AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION,
VIA EDGAR ON MARCH 2, 2000
REGISTRATION NO. 333-92087
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
-------------------------
CNF TECHNOLOGIES, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<CAPTION>
Delaware 3577 23-2997171
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<S> <C> <C>
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
Incorporation or Organization) Classification Code Number)
</TABLE>
CNF Technologies, Inc.
7722 East Gray Road
Scottsdale, Arizona 85260
(480) 718-4065
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(Address, including zip code, and telephone number,
including area code, of registrant's principal executive office and
principal place of business)
Mr. David G. Thompson
7722 East Gray Road
Scottsdale, Arizona 85260
(480) 718-4065
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(Name, address, including zip code, and telephone number,
including area code, of agent for service)
with a copy to:
Stephen M. Cohen, Esquire
Buchanan Ingersoll Professional Corporation
Eleven Penn Center, 14th Floor
1835 Market Street
Philadelphia, PA 19103
(215) 665-3873
----------------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
following effectiveness of this Registration Statement.
-----------------------------------
<PAGE>
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: /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement in 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,
please check the following box: / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed Maximum Proposed Maximum
Title of Each Class Amount to be Offering Price Per Aggregate Amount of
of Securities to be Registered Registered(1) Share(2) Offering Price(2) Registration Fee(2)
------------------------------ ------------- ------------------ ------------------ -------------------
<S> <C> <C> <C> <C>
common stock,
.0001 par value 3,106,623(3) $6.03 $18,732,937 $4,946
</TABLE>
(1) Represents shares of the Company's common stock which may be offered by
certain selling security holders.
(2) Estimated pursuant to Rule 457(c) for the purpose of calculating the
registration fee. Based on the average of the high and low sale prices per
share of the Company's common stock as reported on the National Quotation
Bureau Pink Sheets on February 23, 2000, the last day prior to March 2,
2000 for which a trade was reported.
(3) Pursuant to Rule 416 of the Securities Act of 1933, as amended, this
registration statement also includes additional shares of common stock
issuable upon stock splits, stock dividends or similar transactions.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the registration statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
<PAGE>
The information in this prospectus is not complete and may be changed. The
selling security holders 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 MARCH 2, 2000
PRELIMINARY PROSPECTUS
CNF TECHNOLOGIES, INC.
3,106,623 shares of common stock
The selling security holders identified in this prospectus, may offer and
sell, from time to time, up to 3,106,623 shares of common stock of CNF
Technologies, Inc. The shares were issued by us in private placement
transactions. The selling security holders may sell all or a portion of their
shares on a best efforts basis through public or private transactions at
prevailing market prices or at privately negotiated prices. We will not receive
any part of the proceeds from sales of these shares by the selling security
holders.
Our common stock is traded on the National Quotation Bureau Pink Sheets
under the symbol "CNFT". The last reported sale price of our common stock on
February 23, 2000 on the Pink Sheets was $6.00 per share.
Investing in our common stock involves a high degree of risk. See "RISK
FACTORS" beginning on page 4 of this prospectus.
Neither the Securities and Exchange Commission nor any State Securities
Commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this preliminary prospectus is March 2, 2000.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
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<S> <C>
Prospectus Summary................................................................................................1
The Offering......................................................................................................2
Summary Consolidated Financial Data...............................................................................3
Risk Factors......................................................................................................4
Use Of Proceeds...................................................................................................8
Market For Our Common Stock And Related Stockholder Matters.......................................................8
Capitalization...................................................................................................11
Management's Discussion And Analysis Of Financial Condition And Results Of Operations............................11
Description Of Business..........................................................................................19
Management.......................................................................................................28
Certain Relationships And Related Transactions...................................................................33
Security Ownership Of Certain Beneficial Owners And Management...................................................35
Description Of Securities........................................................................................37
Selling Security Holders.........................................................................................39
Plan Of Distribution.............................................................................................41
Legal Matters....................................................................................................42
Experts..........................................................................................................42
Where You Can Get More Information...............................................................................43
Financial Statements............................................................................................F-1
</TABLE>
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PROSPECTUS SUMMARY
About this prospectus
This prospectus is part of a registration statement we filed with the
United States Securities and Exchange Commission. You should rely only on the
information provided in this prospectus. We have not authorized anyone to
provide you with information different from that contained in this prospectus.
The selling security holders are offering to sell, and seeking offers to buy,
shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of common stock. Applicable SEC rules may require us
to update this prospectus in the future. This preliminary prospectus is subject
to completion prior to this offering.
About CNF Technologies, Inc.
We design, manufacture and market portable computer peripherals and
accessories for laptop computers to original equipment manufacturers, wholesale
distributors, computer resellers, computer retail stores and corporate end users
throughout the United States, Canada, Australia, Japan and Europe. Our principal
products consist of internal high-capacity removable storage devices, portable
DVD-ROM and CD-ROM drives, patented universal bay replicators branded as
deviceDOCK(R) and universal port replicators. We plan to introduce a universal
docking station within the next six to nine months. These devices are designed
to bring the functionality and power of a desktop computer to users of any make
or model of a portable computer.
Corporate information
We were incorporated under the laws of Florida on September 23, 1996 as JLL
Ventures Corp. and on April 1, 1999, reincorporated into the State of Delaware.
Thereafter, our wholly owned subsidiary acquired CNF, Inc., a California
corporation, by merger and assumed the historic operations of CNF, Inc. In
connection with the merger, we changed our name to CNF Technologies, Inc. and
changed the name of our wholly owned subsidiary to CNF Mobile Solutions, Inc.
Prior to the merger, we were an inactive company and our shares were listed for
quotation on the OTC Bulletin Board.
Our principal executive offices are located at 7722 East Gray Road,
Scottsdale, Arizona 85260 and our telephone number is (480) 718-4065.
1
<PAGE>
THE OFFERING
Common stock offered by the selling
security holders: 3,106,623 shares
Common stock currently outstanding: 11,975,063 shares which includes
1,000,000 shares which are subject to
possible cancellation upon the terms set
forth in an escrow agreement entered
into in connection with our merger with
CNF, Inc. The number of outstanding
shares of common stock does not include:
o 3,675,537 shares issuable upon the
conversion of 3,675,537
outstanding shares of our Series A
Convertible Preferred;
o 780,091 shares issuable upon
exercise of outstanding options to
purchase 780,091 shares of Series
A Preferred Stock at exercise
prices ranging from $.24 to $1.21
per share which vest over a four
(4) year period commencing on the
date of grant; and
o 266,667 shares issuable upon
exercise of outstanding warrants.
Common stock to be outstanding after
the offering: 12,625,063 shares as a result of the
conversion of 650,000 shares of our
Series A Preferred Stock
Use of Proceeds: We will not receive any of the proceeds
from the sale of shares by the selling
security holders.
Trading Symbol (National Quotation "CNFT"
Bureau Pink Sheets):
- ----------------------------------------
2
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
Statement of Operations Data:
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<CAPTION>
Year Ended March 31 Nine Months Ended December 31
----------------------------- ------------------------------
1999 1998 1999 1998
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Revenues $9,425,947 $7,726,484 $8,510,873 $7,578,878
Gross Profit 3,337,398 3,265,540 2,462,701 2,512,317
Loss before income taxes (3,119,725) (58,167) (5,824,690) (1,887,883)
Net Loss (3,074,525) (79,267) (5,824,690) (1,887,883)
Basic and Diluted loss per share: (2) (1.23) (0.03) (0.69) (0.76)
Basic and Diluted Weighted average
number of shares outstanding: 2,500,250 2,500,000 8,490,496 2,500,000
</TABLE>
Balance Sheet Data:
<TABLE>
<CAPTION>
As of As of
March 31, 1999 December 31, 1999
-------------- -----------------
Actual Actual
----------- -----------
<S> <C> <C>
Working capital (deficiency) $(3,062,743) $(1,736,116)
Total assets 3,538,687 3,919,551
Total liabilities 6,265,324 5,227,159
Stockholders equity (deficit) (2,726,637) (1,307,608)
</TABLE>
3
<PAGE>
RISK FACTORS
You should not rely on any of the forward-looking statements contained in this
prospectus.
The words "may," "will," "expect," "anticipate," "believe," "continue,"
"estimate," "project," "intend," and similar expressions used in this prospectus
are intended to identify forward-looking statements. You should not place undue
reliance on these forward-looking statements, which speak only as of the date
made. We undertake no obligation to publicly release the result of any revision
of these forward-looking statements to reflect events or circumstances after the
date they are made or to reflect the occurrence of unanticipated events. You
should also know that such statements are not guarantees of future performance
and are subject to risks, uncertainties and assumptions. Should any of these
risks or uncertainties materialize, or should any of our assumptions prove
incorrect, actual results may differ materially from those included within the
forward-looking statements.
We are in need of substantial additional financing to execute our business plan
and we cannot assure you that we will be able to raise the necessary financing.
We currently have very limited cash resources and need approximately
$5,000,000 to execute our business plan. In order to raise such financing, we
will likely need to issue additional debt or equity securities. We cannot assure
you that any such financing will be available or whether it will be available on
terms that are acceptable to us. In addition, we are required to obtain the
consent of two of our shareholders prior to issuing any additional shares of our
common stock or other securities convertible into shares of our common stock.
This may make it more difficult for us to raise the necessary financing.
Unless our level of operations increases, we will require significant additional
capital, and anticipate that our losses will continue for the foreseeable
future.
During the fiscal year ended March 31, 1998 we sustained a net loss of
$79,267. During the fiscal year ended March 31, 1999 we sustained a net loss of
$3,074,525. This trend continued during the nine months ended December 31, 1999
as we sustained additional net losses of $5,824,690. Our operating losses will
likely continue at these levels if operations remain at current levels. Our
business plan assumes a significant increase in sales as we expect our new
products to achieve commercial acceptance and gain market share. This plan
requires us to make significant investments in operations to support
technological development as well as marketing and sales activities. This will
result in continued and substantial increases in our operating expenses. To
execute this plan we need to generate significant additional revenue from new
products and raise substantial additional capital. Since we are uncertain that
we will be able to secure any financing or generate sufficient cash flow from
operations, our operating losses may continue.
Our negative net worth, negative cash flow and history of losses raise
substantial doubt about our ability to sustain operations.
As of March 31, 1999, our current liabilities exceeded our current assets
by $3,062,743 and our total liabilities exceeded our total assets by $2,726,637.
As a result, our financial
4
<PAGE>
condition raises uncertainty as to our ability to continue as a going concern.
Our long-term viability will depend upon our ability to generate sufficient cash
flow from operations to meet our current obligations, raise significant
additional capital and ultimately attain profitable operations.
Due to the novel nature of our key products and rapid technological change in
our markets, we can not accurately predict our future revenues and we expect
significant fluctuations in our operating results which will make managing our
cash flow and financing needs more difficult.
We recently introduced one new product and intend to introduce another new
product during the next fiscal year. These new products are designed to provide
universal connectivity for almost any make or model of a PC-based portable
computer. Since there are no similar products widely available in the market, it
is difficult or impossible for us to predict the future revenues which could be
generated by these products. In addition, given the intense competition, rapid
technological change, substantial swings in consumer demand and short product
life cycles, the continued acceptance of and the revenues generated by our
existing products are difficult or impossible to predict. The development of
superior products by our competitors could also render our existing products
obsolete. As a result, our revenues and operating results are likely to
fluctuate significantly which will make it more difficult to manage our cash
flow and assess our financing needs.
We may not have the financial and human resources necessary to keep up with
rapid technological changes in our chosen markets which may result in our
products becoming obsolete.
The portable computer industry is characterized by rapid technological
change, frequent introduction of new products, continuing changes in consumer
demand, short product life cycles and rapidly evolving industry standards. The
introduction of products utilizing new technology or the emergence of new
industry standards can render existing products obsolete and unmarketable very
quickly. Our future success will depend in large part upon our ability to
satisfy changing customer needs by continuing to develop new products and
upgrade existing products as quickly and efficiently as possible. Any failure by
us to anticipate or respond to such technological developments or shifting
consumer requirements or any significant delay in product development or
introduction could substantially and adversely impact our competitive position
in the market. We can not assure you that we will have the financial and human
resources necessary to do this.
A decline in the demand for laptop computers would result in a decrease in our
sales.
Our future success is dependent not only on our own growth rate but also
the growth rate of the portable computer notebook industry. Even though
notebooks are one of the fastest growing segments of the personal computer
market, we are uncertain whether this growth will continue. An overall decrease
in the demand for portable computers would result in a decrease in our revenues.
5
<PAGE>
We can no longer rely on CD-ROM sales to sustain our business and unless we
develop replacement products such as DVD technology and realize substantial
sales from our new universal port replicators and docking stations, our revenues
are likely to decrease.
Our CD-ROM sales have historically constituted a substantial percentage of
our sales (4% during the nine months ended December 31, 1999, 49% during the
nine months ended December 31, 1998, 41% during fiscal year ended March 31, 1998
and 38% during the fiscal year ended March 31, 1999.) Two market factors
indicate that the product life of external CD-ROM is coming to an end. First,
most major notebooks come standard with an internal CD-ROM, making the need for
an external one unnecessary. In fact, Sherwood Research estimates that only 10%
of the notebooks currently being manufactured are shipped without internal drive
capabilities. Second, there appears to be a shift from CD-ROMs to DVD. Since
these trends reduce the demand for CD-ROMs, our sales of CD-ROMs will continue
to decrease. We are currently attempting to respond to these market forces by
focusing on DVD technology. Our future success will, to some extent, depend upon
our continued development of products that incorporate DVD technology and the
commercial acceptable of our new universal port replicators and docking
stations.
Since we rely on two suppliers to provide critical components and we do not have
long term contracts with either of them, if we do not maintain our relationship
with these companies we will not be able to satisfy our customers' orders.
We are currently dependent on two main product lines (CD-ROMs and Zip(R)
drives) which accounted for approximately 71% of our revenue during the nine
months ended December 31, 1999 and approximately 73% of our revenue during the
fiscal year ended March 31, 1999. One supplier provides the main component for
CD-ROMs and another provides the main component for Zip(R) drives. We purchase
these components under purchase orders and do not have a long-term contract with
either supplier. Any termination or disruption of our relationship with either
supplier or any material adverse change to the financial condition of either
supplier would prevent us from filling customer orders. Although we believe that
our relationships with these suppliers are good, we cannot assure you that these
relationships will continue or whether these suppliers will continue to be able
to provide our components in a timely and cost efficient manner. Although
alternate suppliers are available, there are a limited number of such suppliers
and finding and qualifying replacement suppliers could take several months. We
are also dependent upon these suppliers to manufacture and deliver components
that are free from defect, competitive in functionality and cost and in
compliance with our specifications, all of which are beyond our control. Zip(R)
is a registered trademark of Iomega Corporation.
We do not have contracts with any of our customers and the loss of any of our
four key customers would result in a material decrease in our revenues.
We derive a substantial portion of our product sales from distributors. We
do not maintain an exclusive distributorship with any significant distributor
and our distribution agreements can be terminated at any time. Accordingly, our
distributors are not obligated to purchase products from us in the future and
may sell competing lines of products. As a result, the ultimate distribution of
our products to end-users is beyond our control. In addition, four customers
directly or indirectly accounted for 84% of our revenues during the nine months
ended
6
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December 31, 1999 and 65% of our revenues during the fiscal year ended March 31,
1999. A loss of any of these customers could substantially reduce our sales.
Although we believe our relations with these distributors are good, we cannot
assure you that any or all of them will continue to do business with us in the
future.
We depend on our key employees and we can not assure you that we will be able to
keep these employees.
A loss of one or more of our current officers or key personnel could
severely and negatively impact our operations. Although we have employment
contracts with most of our key personnel, these contracts do not prevent them
from resigning. Effective product development and innovation is dependent upon
our ability to attract and retain talented technical and marketing personnel.
The market for such persons is extremely competitive. We cannot assure you that
we will have the financial or other resources to attract and retain such
individuals.
Our common stock has a limited market and may be adversely effected by the
influx into the market of the shares covered by this prospectus which could
result in a decrease in the trading price of our shares.
The public trading market for our common stock is very thin. Although our
common stock has historically traded on the OTC Electronic Bulletin Board, it is
currently eligible for quotation only on the less liquid National Quotation
Bureau Pink Sheets. Upon the effectiveness of this prospectus, we anticipate
that our common stock will once again be eligible for trading on the OTC
Bulletin Board. There is minimal supply of shares eligible for public resale
(100,000 shares) and trading has been extremely limited. On or about March 15,
2000, an additional 900,000 shares will become eligible for public trading.
Accordingly, we are uncertain that a regular trading market for our common stock
will develop, and if it develops, whether it can be sustained. By its very
nature, trading on the National Quotation Bureau Pink Sheets and OTC Bulletin
Board provides very limited market liquidity. The trading market for our common
stock may be adversely effected by the influx into the market of the 3,106,623
shares of common stock covered by this prospectus.
The ability to trade our shares could be adversely effected if the trading price
falls below $5.00 per share which could result in a further decrease to our
trading price.
The SEC has adopted regulations imposing limitations upon the manner in
which certain low priced securities (referred to as a "penny stock") are
publicly traded. Under these regulations, a penny stock is defined as any equity
security that has a market price of less than $5.00 per share, subject to
certain exceptions. Such exceptions include any equity security listed on a
national exchange, the Nasdaq National Market System or SmallCap Market and any
equity security issued by a company that has (i) net tangible assets of at least
$2,000,000, if such issuer has been in continuous operation for three years,
(ii) net tangible assets of at least $5,000,000, if such issuer has been in
continuous operation for less than three years, or (iii) average annual revenue
of at least $6,000,000 for the last three years. Unless an exception is
available, the regulations require the delivery, prior to any transaction
involving a penny stock, of a disclosure schedule explaining the penny stock
market and the associated risks. The regulations also require certain
broker/dealers who recommend such securities to persons other than established
7
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customers and certain accredited investors to make a special written suitability
determination for the purchaser and receive the purchaser's written agreement to
a transaction prior to sale. These requirements make it more difficult to effect
transactions in penny stocks as compared to other securities. Since our common
stock presently trades above $5.00 per share, it is not considered a "penny
stock." We are uncertain that trading prices at this level can be sustained.
Should trading prices fall below $5.00 per share, our shares could be considered
a "penny stock."
Our common stock will likely be subject to substantial additional dilution.
We are in need of substantial additional financing which will likely entail
the issuance of additional shares of common stock or securities convertible into
common stock which will have the effect of increasing the number of shares
outstanding. In connection with these and other business matters, we will likely
undertake the issuance of additional shares of common stock. This may be done in
order to, among other things, acquire assets or stock of another business,
compensate employees or consultants or for other valid business reasons at the
discretion of our Board of Directors. Under applicable Delaware law, we can
issue additional shares without notice to, or approval of, existing
stockholders. In addition, there are 3,675,537 outstanding shares of Series A
preferred Stock and outstanding options to purchase 780,091 shares of Series A
Preferred Stock. No later than June 30, 2000, these shares will convert into
3,675,537 shares of common stock and the options could be exercised for up to
331,351 (currently vested) or 780,091 (upon full vesting) additional shares. We
also intend to adopt a stock option plan pursuant to which we may grant options
to purchase shares of common stock equal to 10% of our then outstanding shares
of common stock.
A limited number of stockholders have a controlling interest in our stock.
As of the date of this prospectus, our officers, directors and a limited
number of principal stockholders beneficially own approximately 41.5% of our
outstanding voting shares. These stockholders may have the ability to control
the election of our directors and the outcome of other corporate matters.
In order to issue additional shares of our common stock, we need to obtain
the consent of two of our shareholders which may make it more difficult for us
to raise the additional financing necessary to execute our business plan.
USE OF PROCEEDS
We will not receive any proceeds from the sale of common stock by the
selling security holders.
MARKET FOR OUR COMMON STOCK AND
RELATED STOCKHOLDER MATTERS
Market Information
From October 7, 1998 until January 12, 2000, our common stock was listed
for quotation on the OTC Bulletin Board under the symbol "CNFT." Since our
common stock is not registered under the Securities Exchange Act of 1934, it is
no longer eligible for quotation. Upon the
8
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effective date of this prospectus, we will be filing a registration statement
for the purpose of registering our common stock under the Exchange Act which
will be effective upon filing with the SEC. Upon such effectiveness, we intend
to apply to reinstate our shares for trading on the OTC Bulletin Board.
Our common stock currently trades on the less liquid National Quotation
Bureau Pink Sheets. The market for our shares is extremely limited. We are
uncertain if a significant trading market for our common stock will develop or,
if developed, will be sustained.
The following table sets forth the range of the high and low closing bid
prices, or last sales prices, per share of our common stock during each of the
calendar quarters identified below. The bid prices were obtained from the
National Quotation Bureau and do not necessarily reflect actual transactions,
retail markups, mark downs or commissions. The transactions include inter-dealer
transactions. Based on the very limited public float and trading in our common
stock, we believe that such data is anecdotal and may bear no relation to the
true value of our common stock or the range of prices that would prevail in a
liquid market.
1998 High Low
---- ---- ---
4th Quarter * *
1999 High Low
---- ---- ---
1st Quarter * *
2nd Quarter $6.00 $5.50
3rd Quarter $6.4375 $4.00
4th Quarter $6.375 $5.00
2000
1st Quarter (through February 23, 2000) $6.50 $.001
*No bids reported
- ------------------------------
The last price of our common stock as reported on the Pink Sheets by the
National Quotation Bureau on February 23, 2000 was $6.00 per share.
Holders
As of February 23, 2000, we had approximately 95 stockholders of record,
although we believe that there are additional beneficial owners of our common
stock who own their shares in "street name."
Dividends
We have not paid any cash dividends, to date, and we have no intention of
paying any cash dividends on our common stock in the foreseeable future. The
declaration and payment of dividends is subject to the discretion of the Board
of Directors and to certain limitations imposed under the General Corporation
Law of the State of Delaware. The timing, amount and form of
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dividends, if any, will depend, among other things, on our results of
operations, financial condition, cash requirements and other factors deemed
relevant by our Board of Directors.
Shares Eligible for Public Sale and Registration Rights
As of the date of this prospectus, there are 11,975,063 outstanding shares of
our common stock. Of these shares, 100,000 are eligible for public trading.
Assuming that we comply with the adequate public information disclosure
requirements of SEC Rule 144 promulgated under the Securities Act, a substantial
number of additional shares will be eligible for public resale under Rule 144 on
the dates and in the amounts set forth below:
o March 15, 2000 - 900,000 shares
o June 10, 2000 - 8,167,500 shares
o August 15, 2000 - 424,081 shares
o November 2, 2000 - 675,000 shares
o November 26, 2000 - 1,086,250 shares
o February 2, 2001 - 500,000 shares
We have agreed to register the public resale of 3,773,290 of the shares
identified above; 3,106,623 of which are being registered for public resale
hereunder. We have agreed to file a registration statement with the SEC
permitting the public resale of 666,667 shares of our common stock identified
above by no later than on or about August 26, 2000 and 266,667 additional shares
issuable upon exercise of warrants issued or issuable to our placement agent by
no later than November 26, 2000.
Shares Issuable Upon Exercise or Conversion of Outstanding Options, Warrants
and Preferred Stock
We have issued options to purchase an aggregate of 780,091 shares of Series
A Preferred Stock of which 331,351 are currently exercisable. The remaining
options vest in ratable monthly installments over a three (3) year period. We
have also issued warrants to purchase an aggregate of 266,667 shares of common
stock all of which are currently exercisable. Finally, we have issued an
aggregate of 3,675,537 shares of Series A Preferred Stock which will convert
into 3,675,537 shares of common stock by no later than June 30, 2000.
10
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CAPITALIZATION
December 31, 1999
Actual
-----------------
Long -term debt $230,508
Preferred Stock 416
Common Stock 1,145
Additional paid in capital 7,250,658
Accumulated deficit (8,559,827)
Total stockholders' equity (deficiency) (1,307,608)
-----------
Total capitalization $(1,077,100)
===========
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
This Management's Discussion and Analysis of Financial Condition and
Results of Operation and other parts of this prospectus contain forward-looking
statements that involve risks and uncertainties. All forward-looking statements
included in this document are based on information available to us on the date
hereof, and we assume no obligation to update any such forward-looking
statements. Our actual results could differ materially from those anticipated in
these forward-looking statements as a result of a number of factors, including
those set forth in "Risk Factors" and elsewhere in this prospectus.
OVERVIEW
We design, manufacture and market computer peripheral devices and
accessories. Our product lines include:
o internal Zip(R) and SuperDisk(TM) drives
o universal bay replicators branded as deviceDOCK(R)
o portable optical storage devices including DVD and CD-ROM drives
o external numeric keypads
o monitor stands
o auto adapters
o universal port replicators and docking stations
We have in the past derived most of our revenue from the sale of internal
Zip(R) and SuperDisk(TM) drives and CD-ROMS. We believe that our future growth
will be in our universal docking products. These products enable users of almost
any make or model of PC based portable computer to essentially turn their
portable computer into a desktop computer allowing them to link portable
computers to a network, a full-size monitor, keyboard, mouse and an array
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of external and internal peripherals. Principal among this product line is the
universal port replicator and the planned introduction of a universal docking
station during the next fiscal year. SuperDisk(TM) is a trademark of Imation
Enterprises Corporation.
In fiscal 1999 (April 1, 1998 to March 30, 1999) and the first nine months
of fiscal 2000 (April 1, 1999 to December 31, 1999), 73% and 71%, respectively,
of our revenue was derived from sales of the InnerBay(R) Notebook Zip(R) drives
and CD-ROMs. We believe that these product lines will decrease as a percentage
of our revenue as our recently introduced universal port replicator achieves
market acceptance. Current trends indicate that the CD-ROM product life is
coming to an end. While we believe that sales of InnerBay(R) Notebook Zip(R)
drives will continue to account for a significant portion of our revenue and
gross profit, our future results of operations will be highly dependent upon the
success of our universal docking products.
We market and sell our products worldwide through multiple indirect
channels, primarily distributors and resellers, and a substantial majority of
our revenue in fiscal 1999 and the first nine months of fiscal 2000 was derived
from sales to distributors and resellers. Certain of our products, in particular
our InnerBay(R) Notebook Zip(R) drives, and deviceDOCK(R) products, are sold to
original equipment manufacturers and we intend to increase our sales to original
equipment manufacturers in the future. We support our indirect channels with our
own sales and marketing organization. Our key distributors include Ingram Micro
and Merisel America. In fiscal 1999, sales to Ingram Micro accounted for 14% of
our revenue. In the first nine months of fiscal 2000, sales to Ingram Micro
accounted for 27% of our revenue and sales to Merisel America accounted for 46%
of our revenue. The loss of, or reduction in sales to, any of our key customers
could have a material adverse effect on our business and results of operations.
We provide price protection rights and limited product return rights for stock
rotation to most of our distributors and resellers.
We recognize revenue when products are shipped to customers. Our cost of
revenue consists primarily of costs associated with components, outsourced
manufacturing of certain subassemblies and in-house labor associated with
assembly, testing, shipping and quality assurance. Our gross margin is affected
by a number of factors including:
o product mix
o competitive product pricing pressures
o manufacturing costs and
o component costs
We anticipate that our gross margin may decline in the future as a result of
shifts in our product mix and competitive pricing pressure. In particular, we
expect our gross margin on sales of the InnerBay(R) Notebook Zip(R) drives will
decline as a result of a shift in product mix toward lower priced solutions. We
seek to mitigate the effects of declining prices by improving product design and
reducing costs, primarily manufacturing and component costs.
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Our operating results have fluctuated significantly in the past and are
likely to fluctuate significantly in the future on a quarterly and an annual
basis. Prior growth rates that we have experienced in revenue should not be
considered indicative of future growth rates. Factors that could cause our
future operating results to fluctuate include:
o the level of demand for our products
o our success in developing new products
o the timing of new product introductions and product enhancements by us
and our competitors
o market acceptance of our new and enhanced products
o the emergence of new industry standards
o the timing of customer orders
o the mix of products sold
o competition
o the mix of distribution channels through which our products are sold
and general economic conditions
Many of these factors are beyond our control.
The markets for our products are characterized by rapidly changing
technologies, evolving industry standards, frequent new product introductions
and short product life cycles. Our future success will depend to a substantial
degree upon our ability to enhance our existing products and to develop and
introduce, on a timely and cost-effective basis, new products and features that
meet changing customer requirements and emerging and evolving industry
standards. The introduction of new or enhanced products also requires us to
manage the transition from older products in order to minimize disruption in
customer ordering patterns, to avoid excessive levels of older product
inventories and to ensure that adequate supplies of new products can be
delivered to meet customer demand. There can be no assurance that we will
successfully develop, introduce or manage the transition to new products.
RESULTS OF OPERATIONS
Comparison of the Nine Month Period Ended December 31, 1999 to the Nine
Month Period Ended December 31, 1998
Total Revenue
Revenue for the nine months ended December 31, 1999 amounted to $8,510,873
compared to $7,578,878 for the nine months ended December 31, 1998, an increase
of 12%. The increase is attributable primarily to market acceptance of Zip
drives and device docks in fiscal
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2000. The decrease in sales of the CD-ROMs was offset in part by sale of
products that incorporate DVD technology, as well as the introduction of our
universal docking products.
Gross Profit and Cost of Revenue
Gross profit and cost of revenue remained relatively constant during the
nine months ended December 31, 1999 as compared to the nine months ended
December 31, 1998. Specifically, gross profit and gross profit percentage during
the nine months ended December 31, 1999 amounted to $2,462,701 and 29%,
respectively, as compared to $2,512,317 and 33%, respectively during the nine
months ended December 31, 1998. Our cost of revenue for the nine months ended
December 31, 1999 was $6,048,172 or 71% of revenue as compared to $5,066,561 or
67% of revenue during the nine months ended December 31, 1998.
Research and Development
Research and development expenses generally consist of salaries and other
personnel costs of our research and development teams, product supplies and
tooling costs. Research and development expenses amounted to $849,123 during the
nine months ended December 31, 1999 as compared to $800,894 during the nine
months ended December 31, 1998, an increase of 6%. The increase in research and
development costs is primarily due to the development of the universal docking
station, and the release of the universal port replicator during fiscal 2000. We
expect research and development expenses to increase in the future, although
such expenses may vary as a percentage of revenue.
Sales and Marketing Expenses
Sales and marketing expenses generally consist of salaries, commissions and
other personnel costs of our sales, marketing and support personnel,
advertising, promotions and travel. Marketing and sales expenses during the nine
months ended December 31, 1999 amounted to $806,325 as compared to $672,912
during the nine months ended December 31, 1998, an increase of 20%. The increase
was primarily attributable to promotional costs associated with the introduction
of the universal port replicator and trade shows. We expect marketing and sales
expense to increase in the future, although such expenses may vary as a
percentage of revenue.
General and Administrative Expenses
General and administrative expenses primarily consist of salaries, facility
costs, depreciation and other general operation costs. General and
administrative expenses increased to $4,170,091 during the nine months ended
December 31, 1999 from $2,951,046 during the nine months ended December 31,
1998. As a percentage of revenue, general and administrative expenses increased
from 39% to 49%. This increase is primarily attributable to increased salaries
and wages, employee recruitment costs, insurance and legal fees.
Other Expense, Net
Other expense, net in the nine months ended December 31, 1999 increased by
$2,486,504 to $2,461,852 from $24,652 of other income in the nine months ended
December 31, 1998. The
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increase in other expenses was attributable to $2,473,296 of interest expense,
which includes $2,056,383 attributable to equity incentives associated with
bridge financing beginning in April 1999.
Fiscal Year Ended March 31, 1999 compared to 1998
Total Revenue
Revenue for the year ended March 31, 1999 ("Fiscal 1999") amounted to
$9,425,947 compared to $7,726,484 for the year ended March 31, 1998 ("Fiscal
1998"), an increase of 22%. The increase in revenue was principally due to
increased unit sales of ZIP(R) drives and increased unit sales of monitor
stands.
As a percentage of revenue, sales of our CD-ROMs amounted to 38% in Fiscal
1999 and 41% in Fiscal 1998, respectively. We believe that unit sales of CD-ROMs
will continue to decline as the product life cycle comes to an end. Revenue from
this product line is expected to decline as a percentage of our revenue as our
other products achieve market acceptance. While we believe that sales of DVD's
will replace some of the decrease in revenue attributable to CD-ROM's, our
future results of operations will be highly dependent upon the success of our
universal docking products.
Gross Profit and Cost of Revenue
Gross profit and gross profit percentage during Fiscal 1999 amounted to
$3,337,398 and 35%, respectively, as compared to $3,265,540 and 42%,
respectively, during Fiscal 1998. Our cost of revenue for Fiscal 1999 was
$6,088,549 or 65% of revenue as compared to $4,460,944 or 58% of revenue during
Fiscal 1998. The decrease in gross profit and corresponding increase in cost of
revenue during Fiscal 1999 was principally due to a shift in our product mix to
lower gross profit products, primarily ZIP(R) drive products. The decrease was
offset, in part, by increased sales of monitor stands, which provide a higher
gross profit.
Research and Development
Research and development expenses amounted to $1,200,939 during Fiscal 1999
as compared to $890,944 during Fiscal 1998. As a percentage of revenue, research
and development costs remained relatively constant. The increase in research and
development expenses during Fiscal 1999 was principally due to increased
personnel costs associated with the development of new products such as the port
replicator and device dock as well as the continuing development of ZIP(R)
products for new notebooks. We expect research and development expenses to
increase in the future, although such expenses may vary as a percentage of
revenue.
Sales and Marketing Expenses
Sales and marketing expenses during Fiscal 1999 amounted to $1,086,265 as
compared to $480,170 during Fiscal 1998, an increase of 126%. As a percentage of
revenue, such expenses increased from 6% in Fiscal 1998 to 12% in Fiscal 1999.
The increase in marketing and sales expenses during Fiscal 1999 was due
primarily to the increase in personnel and promotional
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activities. We expect marketing and revenue expenses to increase in the future,
although such expenses may vary as a percentage of revenue.
General and Administrative Expenses
General and administrative expenses increased to $3,960,673 during Fiscal
1999 from $1,916,877 during Fiscal 1998. As a percentage of revenue, general and
administrative expenses increased from 25% to 42%. This increase is primarily
attributable to increased personnel costs. Technical personnel, sales
representatives, and a management team were hired in order to guide us through
our projected growth. We also moved our headquarters from Morgan Hill, CA to
Scottsdale, AZ. Our new location contains over 40,000 square feet; 16,000 square
feet of office space and 24,000 square feet of manufacturing and inventory
stockroom. This location is substantially larger than our prior offices. We
expect general and administrative expense to increase in the future, although
such expenses may vary as a percentage of revenue.
LIQUIDITY AND CAPITAL RESOURCES
We have historically funded our operations primarily through cash generated
from operations and lending institutions. More recently, we have funded our
operations through the sale of debt and equity securities. Net cash used in
operating activities amounted to $4,474,588 during the nine months ended
December 31, 1999 and $60,729 during the nine months ended December 31, 1998.
The increase in cash used in operating activities is primarily attributed to an
increased net loss. Net cash used in operating activities amounted to $702,828
during Fiscal 1999 and $444,212 during Fiscal 1998. This 58% increase was
primarily the result of an increased net loss and an increase in inventory and
other assets.
Accounts receivable were $834,383 at March 31, 1999, compared to $1,084,527
at March 31, 1998. Days sales outstanding were 37 days at March 31, 1999
compared to 34 days at March 31, 1998. We expect that accounts receivable will
increase as revenue increases and as revenue from international and original
equipment manufacturers customers represent a higher percentage of our total
revenue. While to date we have not experienced significant losses related to
accounts receivable, there can be no assurance that we will not experience
losses related to accounts receivable in the future.
Net cash used in investing activities amounted to $123,615 during the nine
months ended December 31, 1999 and $195,454 during the nine months ended
December 31, 1998. The decrease is primarily attributable to a reduction in
property and equipment purchases. Net cash used in investing activities amounted
to $211,044 during Fiscal 1999 and $273,929 during Fiscal 1998. The decrease
primarily reflects the net purchase of property and equipment used in
operations.
Net cash provided by financing activities amounted to $4,415,040 during the
nine months ended December 31, 1999 and $28,263 during the nine months ended
December 31, 1998. The increase was primarily due to an increase in notes
payable, the June 8, 1999 merger with JLL Ventures (Delaware) Corp. and the
closing of a private placement transaction resulting in gross proceeds of
$2,000,000. Net cash provided by financing activities amounted to $869,116
during
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Fiscal 1999 and $620,195 during Fiscal 1998. The increase was primarily due to
an increase in notes payable.
As of March 31, 1999, we had two collateralized bank-revolving lines of
credit with balances of $83,000 and $599,120 bearing interest at the lender's
prime rate plus 2.0% and 3.5%, respectively. The lines of credit were paid in
full on October 6, 1999.
Prior to the merger, CNF, Inc. issued promissory notes in the aggregate
principal amount of $1,775,000 at an interest rate of 10% per annum paid
annually in arrears. The holders of $1,375,000 principal amount of these notes
have converted such notes into common stock. The $200,000 outstanding principal
amount of these notes are due on January 30, 2001. After the merger, we issued
additional promissory notes in the aggregate principal amount of $778,259 at an
interest rate of 10%. Holders of $547,253 of these notes have converted such
notes into common stock. The $250,000 outstanding principal amount of these
notes are due January 30, 2001. Finally, during July and August 1999, we issued
promissory notes in the aggregate principal amount of $650,000 at an interest
rate of 10%. The holders of $350,000 principal amount of these notes have
converted such notes into common stock. The $300,000 outstanding principal
amount of these notes are due on January 30, 2001
Upon completion of the merger with CNF, Inc., we obtained $1,000,000;
representing the proceeds from the sale of common stock prior to the merger. The
merger agreement provided for the completion of a private placement to yield
gross proceeds of $2,000,000 to $6,000,000 (including for this purpose the
conversion of certain indebtedness). In this connection, we commenced a private
offering of shares of our common stock and on November 26, 1999, we conducted a
closing resulting in gross proceeds of $2,000,000 from the sale of 666,667
shares of common stock. On February 2, 2000, we issued an additional 250,000
shares of our common stock in a private placement transaction and realized gross
proceeds of $500,000.
We believe that our existing negative working capital and borrowing
capacity, coupled with the funds generated from our operations, will be
insufficient to fund our anticipated working capital, capital expenditures and
debt payment requirements through March 31, 2000. We will require an additional
$5,000,000 in a combination of new capital and the conversion of indebtedness to
execute on our operations plan. In the longer term, unless we can generate
significantly greater cash flow from operations, we will require additional
sources of liquidity to fund future growth. Such sources of liquidity may
include additional equity offerings or debt financing. In order to issue
additional shares of common stock or securities convertible into common stock
we are required to obtain the consent of two of our stockholders, Deremie
Enterprises and Discretionary Investment Trust. In the normal course of
business, we evaluate acquisitions of businesses, products and technologies that
complement our business.
We intend to continue to pursue strategic investment in products,
technologies or distribution networks in order to broaden our product lines and
to provide a more complete solution to the mobile computer user. We may acquire
businesses, products or technologies in the future. There can be no assurance
that we will not require additional financing in the future or, if we were
required to obtain additional financing in the future, that sources of capital
will be available on terms favorable to us, if at all.
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YEAR 2000 COMPLIANCE
To address "Year 2000" issues, we established a Year 2000 Project Team
which completed a five-phase plan to assess the Company's Year 2000 compliance.
In executing this plan, we tested our current products and products under
development, completed an evaluation, analysis and testing of our core internal
systems and assessed the readiness of third-party business partners, including
significant vendors and customers and concluded that there was no significant
risk of noncompliance. Even where assurances were received from third parties
there remains a risk that the failure of systems and products of other companies
on which we rely could have a material adverse effect on us. In addition, there
can be no assurance that certain previous releases of our products, which are no
longer under support, will prove to be Year 2000 compliant.
We have not incurred any material costs and do not expect to incur future
material costs as a result of the Year 2000 problem for our systems and
products. Accordingly, at this time, we do not expect of any material impact to
our financial position, results of operations and cash flows as a result of Year
2000 problems. Since no material non-compliance has been detected, no
contingency plans have been developed.
Because many companies may need to upgrade or replace computer systems and
software to comply with Year 2000 requirements or remedy Year 2000 problems, we
believe that the purchasing patterns of customers and potential customers may be
affected by Year 2000 issues as companies continue to expend significant
resources to upgrade their current software systems for Year 2000 compliance.
These expenditures may result in reduced funds available to purchase products
such as those offered by us, which could have a material adverse effect on our
business, results of operations and cash flows.
SEASONALITY
We believe the markets for our products are somewhat seasonal, with a
higher proportional share of total sales occurring in the fourth fiscal quarter
(first calendar quarter) and a sales slowdown commonly occurring during the
first fiscal quarter (second calendar quarter).
INFLATION
We do not believe that inflation has to date had a material impact on our
operations.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, was issued, which establishes accounting and reporting
standards for derivative instruments and hedging activities which are required
for fiscal quarters beginning after June 15, 1999. On May 20, 1999, the FASB
issued an exposure draft, which would have the effect of deferring the effective
date of SFAS No. 133 to all fiscal quarters of all fiscal years beginning after
June 15, 2000. On July 7, 1999, the FASB adopted the exposure draft SFAS No.
137. This statement requires balance sheet recognition of derivatives as assets
or liabilities measured at fair
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value. Accounting for gains and losses resulting from changes in the values of
derivatives is dependent on the use of the derivative and whether it qualifies
for hedge accounting. On a preliminary basis, we do not believe that eventual
adoption will have a significant impact on our financial statements.
DESCRIPTION OF BUSINESS
General Development of Business and Overview
CNF, Inc. was incorporated under the laws of the State of California in
1988 to design, manufacture and market computer peripheral devices and
accessories. Over time our business has evolved so that we currently focus our
resources exclusively on peripherals and accessories for laptop computers. Our
operations are conducted from offices in Scottsdale, Arizona. Prior to our
relocation to Scottsdale, Arizona in July 1998, we operated in Morgan Hill,
California.
From inception in 1988 until the Merger with JLL on June 8, 1999, we
operated as a independent privately held corporation. By virtue of the Merger,
we became a non-reporting public company whose shares are eligible for quotation
on the OTC Bulletin Board.
