used or occupied in any
manner offensive or objectionable to Landlord or other occupants of this or
neighboring buildings or premises by reason of any odors, fumes or gases.
9. No animals shall be permitted at any time within the Premises.
10. Tenant shall not use the name of the Building or the Project in
connection with or in promoting or advertising the business of Tenant, except as
Tenant's address, without the written consent of Landlord. Landlord shall have
the right to prohibit any advertising by any Tenant which, in Landlord's
reasonable opinion, tends to impair the reputation of the Project or its
desirability for its intended uses, and upon written notice from Landlord any
Tenant shall refrain from or discontinue such advertising.
<PAGE>
11. Canvassing, soliciting, peddling, parading, picketing, demonstrating
or otherwise engaging in any conduct that unreasonably impairs the value or use
of the Premises or the Project are prohibited and each Tenant shall cooperate to
prevent the same.
12. No equipment of any type shall be placed on the Premises which in
Landlord's opinion exceeds the load limits of the floor or otherwise threatens
the soundness of the structure or improvements of the Building.
13. No air conditioning unit or other similar apparatus shall be installed
or used by any Tenant without the prior written consent of Landlord.
14. No aerial antenna shall be erected on the roof or exterior walls of
the Premises, or on the grounds, without in each instance, the prior written
consent of Landlord. Any aerial or antenna so installed without such written
consent shall be subject to removal by Landlord at any time without prior notice
at the expense of the Tenant, and Tenant shall upon Landlord's demand pay a
removal fee to Landlord of not less than $200.00.
15. The entire Premises, including vestibules, entrances, doors, fixtures,
windows and plate glass, shall at all times be maintained in a safe, neat and
clean condition by Tenant. All trash, refuse and waste materials shall be
regularly removed from the Premises by Tenant and placed in the containers at
the locations designated by Landlord for refuse collection. All cardboard boxes
must be "broken down" prior to being placed in the trash container. All
styrofoam chips must be bagged or otherwise contained prior to placement in the
trash container, so as not to constitute a nuisance. Pallets may not be disposed
of in the trash container or enclosures. The burning of trash, refuse or waste
materials is prohibited.
16. Tenant shall use at Tenant' s cost such pest extermination contractor
as Landlord may direct and at such intervals as Landlord may require.
17. All keys for the Premises shall be provided to Tenant by Landlord and
Tenant shall return to Landlord any of such keys so provided upon the
termination of the Lease. Tenant shall not change locks or install other locks
on doors of the Premises, without the prior written consent of Landlord. In the
event of loss of any keys furnished by Landlord for Tenant, Tenant shall pay to
Landlord the costs thereof.
18. No person shall enter or remain within the Project while intoxicated
or under the influence of liquor or drugs. Landlord shall have the right to
exclude or expel from the Project any person who, in the absolute discretion of
Landlord, is under the influence of liquor or drugs.
Landlord reserves the right to amend or supplement the foregoing Rules
and Regulations and to adopt and promulgate additional rules and regulations
applicable to the Premises. Notice of such rules and regulations and amendments
and supplements thereto, if any, shall be given to the Tenant.
-2-
<PAGE>
EXHIBIT X
---------
INDUSTRIAL WORK LETTER
DOLLAR ALLOWANCE
The Tenant Improvement work (herein "Tenant Improvements") shall consist of any
work, including work in place as of the date hereof, required to complete the
Premises pursuant to the approved Working Drawings and Specifications (as
hereinafter defined). The Tenant Improvements shall not include the "Shell
Building Work" (as defined in Article III below). All of the Tenant Improvement
work shall be performed by the "Selected Contractor" (as hereinafter defined)
and in accordance with the procedures and requirements set forth below.
1. ARCHITECTURAL AND CONSTRUCTION PROCEDURES.
A. Tenant and Landlord have approved prior to the execution of this
Lease, both (i) a detailed space plan for the Premises dated November
20, 1998 and consisting of Sheets PP1, PP2 and PP3, prepared by
Landlord's architect, Ware & Malcolm Architects, Inc. ("Preliminary
Plan"), and (ii) an estimate dated November 24, 1998, prepared by
Landlord's contractor, Insignia/ESG of California, Inc., of the cost
for which Landlord will complete or cause to be completed the Tenant
Improvements ("Preliminary Cost Estimate").
B. Prior to the execution of this Lease, Tenant has provided in writing
to Landlord or Landlord's architect all specifications and information
requested by Landlord for the preparation of final construction
documents and costing, including without limitation Tenant's final
selection of wall and floor finishes, complete specifications and
locations (including load and HVAC requirements) of Tenant's
equipment, and details of all "Non-Standard Improvements" (as defined
below) to be installed in the Premises (collectively, "Programming
Information"). Tenant understands that final construction documents
for the Tenant Improvements shall be predicated on the Programming
Information, and accordingly agrees that such information provided to
Landlord is accurate and complete.
C. Except as specified in the Preliminary Plan, the Tenant Improvements
shall incorporate Landlord's building standard materials and
specifications ("Standards") described with particularity in the
Section entitled "Tenant Improvements" of that certain Outline
Specifications and Project Description dated September 22, 1997 (the
"Outline Specifications"). A copy of the Outline Specifications is
attached as Exhibit X-1 hereto. No deviations from the Standards shall
be permitted, provided that Landlord may, in its reasonable
discretion, authorize in writing one or more of such deviations if
requested by Tenant. Subject to the express provisions of Article II.A
below, any excess cost of such deviations shall be part of "Tenant's
Contribution" (as hereinafter defined). Notwithstanding anything to
the contrary contained in the foregoing, Landlord shall in no event be
required to approve any deviations from the Standards ("Non-Standard
Improvements") if Landlord determines that such improvement (i) is of
a lesser quality than the corresponding Standard, (ii) fails to
conform to applicable governmental requirements, (iii) requires
building services beyond the level normally provided to other tenants,
(iv) would delay construction of the Tenant Improvements beyond the
Estimated Commencement Date and Tenant declines to accept such delay
in writing as a Tenant Delay, or (v) would have an adverse aesthetic
impact from the exterior of the Premises.
D. Landlord's architect and engineers shall prepare and deliver to Tenant
working drawings and specifications ("Working Drawings and
Specifications") for the Tenant Improvements based on the Preliminary
Plan not later than twenty (20) days following the execution and
delivery of this Lease by both Landlord and Tenant. Tenant shall have
three (3) business days from the receipt thereof to approve or
disapprove the Working Drawings and Specifications. Tenant shall not
unreasonably withhold or delay its approval, and any disapproval or
requested modification shall be limited to items not contained in the
approved Preliminary Plan or Preliminary Cost Estimate. Should Tenant
disapprove the Working Drawings and Specifications, such disapproval
shall be accompanied by a detailed list of revisions. Any revision
requested by Tenant and reasonably accepted by Landlord shall be
incorporated into a revised set of Working Drawings and
Specifications, and Tenant shall approve same in writing within three
(3) business days of receipt without further revision (provided said
revised set of Working Drawings and Specifications complies with the
applicable revision requested by Tenant and reasonably accepted by
Landlord). Tenant's failure to comply in a timely manner with any of
the requirements of this paragraph shall constitute a Tenant Delay.
<PAGE>
Without limiting the rights of Landlord for Tenant Delays as set forth
herein, in the event Tenant has not approved the Working Drawings and
Specifications within sixty (60) days following the date of this Lease
for any reason other than the failure by Landlord to abide by the
terms and conditions of this Work Letter, then Landlord may, at its
option, elect to terminate this Lease by written notice to Tenant. In
the event Landlord elects to effect such a termination, Tenant shall,
within ten (10) days following demand by Landlord, pay to Landlord any
costs incurred by Landlord in connection with the preparation or
review of plans, construction estimates, price quotations, drawings or
specifications under this Work Letter and for all costs incurred in
the preparation and execution of this Lease, including any leasing
commissions.
E. Upon Tenant's approval of the Working Drawings and Specifications,
Landlord shall submit same both to the City of Irvine for plan check
approval and to Turelk Construction Co. (the "Selected Contractor").
The Selected Contractor shall competitively bid each of the major
subtrades of the Tenant Improvement work with at least three (3)
licensed and qualified subcontractors. Landlord shall also
competitively bid the general contractor's fee and general conditions
of the Tenant Improvements work with at least two (2) other licensed
and qualified general contractors. Such bidding process shall be
completed within ten (10) days following the request for bids, and
Landlord shall notify Tenant of the Selected Contractor's final bid
amount for the Tenant Improvements work (the "Bid Amount"). If the Bid
Amount exceeds the Preliminary Cost Estimate, Landlord and Tenant
shall cooperate in good faith, within three (3) business days
thereafter, to "value engineer" the Tenant Improvements work to reduce
the cost thereof. Upon completion of such process, Landlord shall
execute a "fixed price" or "lump sum" construction contract with the
Selected Contractor for the Bid Amount, as adjusted by any such "value
engineering". Landlord shall cause the Tenant Improvements to be
constructed in a good and workmanlike manner and substantially in
accordance with the approved Working Drawings and Specifications (as
modified by Changes approved by Landlord and Tenant). All materials
and equipment furnished shall conform to such approved Working
Drawings and Specifications and shall be of good quality. Landlord
shall, promptly following notice from Tenant, rectify any
noncompliance with the foregoing obligations at its sole cost and
expense.
F. In the event that Tenant requests in writing a revision in the
approved Working Drawings and Specifications ("Change"), Landlord
shall advise Tenant by written change order as soon as is practical of
any increase in the Completion Cost and/or any Tenant Delay such
Change would cause. Tenant shall approve or disapprove such change
order in writing within three (3) business days following its receipt
from Landlord. Subject to the provisions for application of up to
Ninety Thousand Dollars ($90,000.00) for Non-Standards contained in
Article II.A below, if such Change either involves a Non-Standard
Improvement acceptable to Landlord, or if such Change would result in
the Completion Cost exceeding the Landlord's Contribution, then
Tenant's approval of such Change shall be accompanied by Tenant's
payment of any such increase in the Completion Cost. Landlord shall
have the right to decline Tenant's request for a Change for any of the
reasons set forth in Article I.C above for Landlord's disapproval of a
Non-Standard Improvement. It is understood that Landlord shall have no
obligation to interrupt or modify the Tenant Improvement work pending
Tenant's approval of a change order.