We design, manufacture and market portable computer peripherals and
accessories. We provide a broad range of affordable, easy-to-use devices that
make the functionality and power of desktop computers available to portable
computer users. Our current products include:
o internal high-capacity removable storage devices for various notebook
computers (including Zip(R) and LS/120 SuperDisk(TM) drives)
o portable DVD-ROM drives
o portable CD-ROM drives
o universal bay replicators branded as deviceDOCK(R)
o monitor stands
o numeric keypads
o proprietary and universal auto adapters
o universal port replicators
o universal docking stations (planned introduction during the next fiscal
year)
Universal Port Replicator and Docking Systems
The universal port replicator and universal docking station enable users of
almost any make or model of PC based portable (laptop) computer to essentially
turn their laptop computer into a desktop computer. These devices link portable
computers to a network, a full-size monitor, keyboard, mouse, an array of
external and internal peripherals using parallel, serial, USB, SCSI-2, EIDE,
etc. connections. The universal docking stations will also include PCI expansion
capability.
Prior to our introduction of universal docking solutions all existing
docking stations were compatible with only one particular PC model. Such
"proprietary" docking solutions are more expensive and less flexible than our
universal docking products. We believe that our universal docking products will
expand the overall size of the estimated docking market for a number of
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reasons. First, several notebook manufacturers have removed the proprietary
docking connector from their notebooks (e.g., IBM ThinkPad 240 and Toshiba
Satellite 2500). Accordingly, the only way to "dock" with these notebooks is
through a universally compatible product such as ours. Second, since a universal
product requires a retailer to only carry one product, we believe that retailers
can add incremental revenue by offering universal docking solutions to their
customers without stocking a multitude of different products. Third, we believe
that universal solutions open up entirely new applications for docking such as
multi-brand notebook environments, guest offices, hotel rooms, conference
centers, service bureaus and kiosks.
Industry Background
According to International Data Corporation ("IDC"), a market research
firm, the portable computer market is the fastest growing segment of the
personal computer industry. Growth in this market has been fueled by advances in
computer technology and the increasing demand for computer mobility. IDC
predicts that the portable computer market (excluding handheld devices) will
grow at a compounded annual rate of 15% from 14.1 million units in 1997 to
approximately 25 million units in the year 2001. In addition, the handheld
companion market (as defined by IDC) is expected to grow at a compounded annual
rate of over 40% from 3 million units in 1997 to approximately 13 million units
by 2001. We believe this translates to an addressable potential market of at
least $2 billion per year for portable peripheral products.
Coupled with this trend toward portability, there is an increased demand
for computers that are smaller and lighter but have functionality and
convenience similar to the traditional desktop computer. To meet this demand,
there has been an increased use of peripherals and accessories such as high
capacity storage devices, DVD drives, CD-ROM drives, keypads, auto adapters,
monitor stands, port replicators, docking stations, and Universal Serial Bus
(USB) devices which enable users to maximize their computer's portability while
enhancing its functionality. To make these smaller computers more convenient to
use in the office and home, port replicators and docking stations have been
developed to allow users easy connections to networks, full-size monitors,
keyboards, and other peripheral devices providing portable computer users with
all of the features and functionality of a traditional desktop computer. IDC
reported that 74% of all notebook computers sold in 1997 served as the users'
primary computer. Sherwood research reported that 19% of all notebook buyers use
a Docking Station and 22% of users use a Port Replicator.
Port replicators provide users with ports for utilizing peripherals such as
a standard-size keyboard, mouse and monitor, as well as connecting to other
devices such as an Ethernet network, printer, modem, etc. The main function of a
port replicator is to connect peripherals to a notebook in a fast and convenient
manner. This allows users to take their notebook home or on the road with
maximum convenience.
Docking stations include basic port replicator features, as well as more
advanced capabilities such as PC card slots, internal drive bays for storage
devices, and PCI/ISA slots. Docking stations enable the user to expand the
notebook into a virtual desktop computing device. Attaching and releasing the
portable computers from the port replicator or docking station is
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typically a one-step procedure that takes seconds to complete compared to the
burdensome task of attaching or releasing each external device separately. When
the portable computer is detached from the connectivity product, all external
devices connected to the connectivity product stay in place, ready to be
reattached.
Currently, close to 100% of the docking station market is served internally
by the various portable computer Original Equipment Manufacturers. These
Original Equipment Manufacturers have historically designed port replicators and
docking stations for their makes and models of portable computers and
subcontracted these products for assembly to various vendors. Because computer
Original Equipment Manufacturers primarily focus on providing the latest
technological capabilities with strong price and performance characteristics for
portable computers, their development of port replicators and docking stations
has often been a secondary focus. The port replicators and docking stations
developed by Original Equipment Manufacturers are generally expensive, lack
configuration flexibility and are often available only well after the computer
model is launched. Additionally, original equipment manufacturers generally
retool each generation of portable computers and have not created standardized
port replicators and docking stations that are independent of model or
manufacturer.
Because user demand for high performance portable computers has fueled the
growth in the port replicator and docking station markets, there is a large
opportunity to provide a complete, cost-effective connectivity solution that is
independent of manufacturer and model. In this context, we believe that we have
a significant opportunity to create a new mobile computing product category with
the introduction of our universal port replicators and docking stations, thereby
creating a significant additional market opportunity. We believe that the
universal aspects of these products will open new market segments for docking,
including hotels, kiosks, guest offices and service bureaus.
Our Mission
We believe that current industry trends will lead to an increased demand
for the use of peripherals and accessories designed to maximize the portability
and enhance the functionality of laptop computers and create a substantial
potential market for our products. Our overriding mission is to design,
manufacture and market peripheral products which can integrate any laptop
computer into any network or desktop computer at any time. Our products are
designed to permit laptop computer users to rely exclusively on their laptop by
eliminating the need to rely on a specific stationary office or network. Our
primary focus is to anticipate technological advancements and consumer
preference as far in advance as possible, develop new products and improved
features to meet such market demands and transform ideas from concept to market
as quickly as possible.
Our Products
We currently offer seven major product lines: (i) internal Zip(R) and
SuperDisk(TM) drives; (ii) external bay replicators; (iii) portable optical
storage devices like DVD and CD-ROM drives; (iv) external numeric keypads; (v)
monitor stands; (vi) auto adapters; and (vii) universal port replicators. During
the next fiscal year, we plan to introduce a universal docking station.
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Product Development
We operate in an industry that is subject to rapid technological change and
shifting consumer demands. As a result, our future success depends in
significant part on our ability to continually develop and introduce, in a
timely manner, new products with improved features and to develop and
manufacture these products at an affordable cost. Accordingly, in order to
maintain our competitive position in the market, we must continually enhance our
existing products and develop new products.
Two elements drive our product development strategy. First, our
ear-to-the-market discipline of proactively exploring which new products are
demanded by our customers. Through discussions with an Original Equipment
Manufacturer, for example, we developed the idea to design and develop an
InnerBay(R) Zip(R) drive for the customer's line of portable computers. The
customer had been unable to develop a Zip(R) drive for its line because the
Zip(R) drive mechanism was too large to fit into the InnerBay(R) of the portable
computer. CNF's InnerBay(R) Zip(R) drives for this customer's line of portable
computers began shipping in December 1998. Our development team has also
provided novel solutions to similar problems experienced by other Original
Equipment Manufacturers.
The second element of our product development strategy is an emphasis on
bringing new products to market quickly. Our development team can take a new
product from concept to prototype in several weeks. Similarly, we believe that,
on average, we can take new products from prototype to beta version in several
months.
Our product development is managed by a team that includes electrical,
mechanical and software engineers, marketing and sales personnel, project
managers and component buyers, as well as manufacturing and operations
representatives. The average industry experience of the team members is in
excess of 10 years, and certain members are individually named in over 10
patents and 25 patent applications.
Our engineers start the design process in-house using computer aided design
workstations. Printed circuit boards are laid out, and the files are sent
electronically to partner printed circuit board houses in the United States and
Taiwan. These partner companies generally return the printed circuit boards
within one to five days. Concurrent with the design of custom printed circuit
boards and metal components, we design prototypes for any plastic components in
the product. For such plastic prototyping, we use stereolithography, a process
that produces an exact replica of a design on a computer aided design
workstation in one to four days. The newly formed parts are then painted and
have the appearance of a final tooled and molded part. While the hardware
components are being designed and manufactured, any software code necessary for
the product is developed by our software team, which includes two individuals
who have in excess of 17 years experience as software developers.
We use product prototypes to begin compatibility testing, regulatory
testing, form and fit testing, ergonomic testing, and thermal tests. We also use
the prototypes to garner early market/customer feedback before hard tooling
takes place. Once any final product changes have been implemented in the design
files, the files are sent electronically to a partner company in Taiwan that
cuts steel molds using computer aided machines and some hand processing. The
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molding process utilized generally requires approximately 8 to 10 weeks, which
we believe is substantially faster than many of our competitors. After the new
product is developed, but before it begins shipping, we test the product in our
product assurance lab for various issues, including compatibility, power
consumption, drop testing, and software issues.
Although we believe we have the human resources to effectively develop new
products and respond to market forces, we can give no assurance that we will be
successful in developing, manufacturing and marketing new and enhanced products
that meet both the performance and price demands of the market. It is uncertain
that we will have sufficient capital resources to develop and market new
products on a longer-term basis.
Manufacturing
We focus our manufacturing efforts on producing high-quality products while
at the same time minimizing costs. Our manufacturing operations are located at
our headquarters in Scottsdale, Arizona and consist mainly of materials
procurement, final assembly, testing, quality assurance and shipping.
Low-cost suppliers in Taiwan perform the vast majority of the manufacturing
of our products. Local manufacturing is used to ramp up new products and to
satisfy orders requiring the most immediate delivery. Some of our products,
including the monitor stands and external numeric keypads, are manufactured in
their entirety by third parties. Our current significant supplier or third-party
manufacturing relationships include: Goldteck International, Inc.; Ditron
Manufacturing; Iomega; Mitsubishi Electronics; Performance Mold & Engineering;
and TYI Systems Limited. We oversee the Taiwanese manufacturers through a
liaison. We are also able to monitor the manufacturing lines of one of our key
suppliers via live Internet transmissions. Finally, our representatives visit
suppliers on a regular basis.
Certain select components used in our products are currently available from
a limited number of suppliers. Disruption in service by any of our manufacturers
or our suppliers could lead to supply constraints or delays in the delivery of
our products. This could have a material adverse effect on our business.
Sales And Marketing
Prior to 1998, we marketed and sold our products primarily through direct
sales to Original Equipment Manufacturers and corporate users of portable
computers. Since 1998, we have marketed and sold our products primarily through
indirect channels, including wholesale distributors, Original Equipment
Manufacturers and resellers.
Our key distributors include Ingram Micro and Merisel Americas,
Incorporated. During the nine months ended December 31, 1999, sales to Ingram
Micro accounted for 27% of our revenue and sales to Merisel America accounted
for 46% of our revenue. In the year ended March 31, 1999, sales to Ingram Micro
accounted for 14% and sales to Merisel America accounted for 5% of our revenues.
We intend to increase our sales through distributors in the future.
In international markets, we have agreements with 22 distributors located
in more than 18 foreign countries. During the nine months ended December 31,
1999, international sales represented 11% of revenues. During the year ended
March 31, 1999, international sales represented 10% of revenues. We expect that
international sales will continue to comprise a similar proportion of our
revenues in the future.
23
<PAGE>
We believe that fostering the distribution of our products through
cooperation agreements and alliances with a variety of key companies within the
computer and consumer electronic industries, is a critical element of our
strategic goal of being "the first name you think of once you buy or sell a
notebook computer."
We work directly with the major portable computer manufacturers to achieve
approval of our products as "Standard" or "Approved" products for use with the
manufacturers' portable computers. In many cases, we agree to place the logo of
the manufacturer of the portable computer for which a given peripheral has been
designed on the approved product. We believe that these approvals result in
increased sales of our products to corporations, which account for 60-70% of US
portable computer sales. Most corporations only allow their employees and
purchasing managers to purchase portable computer peripherals that are approved
by the manufacturer of the portable computer in question.
A significant portion of our products are sold as approved or standardized
products of a given portable computer manufacturer. However, in the year ended
March 31, 1999, 15% of our revenues were derived from Original Equipment
Manufacturers sales, when such sales are strictly defined as direct sales to
portable computer manufacturers. The vast majority of our products, even those
that bear the logo of the portable computer manufacturer, are primarily sold
through indirect industry channels, including distributors and resellers, with
the approval of the portable computer manufacturer.
We support our direct and indirect channels with our own sales and
marketing organization. We manage our sales and marketing activities primarily
from our offices in Scottsdale, Arizona. Our field and in-house sales and
marketing staff is largely responsible for generating end user demand for our
products by soliciting prospective customers, providing technical advice with
respect to our products and working closely with distributors to sell our
products. Our sales and marketing staff actively participate with distributors
and resellers in the selling process, which provides end users with the level of
support needed for the successful integration of solutions in enterprise
networks.
Additionally, our sales force concentrates on providing "Fortune 1000"
companies with solutions for their laptop users. Many of these companies use
"standards lists" to test and approve products and only allow their employees to
purchase products from such lists. The goal of the sales force is to penetrate
these "standards lists."
We provide some of our distributors and resellers with limited product
return rights for stock rotation. We also provide most of our distributors and
resellers with price protection rights. Price protection rights require that we
grant retroactive price adjustments for inventories of our products held by
distributors or resellers if we lower our prices for such products.
24
<PAGE>
We believe that our sales strategy of working closely with Original
Equipment Manufacturers to approve products, working with the distributors to
make the product available, and working directly with the corporate end-users to
standardize the product provides us with a competitive advantage.
Backlog
Because our customers typically require prompt delivery of products and a
substantial majority of our sales are booked and shipped in the same quarter,
the timing and volume of customer orders are difficult to forecast. Accordingly,
we typically operate with a relatively small order backlog. Further, sales are
generally made pursuant to standard purchase orders that can be rescheduled,
reduced or canceled with little or no penalty. We believe that our backlog at
any given time is not a meaningful indicator of future revenue.
Seasonality And Other Fluctuations Of Revenue
We believe the markets for our products are somewhat seasonal, with a
higher proportional share of total sales occurring in the fourth fiscal quarter
(first calendar quarter) and a sales slowdown commonly occurring during the
first fiscal quarter (second calendar quarter). Sales in a given period may also
be influenced by new product introductions, component supply availability,
working capital availability, and other factors. Revenues and growth rates for
any prior quarter are not necessarily indicative of revenues or growth rates to
be expected in any future quarter.
Service and Support
We believe that service and support are critical components of end user
satisfaction and the success of our business. Our support includes a toll-free
technical support hotline to provide a range of telephone support to our
distributors, dealers and end-user customers as well as fax back, e-mail and
online Internet support. The service and support group also handles product
returns and updates.
Competition
The market for computer products, in general, is intensely competitive,
subject to rapid technological change, and sensitive to new product
introductions or enhancements, and marketing efforts by industry participants.
The principal competitive factors affecting the markets for our product
offerings include price, corporate and product reputation, innovation with
frequent product enhancement, breadth of integrated product line, product
design, functionality and features, product quality, performance, ease-of-use,
and support. We can not assure you that we will be able to maintain our
competitive position against current or potential competitors, especially those
with greater financial, marketing, service, support, technical or other
competitive resources.
We currently compete primarily with the internal design efforts of Original
Equipment Manufacturers. These Original Equipment Manufacturers, as well as a
number of our potential non- Original Equipment Manufacturers competitors,
generally have larger technical staffs, more
25
<PAGE>
established and larger marketing and sales organizations and significantly
greater financial resources than we do. Although we believe that we have a
proprietary position with respect to our technologies which could pose a
competitive barrier for companies seeking to develop or sell competing products
in our markets, we can not assure you that such competitors will not be able to
respond more quickly to new or emerging technologies and changes than we can, or
develop products that are superior to our products or that achieve greater
market acceptance. In addition, we can not assure you that we will be able to
compete successfully against our competitors or that the competitive pressures
that we face will not have a material adverse effect on our business, results of
operations and financial condition.
Our competitors include notebook manufacturers such as Toshiba, IBM and
Compaq, as well as third party suppliers such as Mobility Electronics, EXP, VST
Technologies, Port/Targus, and Extended Systems.
Our future success will depend, in large part, upon our ability to increase
our share of our target market and to sell additional products and product
enhancements to existing customers. Future competition may result in price
reductions, reduced margins or decreased sales, which, in turn, would have a
material adverse effect on our business, results of operations and financial
condition.
Proprietary Rights
We rely on a combination of patent, copyright and trademark laws, trade
secrets, nondisclosure agreements and technical measures to protect our
technology. While we currently intend to vigorously enforce our intellectual
property rights, we can give no assurance that the steps we take to protect our
technology and enforce our rights will be successful or that we will have the
resources to do so. We have four patents pending in the United States and eight
patents pending in over 21 other countries. The categories of patent
applications include: universal docking and port replication solutions, data
multiplexing, power management, and external and internal device solutions. In
August 1999, we were granted a Notice of Allowance from the United States Patent
and Trademark Office for the issuance of a patent for our Digitari(R) Universal
Docking and Port Replication Technologies. On or about October 28, 1999 the
Australian Patent Office issued us a patent for our Digitari(R) Universal
Docking and Port Replication Technolgies. In August 1999, we were issued a
patent from the United States Patent and Trademark Office for our Universal
deviceDOCK(R) Technologies.
The process of seeking patent protection can be expensive and time
consuming. We can give no assurance that patents will issue from pending or
future applications or that if issued, these patents will not be challenged,
invalidated or circumvented, or that the rights granted to us will provide
meaningful protection or other commercial advantage. Also, we can give no
assurance that any patents that we obtain will provide us with substantial value
or protection, that their validity will not be challenged, that affirmative
defenses to infringement will not be asserted or that we will have the financial
resources to protect such patents.
Due to the rapid technological change that characterizes our industry, we
believe that the success of our products will also depend on the technical
competence and creative skill of our personnel in addition to legal protections
afforded our existing drive and disk technology. As is
26
<PAGE>
typical in our industry, from time to time, we have been, and may in the future
be, notified of claims that may be infringing certain patents, trademarks and
other intellectual property rights of third parties. It is not possible to
predict the outcome of these claims and we can give no assurance that these
claims will be resolved in our favor. If one or more of these claims is resolved
unfavorably, we can give no assurance that the outcomes will not have a material
adverse effect on our business or financial results.
Our industry has been characterized by significant litigation relating to
infringement of patents and other intellectual property rights. We can give no
assurance that future intellectual property claims will not result in
litigation. If infringement were established, we could be required to pay
substantial damages or be enjoined from manufacturing and selling the infringing
product(s) in one or more countries, or both. In addition, the costs of engaging
in intellectual property litigation may be substantial regardless of outcome,
and we can give no assurance that we will be able to obtain any necessary
licenses on satisfactory terms. Certain technology used in our products is
licensed on a royalty-bearing basis from third parties. The termination of a
license arrangement could have a material adverse effect on our business and
financial results.
Facilities
Our executive offices and production facilities are located at 7722 East
Gray Road, Scottsdale, Arizona. The office space consists of approximately
16,000 square feet of leased space. The production facility consists of
approximately 24,000 square feet of leased space and houses two production
lines. The warehouse has four overhead truck doors for incoming and outgoing
materials as well as an industrial freight lift. Both facilities are leased
under an agreement which expires in April, 2001. We believe that our present
facilities will provide adequate space for our business activities and
production for the foreseeable future.
Employees
As of February 22, 2000, we had approximately 51 employees (approximately
13 in operations, 15 in engineering, 16 in sales and marketing and 7 in
administration). None of our employees are covered by a collective bargaining
agreement. We consider our relationship with our employees to be good.
Legal Proceedings
We are not a party to any material legal proceedings, although we are
involved from time to time in routine litigation incident to business.
27
<PAGE>
MANAGEMENT
Directors and Executive Officers
The following sets forth certain information regarding each of the
directors and executive officers of the Company.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Paul Charles 38 Chairman of the Board of Director
Carmine F. Adimando 55 Director
David Thompson 44 Interim Chief Executive Officer, Chief
Financial Officer and Secretary
R. Daniel Rudich 29 Vice President of Marketing
Frank Layland 42 Vice President of Operations
</TABLE>
The following is a brief summary of the business experience of each of the
above-named individuals:
Paul Charles founded CNF, Inc. in 1988 and currently serves as Chairman of
the Company's Board of Directors. Mr. Charles had served as President and Chief
Executive Officer of the Company until November 15, 1999. Mr. Charles has been
primarily responsible for product design, development and innovation and has
been instrumental in the development of each of the Company's principal
products. Between 1985 and 1988 Mr. Charles worked for International Business
Machines in cost accounting and inventory control management, where he
distinguished himself by instituting various cost savings initiatives. Mr.
Charles earned a Bachelor's degree in Finance and Accounting from Brigham Young
University in 1985.
Carmine F. Adimando has served as a Director of the Company since February
15, 2000. Since 1996, Mr. Adimando has been the Chairman and President of CARMCO
Investments, LLC, a financial consulting firm specializing in acquisitions,
diversitures, investors relations and strategic investments, where he manages
the firm's diversified portfolio of public and private companies and specializes
in raising capital for start-up and emerging companies. Mr. Adimando is also the
Chairman of Cordiller Asset Management, a Denver, Colorado based money
management firm. Prior to that, he had a 17 year career at Pitney Bowes, Inc.
serving in various executive positions including Vice President-Finance,
Treasurer and Chief Financial Officer. Mr. Adimando is a member of the Board of
Overseers of the University of Connecticut School of Business as well as the
Board of Regents of Sacred Heart University. He earned his Undergraduate Degree
from Saint John's University and his MBA from Stanford University's Graduate
School of Business. Mr. Adimando serves on the Board as the designee of Imperium
Capital Corp. and is a Certified Public Accountant.
28
<PAGE>
David Thompson was appointed the Interim Chief Executive Officer of the
Company on November 15, 1999. He has served as the Chief Financial Officer and
Secretary since January 1998. From January 1996 until joining the Company, Mr.
Thompson served as the Chief Financial Officer and Vice President of Information
for International Computer Graphics, Inc., a leading wholesale distributor of
computer monitors and video cards. Between January 1992 and December 1996, Mr.
Thompson operated his own accounting practice where he specialized in working
with closely held corporations involved in mergers, acquisitions, private
placements and other financing transactions. Mr. Thompson graduated from Eastern
Washington University with a Bachelor's degree in Business Administration with
an emphasis in professional accounting.
R. Daniel Rudich has served as the Company's Vice President of Marketing
since December 1997. From 1996 until joining the Company, Mr. Rudich served as
the Worldwide Product Manager for notebook Zip(R) products at Iomega Corporation
where he was responsible for the development and marketing of the notebook
Zip(R) drive. During 1995, Mr. Rudich was a marketing intern at Compaq Computer
Corporation. Between 1993 and 1994, Mr. Rudich held various marketing positions
with Matrox Electronics, a Canadian graphics card manufacturer. Mr. Rudich
graduated from McGill University in Montreal, Canada with a Bachelor of Commerce
degree in Marketing and International Business and earned an MBA from Yale
University in 1996.
Frank Layland has served as the Company's Director of Operations since
August 1998. Between 1985 and 1998, Mr. Layland served in various management
positions for Lockheed Martin Corporation, including Business Operations Manager
and Project Operations Manager where he was principally involved with
governmental contracts. Mr. Layland has experience managing subcontractors,
monitoring costs, production schedules and quality control. He graduated from
Brigham Young University with a Bachelor of Science in Business Management.
Board of Directors
All directors hold office until the next annual meeting of stockholders and
the election and qualification of their successors. Officers are elected
annually by the Board of Directors and serve at the discretion of the Board.
The Company currently has two directors; Mr. Paul Charles and Mr. Carmine
F. Adimando. Mr. Charles has the right to nominate one (1) director, if the
Board consists of less than five (5) members, and two (2) directors if the Board
consists of five (5) or more members. Imperium Capital Inc. has the right to
nominate one (1) director. It is anticipated that additional persons will be
appointed to the Board of Directors.
Directors Compensation
Directors who are also officers of the Company receive no additional
compensation for serving on the Board of Directors, other than reimbursement of
reasonable expenses incurred in attending meetings. The Company has not yet
formulated a policy regarding the compensation, if any, of non-employee
directors.
29
<PAGE>
Executive Compensation
The following table provides certain summary information concerning
compensation paid to or accrued by CNF's Chief Executive Officer, and all other
executive officers who earned more than $100,000 (salary and bonus) for all
services rendered in all capacities to CNF (and its predecessors) during the
fiscal years ended March 31, 1997, 1998 and 1999:
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
--------------------------------- ----------------------
Restricted
Name and Principal Fiscal Other Annual Stock Options/
Position Year Salary Bonus Compensation(1) Awards SARs (#)
- --------- ---- -------- ----- ------------ ------ --------
<S> <C> <C> <C> <C> <C> <C>
Paul Charles(2) 1999 $150,000 -- -- -- --
President and Chief 1998 $117,243 -- -- -- --
Executive Officer 1997 $110,993 $288,871 -- -- --
David Thompson(3) 1999 $150,000 -- -- -- 339,277(4)
Interim Chief Executive 1998 $18,367 -- -- -- --
Officer, Chief Financial
Officer and Secretary
R. Daniel Rudich(5) 1999 $100,000 -- -- -- 203,565(4)
Vice President of Marketing 1998 $ 28,353 -- -- --
</TABLE>
- --------------------------
(1) With respect to each of the executive officers named in the table, if not
separately reported, the aggregate amount of perquisites and other personal
benefits, securities or property received was less than either $50,000 or
10% of the total annual salary and bonus reported for such executive
officer.
(2) Mr. Charles resigned his position as President and Chief Executive Officer
of the Company effective November 15, 1999.
(3) Mr. Thompson commenced his employment with CNF on January 1, 1998.
Effective November 15, 1999, Mr. Thompson was appointed as the interim
Chief Executive Officer of the Company.
(4) Consists of options to purchase shares of Series A Preferred Stock which
were issued in exchange for options to purchase shares of CNF common stock
in connection with the Merger.
(5) Mr. Rudich commenced his employment with CNF on December 1, 1997.
30
<PAGE>
OPTION/SAR GRANTS TABLE
<TABLE>
<CAPTION>
Option/SAR Grants in the Last Fiscal Year
======================================================================================================================
Individual Grants
- ----------------------------------------------------------------------------------------------------------------------
% of Total
Options/SARs
Granted to Exercise or
Options/SARs Employees in Base Price Expiration
Name Granted (#)(1) Fiscal Year ($/Sh) Date
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Paul Charles __ __ __ __
Chairman of the Board of Directors
- ----------------------------------------------------------------------------------------------------------------------
David Thompson 339,277 41% $.24 April 15, 2008
Interim Chief Executive Officer,
Chief Financial Officer and
Secretary
- ----------------------------------------------------------------------------------------------------------------------
R. Daniel Rudich 203,565 25% $.24 April 15, 2008
Vice President of Marketing
======================================================================================================================
</TABLE>
(1) Consists of options to purchase shares of Series A Preferred Stock which
were issued in exchange for outstanding options to purchase shares of CNF,
Inc. common stock in connection with the merger.
Employment Arrangements
The Company has entered into employment agreements with Messrs. Charles,
Thompson, Rudich and Layland. The employment agreements are for a term of three
(3) years commencing May 19, 1999, provide for annual base salaries of, $90,000,
$148,000, $85,000 and $85,000, respectively, and an annual merit based
discretionary bonus to be determined by the Board of Directors or Compensation
Committee. Mr. Thompson's salary, within the Company's discretion, may be
increased to $208,000 in the event that the Company reports a net profit during
any fiscal quarter ending after February 15, 2000. Mr. Thompson's agreement
provides for a mandatory bonus for the fiscal year ending March 31, 2000 equal
to $21,000 in the event that the Company achieves the first of the financial
performance targets set forth within the Certificate of Designation for the
Company's Series A Convertible Preferred Stock and an additional $10,500 for
each additional financial performance target the Company's achieves. Mr.
Rudich's salary, within the Company's discretion, may be increased to $120,000
in the event that the Company reports a net profit during any fiscal quarter
ending after February 15, 2000. Mr. Rudich's agreement provides for the payment
of a commission equal to $0.35 for each unit of CNF InnerBay(R) ZIP(R), CNF
Digitari(R) products and all products developed by the Company subsequent to
January 1, 1998 which are sold and paid for subject to a maximum commission of
$200,000 per year.
All executives are entitled to participate in the Company's fringe benefit
programs, any incentive plan adopted by the Company and to reimbursement for
certain company-related travel expenses. Each of the agreements provide for
termination "for cause" which includes failure to achieve individual or
corporate performance goals as determined by the Board of Directors of the
Company or executive management. Commencing on or about May 19, 2000, any
31
<PAGE>
executive may be terminated without cause at the discretion of the Board of
Directors of the Company. In the event of a termination without cause, certain
of the executives are entitled to receive severance pay in the form of salary
continuation for an additional period of one year.
The agreements contain standard clauses regarding confidentiality,
non-compete and non-solicitation of customers, suppliers and employees. The
agreements also provide for the executive to disclose all works and inventions
to the Company, assign any and all patents to the Company and for all
copyrightable material created by any executive during the term of his
employment to be the property of the Company.
Outstanding Options; Stock Incentive Plan
In connection with the Merger, the Company assumed CNF, Inc.'s 1997 Equity
Incentive Plan This plan provided for the grant of options to purchase up to
602,026 shares of CNF common stock to employees, officers, directors and
consultants of CNF, Inc. It provided for the grant of incentive stock options
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended and the grant of non-qualified stock options at exercise prices not less
than the fair market value at the date of grant in the case of incentive stock
options and not less than ninety (90%) of the fair market value at the date of
grant for non-qualified options. The plan also provided for the issuance of
restricted stock awards.
As of the closing of the merger, CNF, Inc. had granted options to purchase
an aggregate of 405,658 shares of CNF, Inc.'s common stock to certain officers
and employees of CNF, Inc. at exercise prices ranging from $.50 to $2.50 per
share. These options were granted during the fiscal year ended March 31, 1999,
expire ten (10) years from the date of grant and vest twenty-five percent (25%)
after the first year and in ratable installments each subsequent month over the
following three (3) years. In connection with the Merger, the Company assumed
these options which now represent the right to purchase an aggregate of up to
836,790 shares of Series A Preferred Stock of the Company (of which 44,350 have
been cancelled and 12,349 have been exercised) at exercise prices ranging from
$.24 to $1.21 per share. At this time, the Company's Board of Directors does not
intend to issue any additional options under this plan.
The Board of Directors does, however, intend to adopt a stock incentive
plan and have such plan approved by the Company's stockholders. It is
anticipated that any such plan will cover the grant of incentive and
non-qualified options as well as the issuance of restricted stock awards and
stock appreciation rights to officers, directors, key employees and consultants
of the Company. The proposed plan will likely cover the issuance of options to
purchase ten percent (10%) of the total number of then outstanding shares of the
common stock of the Company and will be administered by the Board of Directors
or a committee thereof.
32
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Loans to Officers
In February 1997, we loaned Paul Charles $195,000 under a promissory note
payable in full on February 14, 2002 at an interest rate of 8% per annum. This
note was paid in full on August 14, 1998.
Agreements with Officers and Directors
The Company has entered into employment and option agreements with Messrs.
Charles, Thompson, Rudich and Layland.
Amendments to Merger Agreement
Effective June 8, 1999, we acquired CNF, Inc. pursuant to a merger
agreement under which we issued 5,163,588 shares of Series A Preferred Stock and
options to purchase 836,790 shares of Series A Preferred Stock to holders of all
outstanding common shares and options of CNF, Inc. By agreements dated November
1, 1999 and February 2, 2000, by and among the Company, Paul Charles, Synergy
Group International, Inc. and others, certain material provisions of the merger
agreement were amended.
Pursuant to the terms of the initial merger agreement, Mr. Charles received
5,157,000 Series A Preferred Stock and entered into an employment agreement to
serve as our Chief Executive Officer. Mr. Charles has resigned his position and
surrendered 1,500,000 of the shares of Series A Preferred Stock issued to him in
the merger. The initial merger agreement provided for 2,000,000 of the shares of
Series A Preferred Stock issued to Mr. Charles to be placed into escrow to
secure his indemnification obligations under the agreement. 1,000,000 of these
shares were subject to release on or about December 8, 1999 and the remainder
were subject to release on or about December 8, 2000. Given that no
indemnification claims have arisen to date, and Mr. Charles' agreement to
surrender a portion of these shares, we agreed to release the remaining 500,000
shares from escrow in order to permit Mr. Charles to privately transfer such
shares.
The initial merger agreement required us to conduct a private placement to
raise net proceeds of at least $5,000,000 in cash or conversion of indebtedness.
In order to secure this obligation, certain of our historic shareholders
including Vincent J. Marold and Synergy Group International, Inc., placed
4,000,000 shares into escrow which were subject to cancellation in the event
that the required proceeds were not raised within approximately six months of
the effective date of the merger. These provisions have been amended to provide
for the release of 2,000,000 shares upon us realizing $2,000,000 of such
financing, an additional 1,000,000 shares upon realizing an aggregate of
$4,000,000 of financing and the remaining 1,000,000 shares upon realizing an
aggregate of $6,000,000 of such financing by no later then May 15, 2000. These
amendments were the result of extensive negotiation with certain of the historic
shareholders and were prompted by certain material changes in our management,
other operational issues and delays in raising the financing on terms acceptable
to us within the time frame required.
33
<PAGE>
The initial merger agreement also contained certain corporate governance
provisions requiring a super majority vote of our Board of Directors to approve
certain fundamental transactions involving a change in control of the Company or
the issuance of a material amount of securities. In addition, certain of our
historic shareholders holding an aggregate of 2,100,000 shares of common stock
and Mr. Charles agreed to vote their shares to elect a Board of Directors
consisting of two designees of Mr. Marold and three designees of Mr. Charles. In
connection with Mr. Charles' resignation as our Chief Executive Officer, the
corporate governance provisions described above were eliminated and the voting
provision was amended to provide for these shareholders to vote for the
nomination of Mr. Charles to serve on our board in the event our board consists
of less than five members, for Mr. Charles and an additional designee of Mr.
Charles in the event that our board consists of five or more members and a
designee of Imperium Capital Corporation.
34
<PAGE>
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of February 22, 2000 information
with respect to the securities holdings of all persons which the company,
pursuant to filings with the Securities and Exchange Commission, has reason to
believe may be deemed the beneficial owners of more than 5% of the company
outstanding common stock. Also set forth in the table is the beneficial
ownership of all shares of the company's outstanding stock, as of such date, of
all officers and directors, individually and as a group.
<TABLE>
<CAPTION>
Shares Owned Beneficially Percentage of
Name and Address and of Record (1) Outstanding Shares
---------------- ----------------- ------------------
<S> <C> <C>
Paul Charles 3,157,000(2) 20.9%
7722 East Gray Road
Scottsdale, AZ 85260
David Thompson 155,504(3) 1.3%
7722 East Gray Road
Scottsdale, AZ 85260
R. Daniel Rudich 93,302(4) *
7722 East Gray Road
Scottsdale, AZ 85260
Frank Layland 14,612(5) *
7722 East Gray Road
Scottsdale, AZ 85260
Carmine F. Adimando -- --
47 Cherry Gate Lane
Trumbull, CT 06611
Vincent J. Marold 1,477,500(6) 12.3%
c/o Synergy Group
International, Inc.
3725 East Sunrise Drive
Tucson, AZ 85718
Fincord Holding Corp. 725,000 6.1%
P.O. Box 4608
Great Neck, NY 11203
William J. Meris 765,000(7) 6.4%
8652 East Carrie Drive
Scottsdale, AZ 85200
All Directors 3,420,418 22.2%
And Executive Officers as a Group
(5 persons)
</TABLE>
- ---------------
*Represents less than 1% of the outstanding shares of common stock.
35
<PAGE>
(1) The securities "beneficially owned" by a person are determined in
accordance with the definition of "beneficial ownership" set forth in the
rules and regulations promulgated under the Exchange Act, and accordingly,
may include securities owned by and for, among others, the spouse and/or
minor children of an individual and any other relative who has the same
home as such individual, as well as other securities as to which the
individual has or shares voting or investment power or which such person
has the right to acquire within 60 days after the date of this prospectus
pursuant to the exercise of options, or otherwise. Beneficial ownership may
be disclaimed as to certain of the securities. This table has been prepared
based on 11,975,063 shares of common stock outstanding as of February 22,
2000.
(2) Consists of 3,157,000 shares issuable upon conversion of Series A Preferred
Stock.
(3) Consists of shares issuable upon exercise of options to purchase 155,504
shares of Series A Preferred Stock which shares are convertible into a like
number of shares of common stock. Does not include 183,773 shares issuable
upon exercise of options to purchase 183,773 shares of Series A Preferred
Stock which are subject to vesting.
(4) Includes shares issuable upon exercise of options to purchase 93,202 shares
of Series A Preferred Stock which shares are convertible into a like number
of shares of common stock. Does not include 110,263 shares issuable upon
exercise of options to purchase 110,263 shares of Series A Preferred Stock
which are subject to vesting.
(5) Consists of shares issuable upon exercise of options to purchase 14,612
shares of Series A Preferred Stock which shares are convertible into a like
number of shares of common stock. Does not include 26,644 shares issuable
upon exercise of options to purchase 26,644 shares of Series A Preferred
Stock which are subject to vesting.
(6) Includes 477,500 shares owned of record by Synergy Group International,
Inc. of which Mr. Marold is the sole shareholder.
(7) Includes 750,000 shares owned of record by Meris Capital Partners, L.P.
which Mr. Meris is deemed to beneficially own.
Material Escrow Arrangements
1,000,000 of our outstanding shares of common stock have been deposited
into escrow and remain subject to cancellation upon the terms set forth in a
certain escrow agreement entered into in connection with our merger with CNF,
Inc. These shares will be released upon us realizing an additional $2,000,000 of
debt or equity financing by no later than May 15, 2000.
Material Voting Arrangements
Until May 19, 2001, certain of our historic shareholders, including Vincent
J. Marold, and Synergy Group International, Inc., who hold an aggregate of
2,100,000 shares of common stock, and Paul Charles who holds 3,157,000 shares of
Series A Preferred Stock, have agreed to vote their shares to elect a designee
of Imperium Capital Corporation to serve on our Board of Directors, to elect
Paul Charles to serve on our board if it consists of less than five directors
and to elect Mr. Charles and an additional designee of Mr. Charles in the event
that our board consists of five or more directors.
36
<PAGE>
DESCRIPTION OF SECURITIES
Common Stock
We are authorized to issue 50,000,000 shares of common stock, $.0001 par
value per share, of which 11,975,063 are outstanding as of the date of this
prospectus.
Holders of common stock have equal rights to receive dividends when, as and
if declared by the Board of Directors, out of funds legally available therefor.
Holders of common stock have one vote for each share held of record and do not
have cumulative voting rights.
Holders of common stock are entitled, upon liquidation of the Company, to
share ratably in the net assets available for distribution, subject to the
rights, if any, of holders of any preferred stock then outstanding. Shares of
common stock are not redeemable and have no preemptive or similar rights. All
outstanding shares of common stock are fully paid and nonassessable.
Preferred Stock
Within the limits and restrictions provided in the Certificate of
Incorporation, the Board of Directors has the authority, without further action
by the stockholders, to issue up to 15,000,000 shares of preferred stock, $.0001
par value per share (the "Preferred Stock"), in one or more series, and to fix,
as to any such series, any dividend rate, redemption price, preference on
liquidation or dissolution, sinking fund terms, conversion rights, voting
rights, and any other preference or special rights and qualifications.
Series A Convertible Preferred Stock. Our Board of Directors has authorized
the designation of 6,000,000 shares of Preferred Stock as "Series A Convertible
Preferred Stock" of which 3,675,537 are outstanding. The Company has also issued
options to purchase an additional 780,091 shares of Series A Preferred Stock.
The following describes the material features of the series A preferred stock
which are more fully set forth in the company's Certificate of Designation on
file with the Delaware Secretary of State.
The Series A Preferred Stock is essentially a common stock equivalent. The
Series A Preferred Stock does not have a liquidation preference, does not
provide for a preferred dividend other than those declared by our board of
directors out of funds legally available therefor and votes on an as converted
into common stock basis. Commencing on the date of issuance, each share of
Series A Preferred Stock is convertible into one (1) share of common stock.
Thereafter, the conversion ratio is subject to upward adjustment based on the
company achieving certain financial performance targets as reflected in the
company's audited results of operation for the fiscal year ending March 31, 2000
as follows:
37
<PAGE>
<TABLE>
<CAPTION>
Shares of common stock to be
issued upon conversion of each
Financial Performance Target Share of Series A Preferred Stock
---------------------------- ---------------------------------
<S> <C>
Gross Revenues of $22.5 million and Net Income of $900,000 1.5
Gross Revenues of $38.25 million and Net Income of $1.53 million 1.75
Gross Revenues of $51 million and Net Income of $2.04 million 2.00
Gross Revenues of $64 million and Net Income of $2.56 million 2.25
</TABLE>
The Financial Performance Targets with respect to gross revenues and net
income shall be considered to have been achieved if actual gross revenues or net
income, as applicable, as reported in the audited financial statements are
within 10% of the targeted amount. All shares of Series A Preferred Stock which
have not been converted shall automatically convert into common stock upon the
earlier of (i) the completion of the audited financial statements; and (ii) June
30, 2000. Based upon the Company's financial performance during the first three
quarters of fiscal 2000, it is unlikely that any of the financial targets will
be achieved.
Dividend Policy
We have never paid cash dividends on our common stock. Our board of
directors does not anticipate paying cash dividends in the foreseeable future as
it intends to retain future earnings, if any, to finance the growth of the
business. The payment of future cash dividends will depend on such factors as
earnings levels, anticipated capital requirements, the operating and financial
condition of the company and other factors deemed relevant by our board of
directors.
Delaware Anti-Takeover Law and Provisions of Company's Certificate of
Incorporation
Anti Takeover Law. As our shares become more widely held, listed on NASDAQ
or on a national exchange, to which there can be no assurance, we will be
governed by Section 203 of the General Corporation Law of the State of Delaware,
an anti-takeover law. In general, the law prohibits a public Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. "Business combinations" includes
mergers, asset sales and other transactions resulting in a financial benefit to
the stockholder. An "interested stockholder" is a person who, together with its
affiliates and associates, owns (or within three years, did own) 15% or more of
a corporation's voting stock. The provisions regarding certain business
combinations under the General Corporation Law of the State of Delaware could
have the effect of delaying, deferring or preventing a change in control of our
company or the removal of our existing management. A
38
<PAGE>
takeover transaction frequently affords stockholders the opportunity to sell
their shares at a premium over current market prices.