G. Notwithstanding any provision in the Lease to the contrary, if Tenant
fails to comply with any of the time periods specified in this Work
Letter, fails otherwise to approve or reasonably disapprove any
submittal within three (3) business days, fails to approve or
disapprove in writing the Working Drawings and Specifications or the
Final Cost Estimate within the time provided herein, requests any
Changes, furnishes inaccurate or erroneous specifications or other
information, or specifies materials that are not readily available
(provided that Tenant was made aware by Landlord of the delay
associated, or anticipated to be associated, with such Change or
specification at the time of Tenant's request for such Change or
materials) (any of the foregoing being referred to in this Lease as a
"Tenant Delay"), then Tenant shall bear any resulting additional
construction cost or other expenses, and the Commencement Date of this
Lease shall be deemed to have occurred for all purposes, including
Tenant's obligation to pay rent, as of the date Landlord reasonably
determines that it would have been able to deliver the Premises to
Tenant but for the collective Tenant Delays. In no event, however,
shall such date be earlier than the Estimated Commencement Date set
forth in the Basic Lease Provisions. Should Landlord determine that
the Commencement Date should be advanced in accordance with the
foregoing, it shall so notify Tenant in writing. Landlord's
determination shall be conclusive unless Tenant notifies Landlord in
writing, within five (5) days thereafter, of Tenant's election to
contest same by arbitration with JAMS pursuant to
-2-
<PAGE>
Section 22.7 of the Lease. Pending the outcome of such arbitration
proceedings, Tenant shall make timely payment of all rent due under
this Lease based upon the Commencement Date set forth in the aforesaid
notice from Landlord.
H. Landlord shall permit Tenant and its agents to enter the Premises
prior to the Commencement Date of the Lease in order that Tenant may
perform any work to be performed by Tenant hereunder through its own
contractors, subject to Landlord's prior written approval, and in a
manner and upon terms and conditions and at times satisfactory to
Landlord's representative. The foregoing license to enter the Premises
prior to the Commencement Date is, however, conditioned upon Tenant's
contractors and their subcontractors and employees working in harmony
and not interfering with the work being performed by Landlord. If at
any time that entry shall cause disharmony or interfere with the work
being performed by Landlord, this license may be withdrawn by Landlord
upon twenty-four (24) hours written notice to Tenant. That license is
further conditioned upon the compliance by Tenant's contractors with
all requirements imposed by Landlord on third party contractors,
including without limitation the maintenance by Tenant and its
contractors and subcontractors of workers' compensation and public
liability and property damage insurance in amounts and with companies
and on forms satisfactory to Landlord, with certificates of such
insurance being furnished to Landlord prior to proceeding with any
such entry. The entry shall be deemed to be under all of the
provisions of the Lease except as to the covenants to pay rent. Except
to the extent of the active negligence or willful misconduct of
Landlord, or its authorized agents, contractors or employees, Landlord
shall not be liable in any way for any injury, loss or damage which
may occur to any such work being performed by Tenant, the same being
solely at Tenant's risk. In no event shall the failure of Tenant's
contractors to complete any work in the Premises extend the
Commencement Date of this Lease beyond the date that Landlord has
completed its Tenant Improvement work and tendered the Premises to
Tenant.
I. Tenant hereby designates John Ham, Telephone No. (510) 770-8787, as
its representative, agent and attorney in-fact for the purpose of
receiving notices, approving submittals and issuing requests for
Changes, and Landlord shall be entitled to rely upon authorizations
and directives of such person(s) as if given directly by Tenant.
Tenant may amend the designation of its construction representative(s)
at any time upon delivery of written notice to Landlord.
II. COST OF TENANT IMPROVEMENTS.
---------------------------
A. Landlord shall complete, or cause to be completed, the Tenant
Improvements, at the construction cost shown in the Bid Amount
(subject to the provisions of this Work Letter), in accordance with
final Working Drawings and Specifications approved by both Landlord
and Tenant. Landlord shall pay towards the "Completion Cost" (as
hereinafter defined) as incurred a maximum of One Million Ninety
Thousand Dollars ($1,090,000.00) ("Landlord's Contribution"), based on
$7.408 per square foot of the Premises, provided that in the event
that Standards (or Non-Standards approved by Landlord) incorporated
into the Tenant Improvement work shall increase the Completion Cost,
such increase (not to exceed Two Hundred Thousand Dollars
[$200,000.00] in the aggregate) shall be amortized at an interest
factor of twelve percent (12%) per annum over the initial forty-eight
(48) months of the Term, Tenant's Basic Rent shall be so increased by
said amortized amount for the initial forty-eight (48) months of the
Term (and Landlord and Tenant shall execute a memorandum prepared by
Landlord and reasonably acceptable to Tenant confirming said increase
in the Basic Rent), and the Landlord's Contribution shall be deemed to
include any such increase. Tenant shall be fully responsible for the
remainder of the Completion Cost ("Tenant's Contribution"). Landlord's
Contribution shall only be used for construction and installation of
Standards incorporated into the approved Working Drawings and
Specifications, except that: (i) Tenant shall have the right to apply
up to, but not exceeding, Ninety Thousand Dollars ($90,000.00) of the
Landlord's Contribution towards the cost of overtime payments to the
Selected Contractor and for the costs of Changes for any Non-Standards
Improvements approved by Landlord and incorporated in the Tenant
Improvement work. In the event the Completion Cost is less than the
Landlord's Contribution, Tenant may apply such difference towards the
cost of any alterations to the Premises, conforming to Landlord's
Standards and approved by Landlord pursuant to Section 7.3, which
alterations shall be constructed by Tenant within six (6) months
following the Commencement Date.
B. The Completion Cost shall mean the following: (i) payments made to
architects, engineers and other third party consultants in connection
with the preparation of the Preliminary Plan and Working Drawings and
Specifications, (ii) permit fees and other sums paid to
-3-
<PAGE>
governmental agencies, and (iii) costs of all labor and materials for
construction of the Tenant Improvement work in accordance with the
approved Working Drawings and Specifications. The Completion Cost
shall also include an administrative/supervision fee to be paid to
Landlord or to Landlord's management agent in the amount of five
percent (5%) of all such costs. Landlord, at its sole cost and
expense, shall be responsible for and the Completion Cost shall not
include (and Tenant shall have no responsibility for and Landlord's
Contribution shall not be used for) the following: (a) costs
attributable to the "Building Shell Work" defined below; (b) costs
incurred to remove Hazardous Materials from the Premises or the
Project; (c) attorneys' fees incurred in connection with negotiation
of construction contracts, and attorneys' fees, experts' fees and
other costs in connection with disputes with third parties; (d)
interest and other costs of financing construction costs; (e) costs
incurred as a consequence of delay (unless the delay is a "Tenant
Delay" as herein defined), construction defects or default by the
Selected Contractor; (f) costs recoverable by Landlord upon account of
warranties and insurance; (g) restoration costs in excess of insurance
proceeds as a consequence of casualties; (h) penalties and late
charges attributable to Landlord's failure to pay construction costs;
and (i) costs for which Landlord is responsible as provided in Section
2.4 of the Lease.
C. Tenant shall pay to Landlord the amount of the Tenant's Contribution
estimated by Landlord ("Landlord's Final Estimate") following the
final bidding of the Tenant Improvement work and the execution of the
construction contract with the Selected Contractor, as follows: (i)
fifty percent (50%) of the Tenant's Contribution prior to the start of
construction, and (ii) fifty percent (50%) within ten (10) days
following notice from Landlord that the Tenant Improvements work has
been substantially completed. If the actual Completion Cost of the
Tenant Improvements is greater than the Landlord's Final Estimate
because of Changes, or because of Tenant Delays, then Tenant shall be
responsible for all such additional costs; otherwise, Landlord shall
be responsible for such additional costs. The balance of any sums not
otherwise paid by Tenant shall be due and payable on or before the
Commencement Date of this Lease. If Tenant defaults in the payment of
any sums due under this Work Letter, Landlord shall (in addition to
all other remedies) have the same rights as in the case of Tenant's
failure to pay rent under the Lease.
III. SHELL BUILDING WORK.
-------------------
Landlord shall complete, or cause to be completed at its sole cost and
expense, the shell Building work as described with particularity in those
Sections entitled "Site Work" and "Building Shell" in the Outline
Specifications attached as Exhibit X-1 hereto, and the lobby and core
-----------
improvements as described with particularity in the Section entitled
"Lobby/Core Improvements" in the Outline Specifications attached as Exhibit
-------
X-1 hereto for the lobby and core to be constructed in the northeast corner
---
of the Building (collectively, the "Building Shell Work"). The Building
Shell Work shall be constructed in a good and workmanlike manner. All
materials and equipment furnished shall conform to the Outline
Specifications (except to the extent that Landlord shall otherwise
reasonably determine), and shall be of good quality. Landlord shall,
promptly following notice from Tenant, rectify any noncompliance with the
foregoing obligations at its sole cost and expense.
-4-
<PAGE>
OUTLINE SPECIFICATION AND PROJECT DESCRIPTION
MANUFACTURING BUILDINGS
JAMBOREE BUSINESS CENTER
THE IRVINE COMPANY
September 22, 1997
In addition to the Project Data and information provided on the attached
drawings sheets, the following should be considered:
Site Work
---------
Utilities
- ---------
a) Underground storm drain system including catch basins, man holes,
and connections.
b) Interior roof drains at front of building, sheet metal downspouts
at rear of building.
c) Connect sewer from building to street. Include clean outs.
d) Install electrical transformer on pad and connect underground
conduits to building.
e) Provide for telephone connection to the street with underground
conduits between buildings.
f) Provide for underground natural gas to face of building.
g) Provide metered domestic building water connection to the street.
Include separate metered water connection for on-site landscape
irrigation.
h) Provide underground fire line/fire sprinkler water system
including detector check assembly, fire hose connections, post
indicator valves, fire hydrants, and main service into the site
per local fire authority requirements.
Site Concrete
- -------------
a) Provide concrete curbs, gutters and swales, in accordance with
standards of the local municipality.
b) Provide handicapped access curb ramps with 12" wide grooved
warning strips, non slip surface and slopes, crossfall and side
slopes per code.
c) Construct new driveway entrances per city standards including off
site work to patch as required.
d) Construct 6" reinforced concrete trucking pad as shown with
sealed expansion joints at approximately 24' on center and
intermediate sawcut control joints. Broom finish. Reinforcement
as recommended by Geotechnical report.
e) Construct 6" reinforced truck ramps and ramp walls. Ramp walls
may be tilt-up construction. Provide expansion joints, control
joints, broom finish. Paint walls to match building.
f) Construct exit stairs as shown of tilt-up construction and
reinforced concrete steps. Paint walls.
Site Lighting
- -------------
a) Provide high pressure sodium shoe box wall mounted cut-off
light fixtures mounted on the building to meet City of Irvine
and Irvine Spectrum lighting foot-candle requirements.
b) Provide additional pole mounted high pressure sodium cut-off
light fixtures around the site to achieve minimum lighting
levels per city security ordinance throughout site. Mount on
2' height concrete footing base.
Hardscape
- ---------
a) Construct building entry plaza and lunch patio with textured
concrete finish on 4" concrete slab. Provide 1/2" sealed
expansion joints spaced apart as recommended by Geotechnical
report.
b) Construct 4" concrete walks over sand base with score line and
expansion joints spaced apart as recommenced by Geotechnical
report, slab to be finished with medium salt or accent finish.
AC Paving
- ---------
a) Provide standard paving over base at parking stalls and drive
aisles to be used only by cars as recommended by Geotechnical
report.
<PAGE>
b) Provide heavier duty paving over base at drive aisles which will
be used by trucks as recommended by Geotechnical report.
c) Paving to be finished smooth with no sealer.
Striping & Signage
- ------------------
a) Provide city standard parking lot striping double striped with
compact and carpool stall identification.
b) Stripe handicapped stalls with loading zone stripes and
handicapped symbol per code.
c) Provide other site signage for handicapped and accessibility
directions as required, as well as other required surface
markings and curb painting.
Building Shell
--------------
Concrete Slab
- -------------
a) Warehouse slab shall be 6" thick reinforced with wire mesh or re-
bars over gravel base for 3,000 psi strength. Reinforcement and
base as recommended by Geotechnical report. Provide control
joints throughout. Control joints may be sawcut if completed
within twenty four hours of the pour.
b) Office area slab shall be 6" thick reinforced over base and sand
with visqueen vapor barrier centered in sand. Reinforcement, base
and sand thickness as recommended by Geotechnical report.
Columns/Structural Frames
- -------------------------
a) Standard section tube, pipe, or H steel roof and mezzanine
columns full height with welded plates and connectors to accept
floor and/or roof framing structure.
b) Standard section tube or H steel braced "K" frames as needed for
lateral resistance.
Roof Structure
- --------------
a) Steel carrying girders with continuous connectors and shear
straps as needed. 30' clear height.
b) Steel trusses at 8' o.c. with steel connectors, straps and
bracing.
c) Panelized roof with 2 x 4 sub purlins at 24" o.c. and 1/2"
structural grade OSB sheathing over Warehouse areas and 2 x 6
purlins over office areas.
d) Provide supports and blockouts for roof mounted equipment,
skylights, roof access hatch and roof drains per structural
engineer's recommendation.
Roof Finish
- -----------
a) 4-ply built up fiberglass roof system (10 year warranty) complete
with fiber cants, cap sheet, walking pads, and base flashing.
Smokehatch Skylights
- --------------------
a) Provide 4' x 8' vented skylight smoke hatches with integral curb
by Bristolite or equal 2% coverage of warehouse area.
b) Smokehatch skylight units shall have acrylic domes, and shall be
double domed burglar resistant or outfitted with security
bars, as required by local municipality.
Warehouse Curtains
- ------------------
a) Provide separations to 50,000 SF.
b) 6' deep measured from underside of roof sheathing. Smoke curtains
made of 1/2" gyp. board on drywall frame or corrugated sheet
metal with top and bottom angle stiffener. Seal all penetrations.
Walls
- -----
a) 7 1/2" thick concrete tilt-up full height and extended 18" below
finish floor. Walls to be 5' below finished floor at trucking pad
and elsewhere as indicated on grading and structural plans. Walls
may be thicker at panels with openings and at shear wall panels,
or may be thicker per structural engineer's requirements.
b) Add reinforcing steel for future expansion knock-outs as
indicated.
-2-
<PAGE>
c) Include 3/4" deep integral reveals and feature recessed wall
panel areas at exterior side.
d) The exterior side of wall panels shall be sacked and patched as
necessary to result in a smooth, uniform painted surface.
Patching and sacking will also be performed on the edges and
interior surfaces of door and window openings, and any accents or
reveals to provide the same smooth, uniform painted surface as
the exterior walls.
e) Interior shell walls to be 3 5/8" wide 25 gauge or 6" wide / 16
gauge steel studs as required at 24" o.c. or 2 x wood studs at
16" o.c. where indicated.
Fire Sprinkler
- --------------
a) Provide separate zoned system as best suited for this size and
type of building.
b) Provide .45 / 3,000 SF density system throughout entire warehouse
area. (ESFR Ready).
c) Sprinkler spacing in warehouse designed for future ESFR.
d) Provision on site for future ESFR pump location.
e) Ceiling drops into lobbies or care restrooms shall be fitted with
adjustable nipples to allow for future adjustment.
f) Ceiling drops into tenant improved areas by tenant.
Footings
- --------
a) Perimeter walls and interior shear walls to be supported by
continuous type concrete footings. Step as necessary to conform
with exterior finish grades.
b) Interior columns to be supported on concrete spread pad footings.
c) Dry pack under all walls and base plates.
Misc. Steel
- -----------
a) Provide channel or double angle truck door jambs to 4' height and
angle sill edge at all truck doors.
b) Trellis to have structural steel perimeter members and perforated
metal panel in-fill, painted finish.
c) Provide roof access ladder and roof hatch.
Windows
- -------
a) Provide 2" x 4 1/2" aluminum store front mullion system, front
glazed with wallboard adapters at perimeter walls; Kynar or
Duranar finish.
b) Glazing to be 1/4" Tinted Reflective Glass by Spectrum, Guardian,
PPG or equal.
c) Tempered glass at entry doors and elsewhere per code. Provide
spandrel glazing at shear wall and between floor space, where
occurs.
Man Doors
- ---------
a) Provide 3' x 7' 18 ga. hollow metal doors and frames at all
warehouse perimeter doors. Provide drip at top exterior. Paint
finish.
b) Hardware to include 3 ball bearing hinges, lever action exit from
interior, key only from exterior, door stop, self closure,
threshold and seals.
Truck Doors
- -----------
a) Grade level truck doors to be 2 part vertical lift type with
painted finish. Designed for 20 lb. wind load. Manually operated.
Provide minimum air infiltration seals and locks.
b) Dock high truck doors to be overhead sectional lift type with
painted finish. Designed for 20 lb. wind load. Manually operated.
Provide minimum air infiltration seals and locks.
Entry Doors
- -----------
a) Pair 3' x 9' narrow stile aluminum entrance doors with 1/4"
tempered glass.
b) Provide door hardware including recessed floor closer, panic
hardware, key entry, threshold, and pulls.
Glass Exit Doors
- ----------------
a) 3' x 9' narrow stile aluminum entrance door with l/4" tempered
reflective glass.
b) Provide door hardware including overhead closer, panic hardware,
threshold, seals, and key entry.
-3-
<PAGE>
Mezzanine Floor
- ---------------
a) Steel wide flange support beams with 3x wood plates.
b) Wood TJI solid web trusses maximum 20" deep with end hangers and
cross bracing.
c) 3/4" structural plywood subfloor.
d) 1" thick gypsum concrete floor fill.
e) Provide all anchors, ties, straps, and block outs for ducts as
needed.
f) Design load of floor to be 80 lb. reduced live load plus 20 1b.
partition load.
Stairs
- ------
a) Wood framed stair construction with 2 x 16 cut stringers at 12"
o.c. and 3/4" plywood over treads and risers. Treads / risers
shall be glued and nailed to each stringer. Platform framed
landings.
b) Enclosure walls to be wood studs of 1-hour rated construction to
roof with Type "X" gyp. board finish each side.
Electrical / Communications
- ---------------------------
a) Service to building will be 277/480 volt, three phase, four wire.
b) 1200 amp 480 volt 3 phase 4 wire future service provided for,
with additional conduit stubs for future upgrades. (Switchgear
and tenant panels installed as part of the tenant improvement
scope of work).
c) Transformer on grade with bus duct per electric utility purveyor.
d) House meter installed to separately meter common interior and
exterior electrical usage.
e) PacBell service conduits provided to telephone backboard in main
electrical room at each building. Fiber optic service available
to site.
f) 2 - 2" conduits provided to each building for future third party
telephone service use.
g) 1 - 4" conduit between buildings for future inter-building
communications.
Dock Equipment
- --------------
a) Provide a pair of rubber dock bumpers 10" x 11" x 6" thick at
each dock high door.
Lobby / Core Improvements
-------------------------
Wall Framing
- ------------
a) 25 gauge steel studs at 24" o.c. with top and bottom tracks and
screw connections. 3-5/8" throughout except 6" at some plumbing
walls. Provide wood studs at stairwell walls.
b) Use 2 1/2" furring at all improved area concrete exterior walls
and all improved area columns to 6" above finish ceiling height.
c) Provide R-11 Fiberglass Batt insulation at exterior concrete
walls within furring space; full height in improved areas and
restroom walls where indicated.
Ceiling
- -------
a) Use light gauge steel studs or steel channels at solid drywall
ceilings in lobby/core and restrooms, etc., 6" deep at 24" o.c.
or as needed per span. Provide bracing. Gypsum board ceilings at
lobby/core and restrooms to be painted per finish schedule, with
color to match standard wall color.
Insulation
- ----------
a) Provide R-19 fiberglass batt insulation above ceiling or at the
underside of roof structure directly over improved areas, and as
required per acoustical analysis recommendations.
Drywall
- -------
a) 5/8" drywall throughout all interior walls and over furring at
improved area exterior walls.
b) Type "X" drywall all corridor walls, lobby walls, columns at
lobby and corridors.
c) Type "X" drywall at 1-hour rated roof/ceiling at lobby, stair
wells and 1-hour rated floor/ceiling at lobby balconies.
d) Use 5/8" greenboard at restrooms and janitor rooms.
-4-
<PAGE>
e) All drywall at lobbies to receive painted finish of one standard
color. Color options:
a. Benjamin Moore #960
b. Frazee #484.
Carpet
- ------
b) Provide Bentley Mills "Pebble Point" textured loop carpeting at
building entry lobbies. Color options:
a. PB32B-6624 Bone
b. PB32B-6636 Kestrel
c. PB32B-6622 Ash Green
d. PB32B-6632 Graywood
Tile
- ----
a) Provide 2" x 2" ceramic tile on thin set at all rest room floors;
slope to floor drain. Color: Daltile "Almond" DK-35.
b) Provide 4" x 4" full height glazed ceramic tile at all wet walls
in restroom - Daltile Almond.
Doors
- -----
a) Provide solid core 1-3/4", 3' x 9' plastic laminate, Formica
#757-58 Golden Oak - Matte finish. Timely steel frame, CC404
Nickel finish.
b) Provide 20 minute rating for all corridor doors.
Finish Hardware
- ---------------
a) Schlage "L" series dull chrome finish hardware throughout.
Provide 3 ball bearing hinges, hardware stops, silencers, and
concealed auto flush bolts for pairs.
b) Provide panic hardware at all rated doors to corridors, etc.
c) Provide kick plates, push pulls and handicapped signage at
restrooms.