Blank Check Preferred Stock. As described above, our board of directors is
authorized without further stockholder action, to designate any number of series
of preferred stock with such rights, preferences and designations as determined
by the board. Shares of preferred stock issued by our board of directors could
be utilized, under certain circumstances, to make an attempt to gain control of
our company more difficult or time consuming. For example, shares of preferred
stock could be issued with certain rights that might have the effect of diluting
the percentage of common stock owned by a significant stockholder or issued to
purchasers who might side with management in opposing a takeover bid that our
board of directors determines is not in the best interest of the company and its
stockholders. The existence of the preferred stock may, therefore, be viewed as
having possible anti-takeover effects. A takeover transaction frequently affords
stockholders the opportunity to sell their shares at a premium over current
market prices.
Transfer Agent
The transfer agent for the company's securities is StockTrans, Inc., 7 East
Lancaster Avenue, Ardmore, Pennsylvania 19003, (610) 649-7300.
SELLING SECURITY HOLDERS
The selling security holders identified in the following table are offering
for sale 3,106,623 shares of common stock. These shares include:
o 2,456,623 shares of common stock
o 650,000 shares of common stock which may be issued upon the conversion
of series A preferred stock
We previously issued these shares of common stock and series A preferred
stock in private placement transactions. 850,000 of these shares are being
offered by directors, officers or principal stockholders of the company.
Of the 3,106,623 share of common stock being offered by the selling
security holders, 1,453,413 shares are subject to lock-up agreements which
prohibit the offer or sale of these shares until nine (9) months after the date
of this prospectus.
The selling security holders may offer their shares of common stock for
sale from time to time at market prices prevailing at the time of sale or at
negotiated prices, and without payment of any underwriting discounts or
commissions except for usual and customary selling commissions paid to brokers
or dealers.
39
<PAGE>
The following table sets forth as of February 22, 2000 the number of shares
being held of record or beneficially by the selling security holders and
provides by footnote reference any material relationship between the company and
the selling security holder, all of which is based upon information currently
available to the company.
<TABLE>
<CAPTION>
Beneficial Ownership of
Selling security Holder Beneficial Ownership of
Prior to Offering (1) Shares After Offering (2)
---------------------------- ------------------------------
Number of Shares
Name of Selling Security Holder Number Percent Offered Hereby (2) Number Percent
- ------------------------------- ------ ------- ------------------ ------ -------
<S> <C> <C> <C> <C> <C>
Blair Portigal 71,822 * 71,822 - -
Paul Charles(3) 3,157,000(4) 20.9% 150,000 3,007,000 19.2%
Chenango, Inc. 350,000(5) 2.8% 350,000 - -
Discretionary Investment Trust(6) 350,000 2.9% 350,000 - -
Deremie Enterprises Limited(7) 500,000 4.2% 500,000 - -
Enrico E. DiVito, DDS 35,918 * 35,918 - -
Euroswiss Securities, Ltd. 150,000(8) 1.2% 150,000 - -
Michael G. Glynn 97,500 * 87,500 10,000 -
Keith and Carol Henrichsen 11,507 * 5,753 5,754 *
Imperium Capital Corporation(9) 250,000 2.1% 250,000 - -
Lawrence Kaplan 347,574 2.9% 173,787 173,787 1.4%
Allen and Jane Kelsey 35,890 * 35,890 - -
Lindzon Capital Partners(10) 186,562 1.6% 126,562 60,000 *
Meris Capital Partners, L.P(11) 750,000 6.3% 700,000 50,000 *
Harold Rubenstein 113,151 * 83,151 30,000 *
Rochelle and Shelden Terman 36,240 * 36,240 - -
---------
3,106,623
=========
</TABLE>
* Represents less than 1% of the outstanding shares of common stock
(1) Applicable percentage of ownership is based on 11,975,063 shares of common
stock outstanding as of February 22, 2000, plus any securities held by such
holder exercisable for or convertible into common stock within sixty (60)
days after the date of this prospectus.
(2) Assumes that all shares are sold pursuant to this offering and that no
other shares of common stock are acquired or disposed of by the selling
security holders prior to the termination of this offering. Because the
selling security holders may sell all, some or none of their shares or may
acquire or dispose of other shares of common stock, we cannot estimate the
aggregate number of shares which will be sold in this offering or the
number or percentage of shares of common stock that each selling security
holder will own upon completion of this offering. Applicable percentage of
ownership is based on 12,625,063 shares of common stock outstanding after
the offering (11,975,063 shares outstanding as of February 22, 2000, plus
650,000 shares issuable upon the conversion of 650,000 shares of Series A
Preferred Stock), together with any securities held by such holder
exercisable for or convertible into common stock within 60 day after the
date of this prospectus.
(3) Mr. Charles is the Chairman of the Board of Directors and a principal
stockholder of the Company.
(4) Includes 3,157,000 shares of common stock issuable upon the conversion of
Series A Preferred Stock.
(5) Consists of 350,000 shares of common stock issuable upon the conversion of
Series A Preferred Stock.
(6) Pursuant to a February 2, 2000 securities purchase agreement, Discretionary
Investment Trust has the right to consent to the Company's issuance of any
common stock or securities convertible into common stock.
(7) Pursuant to a February 2, 2000 securities purchase agreement, Deremie
Enterprises Limited has the right to consent to the Company's issuance of
any common stock or securities convertible into common stock.
(8) Consists of 150,000 shares of common stock issuable upon the conversion of
Series A Preferred Stock.
(9) Imperium Capital Corporation has the right to designate one person to serve
on the Company's Board of Directors.
40
<PAGE>
(10) Lindzon Capital Partners is an investment fund managed by Howard Lindzon
who beneficially owns an additional 332,500 shares of common stock and
6,188 shares of Series A Preferred Stock.
(11) Under applicable SEC Rules, these shares are deemed to be beneficially
owned by William J. Meris, a principal stockholder of the Company.
Under agreements with the selling security holders, we will pay all
offering expenses except the fees and expenses of any counsel and other advisors
that the selling security holders may employ to represent them in connection
with the offering and all brokerage or underwriting discounts or commissions
paid to broker-dealers in connection with the sale of the shares.
PLAN OF DISTRIBUTION
The selling security holders have not advised us of any specific plan for
distribution of the shares offered hereby, but it is anticipated that the shares
will be sold from time to time by the selling security holders or by pledgees,
donees, transferees or other successors in interest on a best efforts basis
without an underwriter. Such sales may be made on the National Quotation
Bureau's Pink Sheets, the OTC Bulletin Board, any exchange upon which our shares
may trade in the future, over-the-counter, or otherwise, at prices and at terms
then prevailing or at prices related to the then current market price, or in
negotiated transactions. The shares may be sold by one or more of the following:
o a block trade in which the broker or dealer so engaged will attempt to
sell the shares as agent but may position and resell a portion of the
block as principal to facilitate the transaction;
o purchases by a broker or dealer for its account pursuant to this
prospectus;
o ordinary brokerage transactions and transactions in which the broker
solicits purchases;
o through options, swaps or derivatives;
o in privately negotiated transactions;
o in transactions to cover short sales;
o through a combination of any such methods of sale; or
o in accordance with Rule 144 under the Securities Act, rather than
pursuant to this prospectus.
The selling security holders may sell their shares directly to purchasers
or may use brokers, dealers, underwriters or agents to sell their shares.
Brokers or dealers engaged by the selling security holders may arrange for other
brokers or dealers to participate. Brokers or dealers may receive commissions,
discounts or concessions from the selling security holders, or, if any such
broker-dealer acts as agent for the purchaser of shares, from the purchaser in
amounts to be negotiated immediately prior to the sale. The compensation
received by brokers or dealers may,
41
<PAGE>
but is not expected to, exceed that which is customary for the types of
transactions involved. Broker-dealers may agree with a selling security holder
to sell a specified number of shares at a stipulated price per share, and, to
the extent the broker-dealer is unable to do so acting as agent for a selling
security holder, to purchase as principal any unsold shares at the price
required to fulfill the broker-dealer commitment to the selling security holder.
Broker-dealers who acquire shares as principal may thereafter resell the shares
from time to time in transactions, which may involve block transactions and
sales to and through other broker-dealers, including transactions of the nature
described above, in the over-the counter market or otherwise at prices and on
terms then prevailing at the time of sale, at prices then related to the
then-current market price or in negotiated transactions. In connection with
resales of the shares, broker-dealers may pay to or receive from the purchasers
of shares commissions as described above.
The selling security holders and any broker-dealers or agents that
participate with the selling security holders in the sale of the shares may be
deemed to be "underwriters" within the meaning of the securities act. In that
event, any commissions received by broker-dealers or agents and any profit on
the resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the securities act.
From time to time the selling security holders may engage in short sales,
short sales against the box, puts and calls and other hedging transactions in
our securities, and may sell and deliver the shares in connection with such
transactions or in settlement of securities loans. These transactions may be
entered into with broker-dealers or other financial institutions. In addition,
from time to time, a selling security holder may pledge its shares pursuant to
the margin provisions of its customer agreements with its broker-dealer. Upon
delivery of the shares or a default by a selling security holder, the
broker-dealer or financial institution may offer and sell the pledged shares
from time to time.
Of the 3,106,623 shares of common stock being offered by the selling
security holders, 1,453,413 shares are subject to lock-up agreements with the
company. The lock-up agreements prohibit the offer or sale of these shares until
nine (9) months after the date of this prospectus.
We will not receive any proceeds from the sale of the shares. We will pay
the expenses of preparing this prospectus and the related registration
statement. The selling security holders have been advised that they are subject
to the applicable provisions of the Exchange Act, including without limitation,
Rules 10b-5 and Regulation M there under.
LEGAL MATTERS
Certain legal matters, including the validity of the shares being issued,
will be passed upon for the company by Buchanan Ingersoll Professional
Corporation, Eleven Penn Center, 1835 Market Street, 14th Floor, Philadelphia,
PA 19103.
EXPERTS
The financial statements as of March 31, 1999 and 1998 and for each of the
two years in the period ended March 31, 1999 included in this prospectus, have
been audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein (which report
42
<PAGE>
expresses an unqualified opinion and includes an explanatory paragraph regarding
the Company's ability to continue as a going concern), and have been so included
in reliance upon the report of such firm given upon their authority as experts
in accounting and auditing.
WHERE YOU CAN GET MORE INFORMATION
We have filed a registration statement on Form SB-2 with the SEC. This
prospectus, which forms a part of that registration statement, does not contain
all of the information included in the registration statement and the exhibits
and schedules thereto as permitted by the rules and regulations of the SEC. For
further information with respect to the company and the shares of common stock
offered hereby, reference is made to the registration statement, including the
exhibits and schedules thereto. Statements contained in this prospectus as to
the contents of any contract or other document referred to herein are not
necessarily complete and, where such contract or other document is an exhibit to
the registration statement, each such statement is qualified in all respects by
the provisions of such exhibit, to which reference is hereby made. You may
review a copy of the registration statement at the SEC's public reference room
in Washington, D.C., and at the SEC's regional offices in Chicago, Illinois and
New York, New York. Please call the SEC at 1-800-SEC-0330 for further
information on the operation of the public reference rooms. The registration
statement can also be reviewed by accessing the SEC's Internet site at
http://www.sec.gov. As a result of this offering, we will become subject to the
information and reporting requirements of the Securities Exchange Act and, in
accordance therewith, will file periodic reports, proxy statements and other
information with the SEC.
43
<PAGE>
CNF TECHNOLOGIES, INC.
INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS OF THE COMPANY CNF TECHNOLOGIES, INC.
Independent Auditor's Report ................................................F-2
Financial Statements
Balance Sheets...........................................................F-3
Statements of Operations.................................................F-4
Statements of Shareholder's (Capital Deficiency) Equity .................F-5
Statements of Cash Flows ................................................F-6
Notes to Financial Statements ...........................................F-7
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
CNF Technologies, Inc.
Scottsdale, Arizona
We have audited the accompanying balance sheets of CNF Technologies, Inc.
(formerly CNF, Inc.) (the "Company") as of March 31, 1999 and 1998, and the
related statements of operations, shareholder's (capital deficiency) equity, and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at March 31, 1999 and 1998, and
the results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As described in Note 1 to the
financial statements, the Company's recurring losses from operations, negative
working capital, and shareholders' capital deficiency raise substantial doubt
about its ability to continue as a going concern. Management's plans concerning
these matters are described in Note 13. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
DELOITTE & TOUCHE LLP
Phoenix, Arizona
May 925, 1999 (June 11, 1999 as to paragraph 1 of Note 1, paragraph 2 of Note 4,
and paragraphs 4, 5 and 7 of Note 13)
F-2
<PAGE>
CNF TECHNOLOGIES, INC.
(Formerly CNF, Inc.)
BALANCE SHEETS
DECEMBER 31, 1999 AND MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
March 31,
December 31, ------------------
ASSETS 1999 1999 1998
(Unaudited)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,500 $ 184,663 $ 229,419
Accounts receivable - trade (net of allowance of $340,000, $390,000 and
$330,000 at December 31, 1999, March 31, 1999 and 1998, respectively) 1,428,938 834,383 1,084,527
Accounts receivable - employees and other 129 31,736 118,128
Inventories (Note 2) 1,595,550 1,656,001 1,505,140
Prepaid expenses and other current assets 138,701 112,782 314,729
Income tax receivable 95,717 95,717 30,732
------- ------- ------
Total current assets 3,260,535 2,915,282 3,282,675
PROPERTY AND EQUIPMENT - Net (Note 3) 628,346 582,233 338,261
NOTE RECEIVABLE FROM RELATED PARTY (Note 9) 9,906 95,000
OTHER ASSETS 30,670 31,266 14,054
------- ------- ------
TOTAL $ 3,919,551 $ 3,538,687 $ 3,729,990
=========== =========== ==========
LIABILITIES AND SHAREHOLDER'S (CAPITAL DEFICIENCY) EQUITY
CURRENT LIABILITIES:
Accounts payable - trade $ 3,546,351 $ 3,642,535 $ 2,101,691
Accounts payable - related party 345 10,000
Lines of credit (Note 4) 682,120 672,135
Short-term obligations (Note 5) 503,259
Short-term obligations - related parties (Note 5) 750,000 397,551
Accrued compensation 224,695 225,716 144,626
Accrued expenses 389,450 437,050 139,113
Current portion of capital leases (Note 7) 30,510 17,826
Current portion of notes payable (Note 5) 55,645 71,623 62,279
------- ------- ------
Total current liabilities 4,996,651 5,978,025 3,129,844
CAPITAL LEASES (Note 7) 77,402 67,136
NOTES PAYABLE (Note 5) 153,106 220,163 259,758
-------- -------- -------
Total liabilities 5,227,159 6,265,324 3,389,602
---------- ---------- ---------
COMMITMENTS AND CONTINGENCIES (Notes 1, 7, 10, 12 and 13)
SHAREHOLDER'S (CAPITAL DEFICIENCY) EQUITY (Note 6):
Preferred stock, par value of $.0001: 15,000,000 shares authorized;
4,163,933 shares issued and outstanding at December 31, 1999 416
Common stock, par value of $.0001: 50,000,000 shares authorized;
11,445,563 shares issued and outstanding at December 31, 1999 1,145
Common stock, no par value: 25,000,000 shares authorized; 2,503,000 and
2,500,000 shares issued and outstanding as of March 31, 1999 and 1998,
respectively 1,000 1,000
Additional paid-in capital 7,250,658 7,500
(Deficit) retained earnings (8,559,827) (2,735,137) 339,388
--------- --------- -------
Total shareholder's (capital deficiency) equity (1,307,608) (2,726,637) 340,388
--------- --------- --------
TOTAL $ 3,919,551 $ 3,538,687 $ 3,729,990
=========== =========== ===========
</TABLE>
See notes to financial statements.
F-3
<PAGE>
CNF TECHNOLOGIES, INC.
(Formerly CNF, Inc.)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Nine-Month Periods Ended
December 31, Years Ended March 31,
------------------------ ---------------------
1999 1998 1999 1998
(Unaudited)
<S> <C> <C> <C> <C>
REVENUES (Note 11) $ 8,510,873 $ 7,578,878 $ 9,425,947 $ 7,726,484
COST OF REVENUES 6,048,172 5,066,561 6,088,549 4,460,944
---------- ---------- ----------- ---------
Gross profit 2,462,701 2,512,317 3,337,398 3,265,540
---------- ---------- ----------- ---------
OPERATING EXPENSES:
General and administrative 4,170,091 2,951,046 3,960,673 1,916,877
Research and development 849,123 800,894 1,200,939 890,944
Sales and marketing 806,325 672,912 1,086,265 480,170
---------- ---------- ----------- ---------
Total operating expenses 5,825,539 4,424,852 6,247,877 3,287,991
---------- ---------- ----------- ---------
LOSS FROM OPERATIONS (3,362,838) (1,912,535) (2,910,479) (22,451)
---------- ---------- ----------- --------
OTHER INCOME (EXPENSE):
Interest income 3,215 345 20,528 1,070
Interest expense (Notes 5 and 13) (2,473,297) (92,666) (248,342) (68,552)
Other income 8,230 116,973 18,568 31,766
---------- ---------- --------- --------
Other (expense) income - net (2,461,852) 24,652 (209,246) (35,716)
---------- ---------- ------- -------
LOSS BEFORE INCOME TAX (BENEFIT)
PROVISION (5,824,690) (1,887,883) (3,119,725) (58,167)
--------- ---------
(BENEFIT) PROVISION FOR INCOME
TAXES (Note 8) (45,200) 21,100
------ ------
NET LOSS $ (5,824,690) $ (1,887,883) $ (3,074,525) $ (79,267)
============ ============ ============ =========
BASIC AND DILUTED LOSS PER SHARE -
Applicable to common shareholders $ (0.69) $ (0.76) $ (1.23) $ (0.03)
============ ============ ============ =========
BASIC AND DILUTED WEIGHTED AVERAGE
SHARES OUTSTANDING - Basic and diluted 8,490,496 2,500,000 2,500,250 2,500,000
============ ============ ============ =========
</TABLE>
See notes to financial statements.
F-4
<PAGE>
CNF TECHNOLOGIES, INC.
(Formerly CNF, Inc.)
STATEMENTS OF SHAREHOLDER'S (CAPITAL DEFICIENCY) EQUITY
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Total
Preferred Stock Common Stock Additional Retained Shareholder's
------------------ ---------------- Paid-in Earnings Equity (Capital
Shares Amount Shares Amount Capital Deficit) Deficiency)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
APRIL 1, 1997 2,500,000 $1,000 $ 418,655 $ 419,655
Net loss (79,267) (79,267)
--------- --------
BALANCE,
MARCH 31, 1998 2,500,000 1,000 339,388 340,388
Common stock issued
(Note 5) 3,000 $ 7,500 7,500
Net loss (3,074,525) (3,074,525)
---------- ----------
BALANCE,
MARCH 31, 1999 2,503,000 1,000 7,500 (2,735,137) (2,726,637)
Retirement of
CNF, Inc. stock
(unaudited) (Note 13) (2,503,000) (1,000) (1,000)
Issuance of new stock
(Notes 6 and 13):
Preferred stock
(unaudited) 5,163,933 $ 516 516
Common stock
(unaudited) 11,445,563 1,145 7,243,158 7,244,303
Preferred stock surrendered
(unaudited) (1,000,000) (100) (100)
Net loss (unaudited) (5,824,690) (5,824,690)
---------- ----------
BALANCE,
DECEMBER 31, 1999
(unaudited) 4,163,933 $ 416 11,445,563 $1,145 $7,250,658 $(8,559,827) $(1,307,608)
========= ===== ========== ====== ========== =========== ===========
</TABLE>
See notes to financial statements.
F-5
<PAGE>
CNF TECHNOLOGIES, INC.
(Formerly CNF, Inc.)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Nine-Month Periods
Ended December 31, Years Ended March 31,
------------------- ---------------------
1999 1998 1999 1998
(Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(5,824,690) $(1,887,883) $(3,074,525) $ (79,267)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 129,669 100,543 140,323 60,797
Amortization of discount on note payable
subject to 50% conversion (Note 5) 503,259
Loss (gain) on sales of assets 3,122 (1,409) 8,233
Deferred income taxes - net (12,557)
Expenses associated with Private Placement Memorandum (359,846)
Expenses satisfied with issuance of common stock 1,762,489 7,500
Expenses associated with merger (50,250)
Changes in assets and liabilities:
Accounts receivable - trade (594,555) 497,178 250,144 (802,276)
Accounts receivable - other 31,607 51,337 86,392 (102,926)
Inventories 60,451 598,449 (150,861) (931,665)
Prepaid expenses and other assets (25,919) (128,582) 184,735 (248,997)
Accounts payable - trade (104,494) 641,948 1,540,844 1,654,744
Accounts payable - related party (345) (9,510) (9,655)
Income tax receivable (64,985) (24,806)
Accrued compensation (1,021) 37,104 81,090 25,310
Accrued expenses (4,065) 40,096 297,937 17,431
----------- ----------- ---------- ---------
Net cash used in operating activities (4,474,588) (60,729) (702,828) (444,212)
----------- ----------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (133,521) (290,454) (296,138) (273,929)
Loan to officer (9,906)
Collection of note receivable 9,906 95,000 95,000
----------- ----------- ----------
Net cash used in investing activities (123,615) (195,454) (211,044) (273,929)
----------- ----------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (payments) on lines of credit, net (682,120) 9,985 9,985 672,135
Loan and note payable 36,892 540,151
Notes payable - related party 2,302,449 39,000 397,551
Issuance of preferred stock 179
Equity transaction (Note 13) 3,000,000
Principal payments on capital leases (22,434) (7,643) (11,429)
Principal payments on notes payable (83,034) (49,971) (67,142) (51,940)
Principal payments on notes payable - related party (100,000)
-----------
Net cash provided by financing activities 4,415,040 28,263 869,116 620,195
----------- ----------- ---------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (183,163) (227,920) (44,756) (97,946)
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD 184,663 229,419 229,419 327,365
----------- ----------- ---------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,500 $ 1,499 $ 184,663 $ 229,419
=========== =========== ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for interest $ 150,624 $ 92,666 $ 146,289 $ 68,552
=========== =========== ========= =========
Cash paid for income taxes $ - $ 19,000 $ 20,635 $ 59,429
=========== =========== ========= =========
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock in connection with the
conversion of notes payable (Note 13) $ 2,353,259 $ - $ - $ -
=========== =========== ========= =========
Capital expenditures financed through obligations under
capital leases $ 45,384 $ 82,891 $ 96,391 $ -
=========== =========== ========= =========
See notes to financial statements.
</TABLE>
F-6
<PAGE>
CNF TECHNOLOGIES, iNC.
(Formerly CNF, Inc.)
NOTES TO FINANCIAL STATEMENTS
NINE-MONTH PERIODS ENDED DECEMBER 31, 1999 AND 1998 (Unaudited)
AND YEARS ENDED MARCH 31, 1999 AND 1998
- --------------------------------------------------------------------------------
1. BUSINESS AND BASIS OF PRESENTATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
Business - CNF Technologies, Inc. (formerly CNF, Inc.) (the "Company") was
incorporated in California in June 1988. In July 1998, the Company
relocated its corporate headquarters to Scottsdale, Arizona. The Company
designs, manufactures and markets portable peripherals to notebook PC
vendors, wholesale distributors, computer resellers, computer retail
stores and corporate end users. As described in Note 13, on June 8, 1999,
the Company completed a merger with JLL Ventures (Delaware) Corp., a
Delaware Corporation, (JLL) and JLL ACQUISITIONS CORP., a Delaware
corporation and wholly-owned subsidiary of JLL (JLL ACQUISITIONS). JLL
subsequently changed its name to CNF Technologies, Inc. and JLL
ACQUISITIONS changed its name to CNF Mobile Solutions, Inc.
Interim Period Presentation - The unaudited financial statements for the
nine-month periods ended December 31, 1999 and 1998 have been prepared on
the same basis as the audited financial statements included herein. In the
opinion of management, such unaudited financial statements include all
adjustments (consisting of only normal recurring accruals) necessary for a
fair presentation of the financial position, results of operations and
cash flows. The results of operations for the nine-month periods ended
December 31, 1999 are not necessarily indicative of results that may be
expected for the year ending March 31, 2000 or any future period.
Basis of Presentation - The accompanying financial statements have been
prepared on a going concern basis, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of
business. As shown in the financial statements, during the nine-month
periods ended December 31, 1999 and the years ended March 31, 1999 and
1998, the Company incurred net losses of $5,824,690 (unaudited),
$3,074,525 and $79,267, respectively, and, as of December 31, 1999 and
March 31, 1999, the Company's current liabilities exceeded its current
assets by $1,736,116 (unaudited) and $3,062,743, respectively, and its
total liabilities exceeded its total assets by $1,307,608 (unaudited) and
$2,726,637, respectively. These factors, among others, may indicate that
the Company will be unable to continue as a going concern for a reasonable
period of time.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts
and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern. The Company's
continuation as a going concern is dependent upon its ability to generate
sufficient cash flow to meet its obligations on a timely basis, to comply
with the terms and covenants of its financing agreements, to obtain
additional financing or refinancing as may be required, and ultimately to
attain successful operations. Management is continuing its efforts to
obtain additional funds so that the Company can meet its obligations and
sustain operations from sources that are described in Note 13 to the
financial statements.
F-7
<PAGE>
Summary of Significant Accounting Policies
a. Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
b. Cash and cash equivalents consist of cash held in bank demand deposits
and highly liquid investments purchased with initial maturities of
three months or less.
c. Inventories are stated at the lower of cost (first-in, first-out
method) or market.
d. Property and equipment are stated at cost. Depreciation is provided
using the straight-line method over the estimated useful lives of the
assets of five to seven years. Leasehold improvements are amortized
over the shorter of the estimated useful lives or the underlying lease
term. The Company evaluates the recoverability of long-lived assets on
an on-going basis.
e. Income Taxes - The Company accounts for income taxes using the asset
and liability approach. Deferred income taxes reflect the net tax
effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes, and operating loss and tax
credit carryforwards measured by applying current enacted tax laws.
f. Revenue Recognition - Revenues, less reserves for returns, are
recognized upon shipment to the customer. Title to the product
transfers upon shipment to the customer. Revenues from sales to
distributors and authorized resellers are subject to terms allowing
certain rights of return and price protection rights. Accordingly,
allowances for estimated future returns are provided for upon
recognition of revenue. Such amounts are estimated based on historical
rates of return, distributor inventory levels and other factors. At
December 31, 1999, reserves of $330,000 and $10,000 (unaudited) were
recorded by the Company for estimated future returns and bad debts,
respectively. At March 31, 1999 and 1998, reserves of $350,000 and
$40,000 and $300,000 and $30,000, respectively, were recorded by the
Company for estimated future returns and bad debts.
g. Certain Significant Risks and Uncertainties - The Company participates
in a dynamic high technology industry and believes that changes in any
of the following areas, among others, could have a material adverse
effect on the Company's future financial position or results of
operations: advances and trends in new technologies and industry
standards; competitive pressures in the form of new products; changes
in certain strategic partnerships; litigation or claims against the
Company based on intellectual property, patent, product, regulatory or
other factors; risk associated with changes in domestic and
international economic and/or political conditions or regulations;
availability of necessary components; risks associated with year 2000
compliance; and the Company's ability to attract and retain employees
necessary to support its growth.
h. Recently Issued Accounting Standards - In June 1997, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 130, Reporting Comprehensive Income.
SFAS No. 130 requires that an enterprise report, by major components
and as a single total, the change in its net assets from non-owner
sources during the period. There were no differences between net loss
and comprehensive net loss for the years presented.
F-8
<PAGE>
In June 1998, SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, was issued, which establishes accounting and
reporting standards for derivative instruments and hedging activities
which are required for fiscal quarters beginning after June 15, 1999.
On May 20, 1999, the FASB issued an Exposure Draft, which would have
the effect of deferring the effective date of SFAS No. 133 to all
fiscal quarters of all fiscal years beginning after June 15, 2000. On
July 7, 1999, the FASB adopted the Exposure Draft as SFAS No. 137.
This statement requires balance sheet recognition of derivatives as
assets or liabilities measured at fair value. Accounting for gains and
losses resulting from changes in the values of derivatives is
dependent on the use of the derivative and whether it qualifies for
hedge accounting. The Company has not yet determined the effect the
adoption of SFAS No. 133 will have on its financial statements.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
March 31,
December 31, -------------------
1999 1999 1998
(Unaudited)
<S> <C> <C> <C>
Raw materials $ 806,924 $1,011,970 $ 575,675
Work in process 16,800 47,169
Finished goods 771,826 596,862 929,465
------- -------- -------
Inventories $1,595,550 $1,656,001 $1,505,140
========== ========== ==========
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
March 31,
December 31, -------------------
1999 1999 1998
(Unaudited)
<S> <C> <C> <C>
Equipment $ 892,827 $ 737,195 $ 414,872
Furniture and fixtures 50,904 30,754 23,818
Leasehold improvements 7,806
Vehicles 38,025 38,025 1,624
------- ------- -----
Total 981,756 805,974 448,120
Accumulated depreciation and amortization (353,410) (223,741) (109,859)
--------- --------- ---------
Property and equipment - net $ 628,346 $ 582,233 $ 338,261
========= ========= =========
</TABLE>
Assets recorded under capital leases consist of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1999 1999
(Unaudited)
<S> <C> <C>
Equipment $141,774 $ 96,391
Accumulated amortization (31,245) (12,932)
-------- --------
Total $110,529 $ 83,459
======== ========
</TABLE>
F-9
<PAGE>
Depreciation and amortization expense was $129,669 and $100,943 for the
nine-month periods ended December 31, 1999 and 1998 (unaudited),
respectively. Depreciation and amortization expense was $140,323 and
$60,797 for the years ended March 31, 1999 and 1998, respectively.
4. LINES OF CREDIT
In August 1997, the Company borrowed $100,000 and $600,000 under two bank
lines of credit, which bear interest at prime (7.75% at March 31, 1999 and
8.5% at March 31, 1998) plus 2 percent and 3.5 percent per annum,
respectively. The Company had outstanding borrowings of $682,120 and
$672,135 under the lines of credit as of March 31, 1999 and 1998,
respectively. As described in Note 13, subsequent to March 31, 1999, the
Company's lines of credit maturity dates were extended under a loan
modification agreement. Per the loan modification agreement, on June 7,
1999 and on June 30, 1999, a $100,000 principal-only installment shall be
due and payable. In addition, a $100,000 principal-only payment shall be
due and payable upon execution of the loan modification agreement.
Interest-only installments will be due and payable on the tenth day of
each month. The remaining balance on the lines of credit was due and
payable on July 31, 1999.
In accordance with the loan modification agreement, the Company made a
$100,000 principal-only payment, as well as a $100,000 payment for
execution of the loan modification agreement, on June 4, 1999.
The Company made an additional principal only payment in August 1999 in
the amount of approximately $152,000 and negotiated a second loan
modification agreement extending the maturity date to December 31, 1999
(unaudited). On October 6, 1999, the Company paid the final installment on
its lines of credit (unaudited).
F-10
<PAGE>
5. DEBT
Short-term obligations at December 31, 1999 and March 31, 1999 consist of
the following:
<TABLE>
<CAPTION>
December 31, March 31,
1999 1999
(Unaudited)
<S> <C> <C>
Note payable to a shareholder, unsecured, with interest at 10%, payable upon the
earlier of the completion of a $3,000,000 financing transaction by the Company
or March 19, 2000. 3,000 shares of common stock were issued to the investor
as additional consideration. $ 100,000
Notes payable to related-parties, unsecured, with interest at 10%, payable
upon the earlier of the completion of a $4,000,000 financing transaction by
the Company or February 22, 2000 ($250,000) and March 9, 2000 ($25,000).
Holder of the note has the right to convert the note to shares of the
Company's stock at a price equal to a 25% discount from the offering price in
a subsequent offering of the Company's stock, should one occur. On July 15,
1999, one party exercised its option to convert its $25,000 note, plus
accrued interest of $892, to 11,507 shares of the Company's common stock. $ 250,000 275,000
Note payable to the president of the Company, unsecured, with interest
at 10%. 22,551
Notes payable to four shareholders, unsecured, with interest at 10%, payable
upon the earlier of the completion of a $3,000,000 financing transaction by
the Company or one year from the date of the note (maturities range from April
7, 2000 to May 6, 2000). 97,500 shares of common stock were issued to the four
shareholders as additional consideration. Holders of the notes have the right
to convert the notes to shares of the Company's stock at a price equal to a
25% discount from the offering price in a subsequent offering of the Company's
stock, should one occur. 50,000
Notes payable to four shareholders, unsecured, with interest at 10%, payable
upon the earlier of the completion of a $4,000,000 financing transaction by the
Company or one year from the date of the note (maturities range from
May 26, 2000 to June 4, 2000). 70,000 shares of common stock were issued to
the investors as additional consideration. Holders of the notes have the right
to convert the notes to shares of the Company's stock at a price equal to a
25% discount from the offering price in a subsequent offering of the
Company's stock, should one occur. 150,000
Notes payable to eight shareholders, unsecured, with interest at 10%, payable
upon the earlier of the completion of a $5,000,000 financing transaction by
the Company or one year from the date of the note (maturities range from
July 8, 2000 to August 18, 2000). 65,000 shares of common stock were issued
to the investors as additional consideration. 300,000
-------
Total related-party short-term obligations 750,000 397,551
Note payable, unsecured, with interest at 10%, payable upon the earlier
of the completion of a $4,000,000 financing transaction by the Company or
January 8, 2000. Holder of the note had the right to convert the note to
shares of the Company's stock at a price equal to a 50% discount from the
offering price in a subsequent offering of the Company's stock, should one
occur. On July 15, 1999, the holder of the note exercised the option to
convert the $503,259 note, plus accrued interest of $18,102, to
347,574 shares of the Company's common stock. 503,259
--------
Total short-term obligations $ 750,000 $ 900,810
========= =========
</TABLE>
F-11
<PAGE>
During October, November and December 1999 (unaudited), the Company
converted $1,859,630 of notes payable to 1,112,315 shares of common stock.
As the result of the transaction, the Company recorded interest expense of
$1,477,315 to reflect the financial statement impact of the beneficial
conversion feature of the convertible debt and additional equity
incentives (Note 13).
The maturity dates of all remaining outstanding short-term obligations
have been extended through January 30, 2001 (unaudited).
Long-term debt obligations consist of the following:
<TABLE>
<CAPTION>
March 31,
December 31, -------------------
1999 1999 1998
(Unaudited)
<S> <C> <C> <C>
Note payable to bank, unsecured, with interest at prime plus 2%
(9.75% at March 31, 1999) payable in monthly installments of
$1,068 through May 2001 $ 45,000 $ 65,000
Note payable to bank, unsecured, with interest at prime
plus 2.25% (10% at March 31, 1999) payable in
variable monthly installments through September 2003 $ 190,760 220,871 257,037
Other notes payable 17,991 25,915
------- ------
Total long-term obligations 208,751 291,786 322,037
Less current portion (55,645) (71,623) (62,279)
--------- -------- -------
Total long-term obligations $ 153,106 $220,163 $259,758
========= ======== ========
Future annual maturities of the Company's long-term notes payable for the
years subsequent to March 31, 1999 are as follows:
2000 $ 71,623
2001 77,177
2002 58,134
2003 55,149
2004 29,703
------
Total $291,786
========
</TABLE>
6. SHAREHOLDER'S EQUITY
Common Stock
In November 1997, the Board of Directors approved a 250-for-1 split of the
outstanding shares of common stock. All share amounts in these financial
statements have been adjusted to give retroactive effect to the stock
split.
Stock Option Plan
In November 1997, the Board of Directors adopted the 1997 Equity Incentive
Plan (the "Plan"). Under the Plan, the Company may grant options to
purchase up to 602,026 shares of the Company's common stock to employees,
officers, directors, and consultants at prices not less than the fair
market value (as determined by the Board of Directors) at the date of
grant for incentive stock options and not less than 90 percent of the fair
market value at the date of grant for nonqualified stock options.
F-12
<PAGE>
During fiscal 1999, the Company granted options of 405,658 shares of common
stock to certain employees of the Company. These options expire ten years
from the date of grant and vest over a four-year period, 25 percent after
the first year and ratably each subsequent month for the balance of the four
years. Vested options must be exercised within 45 days of termination of
employment.
<TABLE>
<CAPTION>
Options Outstanding
---------------------
Options Exercise
Available Price
for Grant Shares Per Share
<S> <C> <C> <C> <C>
Balance, April 1, 1997 -
Authorized 602,026
-------
Balance, March 31, 1998 602,026
Granted (405,658) 405,658 $0.50 to $2.50
------- ------- --------------
Balance, March 31, 1999 196,368 405,658 $0.50 to $2.50
======= ======= ==============
</TABLE>
In June 1999 (unaudited), the Company issued (i) 5,163,188 shares of Series
A Preferred Stock to the holders of all outstanding shares of common stock
of CNF; and (ii) options to purchase 836,790 shares of Series A Preferred
Stock to the holders of all outstanding options to purchase shares of common
stock of CNF in connection with the merger with JLL and JLL ACQUISITIONS.
The options to purchase shares of preferred stock have a variable conversion
rate to shares of CNF Technologies, Inc. common stock based on financial
performance for the year ending March 31, 2000 (Note 13).
Additionally, in December 1999, employees of the Company purchased 745
shares of the Company's preferred stock (unaudited).
Subsequent to March 31, 1999, the Company issued 11,445,563 shares of common
stock (unaudited). These shares were sold to accredited investors in private
placement transactions.
The following summarizes certain weighted average information on options
outstanding at March 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life (Years) Price Exercisable Price
<S> <C> <C> <C> <C> <C>
$0.50 376,658 9.07 $0.50 0 $0.50
$2.50 29,000 9.83 $2.50 0 $2.50
</TABLE>
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its Plan. There was no compensation cost charged against
income for its Plan for 1999. Had compensation cost for the Company's stock
option plan been determined based on the fair value at the grant dates for
awards under the Plan consistent with the method of SFAS No. 123, the
Company's net loss and net loss per share for the year ended March 31, 1999
would have been adjusted to the pro forma amounts indicated below:
F-13
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Net loss - as reported $ (3,074,525)
============
Net loss - pro forma $ (3,093,583)
============
Basic and diluted loss per share - as reported $ (1.23)
============
Basic and diluted loss per share - pro forma $ (1.24)
============
</TABLE>
The following summarizes certain weighted average information on options
outstanding at December 31, 1999 (unaudited):
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life (Years) Price Exercisable Price
<S> <C> <C> <C> <C> <C>
$0.24 771,812 8.32 $0.24 313,345 $0.24
$1.21 20,628 9.17 $1.21 0 $1.21
</TABLE>
Had compensation cost for the Company's stock option plan been determined
based on the fair value at the grant dates for awards under the Plan
consistent with the method of SFAS No. 123, the Company's net loss and net
loss per share for the nine-month periods ended December 31, 1999 would have
been adjusted to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
<S> <C>
Net loss - as reported $ (5,824,690)
============
Net loss - pro forma $ (5,843,108)
============
Basic and diluted loss per share - as reported $ (0.69)
============
Basic and diluted loss per share - pro forma $ (0.69)
============
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions used
for grants: no dividend yield; expected volatility of 35 percent; risk-free
interest rate of 5 percent; and an expected life of seven years.
Concurrent with the merger discussed in Note 13, the Plan was frozen
subsequent to March 31, 1999 and no additional options will be issued.
On July 14, 1999 (unaudited), the Company issued a Private Placement
Memorandum (the "Private Placement") offering 1,000,000 shares of the
Company's common stock at a price of $3.00 per share, subject to an increase
of up to an additional 1,000,000 shares to cover over-allotments. The
offering period expires on September 14, 1999. However, this date was
extended through February 15, 2000 at the election of the Company (Note 13).
F-14
<PAGE>
7. LEASES
The Company's operations utilize leased equipment and facilities. Future
minimum lease payments under noncancellable operating leases and capital
lease payments as of March 31, 1999 consist of the following:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
<S> <C> <C>
2000 $23,366 $319,020
2001 23,689 319,020
2002 20,971
2003 17,807
2004 13,162
Thereafter 323
------- --------
Total 99,318 $638,040
========
Less - interest (14,356)
-------
Present value of minimum capital lease obligation 84,962
Less current portion of capital lease obligation (17,826)
-------
Long-term portion of capital lease obligation $67,136
=======
</TABLE>
Rent expense was $293,663 and $304,764 for the nine-month periods ended
December 31, 1999 and 1998 (unaudited), respectively. Rent expense was
$412,567 and $54,371 for the years ended March 31, 1999 and 1998,
respectively.
8. INCOME TAXES
The (benefit) provision for income taxes for the years ended March 31
consists of the following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Current:
Federal $(45,200) $ 32,122
State 1,535
-------- --------
Total current (45,200) 33,657
Deferred:
Federal (9,769)
State (2,788)
-------- --------
Total deferred (12,557)
-------- --------
Total (benefit) provision from income taxes $(45,200) $ 21,100
======== ========
</TABLE>
F-15
<PAGE>
A reconciliation of the (benefit) provision for income taxes and the amounts
that would be computed using federal statutory tax rates are as follows:
<TABLE>
<CAPTION>
March 31,
December 31, ---------------------
1999 1999 1998
(Unaudited)
<S> <C> <C> <C>
Computed expected tax benefit $(1,980,395) $(1,060,707) $(19,777)
State income taxes - net of federal benefit (827)
Nondeductible expenses and other credits 37,982 (94,618)
Change in valuation allowance 1,980,395 977,525 136,322
----------- ----------- --------
Total $ - $ (45,200) $ 21,100
=========== =========== ========
</TABLE>
The following summarizes the effect of deferred income tax items and the
impact of "temporary differences" between amounts of assets and liabilities
for financial reporting purposes and such amounts as measured by tax laws.
Temporary differences and carryforwards which give rise to deferred tax
assets and liabilities are as follows:
<TABLE>
<CAPTION>
March 31,
December 31, ----------------------
1999 1999 1998
(unaudited)
<S> <C> <C> <C>
Net operating loss $2,994,176 $ 1,013,781
Credit carryforwards 127,746 127,746 $ 106,873
Temporary differences:
Sales returns 65,000 65,000 42,000
Depreciation (92,680) (92,680) (12,551)
---------- ----------- ---------
Total 3,094,242 1,113,847 136,322
Valuation allowance (3,094,242) (1,113,847) (136,322)
---------- ----------- ---------
Total $ - $ - $ -
========== =========== =========
</TABLE>
The valuation allowance is maintained against deferred tax assets as a
result of uncertainties concerning the Company's future ability to realize
the benefits of such deferred tax assets.
9. RELATED PARTY TRANSACTIONS
In February 1997, the Company's President borrowed $195,000 from the Company
under a note payable due in full with interest on February 14, 2002. This
notes interest rate was 8 percent per annum. At March 31, 1999, the balance
was paid in full. The Company's President loaned the Company $39,000 at an
interest rate of 10 percent on August 19, 1998. The balance of this note was
$22,551 as of March 31, 1999. At December 31, 1999, the balance was paid in
full (unaudited).
The Company's Chief Financial Officer borrowed funds during the fiscal year
ended March 31, 1999 totaling $9,700. The note bears interest at an interest
rate of 8.5 percent per annum. Payments are due monthly with the balance to
be paid in full as of November 5, 2000. The balance of the note as of March
31, 1999, including interest, was $9,906. At December 31, 1999, the balance
was paid in full (unaudited).
The Company leased its California facility from its President. For the years
ended March 31, 1999 and 1998, rent expense for such lease was $34,000 and
$42,800, respectively.
F-16
<PAGE>
10. EMPLOYEE BENEFIT PLAN
In January 1999, the Company adopted a defined contribution plan under
Section 401(k) of the Internal Revenue Service Code covering all eligible
employees (the "401(k) Plan"). Eligible participants may contribute up to 15
percent of their total compensation. Participants will be immediately vested
in their personal contributions and over a six-year period for amounts
contributed by the Company. The Company did not make any matching
contributions to the 401(k) Plan for the fiscal year ended March 31, 1999 or
the nine-month period ended December 31, 1999 (unaudited).
11. BUSINESS SEGMENTS
The Company's only business activity is the manufacture and sale of
peripheral devices for laptop computers. Therefore, the Company currently
operates within one business segment.
Two customers accounted for 73 percent of revenues for the nine-month
periods ended December 31, 1999 (Customer E accounted for 46 percent and
Customer C for 27 percent). Three customers accounted for 65 percent of
revenues for the nine-month periods ended December 31, 1998 (Customer A
accounted for 28 percent, Customer B for 20 percent and Customer D for 17
percent). Three customers accounted for 89 percent of accounts receivable
(Customer E accounted for 28 percent, Customer C for 40 percent and Customer
I for 21 percent) at December 31, 1999 (unaudited).
Four customers accounted for 65 percent of revenues for the year ended March
31, 1999 (Customer A accounted for 22 percent, Customer B for 16 percent,
Customer C for 14 percent, and Customer D for 13 percent of revenue). One
customer accounted for 13 percent of revenues for the year ended March 31,
1998. Export sales accounted for 10 percent and 17 percent of revenues for
the years ended March 31, 1999 and 1998, respectively. Two customers
accounted for 81 percent (Customer C accounted for 48 percent and Customer E
for 33 percent) and three customers accounted for 45 percent of accounts
receivable (Customer F accounted for 27 percent, Customer G for 18 percent,
and Customer H for 13 percent) at March 31, 1999 and 1998, respectively.
12. COMMITMENTS AND CONTINGENCIES
The Company is involved in various legal matters that management considers
to be in the normal course of business. In management's opinion, all matters
will be settled without material effect on the Company's financial position
or results of operations.
13. SUBSEQUENT EVENTS
On April 16, 1999, the Company entered into a definitive agreement to merge
with JLL Ventures (Delaware) Corp., a Delaware corporation, ("JLL") and JLL
ACQUISITIONS CORP., a Delaware corporation and wholly-owned subsidiary of
JLL ("JLL ACQUISITIONS") (the "Merger"). JLL was an inactive public company.
In connection with the Merger, all shares of the Company are to be exchanged
for shares of JLL. JLL held $1,000,000 in cash at the time of the Merger.
The Company will assume no additional liabilities as a result of its merger
with JLL. Furthermore, JLL is required by the merger agreement to assist the
Company in obtaining additional financing in the form of bridge loans from
unrelated parties within 30 days after the Merger closing date. As a result
of the Merger, the shareholders of the Company will maintain a controlling
interest in the Company and the Merger will be accounted for as a "reverse
acquisition." Accordingly, for financial statement presentation purposes,
the Company is viewed as the continuing entity and the related business
combination is viewed as a recapitalization of the Company, rather than an
acquisition by JLL.
F-17
<PAGE>
Each of the Company's shareholders will exchange each share of Company's
common stock for 2.06 shares of JLL's preferred stock. The preferred stock
has voting rights and has a variable conversion rate to common stock of CNF
Technologies, Inc. based on financial performance for the year ending March
31, 2000:
<TABLE>
<CAPTION>
Financial Performance Targets with Preferred Stock Conversion Rates
--------------------------------------------------------------------------------
Conversion
Target Rate
<S> <C>
Gross revenues of $20.25 million and net income of $810,000 1.50
Gross revenues of $34.43 million and net income of $1.38 million 1.75
Gross revenues of $45.9 million and net income of $1.84 million 2.00
Gross revenues of $57.6 million and net income of $2.30 million 2.25
</TABLE>
The Financial Performance Targets are to be derived from the results of
operations reflected within the Company's audited financial statements for
the fiscal year ending March 31, 2000. Prior to that time, preferred stock
can be converted by the holder to common stock on a one-to-one basis. Should
the Company not meet the financial performance targets, the preferred stock
will automatically convert to common stock on a one-to-one basis. In any
event, all shares of preferred stock shall be converted to shares of common
stock no later than June 30, 2000.
Subsequent to March 31, 1999 and prior to the closing of the Merger, in
accordance with the merger agreement, the Company received $975,000 in
bridge loans from four unrelated parties, unsecured, with interest at 10
percent, payable upon the earlier of (i) completion of an unsecured
$3,000,000 financing transaction by the Company or (ii) one year from the
date of the note (maturities range from April 7, 2000 to May 12, 2000).
Also, prior to the closing of the Merger, in accordance with the merger
agreement, the Company received $700,000 in bridge loans from four unrelated
parties, unsecured, with interest at 10 percent, payable upon the earlier of
(i) completion of an unsecured $4,000,000 financing transaction by the
Company or (ii) one year from the date of the note (maturities range from
May 26, 2000 to June 4, 2000). Holders of the notes have the right to
convert the notes to shares of the Company's stock at a price equal to a 25
percent discount from the offering price in a subsequent offering of the
Company's stock, should one occur.
On June 8, 1999, the Merger was completed and JLL ACQUISITIONS changed its
name to CNF Mobile Solutions Inc. On June 11, 1999, JLL changed its name to
CNF Technologies, Inc.
In connection with the anticipated completion of the Merger, the lines of
credit maturity dates were extended under a loan modification agreement. Per
the loan modification agreement, on June 7, 1999 and on June 30, 1999, a
$100,000 principal-only installment shall be due and payable. In addition, a
$100,000 principal-only payment shall be due and payable upon execution of
the loan modification agreement. Interest-only installments will be due and
payable on the tenth day of each month. The remaining balance on the lines
of credit will be due and payable on July 31, 1999.
On June 4, 1999, in accordance with the loan modification agreement, the
Company made the required $100,000 principal-only payment, as well as the
$100,000 principal payment due on execution of the loan modification
agreement.
Unaudited
The Company made an additional principal only payment on its lines of credit
in August 1999 in the amount of approximately $152,000, and negotiated a
second loan modification agreement extending the maturity date to December
31, 1999.
On October 6, 1999, the Company paid the final installment on its lines of
credit.
F-18
<PAGE>
Two million shares of the Company's outstanding common stock have been
deposited into escrow and remain subject to cancellation upon the terms set
forth in a certain escrow agreement entered into in connection with the
Merger. Specifically, certain historic shareholders of the Company have
deposited these shares into escrow to secure an obligation under the merger
agreement to complete a private placement which provides the Company with
proceeds of between $2,000,000 and $6,000,000 (inclusive of the conversion
of certain indebtedness) by no later than on or about February 15, 2000.
These shares will be released based on the gross proceeds realized by the
Company's completion of the private placement and conversion of indebtedness
and the conversion of certain indebtedness.
Two million of the shares of Series A Preferred Stock issued to Mr. Paul
Charles, a principal shareholder of the Company, under the merger agreement
were subject to cancellation upon the terms set forth in a separate escrow
agreement by and between the Company and Mr. Charles. These shares were
deposited into escrow to secure Mr. Charles' indemnification obligations
under the merger agreement with respect to certain representations,
warranties and covenants thereunder. Provided that there were no claims for
indemnification under the merger agreement pending against Mr. Charles,
1,000,000 of these shares were subject to release on or about December 8,
1999 and the remainder were subject to release on or about December 8, 2000.
As the result of cash flow considerations, the Company agreed to provide the
holders of certain bridge loans additional equity incentives to exercise
their rights to convert the bridge loans to shares of the Company's common
stock. During October, November, and December 1999, the Company converted
$1,859,630 of bridge loans ($1,825,000 principal amount and $34,630 of
interest) for 1,112,315 shares of common stock. The resulting shares
consisted of 912,500 for the principal amount of the bridge loans, 17,315
shares for the related accrued interest and 182,500 shares provided to the
holders as equity incentives. As the result of the transaction, the Company
recorded interest expense of $1,477,315 to reflect the impact of the
beneficial conversion feature of the convertible debt and equity incentives.
On November 1, 1999, the Company issued 75,000 shares of common stock to
Deremie Enterprises Limited for consideration for a bridge note of $500,000.
As a result of the transaction, the Company recorded interest expense of
$225,000 to record the impact of the consideration given for the bridge
note. The note was repaid on November 26, 1999.
On November 26, 1999, the Company conducted an initial closing of the
Private Placement pursuant to which the Company obtained gross proceeds of
$2,000,000 from the sale of 666,667 shares of common stock. In connection
with the Private Placement, the Company issued warrants to purchase 200,000
shares of common stock, all of which are currently exercisable. In addition,
the Company agreed to issue warrants to the Company's placement agent to
purchase up to an additional 200,000 shares of common stock, which will be
immediately exercisable. On November 26, 1999, the Company issued 66,667 of
these warrants. All warrants have an exercise price of $3.00 and expire in
November 2004.
On November 15, 1999 and February 8, 2000, the Company entered into
agreements with Paul Charles and Synergy Group International, Inc. ("Synergy
Group"), a principal shareholder of the Company, and others which amended
certain provisions of the Merger. Specifically, Mr. Charles agreed to resign
his position as the Chief Executive Officer and President of the Company and
to surrender 1,500,000 of the shares of Series A Preferred Stock issued to
him in the Merger and to transfer an additional 500,000 shares to a
financial consultant. The agreement also amended the provisions of the
Merger relating to the private financing obligations. These amendments
consisted of reducing the minimum required proceeds from $3,000,000 to
$2,000,000, including the conversion of indebtedness as proceeds and
amending the escrow provisions relating to the 4,000,000 shares of common
stock owned by the Synergy Group and others to secure the funding
obligations. Additionally, the Private Placement Memorandum was terminated
and the remaining shares will be released upon certain performance
F-19
<PAGE>
criteria from various parties. As amended, 2,000,000 of these shares were
released upon the Company realizing gross proceeds of $2,000,000, an
additional 1,000,000 shares were released upon the Company realizing
$4,000,000 of gross proceeds, and the remaining 1,000,000 shares will be
released upon the Company realizing $6,000,000 of gross proceeds.
On February 8, 2000, the Company issued 250,000 shares of common stock
raising gross proceeds of $500,000. The Company also issued 250,000 shares
of common stock for financial consulting services.
In February 2000, employees of the Company purchased 11,604 shares of the
Company's preferred stock.
* * * * *
F-20
<PAGE>
Until ____________ (ninety (90) days after the date of this prospectus), 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
underwriters and with respect to their unsold allotments or subscriptions.
3,106,623 Shares
[LOGO]
CNF TECHNOLOGIES, INC.
Common Stock
-------------------
P R O S P E C T U S
-------------------
March 2, 2000
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation and Bylaws reflect the adoption
of the provisions of Section 102(b)(7) of the Delaware General Corporation Law
(the "GCL"), which eliminate or limit the personal liability of a director to
the Company or its stockholders for monetary damages for breach of fiduciary
duty under certain circumstances. If the GCL is amended to authorize corporate
action further eliminating or limiting personal liability of directors, the
Certificate of Incorporation provides that the liability of the director of the
Company shall be eliminated or limited to the fullest extent permitted by the
GCL. The Company's Certificate of Incorporation and Bylaws also provide that the
Company shall indemnify any person, who was or is a party to a proceeding by
reason of the fact that he is or was a director, officer, employer or agent of
the Company, or is or was serving at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, against expenses (including attorney's fees) actually
and reasonably incurred by him in connection with such proceeding if he acted in
good faith and in a manner he reasonably believed to be or not opposed to the
best interests of the Company, in accordance with, and to the full extent
permitted by, the GCL. The determination of whether indemnification is proper
under the circumstances, unless made by the Court, shall be determined by the
Board of Directors.
Reference is made to Item 28 for the undertakings of the Registrant with
respect to indemnification of liabilities arising under the Securities Act of
1933, as amended (the "Act").
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is a list of the estimated expenses to be incurred by the
Registrant in connection with the preparation and filing of this Registration
Statement.
SEC Registration Fee...................................... $ 4,946
Printing and Engraving.................................... $20,000
Accountants' Fees and Expenses............................ $15,000
Legal Fees and Expenses................................... $30,000
Other Offering Expenses................................... $ 5,000
-------
Total..................................................... $74,946
=======
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Recent Sales of Unregistered Securities
1. On or about February 2, 2000 the Company issued 250,000 shares of common
stock at $2.50 per share raising gross proceeds of $500,000. These securities
were sold to two (2) accredited investors in a private placement transaction
exempt from the registration
II-1
<PAGE>
requirements of the Securities Act pursuant to Section 4(2) thereof directly by
the Company without engaging in any advertising or general solicitation of any
kind and without payment of underwriting discounts or commissions to any person
as follows:
Name Number of Shares
---- ----------------
Discretionary Investment Trust 100,000
Deremie Enterprises Limited. 150,000
-------
250,000
2. On or about February 2, 2000, the Company issued 250,000 shares of
common stock to one (1) accredited investor in consideration of financial
consulting services. The securities were issued in a private placement
transaction exempt from the registration requirements of the Securities Act
pursuant to Section 4 (2) thereof directly by Company without payment of
underwriting discounts or commissions to any person and without engaging in any
advertising or general solicitation of any kind as follows:
Name Number of Shares
---- ----------------
Discretionary Investment Trust 250,000
3. During January and February 2000, the Company issued 29,500 shares of
common stock together with promissory notes in the aggregate principal amount of
$295,000. These securities were sold in a private placement transaction exempt
from the registration requirements of the Securities Act pursuant to Section
4(2) thereof directly by the Company without engaging in any advertising or
general solicitation and without payment of underwriting discounts or
commissions to one (1) accredited investor, who was known either to the
Company's officers or principal shareholders prior to the offering of such
securities, as follows:
Principal Amount
Name of Note Number of Shares
---- ----------------- ----------------
Larry Kaplan $145,000 14,500
Larry Kaplan 150,000 15,000
-------- ------
TOTAL $295,000 29,500
4. On November 26, 1999, the Company issued 666,667 shares of common stock
at $3.00 per share raising gross proceeds of $2,000,000. The Company paid
brokerage commissions and non accountable expense equal to $260,000 together
with warrants to purchase 266,667 shares of common stock at an exercise price of
$3.00 per share to a registered broker-dealer. These securities were sold in a
private placement transaction exempt from the registration requirements of the
Securities Act pursuant to Section 4(2) thereof and Rule 506 of Regulation D
promulgated thereunder solely to a limited number accredited investors without
engaging in any advertising or general solicitation of any kind as follows:
II-3
<PAGE>
Number Number
Name of Shares of Warrants
---- --------- -----------
Donald Parvin & Philip Parvin JTROS 8,333
Pueblo Properties L.L.C. 8,333
Daljit S. Buttar 108,333
Michael K. Havrilesko 83,333
Matrose Capital Management, Ltd. 266,667
Myron H. Reinhart 83,333
Steve Katz & Becky Katz JTROS 16,667
David Henry Sutton 8,333
Neil Druks 16,667
Allen Jacobson 16,667
Jacob Roth & Yentil Roth JTROS 16,667
Amro International S.A. 100,000
Balmore Funds 83,334
Austost Anstalt Schaan 83,334
Frederick G. Heumann 33,333
-------
TOTAL 666,667
5. During November and December 1999, the Company issued 512,316 shares of
common stock in consideration of the cancellation of $825,000 of outstanding
indebtedness, $34,630 of accrued interest and additional equity incentives.
These securities were sold to accredited investors in a private placement
transaction exempt from the registration requirements of the Securities Act
pursuant to Section 4(2) thereof directly by the Company without engaging in any
advertising or general solicitation and without payment of underwriting
discounts or commissions solely to accredited investors who had provided
unsecured debt financing to the Company during July and August 1999. These
investors were known either to the officers or principal shareholders of the
Company prior to the offering of the notes.
Name Number of Shares
---- ----------------
Daljit S. Buttar 92,733
Enrico E. DiVito, DDS 30,918
Michael G. Glynn 75,000
Allen and Jane Kelsey 30,890
Lindzon Capital Partners 126,562
Blair Portigal 61,822
Harold Rubenstein 63,151
Rochelle and Shelden Terman 31,240
-------
TOTAL 512,316
6. On October 29, 1999, the Company issued 600,000 shares of common stock
in consideration of the cancellation of $1,000,000 of outstanding indebtedness
incurred during June 1999, and on November 2, 1999 issued 5,000 shares of common
stock in consideration of the advance of a bridge loan in the principal amount
of $500,000. These securities were sold to two (2) accredited investors who had
either previously provided unsecured debt financing to the Company or as an
incentive to provide financing in a private placement transaction exempt from
the registration requirements of the Securities Act pursuant to Section 4(2)
thereof directly by the
II-3
<PAGE>
Company without payment of underwriting discounts or commissions. Both investors
were either known to the officers or principal shareholders of the Company prior
to the offering of the note.
Name Number of Shares
---- ----------------
Meris Capital Partners, L.P. 600,000
Imperium Capital Corporation 75,000
TOTAL 675,000
7. During July 1999, the Company issued 359,081 shares of common stock in
consideration of the cancellation of $547,253 of outstanding indebtedness.
incurred during June 1999 These securities were sold in a private placement
transaction exempt from the registration requirements of the Securities Act
pursuant to Section 4(2) thereof directly by the without payment of underwriting
discounts or commissions to two (2) accredited investors were known either by
the officers or principal shareholders of the Company prior to the offering of
the notes:
Name Number of Shares
---- ----------------
Larry Kaplan 347,574
Keith and Carol Henrichsen 11,507
8. During July and August 1999, the Company issued 65,000 shares of common
stock together with promissory notes in the aggregate principal amount of
$650,000. These securities were sold in a private placement transaction exempt
from the registration requirements of the Securities Act pursuant to Section
4(2) thereof directly by the Company without engaging in any advertising or
general solicitation and without payment of underwriting discounts or
commissions to a limited number of accredited investors who were known either to
the Company's officers or principal shareholders prior to the offering of such
securities as follows:
Principal Amount Number
Name of Notes of Shares
---- ---------------- ---------
Daljit S. Battar $150,000 15,000
Creative Business (Asia Online Publications) 100,000 10,000
Enrico E. Divito DDS 50,000 5,000
Allen and Jane Kelsey 50,000 5,000
Kerzner Revocable Trust 50,000 5,000
Larfer Family Trust 100,000 10,000
Blair Portigal 100,000 10,000
Myron Reinhart 50,000 5,000
-------- -----
TOTAL $650,000 65,000
9. During February and March 1999, the Company issued promissory notes in
the aggregate principal amount of $778,259. These securities were sold in a
private placement transaction exempt from the registration requirements of the
Securities Act pursuant to Section 4(2) thereof directly by the Company without
engaging in any advertising or general solicitation and without payment of
underwriting discounts or commissions to a limited number of
II-4
<PAGE>
accredited investors who were known either to the Company's officers or
principal shareholders prior to the offering of such securities as follows:
Principal Amount
Name of Notes
---- ----------------
Sid and Lila Parrish $250,000
Larry Kaplan 503,259
Keith and Carol Henrichsen 25,000
--------
TOTAL $778,259
10. After the completion of the Merger, during June 1999, the Company
issued 167,500 shares of common stock in connection with the issuance of the
promissory notes by CNF, Inc. in the aggregate principal amount of $1,675,000
prior to the merger during April 1999. These shares were sold in a private
placement transaction exempt from the registration requirements of the
Securities Act pursuant to Section 4(2) thereof directly by the Company without
engaging in any advertising or general solicitation and without payment of
underwriting discounts or commissions. These shares were issued to a limited
number accredited investors who were known either to the officers of principal
shareholders of the Company prior to the offering of the notes in consideration
of the substantial additional risk undertaken by such investors by advancing
unsecured funds to CNF, Inc. prior to completion of the Merger.
Principal Amount Number
Name of Notes of Shares
---- ---------------- ---------
Jim Caljeen $ 100,000 10,000
Michael G. Glynn 125,000 12,500
Helen and Jerry Holden 50,000 5,000
Lanny Lahr 100,000 10,000
Meris Capital Partners, LP 1,000,000 100,000
Harold Rubenstein 250,000 25,000
Rochelle and Sheldon Terman 50,000 5,000
---------- -------
TOTAL $1,675,000 167,500
11. On June 8, 1999, the Company acquired CNF, Inc. by merger in
consideration of the issuance of (i) 5,163,188 shares of Series A Preferred
Stock to the holders of all outstanding shares of common stock of CNF, Inc.; and
(ii) options to purchase 836,790 shares of Series A preferred Stock to the
holders of all outstanding options to purchase shares of CNF, Inc. common stock.
These securities were issued in a private placement transaction exempt from the
registration requirements of the Securities Act pursuant to Section 4(2) thereof
directly by the Company without payment of underwriting discounts or commissions
to the following accredited investors:
Number of Series A
Name Preferred Shares
Paul Charles 5,157,000
Howard Lindzon 6,188
---------
TOTAL 5,163,188
II-5
<PAGE>
<TABLE>
<CAPTION>
Number of Shares Number of
of CNF Common Preferred Shares
Stock Issuable Current Issuable Upon Adjusted
Holder of CNF Options Upon Exercise Exercise Price($) Exercise Exercise Price($)
--------------------- ---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
David Thompson 164,474 0.5 339,277 0.24
Daniel Rudich 98,684 0.5 203,565 0.24
Luis Manriquez 25,000 0.5 51,570 0.24
Jeff Piper 15,000 0.5 30,942 0.24
Al Ingallinera 10,000 0.5 20,628 0.24
Justin Hendrickson 5,000 0.5 10,314 0.24
Jaime Melendez 5,000 0.5 10,314 0.24
Sal Ramirez 500 0.5 1,031 0.24
Jesus Arrazola 500 0.5 1,031 0.24
Nicole Farley 500 0.5 1,031 0.24
Luke Sanfilippo 2,500 0.5 5,157 0.24
Ryan Taylor 2,500 0.5 5,147 0.24
Nick Nebelsky 5,000 0.5 10,314 0.24
Regina Kretschmann 10,000 0.5 20,628 0.24
Pam Long 1,000 0.5 2,063 0.24
Quin Rodriquez 1,000 0.5 2,063 0.24
Frank Layland 20,000 0.5 41,256 0.24
Sami Aljanabe 10,000 0.5 20,628 0.24
Quin Rodriquez 19,000 2.50 39,193 1.21
David Marsh 10,000 2.50 20,628 1.21
------- -------
TOTAL 405,658 836,790
</TABLE>
12. During May and June 1999, the Company issued and sold an aggregate
of 8,000,000 shares of common stock raising gross proceeds of $1,120,000. These
shares were issued to accredited investors in a private placement transaction
exempt from the registration requirements of the Securities Act pursuant to
Section 4(2) thereof and Rule 506 of Regulation D promulgated thereunder. This
offering was undertaken by the Company to a limited number accredited investors
without engaging in any advertising or general solicitation and without payment
of underwriting discounts or commissions prior to the closing of the merger. At
that time the Company was inactive with no assets or liabilities. Investors in
such offering were, therefore, subject to a number of risks and uncertainties,
including the material contingencies associated with completion of the merger.
Name Number of Shares
---- ----------------
ACA Trading Intermediates 370,000
All Pro Security 65,000
Avalon Financial Services LLC 130,000
Beaumont Investment Holding Ltd. 340,000
Jeff Berman 70,000
Blake Group Inc. 395,000
Boyett Investment Ltd. 318,000
Brookabby Investments Ltd. 5,000
Edmund J. Burgassi 5,000
II-6
<PAGE>
Name Number of Shares
---- ----------------
Capital Growth Trust 175,000
Kenny Cook 100,000
Dwyer Investments LP 5,000
EBR Investments 50,000
FAC Enterprises Inc. 292,000
Clifford Feldstein 25,000
Fincord Holding Corp. 425,000
Michele R. Ganz 20,000
Geneco Investment Corp. 578,000
Marvin Gersten 125,000
Michael Glynn 10,000
Godwin Finance Ltd. 400,000
Michael Goldstein 10,000
Carolyn Gordon 5,000
Cathy Graham 45,000
Gunhill Capital Inc. 50,000
Huber Family Trust 12,000
Imperium Capital 175,000
Allan E. Jacobson 15,000
Ron Jaffe 10,000
Jay Josephs 15,000
KAB Investments Inc. 225,000
Robert S. Kant 20,000
Alan and Jan Kelsey 25,000
Kenneth Kirshcenbaum 50,000
Steven Kram 25,000
Jack Leadbeater 100,000
Howard Lindzon 332,500
Lindzon Capital Partners 60,000
Sara L. Marold Bypass Trust 150,000
Vincent J. Marold Exempt Trust 1,000,000
MCZ Corp 48,000
William Meris 15,000
Meris Capital Partners LP 50,000
Anna Maria Mintz 20,000
Carolyn J. Orena 25,000
Robert Perlitz 5,000
Tom Peterson 25,000
RMLH Holding, LLC 120,000
Harold and Beverly Rubenstein 25,000
Lynda Rufo 20,000
Mark Scatterday 45,000
Arthur Van Beuren Seavey 5,000
Seavey Funds Inc. 108,000
Rob Segal 90,000
Michael S. Siegal 35,000
SPH Investments 257,000
Synergy Group 177,500
Patricia Trish Trust 30,000
II-7
<PAGE>
Name Number of Shares
---- ----------------
Troy Funding Corp. 212,000
Richard Tully 20,000
Wabering Investment Group Ltd. 400,000
Wexler & Burkhart 30,000
Gordon Douglas Young 10,000
---------
TOTAL 8,000,000
ITEM 27. EXHIBITS
THE FOLLOWING EXHIBITS ARE FILED AS PART OF THIS REGISTRATION STATEMENT:
<TABLE>
<CAPTION>
Exhibit No. Description Method of Filing
----------- ----------- ----------------
<S> <C> <C>
2.1 Agreement and Plan of Merger (the "Merger Agreement") dated (1)
April 16, 1999 by and among JLL Ventures (Delaware) Corp.,
JLL Ventures Acquisition Corp., CNF, Inc. and Paul Charles
2.2 Amendment No. 1 to Merger Agreement dated May 24, 1999 (1)
2.3 Agreement dated November 1, 1999 (resulting in a second (1)
amendment to Merger Agreement)
2.4 Amendment No. 1 to Agreement dated November 1, 1999 Filed herewith
(resulting in a third amendment to Merger Agreement)
3.1 Certificate of Incorporation (1)
3.2 Certificate of Amendment to Certificate of Incorporation (1)
3.3 Certificate of Designation of Series A Convertible Preferred (1)
Stock
3.4 By-Laws, as amended to date (1)
5.1 Opinion of Buchanan Ingersoll Professional Corporation To be filed by
Amendment
10.1 Employment Agreement dated May 19, 1999 by and between the (1)
Company and Paul Charles
</TABLE>
II-8
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Method of Filing
----------- ----------- ----------------
<S> <C> <C>
10.2 Addendum to Employment Agreement dated November 2, 1999 by (1)
and between the Company and Paul Charles
10.3 Employment Agreement dated May 19, 1999 by and between the (1)
Company and David Thompson
10.4 Employment Agreement dated May 19, 1999 by and between the (1)
Company and R. Daniel Rudich
10.5 Addendum to Employment Agreement dated November 2, 1999 by (1)
and between the Company and R. Daniel Rudich
10.6 Employment Agreement dated May 19, 1999 by and between the (1)
Company and Frank Layland
10.7 Escrow Agreement dated June 8, 1999 by and among, inter alia, (1)
the Company, Synergy Group International, Inc. and certain
shareholders of the Company (as amended by Exhibits 2.3 and
2.4)
10.8 Escrow Agreement dated June 8, 1999 by and among, inter alia, (1)
the Company and Paul Charles (as substantially amended by
Exhibits 2.3 and 2.4)
10.9 Lease Agreement dated April 1, 1998 by and between the Filed herewith
Company and Filed herewith City Park LLC
10.10 Distribution Agreement dated February 19, 1998 by and between Filed herewith
the Filed herewith Company and Ingram Micro Inc., as amended
10.11 Distributor Agreement dated January 7, 1999 by and between Filed herewith
the Company and Merisel Americas, Inc.
10.12 Promissory Note evidencing certain outstanding unsecured Filed herewith
indebtedness
10.13 Form of Amendment to Promissory Note evidencing all Filed herewith
outstanding unsecured indebtedness
10.14 Form of Promissory Note evidencing certain additional Filed herewith
outstanding indebtedness
</TABLE>
II-9
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Method of Filing
----------- ----------- ----------------
<S> <C> <C>
21.1 Subsidiaries of the Registrant Filed herewith
23.1 Consent of Buchanan Ingersoll Professional Corporation Filed under
Exhibit 5.1
23.2 Consent of Deloitte and Touche LLP Filed herewith
27.1 Financial Data Schedule Filed herewith
99.1 Notice of Allowance dated August 16, 1999 issued by the Filed herewith
United States Patent and Trademark Office for the Company's
Digitari Universal Docking and Port Replication Technologies
99.2 October 28, 1999 Patent issued by the Australian Patent Filed herewith
Office for the Company's Digitari Universal Docking and Port
Replication Technologies
99.3 Notice of Patent issuance dated August 1999 from the United To be Filed
By Amendment
States Patent and Trademark Office for the Company's Device
Dock Technologies.
</TABLE>
- ------------------
(1) Filed as an Exhibit to Registrant's Registration Statement on Form SB-2 on
December 3, 1999.
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
1. To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to: (i) include any
prospectus required by Section 10(a)(3) of the Securities Act of 1933, as
amended; (ii) reflect in the prospectus any facts or events arising after the
effective date of the registration statement which, individually or together,
represent a fundamental change in the information in the registration statement;
and (iii) include any additional or changed material information on the plan of
distribution.
2. For the purpose of determining liability under the Securities Act of
1933, as amended, each post-effective amendment 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.
3. To file a post-effective amendment to remove from registration any of
the securities being registered which remain unsold at the termination of the
offering.
II-10
<PAGE>
4. Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in a successful defense of any action, suit or proceeding) is asserted by a
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, hereunto duly authorized in the City of Scottsdale, Arizona on
March 2, 2000.
CNF TECHNOLOGIES, INC.
By: /s/ David G. Thompson
-----------------------------------
Interim Chief Executive Officer and
Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints DAVID G. THOMPSON his true and lawful
attorney-in-fact and agent with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities to sign any
or all amendments (including, without limitation, post-effective amendments) to
this Registration Statement and any related Registration Statements filed
pursuant to Rule 462(b) under the Securities Act of 1933 and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent 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 for all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent or his substitute or
substitutes, may all that said attorney-in-fact and agent or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates stated.
Signature Title Date
- --------- ----- ----
/s/ Paul D. Charles Chairman March 2, 2000
- -------------------------
Paul D. Charles
/s/ Carmine F. Adimando Director March 2, 2000
- -------------------------
Carmine F. Adimando
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
2.4 Amendment No. 1 to Agreement dated November 1, 1999
(resulting in a third amendment to Merger Agreement)
10.9 Lease Agreement dated April 1, 1998 by and between the
Company and City Park LLC
10.10 Distribution Agreement dated February 19, 1998 by and between
the Company and Ingram Micro Inc., as amended
10.11 Distributor Agreement dated January 7, 1999 by and between
the Company and Merisel Americas, Inc.
10.12 Promissory Note evidencing certain outstanding unsecured
indebtedness
10.13 Form of Amendment to Promissory Note evidencing all
outstanding unsecured indebtedness
10.14 Form of Promissory Note evidencing certain additional
outstanding indebtedness
21.1 Subsidiaries of the Registrant
23.2 Consent of Deloitte and Touche LLP
27.1 Financial Data Schedule
99.1 Notice of Allowance dated August 16, 1999 issued by the
United States Patent and Trademark Office for the Company's
Digitari Universal Docking and Port Replication Technologies
99.2 October 28, 1999 Patent issued by the Australian Patent
Office for the Company's Digitari Universal Docking and Port
Replication Technologies
AMENDMENT NO. 1 TO NOVEMBER 1, 1999 AGREEMENT
AGREEMENT made as of the 28th day of January, 2000, by and among CNF
TECHNOLOGIES, INC., a Delaware corporation (the "Company"), SYNERGY GROUP
INTERNATIONAL, INC., a Nevada corporation ("Synergy"), VINCENT MAROLD, an
individual residing at 4725 East Sunrise Drive, #228, Tucson, Arizona 85718
("Marold"), and PAUL CHARLES, an individual residing at 10931 East Laurel Lane,
Scottsdale, Arizona 85260 ("Charles").
W I T N E S S E T H:
WHEREAS, on April 16, 1999, an Agreement and Plan of Merger was entered
into among JLL Ventures (Delaware) Corp., ("JLL"), JLL Ventures Acquisition
Corp. ("JLL Acquisition"), CNF, INC., a California corporation ("CNF") and Paul
Charles as the principal shareholder of CNF (the "Original Merger Agreement"),
the purpose of which was to effectuate the merger of CNF with and into JLL
Acquisition (the "Merger");
WHEREAS, on May 24, 1999, the parties to the Original Merger Agreement
entered into Amendment No. 1 to the Agreement and Plan of Merger dated April 16,
1999 ("Amendment No. 1 to the Merger Agreement");
WHEREAS, in connection with the Original Merger Agreement and Amendment No.
1 to the Merger Agreement (referred to in the aggregate as the "Merger
Agreement"), Charles entered into an escrow agreement pursuant to which certain
of his shares of JLL were to be placed in escrow for indemnification claims,
among others (the "Shareholder Escrow Agreement"), and certain historic
stockholders of JLL entered into an escrow agreement pursuant to which certain
of their shares of JLL were placed in escrow to assure certain post-closing
placement activities (the "Acquiror Escrow Agreement");
<PAGE>
WHEREAS, effective as of June 19, 1999, the Merger was completed (the
"Closing") pursuant to which CNF merged into JLL Acquisition, JLL Acquisition
changed its corporate name to "CNF Mobile Solutions, Inc." and JLL changed its
corporate name to "CNF Technologies, Inc.";
WHEREAS, on July 14, 1999, the Company commenced a private placement of
shares of its common stock in a manner contemplated in the Merger Agreement (the
"Private Placement");
WHEREAS, in order to induce the interest of certain investors to invest in
the Private Placement, the Company and the parties hereto entered into an
agreement on November 1, 1999 (the "November 1, 1999 Agreement") to modify
certain components of the Private Placement, which, in turn, required an
amendment to certain of the agreements entered into in connection with the
Merger, and resulted in an amendment to the Private Placement, as evidenced by a
Private Placement Memorandum dated November 3, 1999;
WHEREAS, in order to induce a subsequent equity financing of $500,000 into
the Company by Deremie Enterprises ("Deremie"), the parties hereto have agreed
to enter into this Agreement (the "Agreement") which is intended, where
applicable, to constitute a formal amendment to the Original Merger Agreement,
Amendment No. 1 to the Merger Agreement, the Shareholder Escrow Agreement, the
Acquiror Escrow Agreement, and the November 1, 1999 Agreement.
NOW THEREFORE, in consideration of the premises and agreements contained
herein, and for good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree as follows:
-2-
<PAGE>
1. Matters of Corporate Governance.
Until May 19, 2001, Synergy, Charles, plus those other shareholders who
execute the signature page hereof, will agree to vote their shares of common
stock of the Company at any regular or special meeting of its stockholders, or
by written consent, solicitation or otherwise, called or required for the
purpose of electing the Company's Board of Directors, for the nomination of a
designee of Imperium Capital, Inc. to the Company's Board of Directors.
2. Surrender of Preferred Shares.
(a) Upon the execution hereof, Charles agrees to: (i) surrender to the
Company for cancellation 500,000 shares of Series A Convertible Preferred Stock
(the "Preferred Shares"), in addition to the 1,000,000 Preferred Shares
surrendered pursuant to the November 1, 1999 Agreement; and (ii) transfer
500,000 additional shares to Euroswiss Securities or designee thereof for
aggregate consideration of $1.00.
(b) The Company agrees to accord to Charles' remaining Preferred Shares the
same terms and conditions as may be provided to any other holders of the
Preferred Shares, should the Company elect to modify, extend, alter or waive any
of the terms and conditions of the Preferred Shares.
3. Removal of Certain Charles Shares Held in Escrow.
(a) Section 9 of Amendment No. 1 to the Merger Agreement shall be modified
such that the 500,000 Preferred Shares surrendered and 500,000 Preferred Shares
transferred according to Section 2 of this Agreement shall be removed from the
Preferred Shares previously held in escrow, and such escrow arrangements shall
hereafter be of no further force or effect. Accordingly, the Shareholder Escrow
Agreement is deemed terminated.
-3-
<PAGE>
4. Modification to Acquiror Escrow.
Sections 6(b) and 6(c) of the November 1, 1999 Agreement shall be deleted
in their entirety and shall be replaced by the following:
"(b) (i) The Company acknowledges that the Historic Acquiror Shareholders
have, by virtue of the Private Placement that closed on or about November 24,
1999, earned the release of 2,000,000 Historic Acquiror Shares from escrow;
(ii) If an aggregate of $4,000,000 of Gross Proceeds are "realized" by
the Company on or before February 7, 2000 (the "First Surrender Date"), the
Historic Acquiror Shareholders shall be entitled to have an additional 1,000,000
shares released from escrow; and
(iii) If $4,000,000 of Gross Proceeds are "realized" by the First
Surrender Date, and an additional $2,000,000 of Gross Proceeds are "realized" by
May 15, 2000 (the "Second Surrender Date"), the Historic Acquiror Shareholders
shall on the Second Surrender Date be entitled to the release of the remaining
1,000,000 shares from escrow.
(iv) For the purposes of subparagraph (ii) and (iii) above, Gross
Proceeds will be deemed "realized" by the Company through either the Private
Placement, debt or equity financing provided or directed to the Company by any
of the Historic Acquiror Shareholders (excluding for this purpose any of the
financing now being provided by Deremie) or through the conversion of Bridge
Notes or other unsecured indebtedness secured by the Company.
(c) The Acquiror Escrow Agreement shall be deemed amended so as to reflect
terms and conditions consistent with those set forth in Section 5.13(b) of the
Original Merger Agreement, as amended by the November 1, 1999 Agreement and the
foregoing Sections 4(a), 4(b) and 4(c) of this Agreement."
5. Private Sale of Securities.
Section 7 of the November 1, 1999 Agreement shall be deleted in its
entirety and replaced with the following:
"Synergy will use best efforts to arrange for the purchase of 200,000 of
the Preferred Shares owned by Charles, at a price of $1.25 per share, within no
more than 150 days of effectiveness of the Registration Statement on Form SB-2
currently on file with the Securities and Exchange Commission. The Preferred
Shares shall be paid for at least 25% upon the date of purchase, with the
balance paid in three ratable monthly installments thereafter."
-4-
<PAGE>
6. Capitalized Terms.
All capitalized terms utilized herein and not otherwise defined herein,
shall have the meaning ascribed thereto in the Merger Agreement, or in the
November 1, 1999 Agreement, as applicable.
7. Full Force and Effect.
All other provisions in the Merger Agreement, or in the November 1, 1999
Agreement, as applicable, shall remain in full force and effect except those
identified in this Agreement.
8. Counterpart and Facsimile.
This Agreement may be executed in two or more counterparts and delivered
via facsimile, each of which shall be deemed to be an original, and all of which
together shall be deemed to be one and the same instrument.
-5-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed as of the date and year first written above.
CNF TECHNOLOGIES, INC.
By: /s/ Paul Charles
----------------------------------------------
Name: Paul Charles
Title: Chief Executive Officer
SYNERGY GROUP INTERNATIONAL, INC.
By: /s/ Vincent Marold
----------------------------------------------
Name: Vincent Marold
Title: President
/s/ Vincent Marold
----------------------------------------------
Vincent Marold, as designee of Acquiror's
Board of Directors pursuant to Section 5.19(a)
of the Original Merger Agreement
/s/ Paul Charles
----------------------------------------------
Paul Charles
For the sole purpose of acknowledging their agreement to vote their shares in
the manner provided at Section 1 of this Agreement:
BY: BY:
------------------------------ -----------------------------------
Name: Genco Investment Corp. Name: Imperium Capital Corporation
Number of Shares: Number of Shares:
---------------- ---------------------
BY: BY:
------------------------------ -----------------------------------
Name: Fincord Holdings Corp. Name: KAB Investments, Inc.
Number of Shares: Number of Shares:
----------------- ----------------------
-6-
<PAGE>
BY: BY:
------------------------------ -----------------------------------
Name: SPH Investments, Inc. Name: FAC Enterprises, Inc.
Number of Shares: Number of Shares:
----------------- ----------------------
BY: BY: /s/ Howard Lindzon
------------------------------ -----------------------------------
Name: Capital Growth Trust Name: Lindzon Capital Partners, LLC
Number of Shares: Number of Shares:
----------------- ----------------------
BY: BY: /s/ Vincent Marold
------------------------------ -----------------------------------
Name: Howard Lindzon Name: Vincent Marold
Number of Shares: Number of Shares:
----------------- ----------------------
BY: BY:
------------------------------ -----------------------------------
Name: Paul Charles Name: Synergy Group International, Inc.
Number of Shares: Number of Shares:
----------------- ----------------------
STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE MODIFIED NET
1.Basic Provisions ("Basic Provisions")
1.1 Parties: This Lease ("Lease"), dated for reference purposes only, April
1, 1998 is made by and between CITY PARK LLC ("Lessor") and CNF, INC.
("Lessee"), (collectively the "Parties," or individually a "Party").