Toilet Compartments
- -------------------
a) Standard height floor mounted overhead braced metal toilet
partitions throughout all restrooms by Global Steel Products
Corporation Spectra 21 or equal. Baked enamel color to be Glogard
#2103 Almond.
Toilet Rooms
- ------------
a) Standard accessories for toilet paper, trash, seat covers,
feminine napkins, soap, mirrors, etc. by Bobrick or equal for all
restrooms. Recessed and semi-recessed.
b) Plastic laminate lavatory top with self-rimming porcelain sink
(s) - Nevamar MR-7-1T.
c) Vision quality mirrors above lavatories, full width and height to
ceiling, one mirror per toilet room.
Cabinets
- --------
a) All restrooms to have lavatory counters/splashes with angle
supports and laminated plastic finish.
b) Plastic laminate finish options:
a. Nevamar. Spa White, Textured #S-7-48T
b. Nevamar, Smoky White, Textured #S-7-27T
Paint
- -----
a) All surfaces shall be painted unless noted to be finished
otherwise.
b) A standard spec. for paint such as by Frazee or Benjamin Moore
shall be followed for all types of surfaces and conditions.
HVAC
- ----
a) Rooftop package units as required for lobby/core and restroom
areas. Units shall be mounted on factory supplied steel curbs, or
shall be mounted on curbs constructed per structural engineer's
recommendation, and a full sheet metal cap. All sides of curbs
shall be provided with fiber cant strips prior to roofing or re-
roofing.
-5-
<PAGE>
b) Thermostats set points 55(degree)F, control heating no more than
70(degree)F and cooling not less than 78(degree)F.
c) Ceiling supply and return diffusers, perforated face in 2x4
ceiling grid.
d) Exhaust fans provided at all restrooms and mechanical rooms,
controlled by timer in electrical room.
e) Roof loading criteria 1,600 lbs. at first 1/3 of truss spans. No
more than one unit at every other truss at each end of truss.
Lighting
- --------
a) Double switch per Title 24, paired in double gang box, white
plastic cover, 42" AFF. to switch centerline. 2x4 fluorescent
fixture with prismatic lens. Provide parabolic lens at lobby/core
fixtures.
b) Exit signs to be internally illuminated, brushed stainless steel
face.
Outlets
- -------
a) Power: 15 amps 125 volt specification grade duplex receptacle
mounted vertically. 15" AFF. to centerline, white plastic
coverplate.
b) Telephone: Single gang box with mud ring and pull string, mounted
vertically, 15" AFF. to centerline, coverplate by telephone
company. Conduit to grid.
Elevator (Optional)
- -------------------
a) Two stop 2,500 lb. Capacity hydraulic passenger elevator with
standard finished cab, finished elevator shaft, elevator
equipment and necessary mechanical/electrical devices associated
with the installation.
Fire Sprinkler / Protection
- ---------------------------
a) Provide standard office type system at lobby/core areas. Semi-
recessed heads, chrome finish. b) Provide fire extinguishers and
fire extinguisher cabinets as required by fire department.
Tenant Improvements
-------------------
Wall Framing
- ------------
a) 25 gauge steel studs at 24" o.c. with top and bottom tracks and
screw connections. 3-5/8" throughout except 6" at some plumbing
walls. Provide wood studs at stairwell walls.
b) Use 2 1/2" furring at all office area concrete exterior walls and
all office area columns to 6" above finish ceiling height.
c) Provide R-11 Fiberglass Batt insulation at exterior concrete
walls within furring space; full height in office improved areas
and restroom walls where indicated.
Ceiling
- -------
a) 2' x 4' suspended ceiling grid system in standard white finish by
Donn or equal. Include all seismic anchors, compression struts
and diagonal wires per code.
b) 2' x 4' Armstrong Minaboard Cortega White lay-in tile in 9/16" T-
bar grid.
Insulation
- ----------
a) Provide R-19 fiberglass batt insulation above ceiling or at the
underside of roof structure directly over improved tenant office
areas, and as required per acoustical analysis recommendations.
Drywall
- -------
a) 5/8" drywall throughout all interior walls and over furring at
office area exterior walls.
b) Type "X" drywall all corridor walls, lunch room walls, and
conference room walls.
c) Type "X" drywall at 1-hour rated roof/ceiling at stair wells and
conference room, and 1-hour rated floor/ceiling at conference
room.
d) Use 5/8" greenboard at restrooms and janitor rooms.
e) All drywall at lobbies to receive painted finish of one standard
color. Color options:
a. Benjamin Moore #960
b. Frazee #484.
-6-
<PAGE>
Carpet
- ------
a) Provide Designweave 971 Tempest Classic - direct glue down carpet
at standard office areas, and corridors as indicated on the
finish schedule. Color options:
a. 836 "Graphite"
b. 226 "Buckwheat"
c. 236 "Sable"
d. 968 "Silverwing"
e. 967 "Platinum"
Vinyl Flooring & Base
- ---------------------
a) Provide 12 x 12 VCT Mannington Essentials. Color options:
a. 129 Putty
b. 131 Oyster White
c. 112 Pewter
d. 122 Glacier where indicated in the finish schedule.
Include carpet edge trim.
b) Provide rubber stair treads at exit stair well stairs.
c) Provide 2 1/2" Burke rubber base at all walls. Color options:
a. "Pearl" 137P
b. "Bluish White" 168P. Provide rubber stair base at all
stairs.
Note: Coordinated Office Tenant Improvement finishes to be per the
following grid:
<TABLE>
<S> <C> <C>
------------------------------ ------------------------- ---------------------------------
Carpet a, b or e d or e
------------------------------ ------------------------- ---------------------------------
VCT a or b c or d
------------------------------ ------------------------- ---------------------------------
Paint a b
------------------------------ ------------------------- ---------------------------------
Base a b
------------------------------ ------------------------- ---------------------------------
P. Lam. a b
------------------------------ ------------------------- ---------------------------------
</TABLE>
Doors
- -----
a) Provide solid core 1-3/4", 3' x 9' plastic laminate, Formica
#757-58 Golden Oak - Matte finish. Timely steel frame. CC404
Nickel finish.
b) Provide 20 minute rating for all corridor doors.
Finish Hardware
- ---------------
a) Schlage "L" series dull chrome finish hardware throughout.
Provide 3 ball bearing hinges, hardware stops, silencers, and
concealed auto Rush bolts for pairs.
b) Provide panic hardware at all rated doors to corridors, etc.
c) Provide kick plates, push pulls and handicapped signage at
restrooms.
Cabinets
- --------
a) Coffee bar to have 8 lineal feet of plastic laminate faced upper
and lower cabinets, flush overlay custom grade design with single
stainless steel sink and garbage disposal at one location per
tenant, adjacent to restrooms and / or building waste line.
b) Plastic laminate finish options:
a. Nevamar, Spa White, Textured #S-7-48T
b. Nevamar, Smoky White, Textured #S-7-27T
Miniblinds
- ----------
a) All exterior windows to have standard Meriak Industries PVC
vertical blinds throughout.
Paint
- -----
a) All surfaces shall be painted unless noted to be finished
otherwise.
b) A standard spec. for paint such as by Frazee or Benjamin Moore
shall be followed for all types of surfaces and conditions.
c) Eggshell wall paint finish at standard offices.
a. Benjamin Moore #960
b. Frazee #484 City Lights
d) Semi-gloss at lunch room, restrooms, storage rooms or as
otherwise noted.
-7-
<PAGE>
HVAC
- ----
a) Rooftop package units as required for improved areas. Units shall
be mounted on factory supplied steel curbs, or shall be mounted
on curbs constructed per structural engineer's recommendation,
and a full sheet metal cap. All sides of curbs shall be provided
with fiber cant strips prior to roofing or re-roofing.
b) Thermostats set points 55(degree)F, control heating no more than
70(degree)F and cooling not less than 78(degree)F.
c) Ceiling supply and return diffusers, perforated face in 2x4
ceiling grid.
d) Exhaust fans provided at all restrooms and mechanical rooms,
controlled by timer in electrical room.
e) Roof loading criteria 1,600 lbs. at first 1/3 of truss spans. No
more than one unit at every other truss at each end of truss.
Office Lighting
- ---------------
a) Double switch per Title 24, paired in double gang box, white
plastic cover, 42" AFF. to switch centerline. 2x4 fluorescent
fixture with prismatic lens.
b) Exit signs to be internally illuminated, brushed stainless steel
face.
Electrical
- ----------
a) Electrical switchgear and tenant panels installed as part of
tenant improvements.
b) Power: 15 amps 125 volt specification grade duplex receptacle
mounted vertically, 15" AFF. to centerline, white plastic
coverplate.
c) Telephone: Single gang box with mud ring and pull string, mounted
vertically. 15" AFF. to centerline, coverplate by telephone
company. Conduit to grid.
Fire Sprinkler/ Protection
- --------------------------
a) Provide standard office type system at office areas. Semi-
recessed heads, chrome finish. b) Provide fire extinguishers and
fire extinguisher cabinets as required by fire department.
Warehouse Curtains
- ------------------
a) Provide separations to 10,000 SF or as required by fire
department.
b) 6' deep measured from underside of roof sheathing. Smoke curtains
made of l/2" gyp. board on drywall frame or corrugated sheet
metal with top and bottom angle stiffener. Seal all penetrations.
Warehouse Lighting
- ------------------
a) 400 w. metal halide aluminum high bay fixtures for 20 fc general
warehouse lighting.
b) Exit signs to be internally illuminated, brushed stainless steel
face.
Dock Equipment
- --------------
a) Recessed mechanical dock levelers (25,000 lb. capacity) as
manufactured by Kelley Dock Systems or equal.
Mechanical Screen
- -----------------
a) Vertical-ribbed corrugated metal siding equipment screen (size as
indicated) attached to steel angle frames, and braced to roof.
Paint to match building panels.
Concrete Slab Finishes
- ----------------------
a) Warehouse area slabs to be sealed with "Cementone" clear water-
based concrete sealer as manufactured by L.M. Scofield Company.
b) Warehouse floor joints/sawcuts shall be filled with Chemtron CP-
2010 joint filler as manufactured by Chemtron Polymers, Inc.,
Lynnwood, WA.