1.2 Premises: That certain real property, including all improvements
therein or to be provided by Lessor under the terms of this Lease, and commonly
known by the street address of 7722 EAST GRAY ROAD, Suite(s) B, SCOTTSDALE,
located in the County of MARICOPA, State of ARIZONA with a zip code of 85260
and generally described as (describe briefly the nature of the property) AN
APPROXIMATE 21,976 OFFICE/WAREHOUSE SPACE (SEE LEASE ADDENDUM)
In addition to Lessee's rights to use and occupy the Premises as hereinafter
specified, Lessee shall have non-exclusive rights to the Common Areas (as
defined in Paragraph 2.7 below) as hereinafter specified, but shall not have any
rights to the roof, exterior walls or utility raceways of the Building or to any
other buildings in the Industrial Center. The Promises, the Building, the Common
Areas, the land upon which they are located, along with all other buildings and
improvements thereon, are herein collectively referred to as the "Industrial
Center." (Also see Paragraph 2.)
1.2 Parking: 0 unreserved vehicle parking spaces ("Unreserved Parking
Spaces"); and 45 reserved vehicle parking spaces ("Reserved Parking Spaces").
(Also see Paragraph 2.6).
1.3 Term: THREE (3) YEARS ("Original Term") commencing May 1, 1998
("Commencement Date") and ending April 30, 2001 ("Expiration Date"). (See
Paragraph 3 for further provisions.)
1.4 Early Possession: 4/15/98 ("Early Possession Date"). (See Paragraphs
3.2 and 3.3 for further provisions.)
1.5 Base Rent: $14,284.40 per month ("Base Rent"), + rental tax equal to
1.90% payable on the FIRST day of each month commencing May 1, 1998 (See
Paragraph 4 for further provisions.)
[ ] If this box is checked, there are provisions in this Lease for the Base Rent
to be adjusted per Addendum 1 attached hereto.
1.6(a) Rent Paid Upon Execution: $14,555.80 as Base Rent + rental tax for
the period May 1998.
1.6(b) Lessee's Share of Common Area Operating Expenses: 54.940% ("Lessee's
Share") as determined by [X] pro rata square footage of the Premises as compared
to the total square footage of the Building or [ ] other criteria as described
in ___.
1.7 Security Deposit: $14.600.00 ("Security Deposit"). (See Paragraph 5
for further provisions.)
1.8 Permitted Use: DISTRIBUTION, WAREHOUSING AND OFFICES FOR MANUFACTURING
OF PORTABLE COMPUTER PERIPHERAL ACCESSORIES AND EQUIPMENT (See Paragraph 6 for
further provisions.)
1.9 Insuring Party: Lessor is the "Insuring Party" unless otherwise stated
herein. (See Paragraph 8 for further provisions.)
1.10 Real Estate Brokers: The following real estate brokers (collectively,
the "Brokers") and brokerage relationships exist in this transaction and are
consented to by the Parties (check applicable boxes):
CUTLER COMMERCIAL represents
[X} Lessor exclusively ("Lessor's Broker"); [ ] both Lessor and Lessee, and
CORE JACKSON (MILIC) represents
[X} Lessee exclusively ("Lessee's Broker"); [ ] both Lessee and Lessor. (See
Paragraph 15 for further provisions.)
1.10(b) Payment to Brokers. Upon the execution of this Lease by both
Parties, Lessor shall pay to said Broker(s) jointly, or in such separate shares
as they may mutually designate in writing, a fee as set forth in a separate
written agreement between Lessor and said Broker(s) (or in the event there is no
separate written agreement between Lessor and said Broker(s), the sum of $BY
SEPARATE AGREEMENT for brokerage services rendered by said Broker(s) in
connection with this transaction.
1.11 Guarantor. The obligations of the Lessee under this Lease are to be
guaranteed by DAVID THOMPSON, ITS CFO PAUL CHARLES, ITS PRESIDENT
("Guarantor(s)"). (See Paragraph 37 for further provisions.)
1.12 Addenda. Attached hereto is an Addendum or Addenda consisting of
Paragraphs 1-4 and Exhibit(s) A all of which constitute a part of this Lease.
2. Premises.
2.1 Letting. Lessor hereby leases to Lessee, and Lessee hereby leases from
Lessor the Premises, for the term, at the rental, and upon all of the terms,
covenants and conditions set forth in this Lease. Unless otherwise provided
herein, any statement of square footage set forth in this Lease, or that may
have been used in calculating rental, is an approximation which Lessor and
Lessee agree is reasonable and the rental based thereon is not subject to
revision whether or not the actual square footage is more or less.
2.2 Condition. Lessor shall deliver the Premises to Lessee clean and free
of debris on the Commencement Date and warrants to Lessee that the existing
plumbing, fire sprinkler system, lighting, air conditioning, heating, and
loading doors, if any, in the Premises, other than those constructed by Lessee,
shall be in good operating condition on the Commencement Date. If a
non-compliance with said warranty exists as of the Commencement Date, Lessor
shall, except as otherwise provided in this Lease, promptly after receipt of
written notice from Lessee setting forth with specificity the nature and extent
of such non-compliance, rectify same at Lessor's expense. If Lessee does not
give Lessor written notice of a non-compliance with this warranty within thirty
(30) days after the Commencement Date, correction of that non-compliance shall
be the obligation of Lessee at Lessee's sole cost and expense.
2.3 Compliance with Covenants, Restrictions and Building Code. Lessor
warrants to Lessee that the improvements on the Premises comply with all
applicable covenants or restrictions of record and applicable building codes,
regulations and ordinances in effect on the Commencement Date. Said warranty
does not apply to the use to which Lessee will put the Premises or to any
Alterations or Utility Installations (as defined in Paragraph 7.3 (a)) made or
to be made by Lessee. If the Premises do not comply with said warranty, Lessor
shall, except as otherwise provided in this Lease, promptly after receipt of
written notice from Lessee setting forth with specificity the nature and extent
of such non-compliance, rectify the same at Lessors expense. If Lessee does not
give Lessor written notice of a non-compliance with this warranty within six (6)
months following the Commencement Date, correction of that non-compliance shall
be the obligation of Lessee at Lessee's sole cost and expense.
2.4 Acceptance of Premises. Lessee hereby acknowledges: (a) that it has
been advised by the Brokers to satisfy itself with respect to the condition of
the Premises (including but not limited to the electrical and fire sprinkler
systems, security, environmental aspects, compliance with Applicable Law, as
defined in Paragraph 6.3) and the present and future suitability of the Premises
for Lessee's intended use, (b) that Lessee has made such investigation as it
deems necessary with reference to such matters and assumes all responsibility
therefor as the same relate to Lessee's occupancy of the Premises and/or the
term of this Lease, and (c) that neither Lessor, nor any of Lessors agents, has
made any oral or written representations or warranties with respect to the said
matters other than as set forth in this Lease.
2.5 Lessee Prior Owner/Occupant. The warranties made by Lessor in this
Paragraph 2 shall be of no force or effect if immediately prior to the date set
forth in Paragraph 1.1 Lessee was the owner or occupant of the Promises. In Such
event, Lessee shall, at Lessee's sole cost and expense, correct any
noncompliance of the Premises with said warranties.
Initials
------
------
MUTLI-TENANT MODIFIED NET PAGE 1/NET-MULTI
<PAGE>
2.6 Vehicle Parking. Lessee shall be entitled to use the number of
Unreserved Parking Spaces and Reserved Parking Spaces specified in Paragraph
1.2(b) on those portions of the Common Areas designated from time to time by
Lessor for parking. Lessee shall not use more parking spaces than said number.
Said parking spaces shall be used for parking by vehicles no larger than
full-size passenger automobiles or pick-up trucks, herein called "Permitted Size
Vehicles." Vehicles other than Permitted Size Vehicles shall be parked and
loaded or unloaded as directed by Lessor in the Rules and Regulations (as
defined in Paragraph 40) issued by Lessor. (Also see Paragraph 2.9.)
(a) Lessee shall not permit or allow any vehicles that belong to or
are controlled by Lessee of Lessee's employees, suppliers, shippers,
customers, contractors or invitees to be loaded, unloaded, or parked in
areas other than those designated by Lessor of such activities.
(b) If Lessee permits or allows any of the prohibited activities
described in this Paragraph 2.6, then Lessor shall have the right, without
notice, In addition to such other rights and remedies that it may have, to
remove or tow away the vehicle involved and charge the cost to Lessee,
which cost shall be Immediately payable upon demand by Lessor.
(c) Lessor shall at the Commencement Date of this Lease, provide the
parking facilities required by Applicable Law.
2.7 Common Areas - Definition. The term "Common Areas" is defined as all
areas and facilities outside the Premises and within the exterior boundary line
of the Industrial Center and interior utility raceways within the Premises that
are provided and designated by the Lessor from time to time for the general
non-exclusive use of Lessor, Lessee and other lessees of the Industrial Center
and their respective employees, suppliers, shippers, customers, contractors and
Invitees, including parking areas, loading and unloading areas, trash areas,
roadways, sidewalks, walkways, parkways, driveways and landscaped areas.
2.8 Common Areas - Lessee's Rights. Lessor hereby grants to Lessee, for the
benefit of Lessee and its employees, suppliers, shippers, contractors, customers
and invitees, during the term of this Lease, the non-exclusive right to use, in
common with others entitled to such use, the Common Areas as they exist from
time to time, subject to any rights, powers, and privileges reserved by Lessor
under the terms hereof or under the terms of any rules and regulations or
restrictions governing the use of the Industrial Center. Under no circumstances
shall the right herein granted to use the Common Areas be deemed to include the
right to store any property, temporarily or permanently, In the Common Areas.
Any such storage shall be permitted only by the prior written consent of Lessor
or Lessor's designated agent, which consent may be revoked at any time. In the
event that any unauthorized storage shall occur then Lessor shall have the
right, without notice, in addition to such other rights and remedies that it may
have, to remove the property and charge the cost to Lessee, which cost shall be
immediately payable upon demand by Lessor.
2.9 Common Areas - Rules and Regulations. Lessor or such other person(s) as
Lessor may appoint shall have the exclusive control and management of the Common
Areas and shall have the right, from time to time, to establish, modify, amend
and enforce reasonable Rules and Regulations with respect thereto in accordance
with Paragraph 40. Lessee agrees to abide by and conform to all such Rules and
Regulations, and to cause its employees, suppliers, shippers, customers,
contractors and invitees to so abide and conform. Lessor shall not be
responsible to Lessee for the non-compliance with said rules and regulations by
other lessees of the Industrial Center.
2.10 Common Areas - Changes. Lessor shall have the right, in Lessor's sole
discretion, from time to time:
(a) To make changes to the Common Areas, including, without limitation,
changes in the location, size, shape and number of driveways,
entrances, parking spaces, parking areas, loading and unloading areas,
ingress, egress, direction of traffic, landscaped areas, walkways and
utility raceways;
(b) To close temporarily any of the Common Areas for maintenance purposes
so long as reasonable access to the Premises remains available;
(c) To designate other land outside the boundaries of the Industrial Center
to be a part of the Common Areas;
(d) To add additional buildings and improvements to the Common Areas;
(e) To use the Common Areas while engaged in making additional
improvements, repairs or alterations to the Industrial Center, or any
portion thereof; and
(f) To do and perform such other acts and make such other changes in, to
or with respect to the Common Areas and Industrial Center as Lessor
may, in the exercise of sound business judgment, deem to be
appropriate.
3. Term.
3.1 Term. The Commencement Date, Expiration Date and Original Term of this
Lease are as specified in Paragraph 1.3.
3.2 Early Possession. If an Early Possession Date is specified in Paragraph
1.4 and if Lessee totally or partially occupies the Premises after the Early
Possession Dale but prior to the Commencement Date, the obligation to pay Base
Rent shall be abated for the period of such early occupancy. All other terms of
this Lease, however, (including but not limited to the obligations to pay
Lessee's Share of Common Area Operating Expenses and to carry the insurance
required by Paragraph 8) shall be in effect during such period. Any such early
possession shall not affect nor advance the Expiration Date of the Original
Term.
3.3 Delay In Possession. It for any reason Lessor cannot deliver possession
of the Premises to Lessee by the Early Possession Date, If one is specified in
Paragraph 1.4, or if no Early Possession Date is specified, by the Commencement
Date, Lessor shall not be subject to any liability therefor, nor shall such
failure affect the validity of this Lease, or the obligations of Lessee
hereunder, or extend the term hereof, but in such case, Lessee shall not, except
as otherwise provided herein, be obligated to pay rent or perform any other
obligation of Lessee under the terms of this Lease until Lessor delivers
possession of the Premises to Lessee. If possession of the Premises is not
delivered to Lessee within sixty (60) days after the Commencement Date, Lessee
may, at Its option, by notice in writing to Lessor within ten (10) days after
the end of said sixty (60) day period, cancel this Lease, in which event the
parties shall be discharged from all obligations hereunder; provided further,
however, that if such written notice of Lessee is not received by Lessor within
said ten (10) day period, Lessee's right to cancel this Lease hereunder shall
terminate and be of no further force or effect. Except as may be otherwise
provided, and regardless of when the Original Term actually commences, if
possession is not tendered to Lessee when required by this Lease and Lessee does
not terminate this Lease, as aforesaid, the period free of the obligation to pay
Base Rent, if any, that Lessee would otherwise have enjoyed shall run from the
date of delivery of possession and continue for a period equal to the period
during which the Lessee would have otherwise enjoyed under the terms hereof, but
minus any days of delay caused by the acts, changes or omissions of Lessee.
4. Rent.
4.1 Base Rent. Lessee shall pay Base Rent and other rent or charges, as the
same may be adjusted from time to time, to Lessor in lawful money of the United
States, without offset or deduction, on or before the day on which it is due
under the terms of this Lease. Base Rent and all other rent and charges for any
period during the term hereof which is for less than one full month shall be
prorated based upon the actual number of days of the month involved. Payment of
Base Rent and other charges shall be made to Lessor at its address stated herein
or to such other persons or all such other addresses as Lessor may from time to
time designate in writing to Lessee.
4.2 Common Area Operating Expenses. Lessee shall pay to Lessor during the
term hereof, in addition to the Base Rent, Lessee's Share (as specified in
Paragraph 1.6(b)) of all Common Area Operating Expenses, as hereinafter defined,
during each calendar year of the term of this Lease, in accordance with the
following provisions:
(a) "Common Area Operating Expenses" are defined, for purposes of this
Lease, as all costs incurred by Lessor relating to the ownership and
operation of the Industrial Center, including, but not limited to, the
following:
(i) The operation, repair and maintenance, in neat, clean, good
order and condition, of the following:
(aa) The Common Areas, including parking areas, loading
and unloading areas, trash areas, roadways, sidewalks,
walkways, parkways, driveways, landscaped areas,
striping, bumpers, irrigation systems, Common Area
lighting facilities, fences and gates, elevators and
roof.
(bb) Exterior signs and any tenant directories.
(cc) Fire detection and sprinkler systems.
(ii) The cost of water, gas, electricity and telephone to
service the Common Areas.
(iii) Trash disposal, property management and security services
and the costs of any environmental Inspections.
(iv) Reserves set aside for maintenance and repair of Common
Areas.
(v) Real Property Taxes (as defined in Paragraph 10.2) to be
paid by Lessor for the Building and the Common Areas under
Paragraph 10 hereof.
(vi) The cost of the premiums for the insurance policies
maintained by Lessor under Paragraph 8 hereof.
(vii) Any deductible portion of an insured loss concerning the
Building or the Common Areas.
(viii) Any other services to be provided by Lessor that are stated
elsewhere in this Lease to be a Common Area Operating
Expense.
(b) Any Common Area Operating Expenses and Real Property Taxes that
are specifically attributable to the Building or to any other building in
the Industrial Center or to the operation, repair and maintenance thereof,
shall be allocated entirely to the Building or to such other building.
However, any Common Area Operating Expenses and Real Property Taxes that
are not specifically attributable to the Building or to any other building
or to the operation, repair and maintenance thereof, shall be equitably
allocated by Lessor to all buildings in the industrial Center.
(c) The inclusion of the improvements, facilities and services set
forth in Subparagraph 4.2(a) shall not be deemed to impose an obligation
upon Lessor to either have said improvements or facilities or to provide
those services unless the Industrial Center already has the same, Lessor
already provides the services, or Lessor has agreed elsewhere in this Lease
to provide the same or some of them.
(d) Lessee's Share of Common Area Operating Expenses shall be payable
by Lessee within ten (10) days after a reasonably detailed statement of
actual expenses is presented to Lessee by Lessor. At Lessor's option,
however, an amount may be estimated by Lessor [from time to time of
Lessee's Share of annual Common Area Operating Expenses and the same shall
be payable monthly or quarterly, as Lessor shall designate, during each
12-month period of the Lease term, on the same day as the Base Rent is due
hereunder. Lessor shall deliver to Lessee within sixty (60) days after the
expiration of each calendar year a reasonably detailed statement showing
Lessee's Share of the actual Common Area Operating Expenses incurred
during the preceding year. If Lessee's payments under this Paragraph 4.2(d)
during said preceding year exceed Lessee's Share as Indicated on said
statement, Lessee shall be credited the amount of such over-
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payment against Lessee's Share of Common Area Operating Expenses next becoming
due. If Lessee's payments under this Paragraph 4.2(d) during said preceding were
less than Lessee's Share as Indicated on said statement, Lessee shall pay to
Lessor the amount of the deficiency within ten (10) days after delivery by
Lessor to Lessee of said statement.
5. Security Deposit. Lessee shall deposit with Lessor upon Lessee's execution
hereof the Security Deposit set forth In Paragraph 1.7 as security for Lessee's
faithful performance of Lessee's obligations under this Lease. If Lessee fails
to pay Base Rent or other rent or charges due hereunder, or otherwise Defaults
under this Lease (as defined in Paragraph 13.1), Lessor may use, apply or retain
all or any portion of said Security Deposit for the payment of any amount due
Lessor or to reimburse or compensate Lessor for any liability, cost, expense,
loss or damage (including attorneys' fees) which Lessor may suffer or incur by
reason thereof. It Lessor uses or applies all or any portion of said Security
Deposit, lessee shall within ten (10) days after written request therefore
deposit monies with Lessor sufficient to restore said Security Deposit to the
full amount required by this Lease. Any time the Base Rent Increases during the
term of this Lease. Lessee shall, upon written request from Lessor, deposit
additional monies with Lessor as an addition to the Security Deposit so that the
total amount of the Security Deposit shall at all times bear the same proportion
to the then current Base Rent as the initial Security Deposit bears to the
initial Base Rent set forth In Paragraph 1.5. Lessor shall not be required to
keep all or any part of the Security Deposit separate from its general accounts.
Lessor shall, at the expiration or earlier termination of the term hereof and
after Lessee has vacated the Premises, return to Lessee (or, at Lessor's option,
to the last assignee, if any, of Lessee's interest herein), that portion of the
Security Deposit not used or applied by Lessor. Unless otherwise expressly
agreed in writing by Lessor, no part of the Security Deposit shall be considered
to be held In trust, to bear interest or other increment for its use, or to be
prepayment for any monies to be paid by Lessee under this Lease.
6. Use.
6.1 Permitted Use.
(a) Lessee shall use and occupy the Premises only for the Permitted
Use set forth in Paragraph 1.8, or any other legal use which is reasonably
comparable thereto, and for no other purpose. Lessee shall not use or
permit the use of the Premises in a manner that Is unlawful, creates waste
or a nuisance, or that disturbs owners and/or occupants of, or causes
damage to the Premises or neighboring premises or properties.
(b) Lessor hereby agrees to not unreasonably withhold or delay its
consent to any written request by Lessee. Lessee's assignees or subtenants,
and by prospective assignees and subtenants of Lessee, its assignees and
subtenants, for a modification of said Permitted Use, so long as the same
will not impair the structural integrity of the improvements on the
Premises or in the Building or the mechanical or electrical systems
therein, does not conflict with uses by other lessees, Is not significantly
more burdensome to the Premises or the Building and the improvements
thereon, and is otherwise permissible pursuant to this Paragraph 6. If
Lessor elects to withhold such consent, Lessor shall within five (5)
business days after such request give a written notification of same, which
notice shall Include an explanation of Lessor's reasonable objections to
the change In use.
6.2 Hazardous Substances.
(a) Reportable Uses Require Consent. The term "Hazardous Substance" as
used In this Lease shall mean any product, substance, chemical, material or
waste whose presence, nature, quantity and/or intensity of existence, use,
manufacture, disposal, transportation, spill, release or effect, either by
itself or in combination with other materials expected to be on the
Premises, is either: (i) potentially injurious to the public health, safety
or welfare, the environment, or the Premises; (ii) regulated or monitored
by any governmental authority; or (iii) a basis for potential liability of
Lessor to any governmental agency or third party under any applicable
statute or common law theory. Hazardous Substance shall include, but not be
limited to, hydrocarbons, petroleum, gasoline, crude oil or any products or
by-products thereof. Lessee shall not engage in any activity in or about
the Premises which constitutes a Reportable Use (as hereinafter defined) of
Hazardous Substances without the express prior written consent of Lessor
and compliance in a timely manner (at Lessee's sole cost and expense) with
all Applicable Requirements (as defined in Paragraph 6.3). "Reportable Use"
shall mean (i) the installation or use of any above or below ground storage
tank, (ii) the generation, possession, storage, use, transportation, or
disposal of a Hazardous Substance that requires a permit from, or with
respect to which a report, notice, registration or business plan is
required to be filed with, any governmental authority, and (iii) the
presence in, on or about the Premises of a Hazardous Substance with respect
to which any Applicable Laws require that a notice be given to persons
entering or occupying the Premises or neighboring properties.
Notwithstanding the foregoing, Lessee may, without Lessor's prior consent,
but upon notice to Lessor and in compliance with all Applicable
Requirements, use any ordinary and customary materials reasonably required
to be used by Lessee in the normal course of the Permitted Use, so long as
such use is not a Reportable Use and does not expose the Premises or
neighboring properties to any meaningful risk of contamination or damage or
expose Lessor to any liability therefor. In addition, Lessor may (but
without any obligation to do so) condition its consent to any Reportable
Use of any Hazardous Substance by Lessee upon Lessee's giving Lessor such
additional assurances as Lessor, in its reasonable discretion, deems
necessary to protect itself, the public, the Premises and the environment
against damage, contamination or injury and/or liability therefor,
including but not limited to the installation (and, at Lessor's option,
removal on or before Lease expiration or earlier termination) of reasonably
necessary protective modifications to the Premises (such as concrete
encasements) and/or the deposit of an additional Security Deposit under
Paragraph 5 hereof.
(b) Duty to Inform Lessor: If Lessee knows, or has reasonable cause to
believe, that a Hazardous Substance has come to be located in, on, under or
about the Premises or the Building, other than as previously consented to
by Lessor, Lessee shall immediately give Lessor written notice thereof,
together with a copy of any statement, report, notice, registration,
application, permit, business plan, license, claim, action, or proceeding
given to, or received from, any governmental authority or private party
concerning the presence. spill, release, discharge of, or exposure to, such
Hazardous Substance including but not limited to all such documents as may
be involved in any Reportable Use involving the premises. Lessee shall not
cause or permit any Hazardous Substance to be spilled or released In, on,
under or about the Premises (including, without limitation, through the
plumbing or sanitary sewer system).
(c) Indemnification. Lessee shall indemnify, protect, defend and hold
Lessor, its agents, employees, lenders and ground lessor, if any, and the
Premises, harmless from and against any and all damages, liabilities,
judgments, costs, claims, liens, expenses, penalties, loss of permits and
attorneys' and consultants' fees arising out of or involving any Hazardous
Substance brought onto the Premises by or for Lessee or by anyone under
Lessee's control. Lessee's obligations under this Paragraph 6.2(c) shall
include, but not be limited to, the effects of any contamination or injury
to person, property or the environment created or suffered by Lessee, and
the cost of investigation (including consultants' and attorney' fees and
testing), removal, remediation, restoration and/or abatement thereof, or of
any contamination therein involved, and shall survive the expiration or
earlier termination of this Lease. No termination, cancellation or release
agreement entered into by Lessor and Lessee shall release Lessee from its
obligations under this Lease with respect to Hazardous Substances, unless
specifically so agreed by Lessor in writing at the time of such agreement.
6.3 Lessee's Compliance with Requirements. Lessee shall, at Lessee's sole
cost and expense, fully, diligently and in a timely manner, comply with all
"Applicable Requirements," which term is used in this Lease to mean all laws,
rules, regulations, ordinances, directives, covenants, easements and
restrictions of record, permits, the requirements of any applicable fire
insurance underwriter or rating bureau, and the recommendations of Lessor's
engineers and/or consultants, relating in any manner to the Premises (including
but not limited to matters pertaining to (i) industrial hygiene, (ii)
environmental conditions on, in, under or about the Premises, including soil and
groundwater conditions, and (iii) the use, generation, manufacture, production,
installation, maintenance, removal, transportation, storage, spill, or release
of any Hazardous Substance), now in effect or which may hereafter come into
effect. Lessee shall, within five (5) days after receipt of Lessor's written
request, provide Lessor with copies of all documents and information, including
but not limited to permits, registrations, manifests, applications, reports and
certificates, evidencing Lessee's compliance with any Applicable Requirements
specified by Lessor, and shall immediately upon receipt, notify Lessor in
writing (with copies of any documents involved) of any threatened or actual
claim, notice, citation, warning, complaint or report pertaining to or involving
failure by Lessee or the Premises to comply with any Applicable Requirements.
6.4 Inspection; Compliance with Law. Lessor, Lessor's agents, employees,
contractors and designated representatives, and the holders of any mortgages,
deeds of trust or ground leases on the Premises ("Lenders") shall have the right
to enter the Premises at any time in the case of an emergency, and otherwise at
reasonable times, for the purpose of inspecting the condition of the Premises
and for verifying compliance by Lessee with this Lease and all Applicable
Requirements (as defined in Paragraph 6.3), and Lessor shall be entitled to
employ experts and/or consultants in connection therewith to advise Lessor with
respect to Lessee's activities, including but not limited to Lessee's
installation, operation, use, monitoring, maintenance, or removal of any
Hazardous Substance on or from the Premises. The costs and expenses of any such
inspections shall be paid by the party requesting same, unless a Default or
Breach of this Lease by Lessee or a violation of Applicable Requirements or a
contamination, caused or materially contributed to by Lessee, is found to exist
or to be imminent, or unless the inspection is requested or ordered by a
governmental authority as the result of any such existing or imminent violation
or contamination. In such case, Lessee shall upon request reimburse Lessor or
Lessor's Lender, as the case may be, for the costs and expenses of such
inspections.
7. Maintenance, Repairs, Utility Installations, Trade Fixtures and Alterations.
7.1 Lessee's Obligations.
(a) Subject to the provisions of Paragraphs 2.2 (Condition), 2.3
(Compliance with Covenants, Restrictions and Building Code), 7.2 (Lessor's
Obligations), 9 (Damage or Destruction), and 14 (Condemnation), Lessee
shall, at Lessees sole cost and expense and at all times, keep the Premises
and every part thereof in good order, condition and repair (whether or not
such portion of the Premises requiring repair, or the means of repairing
the same, are reasonably or readily accessible to Lessee, and whether or
not the need for such repairs occurs as a result of Lessee's use, any prior
use, the elements or the age of such portion of the Premises), including,
without limiting the generality of the foregoing, all equipment or
facilities specifically serving the Premises, such as plumbing, heating,
air conditioning, ventilating, electrical, lighting facilities, boilers,
fired or unfired pressure vessels, fire hose connections if within the
Premises, fixtures, interior walls, interior surfaces of exterior walls,
ceilings, floors. windows, doors, plate glass, and skylights, but excluding
any items which are the responsibility of Lessor pursuant to Paragraph 7.2
below. Lessee, in keeping the Premises in good order, condition and repair,
shall exercise and perform good maintenance practices. Lessee's obligations
shall include restorations, replacements or renewals when necessary to keep
the Premises and all improvements thereon or a part thereof in good order,
condition and state of repair.
(b) Lessee shall, at Lessee's sole cost and expense, procure and
maintain a contract, with copies to Lessor, in customary form and substance
for and with a contractor specializing and experienced in the inspection,
maintenance and service of the heating, air conditioning and ventilation
system for the Premises. However, Lessor reserves the right, upon notice to
Lessee, to procure and maintain the contract for the heating, air
conditioning and ventilating systems, and if Lessor so elects, Lessee shall
reimburse Lessor, upon demand, for the cost thereof.
(c) If Lessee fails to perform Lessee's obligations under this
Paragraph 7.1, Lessor may enter upon the Premises after ten (10) days'
prior written notice to Lessee (except in the case of an emergency, in
which case no notice shall be required), perform such obligations on
Lessee's behalf, and put the Premises in good order, condition and repair,
in accordance with Paragraph 13.2 below.
7.2 Lessor's Obligations. Subject to the provisions of Paragraphs 2.2
(Condition), 2.3 (Compliance with Covenants, Restrictions and Building Code),
4.2 (Common Area Operating Expenses), 6 (Use), 7.1 (Lessee's Obligations), 9
(Damage or Destruction) and 14 (Condemnation), Lessor, subject to reimbursement
pursuant to Paragraph 4.2, shall keep in good order, condition and repair the
foundations, exterior walls, structural condition of interior bearing walls,
exterior roof, fire sprinkler and/or standpipe and hose (it located in the
Common Areas) or other automatic fire extinguishing system including fire alarm
and/or smoke
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detection systems and equipment, fire hydrants, parking lots, walkways,
parkways, driveways, landscaping, fences, signs and utility systems serving the
Common Areas and all parts thereof, as well as providing the services for which
there is a Common Area Operating Expense pursuant to Paragraph 4.2. Lessor shall
not be obligated to paint the exterior or interior surfaces of exterior walls
nor shall Lessor be obligated to maintain, repair or replace windows, doors or
plate glass of the Premises. Lessee expressly waives the benefit of any statute
now or hereafter in effect which would otherwise afford Lessee the right to make
repairs at Lessor's expense or to terminate this Lease because of Lessor's
failure to keep the Building, Industrial Center or Common Areas in good order,
condition and repair.
7.3 Utility Installations, Trade Fixtures, Alterations.
(a) Definitions; Consent Required. The term "Utility Installations" is
used in this Lease to refer to all air lines, power panels, electrical
distribution, security, fire protection systems, communications systems,
lighting fixtures, heating, ventilating and air conditioning equipment,
plumbing, and fencing in, on or about the Premises. The term "Trade
Fixtures" shall mean Lessee's machinery and equipment which can be removed
without doing material damage to the Premises. The term "Alterations" shall
mean any modification of the improvements on the Premises which are
provided by Lessor under the terms of this Lease, other than Utility
Installations or Trade Fixtures. "Lessee-Owned Alterations and/or Utility
Installations" are defined as Alterations and/or Utility Installations made
by Lessee that are not yet owned by Lessor pursuant to Paragraph 7.4(a).
Lessee shall not make nor cause to be made any Alterations or Utility
Installations in, on, under or about the Premises without Lessor's prior
written consent. Lessee may, however, make non-structural Utility
Installations to the interior of the Premises (excluding the roof) without
Lessor's consent but upon notice to Lessor, so long as they are not visible
from the outside of the Premises, do not involve puncturing, relocating or
removing the roof or any existing walls, or changing or interfering with
the fire sprinkler or fire detection systems and the cumulative cost
thereof during the term of this Lease as extended does not exceed
$2,500.00.
(b) Consent. Any Alterations or Utility Installations that Lessee
shall desire to make and which require the consent of the Lessor shall be
presented to Lessor in written form with detailed plans. All consents given
by Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific
consent, shall be deemed conditioned upon: (i) Lessee's acquiring all
applicable permits required by governmental authorities; (ii) the
furnishing of copies of such permits together with a copy of the plans and
specifications for the Alteration or Utility Installation to Lessor prior
to commencement of the work thereon; and (iii) the compliance by Lessee
with all conditions of said permits in a prompt and expeditious manner. Any
Alterations or Utility Installations by Lessee during the term of this
Lease shall be done in a good and workmanlike manner, with good and
sufficient materials, and be in compliance with all Applicable
Requirements. Lessee shall promptly upon completion thereof furnish Lessor
with as-built plans and specifications therefor. Lessor may, (but without
obligation to do so) condition its consent to any requested Alteration or
Utility Installation that costs $2,500.00 or more upon Lessee's providing
Lessor with a lien and completion bond in an amount equal to one and
one-half times the estimated cost of such Alteration or Utility
Installation.
(c) Lien Protection. Lessee shall pay when due all claims for labor or
materials furnished or alleged to have been furnished to or for Lessee at
or for use on the Premises, which claims are or may be secured by any
mechanic's or materialmen's lien against the Premises or any interest
therein. Lessee shall give Lessor not less than ten (10) days' notice prior
to the commencement of any work in, on or about the Premises, and Lessor
shall have the right to post notices of non-responsibility in or on the
Premises as provided by law. If Lessee shall, in good faith, contest the
validity of any such lien, claim or demand, then Lessee shall, at its sole
expense, defend and protect itself, Lessor and the Premises against the
same and shall pay and satisfy any such adverse judgment that may be
rendered thereon before the enforcement thereof against the Lessor or the
Premises. If Lessor shall require, Lessee shall furnish to Lessor a surety
bond satisfactory to Lessor in an amount equal to one and one-half times
the amount of such contested lien claim or demand, indemnifying Lessor
against liability for the same, as required by law for the holding of the
Premises free from the effect of such lien or claim. In addition, Lessor
may require Lessee to pay Lessor's attorneys' fees and costs in
participating in such action if Lessor shall decide it is to its best
interest to do so.
7.4 Ownership, Removal, Surrender, and Restoration.
(a) Ownership. Subject to Lessor's right to require their removal and
to cause Lessee to become the owner thereof as hereinafter provided in this
Paragraph 7.4, all Alterations and Utility Installations made to the
Premises by Lessee shall be the property of and owned by Lessee, but
considered a part of the Premises. Lessor may, at any time and at its
option, elect in writing to Lessee to be the owner of all or any specified
part of the Lessee-Owned Alterations and Utility Installations. Unless
otherwise instructed per Subparagraph 7.4(b) hereof, all Lessee-Owned
Alterations and Utility Installations shall, at the expiration or earlier
termination of this Lease, become the property of Lessor and remain upon
the Premises and be surrendered with the Premises by Lessee.
(b) Removal. Unless otherwise agreed in writing, Lessor may require
that any or all Lessee-Owned Alterations or Utility Installations be
removed by the expiration or earlier termination of this Lease,
notwithstanding that their installation may have been consented to by
Lessor. Lessor may require the removal at any time of all or any part of
any Alterations or Utility Installations made without the required consent
of Lessor.
(c) Surrender/Restoration. Lessee shall surrender the Premises by the
end of the last day of the Lease term or any earlier termination date,
clean and free of debris and in good operating order, condition and state
of repair, ordinary wear and tear excepted. Ordinary wear and tear shall
not include any damage or deterioration that would have been prevented by
good maintenance practice or by Lessee performing all of its obligations
under this Lease. Except as otherwise agreed or specified herein, the
Premises, as surrendered, shall include the Alterations and Utility
Installations. The obligation of Lessee shall include the repair of any
damage occasioned by the installation, maintenance or removal of Lessee's
Trade Fixtures, furnishings, equipment, and Lessee-Owned Alterations and
Utility Installations, as well as the removal of any storage tank installed
by or for Lessee, and the removal, replacement, or remediation of any soil,
material or ground water contaminated by Lessee, all as may then be
required by Applicable Requirements and/or good practice. Lessee's Trade
Fixtures shall remain the property of Lessee and shall be removed by Lessee
subject to its obligation to repair and restore the Premises per this
Lease.
8. Insurance; Indemnity.
8.1 Payment of Premiums: The cost of the premiums for the insurance
policies maintained by Lessor under this Paragraph 8 shall be a Common Area
Operating Expense pursuant to Paragraph 4.2 hereof. Premiums for policy periods
commencing prior to, or extending beyond, the term of this Lease shall be
prorated to coincide with the corresponding Commencement Date or Expiration
Date.
8.2 Liability Insurance.
(a) Carried by Lessee. Lessee shall obtain and keep in force during
the term of this Lease a Commercial General Liability policy of insurance
protecting Lessee, Lessor and any Lender(s) whose names have been provided
to Lessee in writing (as additional insureds) against claims for bodily
injury, personal injury and property damage based upon, involving or
arising out of the ownership, use, occupancy or maintenance of the Premises
and all areas appurtenant thereto. Such insurance shall be on an occurrence
basis providing single limit coverage in an amount not less than $1,000,000
per occurrence with an Additional Insured-Managers or Lessors of Premises"
endorsement and contain the 'Amendment of the Pollution Exclusion"
endorsement for damage caused by heat, smoke or fumes from a hostile fire.
The policy shall not contain any intra-insured exclusions as between
insured persons or organizations, but shall include coverage for liability
assumed under this Lease as an "insured contract" for the performance of
Lessee's indemnity obligations under this Lease. The limits of said
insurance required by this Lease or as carried by Lessee shall not,
however, limit the liability of Lessee nor relieve Lessee of any obligation
hereunder. All insurance to be carried by Lessee shall be primary to and
not contributory with any similar insurance carried by Lessor, whose
insurance shall be considered excess insurance only.
(b) Carried by Lessor. Lessor shall also maintain liability insurance
described in Paragraph 8.2(a) above, in addition to and not in lieu of, the
insurance required to be maintained by Lessee. Lessee shall not be named as
an additional insured therein.
8.3 Property Insurance-Building, Improvements and Rental Value.
(a) Building and Improvements. Lessor shall obtain and keep in force
during the term of this Lease a policy or policies in the name of Lessor,
with loss payable to Lessor and to any Lender(s), insuring against loss or
damage to the Premises. Such insurance shall be for full replacement cost,
as the same shall exist from time to time, or the amount required by any
Lender(s), but in no event more than the commercially reasonable and
available insurable value thereof if, by reason of the unique nature or age
of the improvements involved, such latter amount is less than full
replacement cost. Lessee-Owned Alterations and Utility Installations, Trade
Fixtures and Lessee's personal property shall be insured by Lessee pursuant
to Paragraph 8.4. If the coverage is available and commercially
appropriate, Lessor's policy or policies shall insure against all risks of
direct physical loss or damage (except the perils of flood and/or
earthquake unless required by a Lender), including coverage for any
additional costs resulting from debris removal and reasonable amounts of
coverage for the enforcement of any ordinance or law regulating the
reconstruction or replacement of any undamaged sections of the Building
required to be demolished or removed by reason of the enforcement of any
building, zoning, safety or land use laws as the result of a covered loss,
but not including plate glass insurance. Said policy or policies shall also
contain an agreed valuation provision in lieu of any co-insurance clause,
waiver of subrogation, and inflation guard protection causing an increase
in the annual property insurance coverage amount by a factor of not less
than the adjusted U.S. Department of Labor Consumer Price Index for All
Urban Consumers for the city nearest to where the Premises are located.
(b) Rental Value. Lessor shall also obtain and keep in force during
the term of this Lease a policy or policies in the name of Lessor, with
loss payable to Lessor and any Lender(s), insuring the loss of the full
rental and other charges payable by all lessees of the Building to Lessor
for one year (including all Real Property Taxes, insurance costs, all
Common Area Operating Expenses and any scheduled rental increases). Said
insurance may provide that in the event the Lease is terminated by reason
of an insured loss, the period of indemnity for such coverage shall be
extended beyond the date of the completion of repairs or replacement of the
Premises, to provide for one full year's loss of rental revenues from the
date of any such loss. Said insurance shall contain an agreed valuation
provision in lieu of any co-insurance clause, and the amount of coverage
shall be adjusted annually to reflect the projected rental income, Real
Property Taxes, insurance premium costs and other expenses, if any,
otherwise payable, for the next 12-month period. Common Area Operating
Expenses shall include any deductible amount in the event of such loss.
(c) Adjacent Premises. Lessee shall pay for any increase in the
premiums for the property insurance of the Building and for the Common
Areas or other buildings in the Industrial Center if said increase is
caused by Lessee's acts, omissions, use or occupancy of the Premises.
(d) Lessee's Improvements. Since Lessor is the Insuring Party, Lessor
shall not be required to insure Lessee-Owned Alterations and Utility
Installations unless the item in question has become the property of Lessor
under the terms of this Lease.
8.4 Lessee's Property Insurance. Subject to the requirements of Paragraph
8.5, Lessee at its cost shall either by separate policy or, at Lessor's option,
by endorsement to a policy already carried, maintain insurance coverage on all
of Lessee's personal property, Trade Fixtures and Lessee-Owned Alterations and
Utility Installations in, on, or abut the Premises similar in coverage to that
carried by Lessor as the Insuring Party under Paragraph 8.3(a). Such insurance
shall be full replacement cost coverage with a deductible not to exceed $1,000
per occurrence. The proceeds from any such insurance shall be used by Lessee for
the replacement of personal property and the restoration of Trade Fixtures and
Lessee-Owned Alterations and Utility Installations. Upon request from Lessor,
Lessee shall provide Lessor with written evidence that such insurance is in
force.
8.5 Insurance Policies. Insurance required hereunder shall be in companies
duly licensed to transact business in the state where the Premises are located,
and maintaining during the policy term a "General Policyholders Rating" of at
least B+, V, or such other rating as may be required by a Lender, as set forth
in the most current issue or "Best's Insurance Guide." Lessee shall not do or
permit to be done anything which shall invalidate the insurance policies
referred to in
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this Paragraph 8. Lessee shall cause to be delivered to Lessor, within seven (7)
days after the earlier of the Early Possession Date or the Commencement Date,
certified copies of, or certificates evidencing the existence and amounts of,
the insurance required under Paragraph 8.2(a) and 8.4. No such policy shall be
cancelable or subject to modification except after thirty (30) days' prior
written notice to Lessor. Lessee shall at least thirty (30) days prior to the
expiration of such policies, furnish Lessor with evidence of renewals or
"insurance binders" evidencing renewal thereof, or Lessor may order such
insurance and charge the cost thereof to Lessee, which amount shall be payable
by Lessee to Lessor upon demand.
8.6 Waiver of Subrogation. Without affecting any other rights or remedies,
Lessee and Lessor each hereby release and relieve the other, and waive their
entire right to recover damages (whether in contract or in tort) against the
other, for loss or damage to their property arising out of or incident to the
perils required to be insured against under Paragraph 8. The effect of such
releases and waivers of the right to recover damages shall not be limited by the
amount of insurance carried or required, or by any deductibles applicable
thereto. Lessor and Lessee agree to have their respective insurance companies
issuing property damage insurance waive any right to subrogation that such
companies may have against Lessor or Lessee, as the case may be, so long as the
insurance is not invalidated thereby.