-8-
<PAGE>
EXHIBIT Y
[Project Site Plan]
<PAGE>
GUARANTEE OF LEASE
------------------
ARTICLE I. PARTIES
The undersigned, KOREA DATA SYSTEMS (AMERICA), INC., a California
corporation (hereinafter, "GUARANTOR"), whose address is hereinafter set forth,
as a material inducement to and in consideration of THE IRVINE COMPANY, a
Delaware corporation, (hereinafter "LANDLORD") entering into a written lease,
(hereinafter, the "Lease") with E-MACHINE, INC., a California corporation,
(hereinafter "TENANT"), of approximately even date herewith, for lease of that
certain space located at 14350 Myford Road, Irvine, California and more
particularly described in the Lease, to which this Guarantee of Lease (the
"Guarantee") shall be attached and made a part, pursuant to the provisions of
this Guarantee unconditionally guarantees and promises to and for the benefit of
LANDLORD full payment and performance of each and all of the terms, covenants
and conditions of the Lease by TENANT, all as more specifically set forth
hereinafter.
ARTICLE II. GUARANTOR'S DUTIES
Section 2.1. Guarantee of TENANT's Performance
-----------------------------------------------
GUARANTOR hereby unconditionally guarantees to LANDLORD the full and
complete performance of each and all of the terms, covenants and conditions of
the Lease as required to be performed by TENANT, including, but not limited to,
the payment of all rental, property taxes, insurance premiums, and any and all
other charges or sums, or any portion thereof, to accrue or become due from
TENANT to LANDLORD pursuant to the terms of the Lease.
Section 2.2. TENANT's Failure to Perform
----------------------------------------
2.2.1 Payment of Rental and Other Sums. In the event that TENANT shall
--------------------------------
be in Default of its obligations under the Lease to pay any rental, property
taxes, insurance premiums, or any other sums or charges, or any portion thereof,
accrued or due pursuant to the terms of said Lease, then within fifteen (15)
days following written notice to GUARANTOR by LANDLORD as herein provided,
GUARANTOR shall, by certified or cashier's check, or in such other manner as
LANDLORD may demand, pay to LANDLORD or LANDLORD's designated agent any and all
such amounts as may be due and owing from TENANT to LANDLORD by reason of
TENANT's Default.
2.2.2 Other Provisions. In the event that TENANT shall be in Default
----------------
of its obligations under the Lease to perform any covenants, terms or conditions
of the Lease as required to be performed, other than as provided for in Section
2.2.1 above, then upon written notice to GUARANTOR by LANDLORD, as provided
herein, GUARANTOR shall commence and complete performance of such conditions,
covenants and terms within fifteen (15) days after the date of LANDLORD's notice
to GUARANTOR of such Default by TENANT to so perform, and in the event such
performance by GUARANTOR cannot be completed within said fifteen (15) days,
GUARANTOR shall commence performance within said time and shall diligently
pursue completion thereof within a reasonable time duly set forth hereinafter.
Section 2.3. Statements of GUARANTOR. GUARANTOR SHALL __________ LANDLORD,
------------------------------------
prior to the execution of this Guarantee and thereafter at any time upon
Landlord's request of GUARANTOR's current tax returns and financial statements,
certified true, accurate and complete by the chief financial officer of
GUARANTOR, including a balance sheet and profit and loss statement for the most
recent prior year (collectively, the "Statements"), which Statements shall
accurately and completely reflect the financial condition of GUARANTOR. LANDLORD
agrees that it will keep the Statements confidential, except that LANDLORD shall
have the right to deliver the same to any proposed purchaser or encumbrancer of
the premises described in the Lease (provided that LANDLORD shall require that
any such proposed purchaser keep such Statements confidential, and shall request
that any such encumbrancer keep such Statements confidential).
<PAGE>
ARTICLE III. LANDLORD'S RIGHTS
Section 3.1. Enforcement
------------------------
Notwithstanding the provisions of Section 2.2.1 above, LANDLORD reserves
the right, in the event of any failure of TENANT to pay rental, property taxes,
insurance premiums and other sums which may become due and owing pursuant to the
terms of the Lease, to proceed against TENANT or GUARANTOR, or both, and to
enforce against GUARANTOR or TENANT, or both, any and all rights that LANDLORD
may have to said rental, property taxes, insurance premiums and other sums
accrued pursuant to the terms of the Lease, without giving prior notice to
TENANT or GUARANTOR, and without making demands therefor on either of them.
GUARANTOR understands and agrees that its liability under this Guarantee shall
be primary and that, in any right of action which may accrue to LANDLORD under
the Lease or this Guarantee, LANDLORD at its option may proceed against
GUARANTOR without having taken any action or obtained any judgment against
TENANT.
Section 3.2. GUARANTOR's Waivers
--------------------------------
In addition to any other waiver herein and except as otherwise specifically
provided in this Guarantee, GUARANTOR hereby waives:
(a) any and all notices, presentments, notice of nonpayment or
nonperformance;
(b) all defenses by reason of any disability of TENANT;
(c) any and all rights it may have now or in the future, whether
pursuant to Section 2845 of the California Civil Code or otherwise, to require
or demand that LANDLORD pursue any right or remedy LANDLORD may have against
TENANT or any other third party;
(d) until such time as all obligations of TENANT under the Lease have
been satisfied in full, any and all rights it may have for subrogation against,
or reimbursement from, TENANT with respect to any sums paid hereunder; and
(e) any and all right to the benefit of, or to participate in, any
security held by LANDLORD now or in the future, or to require that such security
be applied by LANDLORD either (i) prior to any action against GUARANTOR
hereunder or (ii) as a credit or offset against sums owing hereunder.
ARTICLE IV. ALTERATION, MODIFICATION, OR ASSIGNMENT
Section 4.1. Effect of Extension, Modification, or Alteration of Lease
----------------------------------------------------------------------
GUARANTOR understands and agrees that notwithstanding the provisions of
Section 2819 of the California Civil Code, the obligations of GUARANTOR under
this Guarantee shall in no way be affected by any extension, modification or
alteration of the Lease, including, but not limited to, TENANT entering into any
sublease thereunder, or TENANT's obligations under the Lease and each of its
provisions, and any such extension, modification or alteration of the Lease,
including TENANT entering into any sublease thereunder, shall in no way release
or discharge GUARANTOR from any obligations accruing under this Guarantee. The
term "Lease" shall include all amendments, modifications, alterations and
extensions of the Lease.
Section 4.2. Assignment
-----------------------
GUARANTOR understands and agrees that any assignment of the Lease, or any
rights or obligations accruing thereunder, shall in no way affect GUARANTOR's
obligations under this Guarantee.
Section 4.3. Delay in Enforcement
---------------------------------
GUARANTOR understands and agrees that any failure or delay of LANDLORD to
enforce any of its rights under the Lease or this Guarantee shall in no way
affect GUARANTOR's obligations under this Guarantee.
ARTICLE V. TENANT'S INSOLVENCY
Section 5.1. Liability upon TENANT's Insolvency
-----------------------------------------------
GUARANTOR understands and agrees that in the event TENANT shall become
insolvent or be adjudicated bankrupt, whether by voluntary or involuntary
petition, or shall a petition for organization,
-2-
<PAGE>
arrangement, or similar relief be filed against it, or if a receiver of any part
of its property or assets is appointed by any court, GUARANTOR will remain
obligated to pay to LANDLORD the amount of all unpaid rent, property taxes,
operating expenses, and any other sums accrued and thereafter accruing under the
Lease.
Section 5.2. Effect of Operation of Law
---------------------------------------
Any operation of any present or future debtor's relief act or similar act
or law, or decision of any court, shall in no way abrogate or otherwise limit
the obligation of GUARANTOR to perform any of the terms, covenants or conditions
of this Guarantee.
ARTICLE VI. MISCELLANEOUS
Section 6.1. Notices
--------------------
Any and all notices required under this Guarantee shall be made in writing,
and shall be personally delivered, sent by reputable courier or overnight
delivery service, or mailed, first-class mail, postage prepaid, to the party who
is designated to receive such notice at the address set forth after their
respective signatures on this Guarantee, or at such other place as may be
designated by said party upon written notice from time to time hereafter.
Section 6.2. Extent of Obligations
----------------------------------
Notwithstanding anything to the contrary in this Guarantee, it is
understood and agreed that this Guarantee shall extend to any and all
obligations of TENANT and LANDLORD.
Section 6.3. Assignability
--------------------------
This agreement may be assigned in whole or in part by LANDLORD at any time
to any successor to LANDLORD's interest in the leased premises and/or to any
lender of LANDLORD.
Section 6.4. Successors and Assigns
-----------------------------------
The terms and provisions of this Guarantee shall be binding upon and inure
to the benefit of the successors and assigns of the parties hereto.
Section 6.5. Modification of Guarantee
--------------------------------------
This Guarantee constitutes the full and complete agreement between the
parties hereto, and it is understood and agreed that the provisions hereof may
only be modified by a writing executed b y both parties hereto.
Section 6.6. Number and Gender
------------------------------
As used herein the singular shall include the plural, and as used herein
the masculine shall include the feminine and neuter genders.
Section 6.7. Captions/Headings
------------------------------
Any captions or headings used in this Guarantee are for reference purposes
only and are in no way to be construed as part of this Guarantee.
Section 6.8. Invalidity
-----------------------
If any term, provision, covenant or condition of this Guarantee is held to
be void, invalid, or unenforceable, the remainder of the provisions shall remain
in full force and effect and shall in no way be affected, impaired, or
invalidated.
Section 6.9. Jurisdiction
-------------------------
The validity of this agreement and of any of its terms or provisions, as
well as the rights and duties of the parties hereunder, shall be interpreted and
construed pursuant to and in accordance with the laws of the State of
California.
-3-
<PAGE>
Section 6.10. Joint and Several
-------------------------------
Should more than one party execute this instrument as GUARANTOR, then the
obligations of each such party shall be joint and several.
Section 6.11. Attorney's Fees
-----------------------------
In the event it becomes necessary to enforce any of the terms and
provisions of this Guarantee, whether or not suit be instituted, the prevailing
party shall be entitled to its reasonable costs and expenses incurred with
respect thereto, including, but not limited to, reasonable attorney's fees, and
such other costs and expenses as may be allowed by law.
Section 6.12. Guarantee of Payment and Performance
---------------------------------------------------
It is understood and agreed that this Guarantee is unconditional and
continuing, and a guarantee of payment and performance and not of collection.
ARTICLE VII. EXECUTION
IN WITNESS WHEREOF, the undersigned have executed this Guarantee and made
it effective this 24th day of November, 1998.
KOREA DATA SYSTEMS (AMERICA), INC.,
a California corporation
By: /s/ John Hui
_____________________________
Name: John Hui
____________________________
Title: CEO
___________________________
Address: 12360 Edison Way
Garden Grove, CA 92891
_________________________
By: /s/ Ben Wong
______________________________
Name: Ben Wong
____________________________
Title: Secretary
___________________________
Address: 12360 Edison Way
Garden Grove, CA 92891
_________________________
-4-
<PAGE>
EXHIBIT 10.13
THIS WARRANT AND THE SHARES OF COMMON STOCK WHICH MAY BE PURCHASED UPON THE
EXERCISE OF THIS WARRANT HAVE BEEN ACQUIRED SOLELY FOR INVESTMENT AND HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY
STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD, OFFERED FOR SALE,
PLEDGED OR HYPOTHECATED IN THE ABSENCE OF SUCH REGISTRATION OR AN OPINION OF
COUNSEL SATISFACTORY TO THE COMPANY AND ITS COUNSEL THAT SUCH SALE, OFFER,
PLEDGE OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY
REQUIREMENTS OF THE ACT AND OF ANY APPLICABLE STATE SECURITIES LAWS.
THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER ARE SUBJECT TO THE CONDITIONS
SPECIFIED IN THE AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT, DATED AS OF
AUGUST 18, 1999, AND ANY AMENDMENT THERETO OR RESTATEMENTS THEREOF (SUCH
AGREEMENT INCLUDING ANY SUCH AMENDMENT OR RESTATEMENTS, THE "AGREEMENT") AMONG
EMACHINES, INC. AND CERTAIN OTHER SIGNATORIES THERETO, AND NO TRANSFER OF THIS
WARRANT OR SUCH SHARES SHALL BE VALID OR EFFECTIVE UNTIL SUCH CONDITIONS HAVE
BEEN FULFILLED. THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER ARE SUBJECT TO A
VOTING AGREEMENT CONTAINED IN THE AGREEMENT AND BY ACCEPTING ANY INTEREST IN
THIS WARRANT OR SUCH SHARES, THE PERSON ACCEPTING SUCH INTEREST SHALL BE DEEMED
TO AGREE TO AND SHALL BECOME BOUND BY ALL THE PROVISIONS OF THE AGREEMENT. UPON
THE FULFILLMENT OF CERTAIN OF SUCH CONDITIONS EMACHINES, INC. HAS AGREED TO
DELIVER TO THE HOLDER HEREOF A NEW WARRANT OR TO THE HOLDER THEREOF A NEW
CERTIFICATE FOR THE SHARES ISSUABLE HEREUNDER, AS APPLICABLE, IN EACH CASE NOT
BEARING THIS LEGEND, FOR THE WARRANT OR SUCH SHARES, AS THE CASE MAY BE,
REGISTERED IN THE NAME OF THE HOLDER HEREOF OR THEREOF. A COPY OF THE AGREEMENT
MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF
THIS WARRANT OR OF THE SHARES ISSUABLE HEREUNDER TO THE SECRETARY OF EMACHINES,
INC
EMACHINES INC.
COMMON STOCK PURCHASE WARRANT
-----------------------------
No. 1 Void after August 18, 2004
THIS CERTIFIES THAT, for value received, America Online, Inc. (the
"Holder") is entitled to subscribe for and purchase the Formula Number of shares
------
(as such number of shares shall be adjusted pursuant to Section 3 hereof, thus
adjusting the per share Exercise Price) of the fully paid and nonassessable
Common Stock, $0.0000125 par value (the "Shares"), of eMachines, Inc., a
------
<PAGE>
Delaware corporation (the "Company"), at the aggregate exercise price of $3.625
-------
million (the "Exercise Price"), subject to the provisions and upon the terms and
--------------
conditions hereinafter set forth. The "Formula Number" of shares shall mean
$3.625 million divided by (i) in the case of an initial public offering of
Shares pursuant to a registration statement on Form S-1, the greater of (A) the
product of 1.25 and the per Share offering price of the Shares in such offering
and (B) $7.981, or (ii) in any other case, $11.823.
1. Method of Exercise; Payment.
---------------------------
(a) Cash Exercise. The purchase rights represented by this
-------------
Warrant may be exercised by the Holder, in whole or in part, by the surrender of
this Warrant (with the notice of exercise form attached hereto as Exhibit A duly
---------
executed) at the principal office of the Company, and by the payment to the
Company, by certified, cashier's or other check acceptable to the Company or by
wire transfer to an account designated by the Company, of an amount equal to the
aggregate Exercise Price of the Shares being purchased.
(b) Net Issue Exercise. In lieu of exercising this Warrant, the
------------------
Holder may elect to receive Shares equal to the value of this Warrant (or the
portion thereof being canceled) by surrender of this Warrant at the principal
office of the Company together with notice of such election, in which event the
Company shall issue to the Holder a number of Shares computed using the
following formula:
X = Y (A-B)
-------
A
Where X = the number of the Shares to be issued to the Holder.
Y = the number of the Shares purchasable under this Warrant.
A = the fair market value of one Share on the date of
determination.
B = the per share Exercise Price (as adjusted to the date of
such calculation).
(c) Fair Market Value. For purposes of this Section 1, the per
-----------------
share fair market value of the Shares shall mean:
(i) If the Company's Common Stock is publicly traded, the
per share fair market value of the Shares shall be the average of the closing
prices of the Common Stock as quoted on the Nasdaq National Market or the
principal exchange on which the Common Stock is listed, or if not so listed then
the fair market value shall be the average of the closing bid prices of the
Common Stock as published in The Wall Street Journal, in each case for the
-----------------------
fifteen trading days ending five trading days prior to the date of determination
of fair market value;
(ii) If the Company's Common Stock is not so publicly
traded, the per share fair market value of the Shares shall be such fair market
value as is determined in good faith by
-2-
<PAGE>
the Board of Directors of the Company after taking into consideration factors it
deems appropriate, including, without limitation, recent sale and offer prices
of the capital stock of the Company in private transactions negotiated at arm's
length.
(d) Stock Certificates. In the event of any exercise of the rights
------------------
represented by this Warrant, certificates for the Shares so purchased shall be
delivered to the Holder within a reasonable time and, unless this Warrant has
been fully exercised or has expired, a new Warrant representing the shares with
respect to which this Warrant shall not have been exercised shall also be issued
to the Holder within such time.
2. Stock Fully Paid; Reservation of Shares. All of the Shares issuable
---------------------------------------
upon the exercise of the rights represented by this Warrant will, upon issuance
and receipt of the Exercise Price therefor, be fully paid and nonassessable, and
free from all taxes, liens and charges with respect to the issue thereof. During
the period within which the rights represented by this Warrant may be exercised,
the Company shall at all times have authorized and reserved for issuance
sufficient shares of its Common Stock to provide for the exercise of the rights
represented by this Warrant.
3. Adjustments. Subject to the provisions of Section 11 hereof, the
---------------------------
number and kind of securities purchasable upon the exercise of this Warrant and
the Exercise Price therefor shall be subject to adjustment from time to time
upon the occurrence of certain events, as follows:
(a) Reclassification. In the case of any reclassification or
----------------
change of securities of the class issuable upon exercise of this Warrant (other
than a change in par value, or from par value to no par value, or from no par
value to par value, or as a result of a subdivision or combination), or in case
of any merger of the Company with or into another corporation (other than a
merger with another corporation in which the Company is the acquiring and the
surviving corporation and which does not result in any reclassification or
change of outstanding securities issuable upon exercise of this Warrant), or in
case of any sale of all or substantially all of the assets of the Company, the
Company, or such successor or purchasing corporation, as the case may be, shall
duly execute and deliver to the holder of this Warrant a new Warrant (in form
and substance reasonably satisfactory to the holder of this Warrant), or the
Company shall make appropriate provision without the issuance of a new Warrant,
so that the holder of this Warrant shall have the right to receive, at a total
purchase price not to exceed that payable upon the exercise of the unexercised
portion of this Warrant, and in lieu of the shares of Common Stock theretofore
issuable upon exercise of this Warrant, (i) the kind and amount of shares of
stock, other securities, money and property receivable upon such
reclassification, change, merger or sale by a holder of the number of shares of
Common Stock then purchasable under this Warrant, or (ii) in the case of such a
merger or sale in which the consideration paid consists all or in part of assets
other than securities of the successor or purchasing corporation, at the option
of the Holder of this Warrant, the securities of the successor or purchasing
corporation having a value at the time of the transaction equivalent to the fair
market value of the Common Stock at the time of the transaction. The provisions
of this subparagraph (a) shall similarly apply to successive reclassifications,
changes, mergers and transfers.
-3-
<PAGE>
(b) Stock Splits, Dividends and Combinations. In the event that the
----------------------------------------
Company shall at any time subdivide the outstanding shares of Common Stock or
shall issue a stock dividend on its outstanding shares of Common Stock the
number of Shares issuable upon exercise of this Warrant immediately prior to
such subdivision or to the issuance of such stock dividend shall be
proportionately increased, and the Exercise Price shall be proportionately
decreased, and in the event that the Company shall at any time combine the
outstanding shares of Common Stock the number of Shares issuable upon exercise
of this Warrant immediately prior to such combination shall be proportionately
decreased, and the Exercise Price shall be proportionately increased, effective
at the close of business on the date of such subdivision, stock dividend or
combination, as the case may be.
4. Notice of Adjustments. Whenever the number of Shares purchasable
---------------------
hereunder or the Exercise Price thereof shall be adjusted pursuant to Section 3
hereof, the Company shall provide notice to the Holder setting forth, in
reasonable detail, the event requiring the adjustment, the amount of the
adjustment, the method by which such adjustment was calculated, and the number
and class of shares which may be purchased thereafter and the Exercise Price
therefor after giving effect to such adjustment.
5. Fractional Shares. This Warrant may not be exercised for fractional
-----------------
shares. In lieu of fractional shares the Company shall make a cash payment
therefor based upon the Exercise Price then in effect and the fair market value
of the shares then obtaining (calculated in accordance with Section 1(c) hereof
as if the shares were the Shares referred to in such Section).
6. Representations of the Company. The Company represents that all
------------------------------
corporate actions on the part of the Company, its officers, directors and
shareholders necessary for the sale and issuance of the Shares pursuant hereto
and the performance of the Company's obligations hereunder were taken prior to
and are effective as of the effective date of this Warrant.
7. Representations and Warranties by the Holder. The Holder represents
--------------------------------------------
and warrants to the Company as follows:
(a) This Warrant and the Shares issuable upon exercise thereof are
being acquired for its own account, for investment and not with a view to, or
for resale in connection with, any distribution or public offering thereof
within the meaning of the Securities Act of 1933, as amended (the "Act"). Upon
---
exercise of this Warrant, the Holder shall, if so requested by the Company,
confirm in writing, in a form satisfactory to the Company, that the securities
issuable upon exercise of this Warrant are being acquired for investment and not
with a view toward distribution or resale.