8.7 Indemnity. Except for Lessor's negligence and/or breach of express
warranties, Lessee shall indemnify, protect, defend and hold harmless the
Premises, Lessor and its agents, Lessor's master or ground lessor, partners and
Lenders, from and against any and all claims, loss of rents and/or damages,
costs, liens, judgments, penalties, loss of permits, attorneys' and consultants'
fees, expenses and/or liabilities arising out of, involving, or in connection
with, the occupancy of the Premises by Lessee, the conduct of Lessee's business,
any act, omission or neglect of Lessee, its agents, contractors, employees or
invitees, and out of any Default or Breach by Lessee in the performance in a
timely manner of any obligation on Lessees part to be performed under this
Lease. The foregoing shall include, but not be limited to, the defense or
pursuit of any claim or any action or proceeding involved therein, and whether
or not (in the case of claims made against Lessor) litigated and/or reduced to
judgment. In case any action or proceeding be brought against Lessor by reason
of any of the foregoing matters, Lessee upon notice from Lessor shall defend the
same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor
shall cooperate with Lessee in such defense. Lessor need not have first paid any
such claim in order to be so indemnified.
8.8 Exemption of Lessor from Liability. Lessor shall not be liable for
injury or damage to the person or goods, wares, merchandise or other property of
Lessee, Lessee's employees, contractors, invitees, customers, or any other
person in or about the Premises, whether such damage or injury is caused by or
results from fire, steam, electricity, gas, water or rain, or from the breakage,
leakage, obstruction or other defects of pipes, fire sprinklers, wires,
appliances, plumbing, air conditioning or lighting fixtures, or from any other
cause, whether said injury or damage results from conditions arising upon the
Premises or upon other portions of the Building of which the Premises are a
part, from other sources or places, and regardless of whether the cause of such
damage or injury or the means of repairing the same is accessible or not. Lessor
shall not be liable for any damages arising from any act or neglect of any other
lessee of Lessor nor from the failure by Lessor to enforce the provisions of any
other lease in the Industrial Center. Notwithstanding Lessors negligence or
breach of this Lease, Lessor shall under no circumstances be liable for injury
to Lessee's business or for any loss of income or profit therefrom.
9. Damage or Destruction.
9.1 Definitions.
(a) "Premises Partial Damage" shall mean damage or destruction to the
Premises, other than Lessee-Owned Alterations and Utility Installations,
the repair cost of which damage or destruction is less than fifty percent
(50%) of the then Replacement Cost (as defined in Paragraph 9.1(d)) of the
Premises (excluding Lessee-Owned Alterations and Utility Installations and
Trade Fixtures) immediately prior to such damage or destruction.
(b) "Premises Total Destruction" shall mean damage or destruction to
the Premises, other than Lessee-Owned Alterations and Utility
Installations, the repair cost of which damage or destruction is fifty
percent (50%) or more of the then Replacement Cost of the Premises
(excluding Lessee-Owned Alterations and Utility Installations and Trade
Fixtures) immediately prior to such damage or destruction. In addition,
damage or destruction to the Building, other than Lessee-Owned Alterations
and Utility Installations and Trade Fixtures of any lessees of the
Building, the cost of which damage or destruction is fifty percent (50%) or
more of the then Replacement Cost (excluding Lessee-Owned Alterations and
Utility Installations and Trade Fixtures of any lessees of the Building) of
the Building shall, at the option of Lessor, be deemed to be Premises Total
Destruction.
(c) "Insured Loss" shall mean damage or destruction to the Premises,
other than Lessee-Owned Alterations and Utility Installations and Trade
Fixtures, which was caused by an event required to be covered by the
insurance described in Paragraph 8.3(a) irrespective of any deductible
amounts or coverage limits involved.
(d) "Replacement Cost" shall mean the cost to repair or rebuild the
improvements owned by Lessor at the time of the occurrence to their
condition existing immediately prior thereto, including demolition, debris
removal and upgrading required by the operation of applicable building
codes, ordinances or laws, and without deduction for depreciation.
(e) "Hazardous Substance Condition" shall mean the occurrence or
discovery of a condition involving the presence of, or a contamination by,
a Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the
Premises.
9.2 Premises Partial Damage - Insured Loss. If Premises Partial Damage that
is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such
damage (but not Lessee's Trade Fixtures or Lessee-Owned Alterations and Utility
Installations) as soon as reasonably possible and this Lease shall continue in
full force and effect. In the event, however, that there is a shortage of
insurance proceeds and such shortage is due to the fact that, by reason of the
unique nature of the improvements in the Premises, full replacement cost
insurance coverage was not commercially reasonable and available, Lessor shall
have no obligation to pay for the shortage in insurance proceeds or to fully
restore the unique aspects of the Premises unless Lessee provides Lessor with
the funds to cover same, or adequate assurance thereof, within ten (10) days
following receipt of written notice of such shortage and request therefor. If
Lessor receives said funds or adequate assurance thereof within said ten (10)
day period, Lessor shall complete them as soon as reasonably possible and this
Lease shall remain in full force and effect. If Lessor does not receive such
funds or assurance within said period, Lessor may nevertheless elect by written
notice to Lessee within ten (10) days thereafter to make such restoration and
repair as is commercially reasonable with Lessor paying any shortage in
proceeds, in which case this Lease shall remain in full force and effect. If
Lessor does not receive such funds or assurance within such ten (10) day period,
and if Lessor does not so elect to restore and repair, then this Lease shall
terminate sixty (60) days following the occurrence of the damage or destruction.
Unless otherwise agreed, Lessee shall in no event have any right to
reimbursement from Lessor for any funds contributed by Lessee to repair any such
damage or destruction. Premises Partial Damage due to flood or earthquake shall
be subject to Paragraph 9.3 rather than Paragraph 9.2, notwithstanding that
there may be some insurance coverage, but the net proceeds of any such insurance
shall be made available for the repairs if made by either Party.
9.3 Partial Damage - Uninsured Loss. If Premises Partial Damage that is not
an Insured Loss occurs, unless caused by a negligent or willful act of Lessee
(in which event Lessee shall make the repairs at Lessee's expense and this Lease
shall continue in full force and effect), Lessor may at Lessor's option, either
(i) repair such damage as soon as reasonably possible at Lessor's expense, in
which event this Lease shall continue in. full force and effect, or (ii) give
written notice to Lessee within thirty (30) days after receipt by Lessor of
knowledge of the occurrence of such damage of Lessor's desire to terminate this
Lease as of the date sixty (60) days following the date of such notice. In the
event Lessor elects to give such notice of Lessor's intention to terminate this
Lease. Lessee shall have the right within ten (10) days after the receipt of
such notice to give written notice to Lessor of Lessee's commitment to pay for
the repair of such damage totally at Lessee's expense and without reimbursement
from Lessor. Lessee shall provide Lessor with the required funds or satisfactory
assurance thereof within thirty (30) days following such commitment from Lessee.
In such event this Lease shall continue in full force and effect, and Lessor
shall proceed to make such repairs as soon as reasonably possible after the
required funds are available. If Lessee does not give such notice and provide
the funds or assurance thereof within the times specified above, this Lease
shall terminate as of the date specified in Lessor's notice of termination.
9.4 Total Destruction. Notwithstanding any other provision hereof, if
Premises Total Destruction occurs (including any destruction required by any
authorized public authority), this Lease shall terminate sixty (60) days
following the date of such Premises Total Destruction, whether or not the damage
or destruction is an Insured Loss or was caused by a negligent or willful act of
Lessee. In the event, however, that the damage or destruction was caused by
Lessee, Lessor shall have the right to recover Lessor's damages from Lessee
except as released and waived in Paragraph 9.7.
9.5 Damage Near End of Term. If at any time during the last six (6) months
of the term of this Lease there is damage for which the cost to repair exceeds
one month's Base Rent, whether or not an Insured Loss, Lessor may, at Lessor's
option, terminate this Lease effective sixty (60) days following the date of
occurrence of such damage by giving written notice to Lessee of Lessor's
election to do so within thirty (30) days after the date of occurrence of such
damage. Provided, however, if Lessee at that time has an exercisable option to
extend this Lease or to purchase the Premises, then Lessee may preserve this
Lease by (a) exercising such option, and (b) providing Lessor with any shortage
in insurance proceeds (or adequate assurance thereof) needed to make the repairs
on or before the earlier of (f) the date which is ten (10) days after Lessee's
receipt of Lessor's written notice purporting to terminate this Lease, or (ii)
the day prior to the date upon which such option expires. If Lessee duly
exercises such option during such period and provides Lessor with funds (or
adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor
shall, at Lessor's expense repair such damage as soon as reasonably possible and
this Lease shall continue in full force and effect. If Lessee fails to exercise
such option and provide such funds or assurance during such period, then this
Lease shall terminate as of the date set forth in the first sentence of this
Paragraph 9.5.
9.6 Abatement of Rent; Lessee's Remedies.
(a) In the event of (i) Premises Partial Damage or (ii) Hazardous
Substance Condition for which Lessee is not legally responsible, the Base
Rent, Common Area Operating Expenses and other charges, if any, payable by
Lessee hereunder for the period during which such damage or condition, its
repair, remediation or restoration continues, shall be abated in proportion
to the degree to which Lessee's use of the Premises is impaired, but not in
excess of proceeds from insurance required to be carried under Paragraph
8.3(b). Except for abatement of Base Rent, Common Area Operating Expenses
and other charges, if any, as aforesaid, all other obligations of Lessee
hereunder shall be performed by Lessee, and Lessee shall have no claim
against Lessor for any damage suffered by reason of any such damage,
destruction, repair, remediation or restoration.
(b) If Lessor shall be obligated to repair or restore the Premises
under the provisions of this Paragraph 9 and shall not commence, in a
substantial and meaningful way, the repair or restoration of the Premises
within ninety (90) days after such obligation shall accrue, Lessee may, at
any time prior to the commencement of such repair or restoration, give
written notice to Lessor and to any Lenders of which Lessee has actual
notice of Lessees election to terminate this Lease on a date not less than
sixty (60) days following the giving of such notice. If Lessee gives such
notice to Lessor and such Lenders and such repair or restoration is not
commenced within thirty (30) days after receipt of such notice, this Lease
shall terminate as of the date specified in said notice. If Lessor or a
Lender commences the repair or restoration of the Premises within thirty
(30) days after the receipt of such notice, this Lease shall continue in
full force and effect. "Commence" as used In this Paragraph 9.6 shall mean
either the unconditional authorization of the preparation of the required
plans, or the beginning of the actual work on the Premises, whichever
occurs first.
9.7 Hazardous Substance Conditions. If a Hazardous Substance Condition
occurs, unless Lessee is legally responsible therefor (in which case Lessee
shall make the investigation and remediation thereof required by Applicable
Requirements and this Lease shall continue in full force and effect, but subject
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to Lessor's rights under Paragraph 6.2(c) and Paragraph 13), Lessor may at
Lessor's option either (i) investigate and remediate such Hazardous Substance
Condition, if required, as soon as reasonably possible at Lessor's expense, in
which event this Lease shall continue in full force and effect, or (ii) (if the
estimated cost to investigate and remediate such condition exceeds twelve (12)
times the then monthly Base Rent or $100,000 whichever is greater, give written
notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of
the occurrence of such Hazardous Substance Condition of Lessor's desire to
terminate this Lease as of the date sixty (60) days following the date of such
notice. In the event Lessor elects to give such notice of Lessor's intention to
terminate this Lease, Lessee shall have the right within ten (10) days after the
receipt of such notice to give written notice to Lessor of Lessee's commitment
to pay for the excess costs of (a) investigation and remediation of such
Hazardous Substance Condition to the extent required by Applicable Requirements,
over (b) an amount equal to twelve (12) times the then monthly Base Rent or
$100,000, whichever is greater. Lessee shall provide Lessor with the funds
required of Lessee or satisfactory assurance thereof within thirty (30) days
following said commitment by Lessee. In such event this Lease shall continue in
full force and effect, and Lessor shall proceed to make such investigation and
remediation as soon as reasonably possible after the required funds are
available. If Lessee does not give such notice and provide the required funds or
assurance thereof within the time period specified above, this Lease shall
terminate as of the date specified in Lessor's notice of termination.
9.8 Termination - Advance Payments. Upon termination of this Lease pursuant
to this Paragraph 9, Lessor shall return to Lessee any advance payment made by
Lessee to Lessor and so much of Lessee's Security Deposit as has not been, or is
not then required to be, used by Lessor under the terms of this Lease.
9.9 Waiver of Statutes. Lessor and Lessee agree that the terms of this
Lease shall govern the effect of any damage to or destruction of the Premises
and the Building with respect to the termination of this Lease and hereby waive
the provisions of any present or future statute to the extent it is inconsistent
herewith.
10. Real Property Taxes.
10.1 Payment of Taxes. Lessor shall pay the Real Property Taxes, as defined
in Paragraph 10.2, applicable to the Industrial Center, and except as otherwise
provided in Paragraph 10.3, any such amounts shall be included in the
calculation of Common Area Operating Expenses in accordance with the provisions
of Paragraph 4.2.
10.2 Real Property Tax Definition. As used herein, the term "Real Property
Taxes" shall include any form of real estate tax or assessment, general,
special, ordinary or extraordinary, and any license fee, commercial rental tax,
improvement bond or bonds, levy or tax (other than inheritance, personal income
or estate taxes) imposed upon the Industrial Center by any authority having the
direct or indirect power to tax, including any city, state or federal
government, or any school, agricultural, sanitary, fire, street, drainage, or
other improvement district thereof, levied against any legal or equitable
interest of Lessor in the Industrial Center or any portion thereof, Lessor's
right to rent or other income therefrom, and/or Lessor's business of leasing the
Premises. The term "Real Property Taxes" shall also include any tax, fee, levy,
assessment or charge, or any increase therein, imposed by reason of events
occurring, or changes in Applicable Law taking effect, during the term of this
Lease, including but not limited to a change in the ownership of the Industrial
Center or in the improvements thereon, the execution of this Lease, or any
modification, amendment or transfer thereof, and whether or not contemplated by
the Parties. In calculating Real Property Taxes for any calendar year, the Real
Properly Taxes for any real estate tax year shall be included in the calculation
of Real Property Taxes for such calendar year based upon the number of days
which such calendar year and tax year have in common.
10.3 Additional Improvements. Common Area Operating Expenses shall not
include Real Properly Taxes specified in the tax assessor's records and work
sheets as being caused by additional improvements placed upon the Industrial
Center by other lessees or by Lessor for the exclusive enjoyment of such other
lessees. Notwithstanding Paragraph 10.1 hereof, Lessee shall, however, pay to
Lessor at the time Common Area Operating Expenses are payable under Paragraph
4.2, the entirety of any increase in Real Property Taxes if assessed solely by
reason of Alterations, Trade Fixtures or Utility Installations placed upon the
Premises by Lessee or at Lessee's request.
10.4 Joint Assessment. If the Building is not separately assessed, Real
Property Taxes allocated to the Building shall be an equitable proportion of the
Real Property Taxes for all of the land and improvements included within the tax
parcel assessed, such proportion to be determined by Lessor from the respective
valuations assigned in the assessor's work sheets or such other information as
may be reasonably available. Lessor's reasonable determination thereof, in good
faith, shall be conclusive.
10.5 Lessee's Property Taxes. Lessee shall pay prior to delinquency all
taxes assessed against and levied upon Lessee-Owned Alterations and Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee contained in the Premises or stored within the Industrial Center. When
possible, Lessee shall cause its Lessee-Owned Alterations and Utility
Installations, Trade Fixtures, furnishings, equipment and all other personal
property to be assessed and billed separately from the real property of Lessor.
If any of Lessee's said property shall be assessed with Lessor's real property,
Lessee shall pay Lessor the taxes attributable to Lessee's property within ten
(10) days after receipt of a written statement setting forth the taxes
applicable to Lessee's property.
11. Utilities. Lessee shall pay directly for all utilities and services supplied
to the Premises, including but not limited to electricity, telephone, security,
gas and cleaning of the Premises, together with any taxes thereon. If any such
utilities or services are not separately metered to the Premises or separately
billed to the Premises, Lessee shall pay to Lessor a reasonable proportion to be
determined by Lessor of all such charges jointly metered or billed with other
premises in the Building, in the manner and within the time periods set forth in
Paragraph 4.2(d).
12. Assignment and Subletting.
12.1 Lessor's Consent Required.
(a) Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage or otherwise transfer or encumber (collectively, "assign") or
sublet all or any part of Lessee's interest in this Lease or in the Premises
without Lessor's prior written consent given under and subject to the terms of
Paragraph 36.
(b) A change in the control of Lessee shall constitute an assignment
requiring Lessor's consent. The transfer, on a cumulative basis, of twenty-five
percent (25%) or more of the voting control of Lessee shall constitute a change
in control for this purpose.
(c) The involvement of Lessee or its assets in any transaction, or
series of transactions (by way of merger, sale, acquisition, financing,
refinancing, transfer, leveraged buy-out or otherwise), whether or not a formal
assignment or hypothecation of this Lease or Lessee's assets occurs, which
results or will result in a reduction of the Net Worth of Lessee, as hereinafter
defined, by an amount equal to or greater than twenty-five percent (25%) of such
Net Worth of Lessee as it was represented to Lessor at the time of full
execution and delivery of this Lease or at the time of the most recent
assignment to which Lessor has consented, or as it exists immediately prior to
said transaction or transactions constituting such reduction, at whichever time
said Net Worth of Lessee was or is greater, shall be considered an assignment of
this Lease by Lessee to which Lessor may reasonably withhold its consent. "Net
Worth of Lessee" for purposes of this Lease shall be the net worth of Lessee
(excluding any Guarantors) established under generally accepted accounting
principles consistently applied.
(d) An assignment or subletting of Lessee's interest in this Lease
without Lessor's specific prior written consent shall at Lessor's option, be a
Default curable after notice per Paragraph 13.1, or a non-curable Breach without
the necessity of any notice and grace period. If Lessor elects to treat such
unconsented to assignment or subletting as a non-curable Breach, Lessor shall
have the right to either: (i) terminate this Lease, or (ii) upon thirty (30)
days' written notice ("Lessor's Notice"), increase the monthly Base Rent for the
Premises to the greater of the then fair market rental value of the Premises, as
reasonably determined by Lessor, or one hundred ten percent (110%) of the Base
Rent then in effect. Pending determination of the new fair market rental value,
it disputed by Lessee. Lessee shall pay the amount set forth in Lessor's
Notice, with any overpayment credited against the next Installment(s) of Base
Rent coming due, and any underpayment for the period retroactively to the
effective date of the adjustment being due and payable immediately upon the
determination thereof. Further, in the event of such Breach and rental
adjustment, (i) the purchase price of any option to purchase the Premises held
by Lessee shall be subject to similar adjustment to the then fair market value
as reasonably determined by Lessor (without the Lease being considered an
encumbrance or any deduction for depreciation or obsolescence, and considering
the Premises at its highest and best use and in good condition) or one hundred
ten percent (110%) of the price previously in effect, (ii) any index-oriented
rental or price adjustment formulas contained in this Lease shall be adjusted to
require that the base index be determined with reference to the index applicable
to the time of such adjustment, and (iii) any fixed rental adjustments scheduled
during the remainder of the Lease term shall be increased in the same ratio as
the new rental bears to the Base Rent in effect immediately prior to the
adjustment specified in Lessor's Notice.
(e) Lessee's remedy for any breach of this Paragraph 12.1 by Lessor
shall be limited to compensatory damages and/or injunctive relief.
12.2 Terms and Conditions Applicable to Assignment and Subletting.
(a) Regardless of Lessor's consent, any assignment or subletting shall
not (i) be effective without the express written assumption by such assignee or
sublessee of the obligations of Lessee under this Lease, (ii) release Lessee of
any obligations hereunder, nor (iii) alter the primary liability of Lessee for
the payment of Base Rent and other sums due Lesser hereunder or for the
performance of any other obligations to be performed by Lessee under this Lease.
(b) Lessor may accept any rent or performance of Lessee's obligations
from any person other than Lessee pending approval or disapproval of an
assignment. Neither a delay in the approval or disapproval of such assignment
nor the acceptance of any rent for performance shall constitute a waiver or
estoppel of Lessor's right to exercise its remedies for the Default or Breach by
Lessee of any of the terms, covenants or conditions of this Lease.
(c) The consent of Lessor to any assignment or subletting shall not
constitute a consent to any subsequent assignment or subletting by Lessee or to
any subsequent or successive assignment or subletting by the assignee or
sublessee. However, Lessor may consent to subsequent sublettings and assignments
of the sublease or any amendments or modifications thereto without notifying
Lessee or anyone else liable under this Lease or the sublease and without
obtaining their consent, and such action shall not relieve such persons from
liability under this Lease or the sublease.
(d) In the event of any Default or Breach of Lessee's obligation under
this Lease, Lessor may proceed directly against Lessee, any Guarantors or anyone
else responsible for the performance of the Lessee's obligations under this
Lease, including any sublessee, without first exhausting Lessor's remedies
against any other person or entity responsible therefor to Lessor, or any
security held by Lessor.
(e) Each request for consent to an assignment or subletting shall be
in writing, accompanied by information relevant to Lessor's determination as to
the financial and operational responsibility and appropriateness of the proposed
assignee or sublessee, including but not limited to the intended use and/or
required modification of the Premises, if any, together with a non-refundable
deposit of $1,000 or ten percent (10%) of the monthly Base Rent applicable to
the portion of the Premises which is the subject of the proposed assignment or
sublease, whichever is greater, as reasonable consideration for Lessors
considering and processing the request for consent. Lessee agrees to provide
Lessor with such other or additional information and/or documentation as may be
reasonably requested by Lessor.
(f) Any assignee of, or sublessee under, this Lease shall, by reason
of accepting such assignment or entering into such sublease, be deemed for the
benefit of Lessor, to have assumed and agreed to conform and comply with each
and every term, covenant, condition and obligation herein to be observed or
performed by Lessee during the term of said assignment or sublease, other than
such obligations as are contrary to or inconsistent with provisions of an
assignment or sublease to which Lessor has specifically consented in writing.
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(g) The occurrence of a transaction described in Paragraph 12.2(c)
shall give Lessor the right (but not the obligation) to require that the
Security Deposit be increased by an amount equal to six (6) times the then
monthly Base Rent, and Lessor may make the actual receipt by Lessor of the
Security Deposit Increase a condition to Lessor's consent to such transaction.
(h) Lessor, as a condition to giving its consent to any assignment or
subletting, may require that the amount and adjustment schedule of the rent
payable under this Lease be adjusted to what is then the market value and/or
adjustment schedule for property similar to the Premises as then constituted, as
determined by Lessor.
12.3 Additional Terms and Conditions Applicable to Subletting. The
following terms and conditions shall apply to any subletting by Lessee of all or
any part of the Premises and shall be deemed included in all subleases under
this Lease whether or not expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of Lessee's
interest in all rentals and income arising from any sublease of all or a portion
of the Premises heretofore or hereafter made by Lessee, and Lessor may collect
such rent and income and apply same toward Lessee's obligations under this Lease
provided, however, that until a Breach (as defined in Paragraph 13.1) shall
occur in the performance of Lessee's obligations under this Lease, Lessee may,
except as otherwise provided in this Lease, receive, collect and enjoy the rents
accruing under such sublease. Lessor shall not, by reason of the foregoing
provision or any other assignment of such sublease to Lessor, nor by reason of
the collection of the rents from a sublessee, be deemed liable to the sublessee
for any failure of Lessee to perform and comply with any of Lessee's obligations
to such sublessee under such Sublease. Lessee hereby irrevocably authorizes and
directs any such sublessee, upon receipt of a written notice from Lessor stating
that a Breach exists In the performance of Lessee's obligations under this
Lease, to pay to Lessor the rents and other charges due and to become due under
the sublease. Sublessee shall rely upon any such statement and request from
Lessor and shall pay such rents and other charges to Lessor without any
obligation or right to inquire as to whether such Breach exists and
notwithstanding any notice from or claim from Lessee to the contrary. Lessee
shall have no right or claim against such sublessee, or, until the Breach has
been cured, against Lessor, for any such rents and other charges so paid by said
sublessee to Lessor.
(b) In the event of a Breach by Lessee in the performance of its
obligations under this Lease Lessor, at its option and without any obligation to
do so, may require any sublessee to attorn to Lessor, in which event Lessor
shall undertake the obligations of the sublessor under such sublease from the
time of the exercise of said option to the expiration of such sublease;
provided, however, Lessor shall not be liable for any prepaid rents or security
deposit paid by such sublessee to such sublessor or for any other prior defaults
or breaches of such sublessor under such sublease.
(c) Any matter or thing requiring the consent of the sublessor under a
sublease shall also require the consent of Lessor herein.
(d) No sublessee under a sublease approved by Lessor shall further
assign or sublet all or any part of the Premises without Lessor's prior written
consent.
(e) Lessor shall deliver a copy of any notice of Default or Breach by
Lessee to the sublessee, who shall have the right to cure the Default of Lessee
within the grace period, if any, specified in such notice. The sublessee shall
have a right of reimbursement and offset from and against Lessee for any such
Defaults cured by the subleasee.
13. Default; Breach; Remedies.
13.1 Default; Breach. Lessor and Lessee agree that if an attorney is
consulted by Lessor in connection with a Lessee Default or Breach (as
hereinafter defined), $350.00 is a reasonable minimum sum per such occurrence
for legal services and costs in the preparation and service of a notice of
Default, and that Lessor may include the cost of such services and costs in said
notice as rent due and payable to cure said default. A "Default" by Lessee is
defined as a failure by Lessee to observe, comply with or perform any of the
terms, covenants, conditions or rules applicable to Lessee under this Lease. A
"Breach" by Lessee is defined as the occurrence of any one or more of the
following Defaults, and, where a grace period for cure after notice is specified
herein, the failure by Lessee to cure such Default prior to the expiration of
the applicable grace period, and shall entitle Lessor to pursue the remedies set
forth in Paragraphs 13.2 and/or 13.3:
(a) The vacating of the Premises without the intention to reoccupy
same, or the abandonment of the Premises.
(b) Except as expressly otherwise provided in this Lease, the failure
by Lessee to make any payment of Base Rent, Lessee's Share of Common Area
Operating Expenses, or any other monetary payment required to be made by Lessee
hereunder as and when due, the failure by Lessee to provide Lessor with
reasonable evidence of insurance or surety bond required under this Lease, or
the failure of Lessee to fulfill any obligation under this Lease which endangers
or threatens life or property, where such failure continues for a period of
three (3) days following written notice thereof by or on behalf of Lessor to
Lessee.
(c) Except as expressly otherwise provided in this Lease, the failure
by Lessee to provide Lessor with reasonable written evidence (in duly executed
original form, if applicable) of (i) compliance with Applicable Requirements per
Paragraph 6.3, (ii) the inspection, maintenance and service contracts required
under Paragraph 7.1(b), (iii) the rescission of an unauthorized assignment or
subletting per Paragraph 12.1, (iv) a Tenancy Statement per Paragraphs 16 or 37,
(v) the subordination or non-subordination of this Lease per Paragraph 30, (vi)
the guaranty of the performance of Lessee's obligations under this Lease if
required under Paragraphs 1.11 and 37, (vii) the execution of any document
requested under Paragraph 42 (easements), or (viii) any other documentation or
information which Lessor may reasonably require of Lessee under the terms of
this lease, where any such failure continues for a period of ten (10) days
following written notice by or on behalf of Lessor to Lessee.
(d) A Default by Lessee as to the terms, covenants, conditions or
provisions of this Lease, or of the rules adopted under Paragraph 40 hereof that
are to be observed, complied with or performed by Lessee, other than those
described in Subparagraphs 13.1 (a), (b) or (c), above, where such Default
continues for a period of thirty (30) days after written notice thereof by or on
behalf of Lessor to Lessee; provided, however, that if the nature of Lessee's
Default is such that more than thirty (30) days are reasonably required for its
cure, then it shall not be deemed to be a Breach of this Lease by Lessee it
Lessee commences such cure within said thirty (30) day period and thereafter
diligently prosecutes such cure to completion.
(e) The occurrence of any of the following events: (i) the making by
Lessee of any general arrangement or assignment for the benefit of creditors;
(ii) Lessee's becoming a "debtor" as defined in 11 U.S. Code Section 101 or any
successor statute thereto (unless, in the case of a petition filed against
Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of
a trustee or receiver to take possession of substantially all of Lessee's assets
located at the Premises or of Lessee's interest in this Lease, where possession
is not restored to Lessee within thirty (30) days; or (iv) the attachment,
execution or other judicial seizure of substantially all of Lessee's assets
located at the Premises or of Lessee's interest in this Lease, where such
seizure is not discharged within thirty (30) days; provided, however, in the
event that any provision of this Subparagraph 13.1 (e) is contrary to any
applicable law, such provision shall be of no force or effect, and shall not
affect the validity of the remaining provisions.
(f) The discovery by Lessor that any financial statement of Lessee or
of any Guarantor, given to Lessor by Lessee or any Guarantor, was materially
false.
(g) If the performance of Lessee's obligations under this Lease is
guaranteed: (i) the death of a Guarantor, (ii) the termination of a Guarantor's
liability with respect to this Lease other than in accordance with the terms of
such guaranty, (iii) a Guarantor's becoming insolvent or the subject of a
bankruptcy filing, (iv) a Guarantor's refusal to honor the guaranty, or (v) a
Guarantor's breach of its guaranty obligation on an anticipatory breach basis,
and Lessee's failure, within sixty (60) days following written notice by or on
behalf of Lessor to Lessee of any such event, to provide Lessor with written
alternative assurances of security, which, when coupled with the then existing
resources of Lessee, equals or exceeds the combined financial resources of
Lessee and the Guarantors that existed at the lime of execution of this Lease.
13.2 Remedies. If Lessee fails to perform any affirmative duty or
obligation of Lessee under this lease, within ten (10) days after written notice
to Lessee (or in case of an emergency, without notice), Lessor may at its option
(but without obligation to do so), perform such duty or obligation on Lessee's
behalf, including but not limited to the obtaining of reasonably required bonds,
insurance policies, or governmental licenses, permits or approvals. The costs
and expenses of any such performance by Lessor shall be due and payable by
Lessee to Lessor upon invoice therefor. If any check given to Lessor by Lessee
shall not be honored by the bank upon which it is drawn. Lessor, at its own
option, may require all future payments to be made under this Lease by Lessee to
be made only by cashier's check. In the event of a Breach of this Lease by
Lessee (as defined in Paragraph 13.1), with or without further notice or demand,
and without limiting Lessor In the exercise of any right or remedy which Lessor
may have by reason of such Breach, Lessor may:
(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease and the term hereof shall terminate and
Lessee shall immediately surrender possession of the Premises to Lessor. In such
event Lessor shall be entitled to recover from Lessee: (i) the worth at the time
of the award of the unpaid rent which had been earned at the time of
termination; (ii) the worth at the time of award of the amount by which the
unpaid rent which would have been earned after termination until the time of
award exceeds the amount of such rental loss that the Lessee proves could have
been reasonably avoided; (iii) the worth at the time of award of the amount by
which the unpaid rent for the balance of the term after the time of award
exceeds the amount of such rental loss that the Lessee proves could be
reasonably avoided; and (iv) any other amount necessary to compensate Lessor for
all the detriment approximately caused by the Lessee's failure to perform its
obligations under this Lease or which in the ordinary course of things would be
likely to result therefrom, including but not limited to the cost of recovering
possession of the Premises, expenses of retailing, including necessary
renovation and alteration of the Premises, reasonable attorneys' fees, and that
portion of any leasing commission paid by Lessor in connection with this Lease
applicable to the unexpired term of this Lease. The worth at the time of award
of the amount referred to in provision (iii) of the immediately preceding
sentence shall be computed by discounting such amount at the discount rate of
the Federal Reserve Bank of San Francisco or the Federal Reserve Bank District
in which the Premises are located at the time of award plus one percent (1%).
Efforts by Lessor to mitigate damages caused by Lessee's Default or Breach of
this Lease shall not waive Lessor's right to recover damages under this
Paragraph 13.2. If termination of this Lease is obtained through the provisional
remedy of unlawful detainer, Lessor shall have the right to recover in such
proceeding the unpaid rent and damages as are recoverable therein, or Lessor may
reserve the right to recover all or any part thereof in a separate suit for such
rent and/or damages. If a notice and grace period required under Subparagraph
13.1(b), (c) or (d) was not previously given, a notice to pay rent or quit, or
to perform or quit, as the case may be, given to Lessee under any statute
authorizing the forfeiture of leases for unlawful detainer shall also constitute
the applicable notice for grace period purposes required by Subparagraph
13.1(b),(c) or (d). In such case, the applicable grace period under the unlawful
detainer statue shall run concurrently after the one such statutory notice, and
the failure of Lessee to cure the Default within the greater of the two (2) such
grace periods shall constitute both an unlawful detainer and a Breach of this
Lease entitling Lessor to the remedies provided for in this Lease and/or by said
statute.
(b) Continue the Lease and Lessee's right to possession in effect (in
California under California Civil Code Section 1951.4) offer Lessee's Breach and
recover the rent as it becomes due, provided Lessee has the right to sublet or
assign, subject only to reasonable limitations. Lessor and Lessee agree that the
limitations an assignment and subletting in this Lease are reasonable. Acts of
maintenance or preservation, efforts to relet the Premises, or the appointment
of a receiver to protect the Lessor's interest under this Lease, shall not
constitute a termination of the Lessee's right to possession.
(c) Pursue any other remedy now or hereafter available to Lessor under
the laws or judicial decisions of the state wherein the Premises are located.
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(d) The expiration or termination of this Lease and/or the termination
of Lessee's right to possession shall not relieve Lessee from liability under
any indemnity provisions of this Lease as to matters occurring or accruing
during the term hereof or by reason of Lessee's occupancy of the Premises.
13.3 Inducement Recapture In Event of Breech. Any agreement by Lessor for
free or abated rent or other charges applicable to the Premises, or for the
giving or paying by Lessor to or for Lessee of any cash or other bonus,
inducement or consideration for Lessee's entering into this Lease, all of which
concessions are hereinafter referred to as "Inducement Provisions" shall be
deemed conditioned upon Lessee's full and faithful performance of all of the
terms, covenants and conditions of this Lease to be performed or observed by
Lessee during the term hereof as the same may be extended. Upon the occurrence
of a Breach (as defined in Paragraph 13.1) of this Lease by Lessee, any such
Inducement Provision shall automatically be deemed deleted from this Lease and
of no further force or effect, and any rent, other charge, bonus, inducement or
consideration theretofore abated, given or paid by Lessor under such an
Inducement Provision shall be immediately due and payable by Lessee to Lessor,
and recoverable by Lessor, as additional rent due under this Lease,
notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by
Lessor of rent or the cure of the Breach which initiated the operation of this
Paragraph 13.3 shall not be deemed a waiver by Lessor of the provisions of this
Paragraph 13.3 unless specifically so stated in writing by Lessor at the lime of
such acceptance.
13.4 Late Charges. Lessee hereby acknowledges that late payment by Lessee
to Lessor of rent and other sums due hereunder will cause Lessor to incur costs
not contemplated by this Lease, the exact amount of which will be extremely
difficult to ascertain. Such costs include, but are not limited to, processing
and accounting charges, and late charges which may be imposed upon Lessor by the
terms of any ground lease, mortgage or deed of trust covering the Premises.
Accordingly, If any installment of rent or other sum due from Lessee shall not
be received by Lessor or Lessor's designee within ten (10) days after such
amount shall be due, then, without any requirement for notice to Lessee, Lessee
shall pay to Lessor a late charge equal to six percent (6%) of such overdue
amount. The parties hereby agree that such late charge represents a fair and
reasonable estimate of the costs Lessor will incur by reason of late payment by
Lessee. Acceptance of such late charge by Lessor shall in no event constitute a
waiver of Lessee's Default or Breach with respect to such overdue amount, nor
prevent Lessor from exercising any of the other rights and remedies granted
hereunder. In the event that a late charge is payable hereunder, whether or not
collected, for three (3) consecutive installments of Base Rent, then
notwithstanding Paragraph 4.1 or any other provision of this Lease to the
contrary, Base Rent shall, at Lessor's option, become due and payable quarterly
in advance.
13.5 Breach by Lessor. Lessor shall not be deemed in breach of this Lease
unless Lessor fails within a reasonable time to perform an obligation required
to be performed by Lessor. For purposes of this Paragraph 13.5, a reasonable
time shall in no event be less than thirty (30) days after receipt by Lessor,
and by any Lender(s) whose name and address shall have been furnished to Lessee
in writing for such purpose, of written notice specifying wherein such
obligation of Lessor has not been performed; provided, however, that if the
nature of Lessor's obligation is such that more than thirty (30) days after such
notice are reasonably required for its performance, then Lessor shall not be in
breach of this Lease if performance is commenced within such thirty (30) day
period and thereafter diligently pursued to completion.
14. Condemnation. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said power
(all of which are herein called "condemnation"), this Lease shall terminate as
to the part so taken as of the date the condemning authority takes title or
possession, whichever first occurs. If more than ten percent (10%) of the floor
area of the Premises, or more than twenty-five percent (25%) of the portion of
the Common Areas designated for Lessee's parking, is taken by condemnation,
Lessee may, at Lessee's option, to be exercised in writing within ten (10) days
after Lessor shall have given Lessee written notice of such taking (or in the
absence of such notice, within ten (10) days after the condemning authority
shall have taken possession) terminate this Lease as of the date the condemning
authority takes such possession. If Lessee does not terminate this Lease in
accordance with the foregoing, this Lease shall remain in full force and effect
as to the portion of the Premises remaining, except that the Base Rent shall be
reduced in the same proportion as the rentable floor area of the Premises taken
bears to the total rentable floor area of the Premises. No reduction of Base
Rent shall occur if the condemnation does not apply to any portion of the
Premises. Any award for the taking of all or any part of the Premises under the
power of eminent domain or any payment made under threat of the exercise of such
power shall be the property of Lessor, whether such award shall be made as
compensation for diminution of value of the leasehold or for the taking of the
fee, or as severance damages; provided, however, that Lessee shall be entitled
to any compensation, separately awarded to Lessee for Lessee's relocation
expenses and/or loss of Lessee's Trade Fixtures. In the event that this Lease is
not terminated by reason of such condemnation. Lessor shall to the extent of its
net severance damages received, over and above Lessee's Share of the legal and
other expenses incurred by Lessor in the condemnation matter, repair any damage
to the Premises caused by such condemnation authority. Lessee shall be
responsible for the payment of any amount in excess of such net severance
damages required to complete such repair.
15. Brokers' Fees.
15.1 Procuring Cause. The Broker(s) named in Paragraph 1.10 is/are the
procuring cause of this Lease.
15.2 Additional Terms. Unless Lessor and Broker(s) have otherwise agreed in
writing, Lessor agrees that: (a) if Lessee exercises any Option (as defined in
Paragraph 39.1) granted under this Lease or any Option subsequently granted, or
(b) it Lessee acquires any rights to the Premises or other premises in which
Lessor has an interest, or (c) if Lessee remains in possession of the Premises
with the consent of Lessor after the expiration of the term of this Lease after
having failed to exercise an Option, or (d) if said Brokers are the procuring
cause of any other lease or sale entered into between the Parties pertaining to
the Premises and/or any adjacent property in which Lessor has an interest, or
(e) if Base Rent is increased, whether by agreement or operation of an
escalation clause herein, then as to any of said transactions, Lessor shall pay
said Broker(s) a fee in accordance with the schedule of said Broker(s) in effect
at the time of the execution of this Lease.
15.3 Assumption of Obligations. Any buyer or transferee of Lessor's
interest in this Lease, whether such transfer is by agreement or by operation of
law, shall be deemed to have assumed Lessor's obligation under this Paragraph
15. Each Broker shall be an intended third party beneficiary of the provisions
of Paragraph 1.10 and of this Paragraph 15 to the extent of its interest in any
commission arising from this Lease and may enforce that right directly against
Lessor and its successors.
15.4 Representations and Warranties. Lessee and Lessor each represent and
warrant to the other that it has had no dealings with any person, firm, broker
or finder other than as named in Paragraph 1.10(a) in connection with the
negotiation of this Lease and/or the consummation of the transaction
contemplated hereby, and that no broker or other person, firm or entity other
than said named Broker(s) is entitled to any commission or finder's fee in
connection with said transaction. Lessee and Lessor do each hereby agree to
indemnity, protect, defend and hold the other harmless from and against
liability for compensation or charges which may be claimed by any such unnamed
broker, finder or other similar party by reason of any dealings or actions of
the indemnifying Party, including any costs, expenses, and/or attorneys' fees
reasonably incurred with respect thereto.
16. Tenancy and Financial Statements.
16.1 Tenancy Statement. Each Party (as "Responding Party") shall within ten
(10) days after written notice from the other Party (the "Requesting Party")
execute, acknowledge and deliver to the Requesting Party a statement in writing
in a form similar to the then most current "Tenancy Statement" form published by
the American Industrial Real Estate Association, plus such additional
information, confirmation and/or statements as may be reasonably requested by
the Requesting Party.
16.2 Financial Statement. If Lessor desires to finance, refinance, or sell
the Premises or the Building, or any part thereof, Lessee and all Guarantors
shall deliver to any potential lender or purchaser designated by Lessor such
financial statements of Lessee and such Guarantors as may be reasonably required
by such lender or purchaser, including but not limited to Lessee's financial
statements for the past three (3) years. All such financial statements shall be
received by Lessor and such lender or purchaser in confidence and shall be used
only for the purposes herein set forth.
17. Lessor's Liability. The term "Lessor" as used herein shall mean the owner or
owners at the time in question of the fee title to the Premises. In the event
of a transfer of Lessor's title or interest in the Premises or in this Lease,
Lessor shall deliver to the transferee or assignee (in cash or by credit) any
unused Security Deposit held by Lessor at the time of such transfer or
assignment. Except as provided in Paragraph 15.3, upon such transfer or
assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor
shall be relieved of all liability with respect to the obligations and/or
covenants under this Lease thereafter to be performed by the Lessor. Subject to
the foregoing, the obligations and/or covenants in this Lease to be performed by
the Lessor shall be binding only upon the Lessor as hereinabove defined.
18. Severability. The invalidity of any provision of this Lease, as determined
by a court of competent jurisdiction, shall in no way affect the validity of any
other provision hereof.
19. Interest on Past-Due Obligations. Any monetary payment due Lessor hereunder,
other than late charges, not received by Lessor within ten (10) days following
the date on which it was due, shall bear interest from the date due at the
prime rate charged by the largest state chartered bank in the state in which
the Premises are located plus four percent (4%) per annum, bill not exceeding
the maximum rate allowed by law, in addition to the potential late charge
provided for in Paragraph 13.4.