(b) The Holder understands that the Warrant and the Shares have not
been registered under the Act by reason of their issuance in a transaction
exempt from the registration and prospectus delivery requirements of the Act
pursuant to Section 4(2) thereof, and that they must be held by the Holder
indefinitely, and that the Holder must therefore bear the economic risk of such
investment indefinitely, unless a subsequent disposition thereof is registered
under the Act or is exempted from such registration. The Holder further
understands that the Shares have not been qualified under the California
Securities Law of 1968 (the "California Law") by reason of their issuance in a
--------------
transaction exempt from the qualification requirements of the California Law
pursuant
-4-
<PAGE>
to Section 25102(f) thereof, which exemption depends upon, among other things,
the bona fide nature of the Holder's investment intent expressed above.
(c) The Holder has such knowledge and experience in financial
and business matters that it is capable of evaluating the merits and risks of
the purchase of this Warrant and the Shares purchasable pursuant to the terms of
this Warrant and of protecting its interests in connection therewith.
(d) The Holder is able to bear the economic risk of the purchase
of the Shares pursuant to the terms of this Warrant.
8. Restrictive Legend.
------------------
The Shares (unless registered under the Act) shall be stamped or
imprinted with a legend in substantially the following form:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE
SALE OR DISTRIBUTION THEREOF, AND HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED. SUCH SHARES MAY NOT BE
SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS
THE COMPANY RECEIVES AN OPINION OF COUNSEL REASONABLY ACCEPTABLE
TO IT STATING THAT SUCH SALE OR TRANSFER IS EXEMPT FROM THE
REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF THE ACT.
THE SECURITIES REPRESENTED HEREBY ARE SUBJECT TO THE CONDITIONS
SPECIFIED IN THE AMENDED AND RESTATED INVESTORS' RIGHTS
AGREEMENT, DATED AS OF AUGUST __, 1999, AND ANY AMENDMENT THERETO
OR RESTATEMENTS THEREOF (SUCH AGREEMENT INCLUDING ANY SUCH
AMENDMENT OR RESTATEMENTS, THE "AGREEMENT") AMONG EMACHINES, INC.
AND CERTAIN OTHER SIGNATORIES THERETO, AND NO TRANSFER OF THESE
SECURITIES SHALL BE VALID OR EFFECTIVE UNTIL SUCH CONDITIONS HAVE
BEEN FULFILLED. THE SECURITIES REPRESENTED HEREBY ARE SUBJECT TO
A VOTING AGREEMENT CONTAINED IN THE AGREEMENT AND BY ACCEPTING
ANY INTEREST IN SUCH SECURITIES, THE PERSON ACCEPTING SUCH
INTEREST SHALL BE DEEMED TO AGREE TO AND SHALL BECOME BOUND BY
ALL THE PROVISIONS OF THE AGREEMENT. UPON THE FULFILLMENT OF
CERTAIN OF SUCH CONDITIONS EMACHINES, INC. HAS AGREED TO DELIVER
TO THE HOLDER HEREOF A NEW CERTIFICATE NOT BEARING THIS LEGEND
FOR THE SECURITIES REPRESENTED HEREBY REGISTERED IN THE NAME OF
THE HOLDER HEREOF. A COPY OF THE AGREEMENT MAY BE OBTAINED AT NO
COST
-5-
<PAGE>
BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF THIS
CERTIFICATE TO THE SECRETARY OF EMACHINES, INC.
9. Restrictions Upon Transfer and Removal of Legend.
------------------------------------------------
(a) The Company need not register a transfer of this Warrant or
Shares bearing the restrictive legend set forth in Section 8 hereof, unless the
conditions specified in such legend are satisfied. The Company may also instruct
its transfer agent not to register the transfer of the Shares, unless one of the
conditions specified in the legend referred to in Section 8 hereof is satisfied.
(b) Notwithstanding the provisions of paragraph (a) above, no
opinion of counsel shall be necessary for a transfer without consideration by
any holder (i) if such holder is a partnership, to a partner or retired partner
of such partnership who retires after the date hereof or to the estate of any
such partner or retired partner, or (ii) if such holder is a corporation, to a
shareholder of such corporation, or to any other corporation under common
control, direct or indirect, with such holder.
(c) The holder agrees not to sell, make any short sale of, loan,
grant any option for the purchase of, or otherwise transfer or dispose of any
shares of Common Stock (or other securities) of the Company held by such holder
during a period of time determined by the Company and its underwriters (not to
exceed 180 days in the event of the Company's initial public offering and 90
days in the event of any other public offering) following the effective date of
a registration statement of the Company filed under the Securities Act, as
amended. The Company may impose stop-transfer instructions with respect to the
Common Stock (or other securities) subject to the foregoing restriction until
the end of said period.
10. Rights of Shareholders. No holder of this Warrant shall be entitled,
----------------------
as a Warrant holder, to vote or receive dividends or be deemed the holder of any
Shares or any other securities of the Company which may at any time be issuable
on the exercise hereof for any purpose, nor shall anything contained herein be
construed to confer upon the holder of this Warrant, as such, any of the rights
of a stockholder of the Company or any right to vote for the election of
directors or upon any matter submitted to shareholders at any meeting thereof,
or to give or withhold consent to any corporate action (whether upon any
recapitalization, issuance of stock, reclassification of stock, change of par
value, consolidation, merger, conveyance, or otherwise) or to receive notice of
meetings, or to receive dividends or subscription rights or otherwise until the
Warrant shall have been exercised and the Shares purchasable upon the exercise
hereof shall have become deliverable, as provided herein. The holder of this
Warrant will not be entitled to share in the assets of the Company in the event
of a liquidation, dissolution or the winding up of the Company.
11. Notices. All notices and other communications required or permitted
-------
hereunder shall be in writing, shall be effective when given, and shall in any
event be deemed to be given upon receipt or, if earlier, (a) five (5) days after
deposit with the U.S. Postal Service or other applicable postal service, if
delivered by first class mail, postage prepaid, (b) upon delivery, if delivered
by hand,
-6-
<PAGE>
(c) one business day after the business day of deposit with Federal Express or
similar overnight courier, freight prepaid or (d) one business day after the
business day of facsimile transmission, if delivered by facsimile transmission
with copy by first class mail, postage prepaid, and shall be addressed (i) if to
the Holder, at the Holder's address as set forth on the books of the Company,
and (ii) if to the Company, at the address of its principal corporate offices
(attention: Stephen Dukker, President and CEO), with a copy to John A. Fore,
Wilson Sonsini Goodrich & Rosati, P.C., 650 Page Mill Road, Palo Alto,
California 94304 or at such other address as a party may designate by ten days
advance written notice to the other party pursuant to the provisions above.
12. Registration Rights Agreement. The registration rights of the Holder
-----------------------------
(including Holders' successors) with respect to the stock underlying this
warrant will be the same as granted to the holders of the Company's Common
Stock.
[Remainder of page intentionally left blank.]
-7-
<PAGE>
13. Governing Law. This Warrant and all actions arising out of or in
-------------
connection with this Agreement shall be governed by and construed in accordance
with the laws of the State of California, without regard to the conflicts of law
provisions of the State of California or of any other state.
Issued this 18th day of August, 1999.
EMACHINES, INC
/s/ Stephen A. Dukker
_______________________________________
Name: Stephen A. Dukker
Title: President and Chief Executive Officer
-8-
<PAGE>
EXHIBIT A
---------
NOTICE OF EXERCISE
------------------
TO: eMachines, Inc.
14350 Myford Road, Suite 100
Irvine, California 92606
Attention: President
1. The undersigned hereby elects to purchase __________ Shares of
eMachines, Inc. pursuant to the terms of the attached Warrant.
2. Method of Exercise (Please initial the applicable blank):
___ The undersigned elects to exercise the attached Warrant by means
of a cash payment, and tenders herewith or by concurrent wire
transfer payment in full for the purchase price of the shares
being purchased, together with all applicable transfer taxes, if
any.
___ The undersigned elects to exercise the attached Warrant by means
of the net exercise provisions of Section 1(b) of the Warrant.
3. Please issue a certificate or certificates representing said Shares in
the name of the undersigned or in such other name as is specified below:
_________________________________
(Name)
_________________________________
_________________________________
(Address)
4. The undersigned hereby represents and warrants that the aforesaid
Shares are being acquired for the account of the undersigned for investment and
not with a view to, or for resale, in connection with the distribution thereof,
and that the undersigned has no present intention of distributing or reselling
such shares and all representations and warranties of the undersigned set forth
in Section 7 of the attached Warrant are true and correct as of the date hereof.
______________________________
(Signature)
Title:__________________________
____________________________
(Date)
<PAGE>
EXHIBIT 10.14
THIS OPTION AND THE SHARES OF COMMON STOCK WHICH MAY BE PURCHASED UPON THE
EXERCISE OF THIS OPTION HAVE BEEN ACQUIRED SOLELY FOR INVESTMENT AND HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY
STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD, OFFERED FOR SALE,
PLEDGED OR HYPOTHECATED IN THE ABSENCE OF SUCH REGISTRATION OR AN OPINION OF
COUNSEL SATISFACTORY TO THE COMPANY AND ITS COUNSEL THAT SUCH SALE, OFFER,
PLEDGE OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY
REQUIREMENTS OF THE ACT AND OF ANY APPLICABLE STATE SECURITIES LAWS.
EMACHINES, INC.
OPTION TO PURCHASE COMMON STOCK
-------------------------------
Void after August 18, 2009
THIS CERTIFIES THAT, for value received, Stephen Dukker (the "Holder") is
------
entitled to subscribe for and purchase 227,897 shares (as such number of shares
shall be adjusted pursuant to Section 3 hereof, thus adjusting the per share
Exercise Price) of the fully paid and nonassessable Common Stock, $0.0000125 par
value (the "Shares"), of eMachines, Inc., a Delaware corporation (the
------
"Company"), at the exercise price of $1.61 per share (the "Exercise Price"),
------- --------------
subject to the provisions and upon the terms and conditions hereinafter set
forth.
1. Method of Exercise; Payment.
------------------------------
(a) Cash Exercise. The purchase rights represented by this Option
-------------
may be exercised by the Holder, in whole or in part, by the surrender of this
Option (with the notice of exercise form attached hereto as Exhibit A duly
---------
executed) at the principal office of the Company, and by the payment to the
Company, by certified, cashier's or other check acceptable to the Company or by
wire transfer to an account designated by the Company, of an amount equal to the
aggregate Exercise Price of the Shares being purchased.
(b) Net Issue Exercise. In lieu of exercising this Option, the
------------------
Holder may elect to receive Shares equal to the value of this Option (or the
portion thereof being canceled) by surrender of this Option at the principal
office of the Company together with notice of such election, in which event the
Company shall issue to the Holder a number of Shares computed using the
following formula:
X = Y (A-B)
-------
A
Where X = the number of the Shares to be issued to the Holder.
Y = the number of the Shares purchasable under this Option.
<PAGE>
A = the fair market value of one Share on the date of determination.
B = the per share Exercise Price (as adjusted to the date of such
calculation).
(c) Fair Market Value. For purposes of this Section 1, the per
-----------------
share fair market value of the Shares shall mean:
(i) If the Company's Common Stock is publicly traded, the per
share fair market value of the Shares shall be the average of the closing prices
of the Common Stock as quoted on the Nasdaq National Market or the principal
exchange on which the Common Stock is listed, or if not so listed then the fair
market value shall be the average of the closing bid prices of the Common Stock
as published in The Wall Street Journal, in each case for the fifteen trading
-----------------------
days ending five trading days prior to the date of determination of fair market
value;
(ii) If the Company's Common Stock is not so publicly traded,
the per share fair market value of the Shares shall be such fair market value as
is determined in good faith by the Board of Directors of the Company after
taking into consideration factors it deems appropriate, including, without
limitation, recent sale and offer prices of the capital stock of the Company in
private transactions negotiated at arm's length.
(d) Stock Certificates. In the event of any exercise of the rights
------------------
represented by this Option, certificates for the Shares so purchased shall be
delivered to the Holder within a reasonable time and, unless this Option has
been fully exercised or has expired, a new Option representing the shares with
respect to which this Option shall not have been exercised shall also be issued
to the Holder within such time.
2. Stock Fully Paid; Reservation of Shares. All of the Shares issuable
----------------------------------------
upon the exercise of the rights represented by this Option will, upon issuance
and receipt of the Exercise Price therefor, be fully paid and nonassessable, and
free from all taxes, liens and charges with respect to the issue thereof. During
the period within which the rights represented by this Option may be exercised,
the Company shall at all times have authorized and reserved for issuance
sufficient shares of its Common Stock to provide for the exercise of the rights
represented by this Option.
3. Adjustments. Subject to the provisions of Section 11 hereof, the
-----------
number and kind of securities purchasable upon the exercise of this Option and
the Exercise Price therefor shall be subject to adjustment from time to time
upon the occurrence of certain events, as follows:
(a) Reclassification. In the case of any reclassification or change of
----------------
securities of the class issuable upon exercise of this Option (other than a
change in par value, or from par value to no par value, or from no par value to
par value, or as a result of a subdivision or combination), or in case of any
merger of the Company with or into another corporation (other than a merger with
another corporation in which the Company is the acquiring and the surviving
corporation and which does not result in any reclassification or change of
outstanding securities issuable upon exercise of this Option), or in case of any
sale of all or substantially all of the assets of the Company, the Company, or
such successor or purchasing corporation, as the case may be, shall duly execute
and deliver to the holder of this Option a new Option (in form and substance
reasonably satisfactory to the holder of this Option), or the
<PAGE>
Company shall make appropriate provision without the issuance of a new Option,
so that the holder of this Option shall have the right to receive, at a total
purchase price not to exceed that payable upon the exercise of the unexercised
portion of this Option, and in lieu of the shares of Common Stock theretofore
issuable upon exercise of this Option, (i) the kind and amount of shares of
stock, other securities, money and property receivable upon such
reclassification, change, merger or sale by a holder of the number of shares of
Common Stock then purchasable under this Option, or (ii) in the case of such a
merger or sale in which the consideration paid consists all or in part of assets
other than securities of the successor or purchasing corporation, at the option
of the Holder of this Option, the securities of the successor or purchasing
corporation having a value at the time of the transaction equivalent to the fair
market value of the Common Stock at the time of the transaction. The provisions
of this subparagraph (a) shall similarly apply to successive reclassifications,
changes, mergers and transfers.
(b) Stock Splits, Dividends and Combinations. In the event that the
----------------------------------------
Company shall at any time subdivide the outstanding shares of Common Stock or
shall issue a stock dividend on its outstanding shares of Common Stock the
number of Shares issuable upon exercise of this Option immediately prior to such
subdivision or to the issuance of such stock dividend shall be proportionately
increased, and the Exercise Price shall be proportionately decreased, and in the
event that the Company shall at any time combine the outstanding shares of
Common Stock the number of Shares issuable upon exercise of this Option
immediately prior to such combination shall be proportionately decreased, and
the Exercise Price shall be proportionately increased, effective at the close of
business on the date of such subdivision, stock dividend or combination, as the
case may be.
4. Notice of Adjustments. Whenever the number of Shares purchasable
---------------------
hereunder or the Exercise Price thereof shall be adjusted pursuant to Section 3
hereof, the Company shall provide notice to the Holder setting forth, in
reasonable detail, the event requiring the adjustment, the amount of the
adjustment, the method by which such adjustment was calculated, and the number
and class of shares which may be purchased thereafter and the Exercise Price
therefor after giving effect to such adjustment.
(a) Fractional Shares. This Option may not be exercised for
-----------------
fractional shares. In lieu of fractional shares the Company shall make a cash
payment therefor based upon the Exercise Price then in effect and the fair
market value of the shares then obtaining (calculated in accordance with Section
1(c) hereof as if the shares were the Shares referred to in such Section).
5. Restrictive Legend.
------------------
The Shares (unless registered under the Act) shall be stamped or imprinted with
a legend in substantially the following form:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE
OR DISTRIBUTION THEREOF, AND HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED. SUCH SHARES MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS THE COMPANY
RECEIVES AN OPINION OF COUNSEL REASONABLY ACCEPTABLE TO IT STATING
THAT SUCH SALE OR
<PAGE>
TRANSFER IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY
REQUIREMENTS OF THE ACT.
6. Restrictions Upon Transfer and Removal of Legend.
------------------------------------------------
(a) The Company need not register a transfer of this Option or Shares
bearing the restrictive legend set forth in Section 5 hereof, unless the
conditions specified in such legend are satisfied. The Company may also instruct
its transfer agent not to register the transfer of the Shares, unless one of the
conditions specified in the legend referred to in Section 5 hereof is satisfied.
(b) Notwithstanding the provisions of paragraph (a) above, no opinion
of counsel shall be necessary for a transfer without consideration by any holder
(i) if such holder is a partnership, to a partner or retired partner of such
partnership who retires after the date hereof or to the estate of any such
partner or retired partner, or (ii) if such holder is a corporation, to a
shareholder of such corporation, or to any other corporation under common
control, direct or indirect, with such holder.
(c) The holder agrees not to sell, make any short sale of, loan,
grant any option for the purchase of, or otherwise transfer or dispose of any
shares of Common Stock (or other securities) of the Company held by such holder
during a period of time determined by the Company and its underwriters (not to
exceed 180 days in the event of the Company's initial public offering and 90
days in the event of any other public offering) following the effective date of
a registration statement of the Company filed under the Securities Act, as
amended. The Company may impose stop-transfer instructions with respect to the
Common Stock (or other securities) subject to the foregoing restriction until
the end of said period.
7. Rights of Shareholders. No holder of this Option shall be entitled,
----------------------
as a Option holder, to vote or receive dividends or be deemed the holder of any
Shares or any other securities of the Company which may at any time be issuable
on the exercise hereof for any purpose, nor shall anything contained herein be
construed to confer upon the holder of this Option, as such, any of the rights
of a stockholder of the Company or any right to vote for the election of
directors or upon any matter submitted to shareholders at any meeting thereof,
or to give or withhold consent to any corporate action (whether upon any
recapitalization, issuance of stock, reclassification of stock, change of par
value, consolidation, merger, conveyance, or otherwise) or to receive notice of
meetings, or to receive dividends or subscription rights or otherwise until the
Option shall have been exercised and the Shares purchasable upon the exercise
hereof shall have become deliverable, as provided herein. The holder of this
Option will not be entitled to share in the assets of the Company in the event
of a liquidation, dissolution or the winding up of the Company.
8. Notices. All notices and other communications required or permitted
-------
hereunder shall be in writing, shall be effective when given, and shall in any
event be deemed to be given upon receipt or, if earlier, (a) five (5) days after
deposit with the U.S. Postal Service or other applicable postal service, if
delivered by first class mail, postage prepaid, (b) upon delivery, if delivered
by hand, (c) one business day after the business day of deposit with Federal
Express or similar overnight courier, freight prepaid or (d) one business day
after the business day of facsimile transmission, if delivered by facsimile
transmission with copy by first class mail, postage prepaid, and shall be
addressed (i) if to the Holder, at the Holder's address as set forth on the
books of the Company, and (ii) if to the Company, at the
<PAGE>
address of its principal corporate offices (attention: Steve Miller, CFO), with
a copy to John A. Fore, Wilson Sonsini Goodrich & Rosati, P.C., 650 Page Mill
Road, Palo Alto, California 94304 or at such other address as a party may
designate by ten days advance written notice to the other party pursuant to the
provisions above.
9. Governing Law. This Option and all actions arising out of or in
-------------
connection with this Agreement shall be governed by and construed in accordance
with the laws of the State of California, without regard to the conflicts of law
provisions of the State of California or of any other state.
Issued this 18th day of August, 1999.
EMACHINES, INC.
By: /s/ Steven H. Miller
--------------------
Title: Vice President and Chief Financial
-----------------------------------
Officer
-------
<PAGE>
EXHIBIT A
---------
NOTICE OF EXERCISE
------------------
TO: eMachines, Inc.
14350 Myford Road, Suite 100
Irvine, California 92606
Attention: CFO
1. The undersigned hereby elects to purchase __________ Shares of
eMachines, Inc. pursuant to the terms of the attached Option.
2. Method of Exercise (Please initial the applicable blank):
___ The undersigned elects to exercise the attached Option by means
of a cash payment, and tenders herewith or by concurrent wire
transfer payment in full for the purchase price of the shares
being purchased, together with all applicable transfer taxes, if
any.
___ The undersigned elects to exercise the attached Option by means
of the net exercise provisions of Section 1(b) of the Option.
3. Please issue a certificate or certificates representing said Shares in
the name of the undersigned or in such other name as is specified below:
_________________________________
(Name)
_________________________________
_________________________________
(Address)
_________________________________
(Signature)
Title:___________________________
_________________________________
(Date)
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
To the Board of Directors and Stockholders of
eMachines, Inc.
Irvine, California
We consent to the use in this Registration Statement of eMachines, Inc. on Form
S-1 of our report dated August 23, 1999, appearing in the Prospectus, which is
a part of this Registration Statement, and to the reference to us under the
heading "Experts" in such Prospectus.
Our audit of the financial statements referred to in our aforementioned report
also included the financial statement schedule of eMachines, Inc., listed in
Item 16. The financial statement schedule is the responsibility of the
Corporation's management. Our responsibility is to express an opinion based on
our audit. In our opinion, such financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Los Angeles, California
August 30, 1999