20. Time of Essence. Time is of the essence with respect to the performance of
all obligations to be performed or observed by the Parties under this Lease.
21. Rent Defined. All monetary obligations of Lessee to Lessor under the terms
of this Lease are deemed to be rent.
22. No Prior or other Agreements; Broker Disclaimer. This Lease contains all
agreements between the Parties with respect to any matter mentioned herein, and
no other prior or contemporaneous agreement or understanding shall be effective.
Lessor and Lessee each represents and warrants to the Brokers that it has made,
and is relying solely upon, its own investigation as to the nature, quality,
character and financial responsibility of the other Party to this Lease and as
to the nature, quality and character of the Premises. Brokers have no
responsibility with respect thereto or with respect to any default or breach
hereof by either Party. Each Broker shall be an intended third party beneficiary
of the provisions of this Paragraph 22.
23. Notices.
23.1 Notice Requirements. All notices required or permitted by this Lease
shall be in writing and may be delivered in person (by hand or by messenger or
courier service) or may be sent by regular, certified or registered mail or U.S.
Postal Service Express Mail, with postage prepaid, or by facsimile transmission
during normal business hours, and shall be deemed sufficiently given if served
in a manner specified in this Paragraph 23. The addresses noted adjacent to a
Party's signature on this Lease shall be that Party's address for delivery or
mailing of notice purposes. Either Party may by written notice to the other
specify a different address for notice purposes, except that upon Lessee's
taking possession of the Premises, the Premises shall constitute Lessee's
address for the purpose of mailing or delivering notices to Lessee. A copy of
all notices required or permitted to be given to Lessor hereunder shall be
concurrently transmitted to such party or parties at such addresses as Lessor
may from time to time hereafter designate by written notice to Lessee.
23.2 Date of Notice. Any notice sent by registered or certified mail,
return receipt requested, shall be deemed given on the date of delivery shown on
the receipt card, or if no delivery dale is shown, the postmark thereon. If
sent by regular mail, the notice shall be deemed given forty-eight (48) hours
after the same is addressed as required herein and mailed with postage prepaid.
Notices delivered by United Slates Express Mail or overnight courier that
guarantees next day
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delivery shall be deemed given twenty-four (24) hours after delivery of the same
to the United States Postal Service or courier. It any notice is transmitted by
facsimile transmission or similar means, the same shall be deemed served or
delivered upon telephone or facsimile confirmation of receipt of the
transmission thereof, provided a copy is also delivered via delivery or mail. If
notice is received on a Saturday or a Sunday or a legal holiday, it shall be
deemed received on the next business day.
24. Waivers. No waiver by Lessor of the Default or Breach of any term, covenant
or condition hereof by Lessee, shall be deemed a waiver of any other term,
covenant or condition hereof, or of any subsequent Default or Breach by Lessee
of the same or any other term, covenant or condition hereof. Lessor's consent
to, or approval of, any such act shall not be deemed to render unnecessary the
obtaining of Lessor's consent to, or approval of, any subsequent or similar act
by Lessee, or be construed as the basis of an estoppel to enforce the provision
or provisions of this Lease requiring such consent. Regardless of Lessor's
knowledge of a Default or Breach at the time of accepting rent, the acceptance
of rent by Lessor shall not be a waiver of any Default or Breach by Lessee of
any provision hereof. Any payment given Lessor by Lessee may be accepted by
Lessor on account of moneys or damages due Lessor, notwithstanding any
qualifying statements or conditions made by Lessee in connection therewith,
which such statements and/or conditions shall be of no force or effect
whatsoever unless specifically agreed to in writing by Lessor at or before the
time of deposit of such payment.
25. Recording. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees or taxes applicable thereto.
26. No Right To Holdover. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or earlier termination of
this Lease. In the event that Lessee holds over in violation of this Paragraph
26 then the Base Rent payable from and after the time of the expiration or
earlier termination of this Lease shall be increased to two hundred percent
(200%) of the Base Rent applicable during the month immediately preceding such
expiration or earlier termination. Nothing contained herein shall be construed
as a consent by Lessor to any holding over by Lessee.
27. Cumulative Remedies. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
28. Covenants and Conditions. All provisions of this Lease to be observed or
performed by Lessee are both covenants and conditions.
29. Binding Effect; Choice of Law. This Lease shall be binding upon the Parties,
their personal representatives, successors and assigns and be governed by the
laws of the State in which the Premises are located. Any litigation between the
Parties hereto concerning this Lease shall be initiated in the county in which
the Premises are located.
30. Subordination; Attornment; Non-Disturbance.
30.1 Subordination. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or other
hypothecation or security device (collectively, "Security Device"), now or
hereafter placed by Lessor upon the real property of which the Premises are a
part, to any and all advances made on the security thereof, and to all renewals,
modifications, consolidations, replacements and extensions thereof. Lessee
agrees that the Lenders holding any such Security Device shall have no duty,
liability or obligation to perform any of the obligations of Lessor under this
Lease, but that in the event of Lessor's default with respect to any such
obligation, Lessee will give any Lender whose name and address have been
furnished Lessee in writing for such purpose notice of Lessor's default pursuant
to Paragraph 13.5. If any Lender shall elect to have this Lease and/or any
Option granted hereby superior to the lien of its Security Device and shall give
written notice thereof to Lessee, this Lease and such Options shall be deemed
prior to such Security Device, notwithstanding the relative dates of the
documentation or recordation thereof.
30.2 Attornment. Subject to the non-disturbance provisions of Paragraph
30.3, Lessee agrees to attorn to a Lender or any other party who acquires
ownership of the Premises by reason of a foreclosure of a Security Device, and
that in the event of such foreclosure, such new owner shall not: (i) be liable
for any act or omission of any prior lessor or with respect to events occurring
prior to acquisition of ownership, (ii) be subject to any offsets or defenses
which Lessee might have against any prior lessor, or (iii) be bound by
prepayment of more than one month's rent.
30.3 Non-Disturbance. With respect to Security Devices entered into by
Lessor after the execution of this lease, Lessee's subordination of this Lease
shall be subject to receiving assurance (a "non-disturbance agreement") from the
Lender that Lessee's possession and this Lease, including any options to extend
the term hereof, will not be disturbed so long as Lessee is not in Breach hereof
and attorns to the record owner of the Premises.
30.4 Self-Executing. The agreements contained in this Paragraph 30 shall be
effective without the execution of any further documents; provided, however,
that upon written request from Lessor or a Lender in connection with a sale,
financing or refinancing of Premises, Lessee and Lessor shall execute such
further writings as may be reasonably required to separately document any such
subordination or non-subordination, attornment and/or non-disturbance agreement
as is provided for herein.
31. Attorneys' Fees. It any Party or Broker brings an action or proceeding to
enforce the terms hereof or declare rights hereunder, the Prevailing Party (as
hereafter defined) in any such proceeding, action, or appeal thereon, shall be
entitled to reasonable attorneys' fees. Such fees may be awarded in the same
suit or recovered in a separate suit, whether or not such action or proceeding
is pursued to decision or judgment. The term "Prevailing Party" shall include,
without limitation, a Party or Broker who substantially obtains or defeats the
relief sought, as the case may be, whether by compromise, settlement, judgment,
or the abandonment by the other Party or Broker of its claim or defense. The
attorneys' fee award shall not be computed in accordance with any court fee
schedule, but shall be such as to fully reimburse all attorneys' fees reasonably
incurred. Lessor shall be entitled to attorneys' fees, costs and expenses
incurred in preparation and service of notices of Default and consultations in
connection therewith, whether or not a legal action is subsequently commenced in
connection with such Default or resulting Breach. Broker(s) shall be intended
third party beneficiaries of this Paragraph 31.
32. Lessor's Access; Showing Premises; Repairs. Lessor and Lessor's agents shall
have the right to enter the Premises at any time, in the case of an emergency,
and otherwise at reasonable times for the purpose of showing the same to
prospective purchasers, lenders, or lessees, and making such alterations,
repairs, improvements or additions to the Premises or to the Building, as Lessor
may reasonably deem necessary. Lessor may at any time place on or about the
Premises or Building any ordinary "For Sale" signs and Lessor may at any time
during the last one hundred eighty (180) days of the term hereof place on or
about the Premises any ordinary "For Lease" signs. All such activities of Lessor
shall be without abatement of rent or liability to Lessee.
33. Auctions. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without first having
obtained Lessor's prior written consent. Notwithstanding anything to the
contrary in this Lease, Lessor shall not be obligated to exercise any standard
of reasonableness in determining whether to grant such consent.
34. Signs. Lessee shall not place any sign upon the exterior of the Premises or
the Building, except that Lessee may, with Lessor's prior written consent,
install (but not on the roof) such signs as are reasonably required to advertise
Lessee's own business so long as such signs are in a location designated by
Lessor and comply with Applicable Requirements and the signage criteria
established for the Industrial Center by Lessor. The installation of any sign on
the Premises by or for Lessee shall be subject to the provisions of Paragraph 7
(Maintenance, Repairs, Utility Installations, Trade Fixtures and Alterations).
Unless otherwise expressly agreed herein, Lessor reserves all rights to the use
of the roof of the Building, and the right to install advertising signs on the
Building, including the roof, which do not unreasonably interfere with the
conduct of Lessee's business; Lessor shall be entitled to all revenues from such
advertising signs.
35. Termination; Merger: Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for Breach
by Lessee, shall automatically terminate any sublease or lesser estate in the
Premises; provided, however, Lessor shall, in the event of any such surrender,
termination or cancellation, have the option to continue any one or all of any
existing subtenancies. Lessor's failure within ten (10) days following any such
event to make a written election to the contrary by written notice to the holder
of any such lesser interest, shall constitute Lessor's election to have such
event constitute the termination of such interest.
36. Consents.
(a) Except for Paragraph 33 hereof (Auctions) or as otherwise provided
herein, wherever in this Lease the consent of a Party is required to an act by
or for the other Party, such consent shall not be unreasonably withheld or
delayed. Lessor's actual reasonable costs and expenses (including but not
limited to architects', attorneys', engineers' and other consultants' fees)
incurred in the consideration of, or response to, a request by Lessee for any
Lessor consent pertaining to this Lease or the Premises, including but not
limited to consents to an assignment a subletting or the presence or use of a
Hazardous Substance, shall be paid by Lessee to Lessor upon receipt of an
invoice and supporting documentation therefor. In addition to the deposit
described in Paragraph 12.2(e), Lessor may, as a condition to considering any
such request by Lessee, require that Lessee deposit with Lessor an amount of
money (in addition to the Security Deposit held under Paragraph 5) reasonably
calculated by Lessor to represent the cost Lessor will incur in considering and
responding to Lessee's request. Any unused portion of said deposit shall be
refunded to Lessee without interest. Lessor's consent to any act, assignment of
this Lease or subletting of the Premises by Lessee shall not constitute an
acknowledgment that no Default or Breach by Lessee of this Lease exists, nor
shall such consent be deemed a waiver of any then existing Default or Breach,
except as may be otherwise specifically stated in writing by Lessor at the time
of such consent.
(b) All conditions to Lessor's consent authorized by this Lease are
acknowledged by Lessee as being reasonable. The failure to specify herein any
particular condition to Lessor's consent shall not preclude the impositions by
Lessor at the time of consent of such further or other conditions as are then
reasonable with reference to the particular matter for which consent is being
given.
37. Guarantor.
37.1 Form of Guaranty. If there are to be any Guarantors of this Lease per
Paragraph 1.11, the form of the guaranty to be executed by each such Guarantor
shall be in the form most recently published by the American Industrial Real
Estate Association, and each such Guarantor shall have the same obligations as
Lessee under this lease, including but not limited to the obligation to provide
the Tenancy Statement and information required in Paragraph 16.
37.2 Additional Obligations of Guarantor. It shall constitute a Default of
the Lessee under this Lease if any such Guarantor fails or refuses, upon
reasonable request by Lessor to give: (a) evidence of the due execution of the
guaranty called for by this Lease, including the authority of the Guarantor (and
of the party signing on Guarantor's behalf) to obligate such Guarantor on said
guaranty, and resolution of its board of directors authorizing the making of
such guaranty, together with a certificate of incumbency showing the signatures
of the persons authorized to sign on its behalf, (b) current financial
statements of Guarantor as may from time to time be requested by Lessor, (c) a
Tenancy Statement, or (d) written confirmation that the guaranty is still in
effect.
38. Quiet Possession. Upon payment by Lessee of the rent for the Premises and
the performance of all of the covenants, conditions and provisions on Lessee's
part to be observed and performed under this Lease, Lessee shall have quiet
possession of the Premises for the entire term hereof subject to all of the
provisions of this Lease.
Initials:
MULTI-TENANT--MODIFIED NET
(C) American Industrial Real Estate Association 1993
-9-
<PAGE>
39. Options.
39.1 Definition. As used in this Lease, the word "Option" has the following
meaning: (a) the right to extend the form of this Lease or to renew this Lease
or to extend or renew any lease that Lessee has on other property of Lessor; (b)
the right of first refusal to lease the Premises or the right of first offer to
lease the Premises or the right of first refusal to lease other property of
Lessor or the right of first offer to lease other property of Lessor; (c) the
right to purchase the Premises, or the right of first refusal to purchase the
Premises, or the right of first offer to purchase the Premises, or the right to
purchase other property of Lessor, or the right of first refusal to purchase
other property of Lessor, or the right of first offer to purchase other property
of Lessor.
39.2 Options Personal to Original Lessee. Each Option granted to Lessee in
this Lease is personal to the original Lessee named in Paragraph 1.1 hereof, and
cannot be voluntarily or involuntarily assigned or exercised by any person or
entity other than said original Lessee while the original Lessee is in full and
actual possession of the Premises and without the intention of thereafter
assigning or subletting. The Options, if any, herein granted to Lessee are not
assignable, either as a part of an assignment of this Lease or separately or
apart therefrom, and no Option may be separated from this Lease in any manner,
by reservation or otherwise.
39.3 Multiple Options. In the event that Lessee has any multiple Options to
extend or renew this Lease, a later option cannot be exercised unless the prior
Options to extend or renew this Lease have been validly exercised.
39.4 Effect of Default on Options.
(a) Lessee shall have no right to exercise an Option notwithstanding
any provision in the grant of Option to the contrary: (1) during the period
commencing with the giving of any notice of Default under Paragraph 13.1 and
continuing until the noticed Default is cured, or (ii) during the period of time
any monetary obligation due Lessor from Lessee is unpaid (without regard to
whether notice thereof is given Lessee), or (iii) during the time Lessee is in
Breach of this Lease, or (iv) in the event that Lessor has given to Lessee three
(3) or more notices of separate Defaults under Paragraph 13.1 during the twelve
(12) month period immediately preceding the exercise of the Option, whether or
not the Defaults are cured.
(b) The period of time within which an Option may be exercised shall
not be extended or enlarged by reason of Lessee's inability to exercise an
Option because of the provisions of Paragraph 39.4(a)
(c) All rights of Lessee under the provisions of an Option shall
terminate and be of no further force or effect, notwithstanding Lessee's due and
timely exercise of the Option, it, after such exercise and during the term of
this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee
for a period of thirty (30) days after such obligation becomes due (without any
necessity of Lessor to give notice thereof to Lessee), or (ii) Lessor gives to
Lessee three (3) or more notices of separate Defaults under Paragraph 13.1
during any twelve (12) month period, whether or not the Defaults are cured, or
(iii) if Lessee commits a Breach of this Lease.
40. Rules and Regulations. Lessee agrees that it will abide by, and keep and
observe all reasonable rules and regulations ("Rules and Regulations") which
Lessor may make from time to time for the management, safety, care, and
cleanliness of the grounds, the parking and unloading of vehicles and the
preservation of good order, as well as for the convenience of other occupants or
tenants of the Building and the Industrial Center and their invitees.
41. Security Measures. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises, Lessee,
its agents and invitees and their property from the acts of third parties.
42. Reservations. Lessor reserves the right, from time to time, to grant,
without the consent or joinder of Lessee, such easements, rights of way, utility
raceways, and dedications that Lessor deems necessary, and to cause the
recordation of parcel maps and restrictions, so long as such easements, rights
of way, utility raceways, dedications, maps and restrictions do not reasonably
interfere with the use of the Premises by Lessee. Lessee agrees to sign any
documents reasonably requested by Lessor to effectuate any such easement rights,
dedication, map or restrictions.
43. Performance Under Protest. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one Party to the other under the provisions
hereof, the Party against whom the obligation to pay the money is asserted shall
have the right to make payment "under protest" and such payment shall not be
regarded as a voluntary payment and there shall survive the right on the part of
said Party to institute suit for recovery of such sum. If it shall be adjudged
that there was no legal obligation on the part of said Party to pay such sum or
any part thereof, said Party shall be entitled to recover such sum or so much
thereof as it was not legally required to pay under the provisions of this
Lease.
44. Authority. If either Party hereto is a corporation, trust, or general or
limited partnership, each individual executing this Lease on behalf of such
entity represents and warrants that he or she is duly authorized to execute and
deliver this Lease on its behalf. If Lessee is a corporation, trust or
partnership, Lessee shall, within thirty (30) days after request by Lessor,
deliver to Lessor evidence satisfactory to Lessor of such authority.
45. Conflict. Any conflict between the printed provisions of this Lease and the
typewritten or handwritten provisions shall be controlled by the typewritten or
handwritten provisions.
46. Offer. Preparation of this Lease by either Lessor or Lessee or Lessor's
agent or Lessee's agent and submission of same to Lessee or Lessor shall not be
deemed an offer to lease. This Lease is not intended to be binding until
executed and delivered by all Parties hereto.
47. Amendments. This Lease may be modified only in writing, signed by the
parties in interest at the time of the modification. The Parties shall amend
this Lease from time to time to reflect any adjustments that are made to the
Base Rent or other rent payable under this Lease. As long as they do not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable nonmonetary modifications to this Lease as may be reasonably required
by an institutional insurance company or pension plan Lender in connection with
the obtaining of normal financing or refinancing of the property of which the
Premises are a part.
48. Multiple Parties. Except as otherwise expressly provided herein, if more
than one person or entity is named herein as either Lessor or Lessee, the
obligations of such multiple parties shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or Lessee.
Initials:
MULTI-TENANT--MODIFIED NET
(C) American Industrial Real Estate Association 1993
-10-
<PAGE>
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
This lease has been prepared for submission to your attorney who will
review the document and assist you to determine whether your legal rights
are adequately protected. Cutler Commercial is not authorized to give legal
or tax advice; no representation or recommendation is made by Cutler
Commercial or its agents or employees as to the legal sufficiency, legal
effect or tax consequences of this document or any transaction relating
thereto. These are questions for your attorney with whom you should consult
before signing this document.
The parties hereto have executed this Lease at the place on the dates specified
immediately adjacent to their respective signatures.
BY LESSOR: CITY PARK LLC
(For Rental Payments) C/O 2150 EAST HIGHLAND STE 207
PHOENIX ARIZONA 85016-4721
- ------------------------------------------------------
Date: CLIFFORD J. CUTLER, ITS MANAGING MEMBER
NAME PRINTED: CLIFFORD J. CUTLER, ITS MANAGING MEMBER
BY LESSEE: CNF, INC.
(For Notices) 7722 EAST GRAY ROAD
SCOTTSDALE AZ 85260
BY: /s/ Illegible 4/7/98
- ------------------------------------------------------
NAME PRINTED: DAVID THOMPSON, ITS CFO
BY: /s/ David Thompson 4/7/98
- ------------------------------------------------------
NAME PRINTED: PAUL CHARLES, ITS PRESIDENT
BY: /s/ Paul Charles 4/7/98
- ------------------------------------------------------
MULTI-TENANT MODIFIED NET PAGE 11/NET-MULTI
<PAGE>
LEASE ADDENDUM TO
STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE MODIFIED NET
THIS LEASE ADDENDUM, pertaining to that certain Lease dated for reference
purposes only, April 01, 1998 , made by and between CITY PARK LLC ("Lessor") and
CNF, INC. ("Lessee"), (collectively the "Parties," or individually a "Party")
for that certain real property, including all improvements therein or to be
provided by Lessor under the terms of this Lease, and commonly known by the
street address of 7722 EAST GRAY ROAD, SUITE B, SCOTTSDALE, located in the
county of MARICOPA, State of ARIZONA with zip code 85260,
Lessor and Lessee agree to the following additional provisions:
1.) THE PREMISES ARE THOSE SHOWN ON EXHIBIT A (FLOOR PLAN) ATTACHED HERETO AND
MADE A PART HEREOF. THE PREMISES SHALL CONSIST OF AN AREA OF APPROXIMATELY
21,976 SQUARE FEET OF GROSS RENTABLE AREA ON THE GROUND AND FIRST FLOORS OF
THE BUILDING. THE EXACT AREA OF THE PREMISES SHALL BE CALCULATED ACCORDING
TO B.O.M.A. STANDARD BY THE LESSOR'S ARCHITECT.
2.) LESSOR'S IMPROVEMENTS, LESSOR, AT LESSOR'S EXPENSE, SHALL PERFORM THE
FOLLOWING WORK TO BE COMPLETED AS SOON AS REASONABLY POSSIBLE:
A.) WAREHOUSE - FIRST FLOOR
1.) ALL AIR CONDITIONING AND HEATING UNITS, SHIPPING DOORS,
MECHANICAL IN GOOD WORKING CONDITION.
2.) DELIVER ENTIRE WAREHOUSE FLOOR IN "BROOM-CLEAN" CONDITION.
3.) ERECT A DIVISION WALL (ACCORDING TO CITY AND STATE CODE) ALONG
COLUMN LINE AS SHOWN ON PLAN ATTACHED.
B.) OFFICES - SECOND FLOOR
1.) TOUCH UP PAINT ON OFFICE WALLS WHERE NECESSARY.
2.) DELIVER ALL CARPET IN SHAMPOOED AND VACUUM-CLEANED CONDITION.
3.) FIRST RIGHT OF REFUSAL TO LEASE ADJACENT SPACE.
PROVIDED LESSEE IS NOT IN DEFAULT OF ANY TERM, CONDITION, RULE OR
REGULATION OF THIS LEASE, LESSEE SHALL HAVE THE RIGHT OF FIRST REFUSAL TO
LEASE ANY ADJACENT SPACE THAT MAY BE OR BECOME AVAILABLE DURING THE TERM OF
THE LEASE.
SHOULD LESSOR RECEIVE A BONA FIDE OFFER TO LEASE THAT IS ACCEPTABLE TO
LESSOR REGARDING ADJACENT SPACE WITHIN THE BUILDING, LESSOR MUST NOTIFY
LESSEE IN WRITING OF HIS RECEIPT OF SUCH OFFER INCLUDING ITS TERMS AND
CONDITIONS WITHIN TWENTY-FOUR (24) HOURS. LESSEE SHALL THEN HAVE THREE (3)
BUSINESS DAYS TO RESPOND TO LESSOR. SHOULD LESSEE ADVISE LESSOR OF HIS
ACCEPTANCE, AND LESSEE SHALL EXERCISE ITS FIRST RIGHT OF REFUSAL, THE LEASE
TERM SHALL COMMENCE ON THE FIRST OF THE MONTH NEAREST THIRTY DAYS AFTER
LESSEE EXERCISES ITS FIRST RIGHT OF REFUSAL AND EXPIRE ON THE SAME DATE AS
THIS LEASE AGREEMENT.
4.) OPTION TO PURCHASE:
PROVIDED LESSEE IS NOT IN DEFAULT OF ANY TERM, CONDITION, RULE OR
REGULATION OF THIS LEASE AGREEMENT, LESSEE SHALL HAVE THE OPTION TO
PURCHASE THE BUILDING, TOGETHER WITH THE 1.62 ACRES OF LAND UPON WHICH IT
IS SITUATED IDENTIFIED BY TAX PARCEL NO. 162-35-620 (HEREINAFTER
COLLECTIVELY REFERRED TO AS THE "PROPERTY" FOR A PURCHASE PRICE OF TWO
MILLION FOUR HUNDRED THOUSAND DOLLARS AND N0/100 ($2,400,000.00). THIS
OPTION TO PURCHASE THE PROPERTY SHALL BE EXERCISABLE AT ANY TIME DURING THE
FIRST TWELVE (12) MONTHS OF THE LEASE TERM BY NOTIFYING LESSOR OF LESSEE'S
INTENT TO DO SO IN WRITING. FOLLOWING LESSOR'S RECEIPT OF WRITTEN NOTICE OF
LESSEE'S EXERCISING ITS OPTION, THERE SHALL BE A THIRTY (30) DAY PERIOD
WITHIN WHICH LESSEE AND LESSOR SHALL HAVE TO EXECUTE A PURCHASE AND SALE
AGREEMENT CONTAINING USUAL REPRESENTATIONS, WARRANTIES, CONDITIONS AND
ESCROW INSTRUCTIONS NORMALLY FOUND IN SUCH AN AGREEMENT. CLOSE OF ESCROW
SHALL TAKE PLACE WITHIN SIXTY (60) DAYS THEREAFTER. ESCROW INSTRUCTIONS
SHALL CONTAIN A COMMISSION OF FOUR PERCENT (4%) PAYABLE TO THE BROKERS (50%
TO CUTLER COMMERCIAL AND 50% TO CORE/JACKSON) UPON RECORDING OF THE SALE BY
ESCROW AGENTS LESS THE UNEARNED INCREMENT FROM THE LEASING COMMISSION.
FURTHERMORE, SHOULD LESSOR RECEIVE A BONA FIDE OFFER TO PURCHASE THAT IS
ACCEPTABLE FOR THE SALE OF THE PROPERTY, LESSOR MUST NOTIFY IN WRITING THE
LESSEE OF RECEIPT OF SUCH OFFER, INCLUDING ITS TERMS AND CONDITIONS WITHIN
TWENTY-FOUR (24) HOURS. THE LESSEE SHALL THEN HAVE THREE (3) CALENDAR DAYS
TO CONTEMPLATE SAID OFFER AND EXERCISE HIS FIRST RIGHT OF REFUSAL BY
NOTIFYING THE LESSOR IN WRITING OF HIS ACCEPTANCE OF SAID OFFER. SHOULD THE
LESSEE ADVISE LESSOR OF HIS ACCEPTANCE OF SAME, THEN THE SAME PROCEDURE AS
STATED ABOVE FOR THE EXERCISING OF THE OPTION TO PURCHASE SHALL APPLY, AND
THE TWO PARTIES SHALL PROCEED TO CLOSE OF ESCROW.
MULTI-TENANT MODIFIED NET PAGE 11/NET-NETADD-CNF.040198
<PAGE>
The parties hereto have executed this Lease at the place on the dates specified
immediately adjacent to their respective signatures.
BY LESSOR: CITY PARK LLC
- -------------------------------------------------------
Date: CLIFFORD J. CUTLER, ITS MANAGING MEMBER
NAME PRINTED: CLIFFORD J. CUTLER, ITS MANAGING MEMBER
BY LESSEE: CNF, INC.
BY: 4/7/98
- -------------------------------------------------------
Date
NAME PRINTED: DAVID THOMPSON, ITS CFO
BY: 4/7/98
- -------------------------------------------------------
Date
NAME PRINTED: PAUL CHARLES, ITS PRESIDENT
BY: 4/7/98
- -------------------------------------------------------
Date
MULTI-TENANT MODIFIED NET PAGE 11/NET-NETADD-CNF.040198
<PAGE>
EXHIBIT A
GUARANTEE
For value received, the undersigned absolutely guarantees all payments under
that certain Lease Agreement dated for reference purposes only, April 01, 1998
by and between CITY PARK LLC (as Lessor) and CNF, INC. (as Lessee) for the
premises known as 7722 EAST GRAY ROAD,, SUITE B, SCOTTSDALE AZ 85260, executed
by DAVID THOMPSON, ITS CFO and PAUL CHARLES, ITS PRESIDENT. If obligor breaches
any terms of the Lease Agreement, the undersigned will be liable thereon demand.
The undersigned waive notice of acceptance, notice of nonpayment, protest and
notice of protest with respect to the obligation covered hereunder.
This guarantee shall continue in force and apply to all transactions
notwithstanding any change in the makeup of the debtor's corporate board and
officers or board member.
Liability under this Agreement shall commence on the date of the Lease, and
shall continue the obligation guaranteed hereunder is completely discharged.
This guarantee shall continue in effect notwithstanding any legal disability of
the debtor to incur the indebtedness or obligation in full or in part.
The creditor may proceed against any or all of the guarantors for any amount
guaranteed hereunder whether action is brought against the debtor or whether the
debtor is joined in any such action or actions or not.
Creditor may without notice sell, assign or transfer all the indebtedness or
obligation covered hereunder. In that event, each and every immediate and
successive assignee, transferee, or holder of all or any part of the
indebtedness or obligation shall have the right to enforce this guarantee by
legal action or otherwise for the benefit of such assignee, transferee, or
holder as fully as if such assignee, transferee, or holder were herein named
specifically given such right and power.
Should suit be brought to recover on this guarantee, the guarantor(s) promise to
pay as attorney's fees, a reasonable amount additional to the amount found due
hereunder.
GUARANTOR: /s/ David Thompson
-----------------------------------
DAVID THOMPSON, ITS CFO
SOCIAL SECURITY NO: ###-##-####
GUARANTOR: /s/ Paul Charles
-----------------------------------
PAUL CHARLES, ITS PRESIDENT
HOME ADDRESS: 15645 CALLE ENRIQUE, MORGAN HILL, CA 95037
NEW ADDRESS: 7722 EAST GRAY ROAD, SUITE B
SCOTTSDALE, AZ 85260
MUTLI-TENANT MODIFIED NET PAGE 1/NET-MULTI
<PAGE>
DISCLOSURE REGARDING
REAL ESTATE AGENCY RELATIONSHIPS
(As required by the Civil Code)
When you enter into a discussion with a real estate agent regarding a real
estate transaction, you should from the outset understand what type of agency
relationship or representation you wish to have with the agent in the
transaction.
LESSOR or SELLER'S AGENT
A Lessor or Seller's agent under a listing agreement with Lessor or Seller acts
as the agent for the Lessor or Seller only. A Lessor or Seller's agent or a
subagent of that agent has the following affirmative obligations:
To the Lessor or Seller:
(a) A fiduciary duty of utmost care, integrity, honesty, and loyalty in
dealings with the Lessor or Seller.
To the Lessee/Buyer and Lessor/Seller:
(a) Diligent exercise of reasonable skill and care in performance of
agent's duties.
(b) A duty of honest and fair dealing and good faith.
(c) A duty to disclose all facts known to the agent materially affecting
the value or desirability of property that are not known to, or within
the diligent attention and observation of the parties.
An agent is not obligated to reveal to either party any confidential information
obtained from the other party which does not involve the affirmative duties set
forth above.
LESSEE OR BUYER'S AGENT:
A leasing/selling agent can with a Buyer's consent, agree to act as agent for
the Buyer only. In these situations, the agent is not the Lessor or Seller's
agent, even if by agreement the agent may receive compensation for services
rendered, either in full or in part from the Seller. An agent acting only for a
Buyer has the following affirmative obligations:
To the Lessee or Buyer;
(a) A fiduciary duty of utmost care, integrity, honesty, and loyalty in
dealings with the Lessee or Buyer.
To the Lessee/Buyer and Lessor/Seller:
(a) Diligent exercise of reasonable skill and care in performance of
agent's duties.
(b) A duty of honest and fair dealing and good faith.
(c) A duty to disclose all facts known to the agent materially affecting
the value or desirability of property that are not known to, or within
the diligent attention and observation of the parties.
An agent is not obligated to reveal to either party any confidential information
obtained from the other party which does not involve the affirmative duties set
forth above.
AGENT REPRESENTING BOTH LESSOR/SELLER AND LESSEE/BUYER:
A real estate agent, either acting directly or through one or more associate
licensees, can legally be the agent of both the Lessor/Seller and the
Lessee/Buyer in a transaction, but only with the knowledge and consent of both
the Lessor/Seller and the Lessee/Buyer.
In a dual agency situation, the agent has the following affirmative obligations
to both the Lessor/Seller and the Lessee/Buyer:
(a) A fiduciary duty of utmost care, integrity, honesty, and loyalty in
dealings with the Lessee or Buyer.
(b) Other duties to the Lessor/Seller and the Lessee/Buyer as stated above
in their respective sections.
In representing both Lessor/Seller and Lessee/Buyer, the agent may not, without
the express permission of the respective party, disclose to the other party that
the Lessor/Seller will accept a price than the listing price or the Lessee/Buyer
will pay a price greater than the price offered.
Throughout your real property transaction you may receive more than one
disclosure form, depending upon the number of agents assisting in the
transaction. The law requires each agent with whom you have more than a casual
relationship to present you with this disclosure form. You should read its
contents each time it is presented to you, considering the relationship between
you and the real estate agent in your specific transaction.
<PAGE>
CONFIRMATION
REAL ESTATE AGENCY RELATIONSHIPS
Subject Property Address: 7722 EAST GRAY ROAD B SCOTTSDALE AZ 85260
The following agency relationship(s) is/are confirmed for this transaction:
<TABLE>
<CAPTION>
CUTLER COMMERCIAL CORE JACKSON (MILIC):
- --------------------------------------------- ------------------------------------------------
<S> <C>
is the agent of (check one) is the agent of (check one)
/ / the Lessor/Seller exclusively; or / / the Lessee/Buyer exclusively; or
/ / both the Lessor/Seller and Lessee/Buyer / / the Lessor/Seller exclusively; or
/ / both the Lessee/Buyer and
Lessor/Seller
I/WE ACKNOWLEDGE RECEIPT OF A COPY OF THIS CONFIRMATION.
CITY PARK LLC
Lessor/Seller: Lessor/Seller:
---------------------------------- ----------------------------------
Date: Date:
------------------------------------------- -------------------------------------------
CNF, INC.
Lessee/Buyer: /s/ Paul Charles Lessee/Buyer: /s/ David Thompson
----------------------------------- -----------------------------------
Date: 4/7/98 Date: 4/6/98
------------------------------------------- -------------------------------------------
CUTLER COMMERCIAL:
BY: DATE:
---------------------------------------------------------------- ------------------------
CORE JACKSON (MILIC):
BY: DATE:
---------------------------------------------------------------- ------------------------
</TABLE>
A real estate broker is qualified to advise on real estate. If you desire Legal
Advice, please consult your attorney.
BROKERS FILE NO: BROKER INITIALS:
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DISTRIBUTION AGREEMENT
THIS DISTRIBUTION AGREEMENT ("Agreement"), is entered into this 19th day of
February, 1998, by and between INGRAM MICRO INC. ("Ingram"), a Delaware
corporation, having its principal place of business at 1600 E. St. Andrew Place,
Santa Ana, California 92705, and CNF, Inc. ("Vendor"), a California corporation,
having its principal place of business at 15345 Calle Enrique, Morgan Hill,
California 95037. The parties desire to and hereby do enter into a
distributor/supplier relationship, the governing terms and mutual promises of
which are set out in this Agreement.
1. DISTRIBUTION RIGHTS
1.1 Territory Vendor grants to Ingram, including its affiliates for resale, and
Ingram accepts, the nonexclusive right to distribute worldwide all computer
products produced and/or offered by Vendor ("Product") during the term of this
Agreement. Ingram shall have the right to purchase, sell and ship to any
reseller within the territory or to Ingram's affiliate, or at Vendor's option
Ingram's affiliate may purchase direct from Vendor.
1.2 Product Vendor agrees to make available and to sell to Ingram such Product
as Ingram shall order from Vendor at the prices and subject to the terms set
forth in this Agreement. Ingram shall not be required to purchase any minimum
amount or quantity of the Product.
2. TERM AND TERMINATION
2.1 Term The initial term of this Agreement shall be for a period of twelve (12)
months, beginning on the date first above written. Vendor shall achieve and
maintain an average sell thru rate of fifty thousand dollars ($50,000) per month
during the initial term, otherwise Ingram will review for possible contract
termination. In the event such sell thru rate is attained Ingram will extend the
term an additional twelve (12) months. Thereafter, this Agreement shall be
renewed for successive one (1) year terms without further notice, unless
terminated sooner as provided under the provisions of this Agreement.
2.2 Termination
(a) Either party may terminate this Agreement, with or without cause, by
giving thirty (30) days written notice to the other party.
(b) Either party may immediately terminate this Agreement with written
notice if the other party:
(i) materially breaches any term of this Agreement and such breach
continues for thirty (30) business days after written
notification thereof; or
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(ii) ceases to conduct business in the normal course, becomes
insolvent, makes a general assignment for the benefit of
creditors, suffers or permits the appointment of a receiver for
its business or assets, or avails itself of or becomes subject
to any proceeding under any Bankruptcy Act or any other federal
or state statute relating to insolvency or the protection of
rights of creditors; or
(iii) attempts to assign or otherwise transfer its rights hereunder
unless both have agreed in writing to such assignment or
transfer.
3. INGRAM OBLIGATIONS
3.1 Product Availability Ingram will list Product in its catalog(s) as
appropriate and endeavor to make such Product available to customers.
3.2 Advertising Ingram will advertise and/or promote Product in a commercially
reasonable manner and will transmit as reasonably necessary Product information
and promotional materials to its customers.
3.3 Support Ingram will make its facilities reasonably available for Vendor and
will assist in Product training and support. Ingram will provide reasonable,
general Product technical assistance to its customers, and will direct all other
technical issues directly to Vendor.
3.4 Administration
(a) Upon request, Ingram will furnish Vendor with a valid tax exemption
certificate.
(b) Ingram will provide Vendor standard sales-out and inventory reports via
its electronic Bulletin Board System.
(c) Ingram may handle its customers' Product returns by batching them for
return to Vendor at regular intervals.
4. VENDOR OBLIGATIONS
4.1 Shipping/Export
(a) Vendor shall ship Product pursuant to Ingram purchase order(s)
("P.O."). Product shall be shipped F.O.B. Ingram's designated warehouse with
risk of loss or damage to pass to Ingram upon delivery to the warehouse
specified in Ingrain's P.O.
(b) Ingram requires concurrent with the execution of this Agreement Export
Administration Regulations product classification and supporting documentation:
Certificate of Origin (General Use and/or NAFTA), Export Commodity Control
Number's; (ECCN's), General License and/or Individual Validated License
information and Schedule "B"/Harmonized
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Numbers. This applies when distribution rights granted under Section 1.1 are
outside the United States for the initial Product/s and when additions or
changes to these Products occurs.
4.2 Invoicing For each Product shipment to Ingram, Vendor shall issue to Ingram
an invoice showing Ingram's order number, the Product part number, description,
price and any discount. At least monthly, Vendor shall provide Ingram with a
current statement of account, listing all invoices outstanding and any payments
made and credits given since the date of the previous statement.
4.3 Product Availability Vendor agrees to maintain sufficient Product inventory
to fill Ingram's orders. If a shortage of any Product exists, Vendor agrees to
allocate its available inventory of such Product to Ingram in proportion to
Ingram's percentage of all of Vendor's customer orders for such Product during
the previous sixty (60) days.
4.4 Product Marking Vendor will clearly mark each unit of Product with the
Product name and computer compatibility. Such packaging will also bear a
machine-readable bar code identifier scannable in standard Uniform Product Code
(UPC) format. The bar code must identify the Product as specified by the Uniform
Code Council (UCC). If the Vendor or Ingram customers' require serial number
tracking the serial number must be clearly marked and bar coded on the outside
of the individual selling unit. The bar code shall fully comply with all
conditions regarding standard product labeling set forth in Exhibit B in the
then-current Ingram Guide to Bar Code: The Product Label. Vendor may be assessed
a reasonable per unit charge for all Product not in conformance herewith.
4.5 TechNotes Vendor will within thirty (30) days of execution of this Agreement
sign the CIS/ Manufacture Product Information Library - TechNotes and Content
Distribution Agreements as shown in Exhibit C and provide the required product
information in the designated template format.
4.6 Support At no charge to Ingram, Vendor shall support Product and any
reasonable Ingram efforts to sell Product. Vendor shall also provide to Ingram,
its employees, and its customers reasonable amounts of sales literature,
advertising materials, and training and support in Product sales.
4.7 New Product Vendor shall endeavor to notify Ingram at least thirty (30) days
before the date any new Product is introduced. Vendor shall make such Product
available for distribution by Ingram no later than the date it is first offered
for sale in the marketplace.
4.8 Insurance Vendor shall carry insurance coverage for product
liability/completed operations with minimum limits of two million dollars
($2,000,000). Within ten (10) days of full execution of this Agreement, Vendor
shall provide Ingram with a Certificate of Insurance. This Certificate of
Insurance must include: (i) a broad form endorsement naming Ingram as an
additional insured, and (ii) a mandatory thirty (30) day notice to Ingram of
insurance cancellation.
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4.9 Warranties/Certification
(a) General Warranty Vendor represents and warrants that (i) it has good
transferable title to the Products, (ii) the Product will perform in conformity
with specifications and documentation supplied by Vendor, (iii) the Product or
its use does not infringe any patents, copyrights, trademarks, trade secrets, or
any other intellectual property rights, (iv) that there are no suits or
proceedings pending or threatened which allege any infringement of such
proprietary rights, and (v) the Product sales to Ingram do not in any way
constitute violations of any law, ordinance, rule or regulation in the
distribution territory.
(b) Warranty Vendor hereby represents and warrants that any Product offered
for distribution does not contain any obscene, defamatory or libelous matter or
violate any right of publicity or privacy.
(c) End-User Warranty Vendor shall provide a warranty statement with
Product for end user benefit. This warranty shall commence upon Product delivery
to end-user.
(d) Millennium Compliance Warranty Vendor warrants and represents that the
Product will properly (a) record, store, process, calculate or present calendar
dates falling on and after (and if applicable, spans of time including) January
1, 2000 as a result of the occurrence, or use of data consisting of, such dates
and (b) calculate any information dependent on or relating to dates on or after
January 1, 2000 in the same manner, and with the same functionality, data
integrity and performance, as such Product records, stores, processes,
calculates and presents calendar dates on or before December 31, 1999, or
information dependent on or relating to such dates.
(e) Class B Warranty Vendor hereby represents and warrants that the Product
has been or will be at the time of shipment certified as a Class B computing
device as required by the rules of the U.S.A. Federal Communications Commission
("FCC Rules").
(f) EU Warranty Vendor further warrants and represents for Products
distributed to the European Union ("EU") that the Products will be accepted
under all EU directives, regulations and the EU country's legislation.
(g) Made in America Certification Vendor by the execution of this Agreement
certifies that it will not label any of its products as being "Made in America,"
"Made in U.S.A.," or with similar wording, unless all components or elements of
such Product is in fact made in the United States of America. Vendor further
agrees to defend, indemnify and hold harmless from and against any and all
claims, demands, liabilities, penalties, damages, judgments or expenses
(including attorney's fees and court costs) arising out of or resulting in any
way from Product that does not conform to the Certification.
4.10 Sell Through Vendor shall achieve and maintain an average sell through of
one hundred thousand dollars ($100,000) per month combined for all Products.
Vendor shall
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pre-pay all marketing expenditures by Ingram during the first ninety (90) days
("initial period") and thereafter in the event the sell through rate either (i)
fails to achieve this amount after the initial period, or (ii) at any time
thereafter when such rate is not maintained.
4.11 Rebate Vendor will pay Ingram a three percent (3%) quarterly rebate based
on gross sales. The rebate will be paid by check within thirty (30) days after
the quarter end. If no check is received within that period Ingram shall deduct
that amount from the Vendor's next payment.
5. PRICING
5.1 Ingram Pricing The suggested retail price and any Ingram discount for
Product is set out in Exhibit D. Vendor may modify Exhibit D with a minimum of
thirty (30) days advance written notice to Ingram. All Ingram orders for Product
will be billed at the price in effect when the order is placed. Ingram shall
have sole discretion as to selling price of Product to its customers.
5.2 Vendor Pricing Vendor agrees that the prices and terms it offers to Ingram
are now and will continue to be at least as low as those it offers to any of its
customers excluding Original Equipment Manufacturer ("OEM") accounts. If Vendor
offers price discounts, promotional discounts or other special prices to its
other customers excluding OEM accounts, Ingram shall also be entitled to
participate in and receive notice of the same no later than Vendor's other non
OEM customers.
5.3 International Pricing If Vendor offers a better price outside the U.S. and
Ingram has distribution rights in that territory then the same price shall be
offered to Ingram for Product sales into that territory.
5.4 Price Adjustments If Vendor reduces any Product price, or offers increased
discounts to any customers excluding OEM accounts, Vendor will promptly credit
Ingram for the difference between the original Product price and the reduced
Product price for Ingram's and its customers' Product inventory, including: (i)
any Customer Product in-transit from/to Ingrain, (ii) any unshipped orders, and
(iii) orders in-transit to Ingram on the price reduction or increased discount
offer date. In the event that Vendor shall raise the list price of a Product,
all orders for such Product placed prior to the effective date of the price
increase shall be invoiced at the lower price. Vendor shall provide Ingram with
thirty (30) days advance notice of any price increases.
5.5 Payment Terms Vendor will issue invoices concurrently with Product shipments
to Ingram. Ingram will pay Vendor one time per month for any invoices not held
in reserve for: (i) Product on hand at Ingram, (ii) Product on hand at resellers
who have purchased Vendor's product from Ingram, (iii) Product in transit to
Ingram from resellers, (iv) marketing programs which will occur in the near
future, and (v) for any outstanding debit or invoice to Vendor.
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5.6 Right to Withhold Notwithstanding any other provision in this Agreement to
the contrary, Ingram shall not be deemed in default if it withholds any specific
amount to Vendor because of a legitimate dispute between the parties as to that
specific amount pending the timely resolution of the disputed amount.
6. MARKETING
6.1 Trademarks Ingram may advertise and promote the Product and/or Vendor, and
may thereby use Vendor's trademarks, service marks and trade names. Neither
party shall acquire any rights in the trademarks, service marks or trade names
of the other.
6.2 Advertising
(a) Vendor agrees to cooperate with Ingram in advertising and promoting the
Product and/or Vendor and hereby grants Ingram a cooperative advertising
allowance of two percent (2%) of invoice amounts for Product purchased by Ingram
from Vendor to the extent that Ingram or customer/dealers use the allowance for
any advertising and promoting which features Product and/or Vendor. Upon receipt
of reasonable evidence of advertising expenditures, Vendor agrees to credit the
amount of any such expenditures against future purchases by Ingram.
(b) Vendor agrees to provide Marketing Development Funds ("MDF") of one
percent (1%) of invoice amounts for Product purchased by Ingram from Vendor.
6.3 Programs
(a) Ingram may offer marketing programs to Vendor including but not limited
to launch programs and reseller pass through opportunities. If Vendor elects to
participate, Vendor agrees to pay such funds as may be required for this
purpose.
(b) Vendor shall provide in addition to amounts under 6.2 (a) & (b), thirty
thousand dollars ($30,000) to be used during the first three (3) months for
Product launch. A check for this amount shall be issued to Ingram concurrent
with the execution of this Agreement. Thereafter, Vendor shall pre-pay all
marketing and promotional activities until a sales rate of one hundred thousand
dollars ($100,000) per month is achieved. Ingram shall prepare, implement and
review with Vendor marketing plans funded by these expenditures.
6.4 Support Product Vendor shall consign a reasonable amount of demonstration
Product to aid Ingram in its support and promotion of Product. All such
consigned Product will be returned to Vendor upon request.
7. RETURNS
7.1 Stock Balancing Notwithstanding anything herein to the contrary, Ingram may
return throughout the term any Products which are in their original packaging to
Vendor for full credit
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of the Products' purchase price. In the event that a Return Material
Authorization (RMA) for the return of Product is not issued within five (5) days
of the request, Ingram shall have the right to return any Product(s) to Vendor
without an RMA, and Vendor shall be obligated to accept such return for credit.
Ingram will pay all freight charges for returned Products.
7.2 Post-Term/Termination For one hundred eighty (180) days after the expiration
or earlier termination of this Agreement, Ingram may return to Vendor any
Product for credit against outstanding invoices, or if there are no outstanding
invoices for a cash refund. Any credit or refund due Ingram for returned Product
shall be equal to the Product purchase price. Ingram will pay all freight
charges for returned Products.
7.3 Product Discontinuation Vendor shall give Ingram thirty (30) days' advance
written notice of Product discontinuation. Ingram may return all such Product to
Vendor for full credit of Product purchase price plus all freight charges
incurred by Ingram in returning the Product.
7.4 Defective Product
(a) Ingram may return any Product to Vendor that Ingram or its customer
finds defective. Vendor shall immediately credit Ingram for the Product purchase
price, plus all freight charges incurred by Ingram in returning the defective
Product.
(b) If any Product is recalled by Vendor because of defects, revisions or
upgrades, Ingram will, at Vendor's request, provide reasonable assistance with
the recall. Vendor will pay Ingrain's expenses in connection with such recall.
8. INDEMNIFICATION
8.1 Product Indemnity Vendor shall defend, indemnify, and hold harmless Ingram
from and against any claims, demands, liabilities, or expenses (including
attorney's fees and costs) for any injury or damage, including, but not limited
to, any personal or bodily injury or property damage, arising out of or
resulting in any way from any defect in Products. This duty to indemnify Ingram
shall be in addition to the warranty obligations of Vendor.
8.2 General Indemnity Each party shall indemnify, defend and hold the other
harmless from and against any and all claims, actions, damages, demands,
liabilities, costs and expenses, including reasonable attorney's fees and
expenses, resulting from any act or omission of the acting party or its
employees under this Agreement, that causes or results in property damage,
personal injury or death.
8.3 Intellectual Property Rights Indemnity Vendor shall defend, indemnify and
hold Ingram, its resellers and their customers, harmless from and against all
damages and costs incurred by any of them arising from the infringement of any
patent, copyright, trademark, trade secret or other proprietary right by reason
of the manufacture, sale, marketing, or use of Product.
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8.4 Product Infringement Upon infringement, Vendor may, at its expense and
option (i) procure the right to continue using any part of Product, (ii) replace
the infringing Product with a non-infringing Product of similar performance, or
(iii) modify Product to make it non-infringing, or provide Ingram with written
assurances that the claim is unsupportable. In either case, Vendor shall defend,
indemnify and hold Ingram, its resellers and their customers, harmless from and
against all damages and costs incurred by any of them arising from a claim of
infringement. If Vendor does not so act within ninety (90) days after such
claim, Ingram may return Product to Vendor for a full credit against future
purchases or for a cash refund, at Ingram's option.
8.5 Multi-Media Indemnity Vendor shall defend, indemnify and hold Ingram, its
resellers and their customers, harmless from and against all damages and costs
incurred by any of them to the extent it is based upon a claim that the Product
either (i) violates a third party's right of publicity and/or right of privacy,
or (ii) contains any obscene, defamatory or libelous matter.
8.6 European Indemnity For Products distributed to a country of the EU, the
Vendor accepts full responsibility for, and will indemnify Ingram for, all costs
and damages arising from any non-compliance with any manufacturer-directed EU
decree, regulation or directive.
8.7 Millennium Compliance Indemnity Vendor agrees to indemnify and hold Ingram
and its shareholders, officers, directors, employees, agents, successors, and
assigns harmless from and against any and all claims, suits, actions,
liabilities, losses, costs, reasonable attorney's fees, expenses, judgments or
damages, whether ordinary, special or consequential, resulting from any third
party claim made or suit brought against Ingram or such persons, to the extent
such results from Vendor's breach of the warranty specified in Section 4.9(d).
8.8 Limitation of Liability NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR LOST
PROFITS OF BUSINESS, INDIRECT, CONSEQUENTIAL OR PUNITIVE DAMAGES, WHETHER BASED
IN CONTRACT OR TORT (INCLUDING NEGLIGENCE, STRICT LIABILITY OR OTHERWISE), AND
WHETHER OR NOT ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
THIS LIMITATION IS IN NO WAY MEANT TO LIMIT VENDOR'S LIABILITY FOR PERSONAL
INJURY OR DEATH AS A RESULT OF A DEFECT IN ANY PRODUCT IN THOSE JURISDICTIONS
WHERE THE LAW DOES NOT ALLOW THIS LIMITATION.
9. COMPLIANCE WITH FEDERAL LAWS AND REGULATIONS
9.1 Executive Order 11246 Vendor agrees to include the Equal Employment
Opportunity Clause by reference in every contract, agreement and purchase order
entered into with subcontractors or suppliers as required by 41 CFR 60-1.4.
9.2 Employer Information Report EEO-1/ Written Affirmative Action Program Vendor
agrees that if the value of any contract or purchase order is fifty thousand
dollars ($50,000) or
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more and the Vendor has fifty (50) or more employees, Vendor will (i) file an
EEO-1 report (Standard Form 100) and comply with and file such other compliance
reports as may be required under Executive Order 11246, as amended, and Rules
and Regulations adopted thereunder and (ii) will develop a written affirmative
action compliance program for each of its establishments as required by Title 41
CFR 60-1.40.
9.3 Veterans Employment Clause Vendor agrees to abide by and comply with the
provisions of the Affirmative Action Clause, 41 CFR 60-250.4.
9.4 Employment of Handicapped Persons Vendor agrees that it will abide by and
comply with the provisions of the Affirmative Action Clause, 41 CFR 60-741.4.
9.5 Small Business Concerns and Small Business Concerns Owned and Controlled by
Socially and Economically Disadvantaged Individuals Where a government contract
is expected to exceed five hundred thousand dollars ($500,000), Vendor agrees to
comply with all requirements of P.L. 95-507 and regulations promulgated
thereunder. Vendor shall comply with instructions contained in Exhibit E.
9.6 Women-Owned Business Concerns Vendor shall comply with instructions
contained in Exhibit E. Where a government contract is expected to exceed five
hundred thousand dollars ($500,000), Vendor agrees to comply with all
requirements of Executive Order 12138 and all regulations promulgated
thereunder.
10. GOVERNMENT PROGRAM
10.1 Partnership America Vendor may, at its sole option, participate in Ingram's
government reseller program in which case the provisions of Exhibit F,
Partnership America, shall apply. A draft copy is provided solely for your
information and review.
11. GENERAL PROVISIONS
11.1 Notices Any notice which either party may desire to give the other party
must be in writing and may be given by (i) personal delivery to an officer of
the party, (ii) by mailing the same by registered or certified mail, return
receipt requested, to the party to whom the party is directed at the address of
such party as set forth at the beginning of this Agreement, or such other
address as the parties may hereinafter designate, and (iii) by facsimile or
telex communication subsequently to be confirmed in writing pursuant to item
(ii) herein.
11.2 Governing Law This Agreement shall be construed and enforced in accordance
with the laws of the State of California, except that body of law concerning
conflicts of law. The United Nations Convention on Contracts for the
International Sale of Goods shall not apply to this Agreement.
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11.3 Cooperation Each party agrees to execute and deliver such further documents
and to cooperate as may be necessary to implement and give effect to the
provisions contained herein.
11.4 Force Majeure Neither party shall be liable to the other for any delay or
failure to perform which results from causes outside its reasonable control.
11.5 Attorneys Fees In the event there is any dispute concerning the terms of
this Agreement or the performance of any party hereto pursuant to the terms of
this Agreement, and any party hereto retains counsel for the purpose of
enforcing any of the provisions of this Agreement or asserting the terms of this
Agreement in defense of any suit filed against said party, each party shall be
solely responsible for its own costs and attorney's fees incurred in connection
with the dispute irrespective of whether or not a lawsuit is actually commenced
or prosecuted to conclusion.
11.6 Export Regulations Ingram agrees by the purchase of Products to conform to,
and abide by, the export laws and regulations of the United States, including
but not limited to, the Export Administration Act of 1979 as amended and its
implementing regulations. Ingram shall include a statement in it's standard
sales terms and conditions that any shipment of Product outside the United
States will require a valid export license. Ingram further agrees to distribute
Product in accordance with the territory as defined in Section 1.1. Whenever a
EU country is specified as Territory under Section 1.1, Territory shall include
all EU countries.
12. AGREEMENT
12.1 Counterparts This Agreement may be executed in one or more counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
12.2 Section Headings Section headings in this Agreement are for convenience
only, and shall not be used in construing the Agreement.
12.3 Incorporation of all Exhibits Each and every exhibit referred to
hereinabove and attached hereto is hereby incorporated herein by reference as if
set forth herein in full.
12.4 Severability A judicial determination that any provision of this Agreement
is invalid in whole or in part shall not affect the enforceability of those
provisions found to be valid.
12.5 No Implied Waivers If either party fails to require performance of any duty
hereunder by the other party, such failure shall not affect its right to require
performance of that or any other duty thereafter. The waiver by either party of
a breach of any provision of this Agreement shall not be a waiver of the
provision itself or a waiver of any breach thereafter, or a waiver of any other
provision herein.
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12.6 Binding Effect/Assignment This Agreement shall be binding upon and shall
inure to the benefit of the parties hereto, and their respective
representatives, successors and permitted assigns. This Agreement shall not be
assignable by Vendor, without the express written consent of Ingram, which
consent shall not be unreasonably withheld, including to a Person in which it
has merged or which has otherwise succeeded to all or substantially all of such
party's business and assets to which this Agreement pertains and which has
assumed in writing or by operation of law its obligations under this Agreement.
Any attempted assignment in violation of this provision will be void.
12.7 Survival Sections 5.5 (Payment Terms), 5.6 (Right to Withhold), 7.2
(Post-Term Termination) and 8. (Indemnification) shall survive the expiration or
earlier termination of this Agreement.
12.8 Entire This Agreement constitutes the entire agreement between the parties
regarding its subject matter. This Agreement supersedes any and all previous
proposals, representations or statements, oral or written. Any previous
agreements between the parties pertaining to the subject matter of this
Agreement are expressly terminated. The terms and conditions of each party's
purchase orders, invoices, acknowledgments/confirmations or similar documents
shall not apply to any order under this Agreement, and any such terms and
conditions on any such document are objected to without need of further notice
or objection. Any modifications to this Agreement must be in writing and signed
by authorized representatives of both parties.
12.9 Authorized Representatives Either party's authorized representative for
execution of this Agreement or any amendment hereto shall be president, a
partner, or a duly authorized vice president of their respective party. The
parties executing this Agreement warrant that they have the requisite authority
to do so.
IN WITNESS WHEREOF, the parties hereunto have executed this Agreement.
"Ingram" "Vendor"
Ingram Micro Inc. CNF, Inc.
1600 E. St. Andrew Place 15345 Calle Enrique
Santa Ana, California 92705 Morgan ill, California 9503
By: /s/ Michael Terrell By: /s/ David G. Thompson
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Name: Michael Terrell Name: David G. Thompson
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Title: Vice President Purchasing Title: CFO
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Date: May 28, 1998 Date: 4/9/98
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*AGREEMENT MUST BE SIGNED BY PRESIDENT OR BY A DULY AUTHORIZED VICE PRESIDENT OR
PARTNER.
EXHIBITS:
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A - Vendor Routing Guide (if applicable)
B - Guide to Bar Code: The Product Label
C - TechNotes
D - Product Price List
E - Small And Disadvantaged Business Certification
F - Partnership America
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AMENDMENT #1 to the
DISTRIBUTION AGREEMENT
THIS AMENDMENT (the "Amendment") is entered into this 2nd day of June, 1999, by
and between INGRAM MICRO INC. ("Ingram") and CNF Mobile Solutions, Inc., a
wholly owned subsidiary of CNF Technologies, Inc. ("Vendor").
The parties have agreed to amend their Distribution Agreement ("Agreement")
dated February 19, 1998.
1. Due to the merge of CNF, Inc. ("CNF") and JLL Ventures, Inc. ("JLL"),
replace the name with CNF Mobile Solutions, Inc., a wholly owned subsidiary
of CNF Technologies, Inc. with principal place of business at 7722 E. Gray
Rd., Scottsdale, Az. 85260
2. Section 2.1, Term - Delete the 2nd & 3rd sentences.
3. Section 4.10, Sell Through - Delete the 2nd sentence.
4. Section 4.11, Rebate - Delete the entire section.
5. Section 5.5, Payment Terms - Replace the words in the 2nd sentence "Ingram
will pay Vendor one time per month ........" with "Ingram will pay Vendor
net thirty (30) days from the invoice date ........".
6. Section 6.3(b), Programs - Delete the entire section.
7. This Amendment shall remain in effect for the current term and any renewal
term of the Agreement.
INGRAM MICRO INC. CNF Mobile Solutions, Inc.
1600 East St. Andrew Place 7722 E. Gray Road
Santa Ana, CA 92705 Scottsdale, Arizona 85260
By: /s/ Tim Jeffries By: /s/ David G. Thompson
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Name: Tim Jeffries Name: David G. Thompson
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Title: GM, Storage & Components Title: CFO
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JLL Ventures, Inc. 1 Confidential
(Doc Rev 2/97) 6/2/99
DISTRIBUTOR AGREEMENT
This Distributor Agreement (the "Agreement") is made by and between CNF,
Inc., a California corporation ("Supplier") and Merisel Americas, Inc., a
Delaware corporation ("Distributor"). Supplier and Distributor hereby agree as
follows:
1. Distribution Rights. Supplier grants to Distributor the non-exclusive
worldwide right and license to distribute Supplier's Products to Distributor's
customers; provided, that Distributor may at any time during the term of this
Agreement assign its rights and obligations under this Agreement to one or more
of Distributor's direct or indirect subsidiaries or affiliates (individually, a
"Subsidiary") with respect to specific territories around the world, and each
Subsidiary shall thereafter have the rights and obligations of Distributor
hereunder with respect to the territory assigned to it as if such Subsidiary had
entered into this Agreement directly with Supplier. "Products" shall include all
of Supplier's products set forth on Exhibit A hereto and any other products
manufactured or marketed by Supplier during the term of this Agreement and
intended for sale by resellers. Supplier has provided Distributor a list of all
other distributors purchasing Products from Supplier as of the date hereof, and
Supplier shall give Distributor at least thirty (30) days' prior written notice
of the appointment of any other distributor in the United States or Canada of
any of its Products during the term of this Agreement, and shall make reasonable
efforts to notify Distributor of any distributors appointed outside the United
States and Canada, prior to such appointment.
2. Price and Payment Terms.
2.1 Retail Price and Discount. The purchase price payable for any Product
ordered by Distributor shall be equal to Supplier's published suggested retail
price for the Product less a discount off such suggested retail price. Suggested
retail prices, Distributor and Reseller discount amounts and purchase prices for
the Products are set forth on Exhibit A. In the event Supplier wishes to change
the suggested retail price of any Product, Supplier shall give Distributor at
least thirty (30) days' prior written notice of the change, specifying the new
suggested retail price, discount amount (determined using the above discount
percentage) and purchase price payable by Distributor. In the event any new
Product is manufactured or marketed by Supplier during the term of the
Agreement, Supplier shall notify Distributor in writing of the suggested retail
price, discount amount (determined using the above discount percentage) and
purchase price payable by Distributor.
2.2 Price Protection. (a) If the purchase price of any Product is
increased, Supplier shall honor any Distributor purchase orders placed prior to
the effective date of the increase at the price in effect immediately prior to
the time the increased is announced.
(b) If the purchase price of any Product is decreased, Supplier shall grant
Distributor a credit in the amount of the price decrease for each unit of the
Product that is or has been (i) on order or in transit to Distributor on the
effective date of the price decrease, and (ii) in Distributor's inventory on the
effective date of the decrease. In addition, Distributor and Supplier shall
mutually agree upon which Resellers shall be entitled to price protection from
Supplier and Supplier shall grant Distributor a price protection credit for each
price protection request submitted by such Resellers provided the price
protection request is placed with Distributor within the thirty (30) days
following the effective date of the price decrease. In order to receive any
credits hereunder, Distributor shall provide Supplier with a report or reports
specifying the number of units for which credits are requested, and Supplier
shall grant such credits within thirty (30) days after receipt of any such
report. In the event Supplier has not granted such credit(s) to Distributor
within such thirty (30) day period, Distributor shall have the right to deduct
such credit(s) from any amounts due Supplier under this Agreement at such time.
In the event no amounts are due to Supplier at such time, Distributor shall have
the right to request cash payment of such credit amount by Supplier, in
accordance with Section 2.6 of this Agreement. Should Supplier have reasonable,
valid cause to question or contest any credit requested under this
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Section 2.2, Supplier shall contest such amount or pose such question within
thirty (30) days following Supplier's receipt of Distributor's report(s) as
described hereinabove or Supplier shall waive its rights to contest or question
such credits and shall remit such credit amounts to Distributor as described in
this Section 2.2.
(c) Section 2.2(b) shall apply to all Subsidiaries that have the rights of
Distributor hereunder (and also for Merisel Americas, Inc. to the extent Product
is held in inventory outside of the United States or ordered from a location
outside of the United States).
2.3 Payment Terms. All payments made to either party under this Agreement
shall be due and payable in United States Dollars. Payments to Supplier with
respect to all Products received by Distributor Supplier shall be due and
payable within thirty (30) days after the shipment date of the Products ordered.
All payments shall be subject to (i) a two percent (2%) discount if payment is
made within net fifteen (15) days of the date of receipt of Products and (ii) a
three percent (3%) discount if payment is made prior to the receipt of the
Products ordered.
2.4 Rebates. Supplier and Distributor agree to enter into rebate
discussions within one (1) year following the date of execution of this
Agreement. In the event Distributor achieves the Quarterly Sales Goal in any
quarter which occurs after such rebates have been established, (as they may be
adjusted from time to time pursuant to Exhibit A), Supplier shall pay
Distributor a rebate in the amount determined pursuant to Exhibit A within
thirty (30) days after receipt of a sales report from Distributor setting forth
its sales results.
2.5 Most Favored Customer. Supplier agrees that the discounts, purchase
prices, payment terms and other terms and conditions of sale for any Product
shall not at any time be less favorable to Distributor than the discounts,
purchase prices, payment terms and other terms and conditions of sale for the
Products offered by Supplier to any other distributor or aggregator.
2.6 Recoupment (a) Distributor shall have the right of recoupment with
respect to all amounts owed to it by Supplier under this Agreement. Any amounts
payable to Distributor under this Agreement for any reason (including, without
limitation, for price protection, product returns, marketing funds or Frequent
Buyer Program funds) shall first be applied as a credit by Distributor and shall
reduce any uncontested amounts owed by Distributor to Supplier. In the event
that Distributor maintains a credit balance with Supplier after application of
credits, Supplier shall pay Distributor the amount of the remaining credit
balance within thirty (30) days via an instrument acceptable to Distributor
(which may include, but shall not be limited to, in Distributor's sole option,
by cash, company check, cashier's check, or wire transfer).
(b) Distributor shall have the right of recoupment with respect to any
amounts owed by it to Supplier. Any amounts owed to Supplier by Distributor
under this Agreement for any reason (including, without limitation, for the
purchase of products) shall first be reduced by any amounts owed to Distributor
by Supplier. In the event that Distributor maintains a debit balance with
Supplier after such reduction (including the application of credits),
Distributor shall have the right, in its sole option, to either: (i) return
Products in Distributor's inventory to Supplier for credit in the amount of the
purchase price paid for such Products, less any credits previously issued to
Distributor under Section 2.2 hereof, which credit shall be applied to the
amounts owed by Distributor to Supplier; or (ii) pay Supplier the amount owed by
Distributor to Supplier. Irrespective of which option Distributor selects,
Distributor shall retain all future rights to return Product as set forth in
this Agreement.
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3. Orders and Shipping.
3.1 Order Placement. Distributor shall place orders for Products with
Supplier in writing. Supplier shall use reasonable efforts to deliver Products
to Distributor within ten (10) days of the date of Distributor's order.
Distributor shall have no obligation to order any minimum quantity of Products.
3.2 Allocation. In the event of any shortage of Products, upon order by
Distributor Supplier shall ship to Distributor at least as many units of Product
as Supplier ships to any other customer. In the event any Product is subject to
limited availability at any time and Distributor has placed orders for such
Product, either prior to the date such Product becomes subject to limited
availability, or during such time as such Product is subject to limited
availability, Supplier agrees to contact Distributor prior to shipping any order
for such Product, and Distributor shall have the right, in its sole option and
without liability, to cancel any existing order for such Product(s).
3.3 Title and Risk of Loss. Products shall be shipped F.O.B. to the
Distributor warehouse specified in the order. Any freight costs for Products
shipped to Distributor's United States locations shall be paid by Supplier and
Supplier shall have access to Distributor's negotiated freight rates with
Distributor's designated carrier. Distributor agrees to utilize such designated
carrier for all shipments unless both parties mutually agree on an alternate
shipping method.
3.4 Incorrect or Erroneous Shipment. In the event the Product(s) shipped to
Distributor does not conform to the Product description for such Product set
forth on the applicable purchase order for such Product(s), Distributor shall
contact Supplier, and Supplier shall use reasonable efforts to ship the correct
Product(s) to the United States location specified by Distributor within ten
(10) business days of Distributor's notification of such misshipment to Supplier
at no additional cost to Distributor. Distributor shall obtain a Return Material
Authorization number, as is set forth in Section 5.4 of this Agreement, for any
such Product and shall return any misshipped Product to Supplier, via freight
collect, for credit in the amount paid by Distributor for such Product.
3.5 Disclaimer of Standard Terms. All terms, conditions, or provisions
which may appear as pre-printed language or otherwise be inserted within any
order confirmation or invoice for any Products shall be of no force and effect
notwithstanding the execution or delivery of such other document subsequent to
the date of this Agreement.
3.6 Bar Coding. Supplier shall mark each Product sold to Distributor with
the appropriate UPC bar code: The preferred bar codes are Version A barcode, or
Code 39 with FACT Data Identifiers barcode. In the event Supplier utilizes any
other UPC standard bar code, Supplier shall submit a sample of such bar code to
Distributor, prior to the execution of this Agreement, to verify compatibility
with Distributor's bar code recognition systems. Distributor reserves the right,
in its sole discretion and without penalty or liability to Distributor, to (i)
refuse any shipment of Product(s) which are not so marked; and (ii) elect not to
set up any Product in its systems which is not marked with a UPC standard bar
code compatible with Distributor's bar code recognition systems.
4. Defective Products. Supplier shall accept the return of any Product
alleged by Distributor or its customers to be defective and shall grant to
Distributor a credit for any Products to be returned in the amount of the
purchase price charged to Distributor therefor, less any applicable credits
pursuant to Section 2.2 hereof which have been previously paid to Distributor.
Distributor shall first instruct its customer to contact Supplier's technical
support group to verify such defect, but Distributor's customer's failure to so
contact Supplier shall not affect Distributor's right to return Products under
this Section 4. Distributor shall obtain a Return Material Authorization
("RMA"), as set forth in Section 5.4 of this Agreement, for all returns under
this Section 4.
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Supplier also shall pay all freight charges for shipments of such Products from
Distributor's United States location to Supplier by Distributor.
5. Inventory Maintenance.
5.1 Stock Balancing Rights. At any time or from time to time during the
term of the Agreement, Distributor may return for credit an amount of Products
with an original purchase price not in excess of twenty-five percent (25%) of
the aggregate purchase price of all of Distributor's purchases during the
preceding two (2) calendar quarters.
5.2 Acceptable Level Return Rights. In addition to the Stock Balancing
Rights set forth hereinabove, in the event Distributor determines that the sales
of any Product have not reached, or do not remain at, an acceptable level at any
time during the term of this Agreement, Distributor may return any or all units
of such Product to Supplier for credit. For the purposes of this Section 5.2,
"acceptable level" shall mean sales of any Product in an amount equal to or
greater than fifteen thousand dollars ($15,000.00) per month.
5.3 Discontinued Products. (a) In the event Supplier shall discontinue any
Product, or declare any Product to be obsolete, Supplier shall notify
Distributor thirty (30) days in advance of such discontinuation or declaration
of obsolescence. Distributor shall have the right to return all units of such
Product then in Distributor's Inventory to Supplier, for credit for a period of
one hundred eighty (180) days following the effective date of discontinuation.
(b) In the event Supplier offers to Distributor, or any other similar
purchaser, new Products which are of equivalent and/or superior fit, form and
function to a similar Product, and such new Product negatively affects
Distributor's ability to sell such similar Product(s) then in Distributor's
inventory, to the extent that Distributor's sales of the prior version of such
Product decrease by fifty percent (50%) or more based upon Distributor's sales
out of such Product(s) in the sixty (60) days preceding the date such new
Product(s) is made available, Distributor shall have the right to declare its
inventory of such similar Product(s) functionally discontinued, shall so notify
Supplier, and shall return the affected inventory of such functionally
discontinued Product(s) for credit for a period of sixty (60) days for all mass
storage subsystem Products, and one hundred eighty (180) days for all other
Products, following the date of functional discontinuation.
(c) The return rights set forth in this Section 5.3 are in addition to any
return rights described under Sections 5.1 and 5.2 of this Agreement.
5.4 Return Procedures. Supplier shall issue a Return Material Authorization
("RMA") number for any Products Distributor requests to return within five (5)
business days following the date Distributor requests such RMA; (provided,
however, that in the event such RMA is not issued within such five (5) day
period, Distributor shall have the right to return any units of the Product(s)
to Supplier without an RMA, and Supplier shall be obligated to accept such
return). All Products returned pursuant to this Section 5 shall be unopened and
in their original packaging. The amount of the credit for any returned Products
shall be equal to the original purchase price charged to Distributor less any
credits pursuant to Section 2.2 hereof which have been previously paid to
Distributor. Supplier shall bear all freight costs associated with returns of
Product to Supplier by Distributor under this Section 5.
6. Product Information Obligations and Set-Up Fees.
6.1 Product Set Up, Descriptions and Technical Support Requirements.
Supplier shall provide Distributor's Product Information Center with the
materials set forth on Exhibit B hereto. Distributor may, from time to time,
change the requirements set forth in Exhibit B. Supplier shall be solely
responsible for
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the factual accuracy and completeness of any information or materials provided
to Distributor. Distributor reserves the right to delay set up in Distributor's
systems of any Product for which this information is not provided.
6.2 Product Physical Information. Supplier agrees to provide Distributor
with the per-unit weight of each Product (such weight to include packaging) to
be distributed by Distributor, and the cube dimension of each unit of Product,
each Master Carton (if any) for each Product, and each pallet. Distributor
reserves the right to delay set up in Distributor's systems of any Product for
which this information is not provided.
6.3 New Products. Supplier agrees to provide Distributor with the material
described in Section 6.1 and Exhibit B hereof for all updates and revisions of
each Product and for each new Product which is manufactured or marketed by
Supplier and which Distributor will distribute during the term of this
Agreement, and shall make reasonable efforts provide Distributor with thirty
(30) days prior notice of any such update, revision or new Product.
6.4 Product Changes. Supplier shall make reasonable commercial efforts to
give Distributor thirty (30) days notice, or at least as much notice as is given
to any other similar purchaser for any changes in Product packaging,
documentation or major version changes.
6.5 Information. Products and Services. (a) Distributor, from time to time,
may design, develop and operate a variety of materials, product catalogues,
product set up forms, sales support and marketing services in connection with
its wholesale computer products distribution business, including, without
limitation, maintaining an electronic library containing computer hardware,
software, peripheral and accessory product descriptions, creating custom product
descriptions upon the request of its customers, publishing a computer reseller
price book, creating and publishing advertisements for computer products;
operating direct mail promotions, publishing catalogues; operating sales events
and promotions and training sessions; operating an on-line order entry and
information service (collectively, the "Information Products"). Distributor's
Information Products may also permit Supplier to communicate directly with
resellers through on-line message boards and other technology.
(b) From time to time Supplier may provide information to Distributor for
inclusion in the Information Products. Distributor may, in its sole discretion,
with prior written approval from Supplier, charge a fee to the Supplier as a
condition precedent for the inclusion of Supplier's information in an
Information Product.
(c) Distributor, in its sole discretion, may publish the Information
Products through any available medium, including, without, limitation, through
on-line computer networks, print media, CD ROM, diskette, facsimile, cable or
satellite transmission. The type, amount and usage of the Information Products
shall be as determined by Distributor from time to time, in its sole discretion.
Distributor, in its sole discretion, may elect to charge the recipient of the
Information Products (the "Customer") for receipt of the Information Products
and the pricing charged by Distributor may include a profit for Distributor.
Distributor reserves the right to modify or terminate any Information Product at
any time, without notice or liability to Supplier, unless Supplier has paid for
inclusion in which case Distributor will notify Supplier and provide a refund
for service paid for but not provided.
(d) The information that is contained in the Information Products comes
from the following sources:
i) Distributor created or generated information, including materials
created by Distributor, that may or may not embody product information
provided by the Supplier; and
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ii) Supplier provided "Spec Sheets", photographs and Supplier
trademarks, trade names and logos (collectively, the "Supplier
Information"). "Distributor Information" means all intellectual property
and information that is contained in the Information Products, except the
Supplier Information.
(e) Distributor shall have the ownership rights for all Distributor
Information. Any information provided to Distributor for use in an Information
Product that is not Supplier Information shall become Distributor Information.
Supplier grants Distributor a nonexclusive worldwide right and license to
republish and distribute the Supplier Information and to include the Supplier
Information in any Information Product that Distributor may produce from time to
time. Supplier warrants to Distributor that it has all rights to grant such a
license in the Supplier Information.
(f) Supplier shall be solely responsible for the factual accuracy and
completeness of any information provided to Distributor for use in any
Information Product.
6.6 D.A.T.A. Bank Program. During the first year of this Agreement,
Supplier agrees to participate in Distributor's D.A.T.A. Bank Program, in such
countries where Distributor offers such a Program, a copy of which is attached
to this Agreement as Exhibit C and which may subsequently be amended or
discontinued by Distributor from time to time. Supplier's participation in the
D.A.T.A. Bank Program during each subsequent year shall be automatically renewed
unless Supplier gives written notice to Distributor, in accordance with the
terms set forth in Exhibit C, at least thirty (30) days prior to the expiration
of the first or any subsequent Program year during the term of this Agreement.
Distributor shall render an invoice each calendar quarter to Supplier for the
participation fees payable by Supplier in connection with the D.A.T.A. Bank
Program during the preceding quarter. Invoices rendered hereunder shall be paid
by Supplier within thirty (30) days after receipt or, at Distributor's option,
Distributor may deduct such amounts from any amounts due Supplier hereunder.
7. Marketing
7.1 Programs and Development Funds. Supplier shall provide Distributor with
marketing development funds on a case by case basis for such marketing program
as Supplier and Distributor mutually agree upon. Such funds shall be used in
connection with marketing programs to be mutually agreed upon by Supplier and
Distributor. Supplier shall also provide Distributor with Product launch funds
to be utilized by Distributor to conduct initial marketing activities in
connection with the commencement of Distributor's relationship with Supplier,
such funds to be expended in accordance with a launch plan to be mutually agreed
upon by Supplier and Distributor. Distributor shall invoice Supplier for all
marketing development and launch funds due Distributor hereunder, and such
invoices shall be due and payable within thirty (30) days after receipt or, at
Distributor's option, Distributor may deduct such amounts from amounts due
Supplier.
7.2 News Releases. No news releases, including photographs, films or
videos, public announcements, Product or company endorsements by Distributor or
confirmation of all, or any part of, the subject matter of this Agreement shall
be made public without the prior written consent of Distributor.
8. Product Agreements and Indemnification.
8.1 No Violations. Supplier represents and warrants that the purchase of
Products by Distributor and subsequent sale to its customers, as contemplated by
this Agreement throughout the United States, Canada and Mexico, and, to the best
knowledge of Supplier, the sale of each Product in any other foreign
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country, violates no foreign, federal state or local law or regulation or any
agreement between Supplier and any other person or entity.
8.2 Title and Infringement. Supplier represents and warrants that (a) it
owns all right, title and interest in and to the Products necessary to enter
into and perform its obligations to Distributor hereunder, and (b) no Product
sold to Distributor during the term of this Agreement, nor the use of any such
Product, nor anything in or contemplated by this Agreement, infringes upon the
Intellectual Rights (as herein defined) of any other person or entity, and no
suit or proceeding is pending or threatened alleging that any Product or the use
thereof infringes upon any Intellectual Rights. As used herein, the term
"Intellectual Right" means any rights relating to any trademark, tradename,
service mark, copyright, patent, trade secret or other proprietary right.
8.3 Indemnification. Supplier agrees to hold Distributor harmless and
indemnify, reimburse, and defend it upon request at its own cost from any
proceedings related to any claim asserted against Distributor or its customers
with respect to the Products, any information or materials provided by Supplier
pursuant to this Agreement, or which otherwise arises out of its relationship
with Distributor, (including without limitation any claim that any Product
infringes the Intellectual Rights of another) and shall pay them for all amounts
owed by them to third persons and expenses incurred by them in connection with
any such claim or suit. Distributor shall notify Supplier of any claim described
in this Section 8.3 and shall allow Supplier the opportunity to assume the sole
control of the defense and/or settlement of any such claim, provided that
Distributor shall have the right to approve any settlement which imposes any
obligation upon it.
8.4 Insurance. Supplier shall maintain, at its expense, a policy or
policies of product liability insurance, with a broad form Vendor's Endorsement
naming Distributor as an additional insured, providing coverage of not less than
one million dollars ($1,000,000.00) combined single limit, and shall provide
Distributor with a Certificate of Insurance (including broad form Vendor's
Endorsement) reflecting such coverage. The Certificate shall provide for at
least ten (10) days prior written notice of cancellation or substantial change.
8.5 Buy American Act. In order to ascertain whether or not the Products
meet the requirements of the "Buy American Act" and to ensure that the Products
may be exported to Canada and Mexico in accordance with the terms of the North
American Free Trade Agreement, Supplier shall set forth, on Exhibit A hereto,
which Products, if any, are less than fifty-one percent (51%) U.S. manufactured,
and further shall complete the information set forth on Exhibit D hereto, the
"Certificate of Origin" with respect to each Product made available to
Distributor under this Agreement, such form to be completed on or prior to the
date such Product is first made available for purchase hereunder. Further, a new
copy of such form shall be provided to Distributor each year during the term of
this Agreement, prior to the annual anniversary date of such Agreement. Supplier
shall indemnify Distributor, hold it harmless and reimburse it for any and all
expenses or costs incurred by Distributor in the event the information set forth
by Supplier on the "Certificate of Origin" is incorrect or erroneous.
9. Term and Termination.
9.1 Unless earlier terminated as provided herein, this Agreement shall have
an initial term of one year from the last date either party executed this
Agreement, and shall automatically renew for successive one year periods unless
either party notifies the other party in writing of its election to terminate
the Agreement at least sixty (60) days prior to the expiration of the initial
term or any renewal term, as applicable.
9.2 Either party may terminate this Agreement with or without cause, upon
thirty (30) days prior written notice to the other party; provided that, in the
event the terminating party notifies the other party that such other party has
materially breached any provision of this Agreement, the party in breach shall
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have thirty (30) days after written notification detailing the breach is
delivered by the non-breaching party to cure such breach.
9.3 Upon expiration of this Agreement or termination by either party,
Distributor may return to Supplier for credit any Products in its inventory or
returned to it by its customers within the succeeding sixty (60) days for mass
storage subsystem Products, and one hundred eighty (180) days for all other
Products. Distributor shall be credited for any Products so returned in an
amount equal to the original purchase price thereof, less any credits pursuant
to Section 2.2 hereof which have been previously paid to Distributor and shall
be first applied to any uncontested amounts due Supplier. Any remaining balance
shall be promptly paid to Distributor.
10. General.
10.1 Entire Agreement. This Agreement contains all the agreements,
understanding, representations, conditions, warranties and covenants, and
constitutes the sole and entire agreement between the parties hereto pertaining
to the subject matter hereof and supersedes all prior communications or
agreements, written or oral. This Agreement may not be released or modified
except by the mutual written consent of both Distributor and Supplier as
attested to by an instrument signed by an officer of each of them. If any
provision of this Agreement is declared invalid or unenforceable the remaining
provisions of this Agreement shall remain in full force and effect.
10.2 Independent Relationship. Nothing contained herein shall be deemed or
construed as creating a joint venture or partnership between Distributor and
Supplier. Neither Distributor nor Supplier is by virtue of this Agreement
authorized as an agent or other representative of the other.
10.3 Assignment. Except as expressly provided herein, neither this
Agreement nor any rights or obligations hereunder may be assigned by either
party without the written consent of the other party; provided, that Distributor
may assign its rights and obligations hereunder to one or more subsidiary or
affiliate corporations without consent, but Distributor shall remain liable for
all obligations hereunder.
10.4 Waiver or Delay. Any waiver of any provision of this Agreement, or a
delay by either party in the enforcement of any right hereunder, shall neither
be construed as a continuing waiver, or create an expectation of
non-enforcement, of that or any other provision of this Agreement, either in the
present or in the future.
10.5 Governing Law. The validity, interpretation, and performance of this
Agreement shall be controlled by and construed under the laws of the State of
California.
10.6 Force Majeure. Neither party hereto shall be liable for the failure to
perform of any of its obligations under this Agreement if such failure is caused
by the occurrence of any force majeure beyond the reasonable control of such
party, including without limitation fire, flood, strikes and other industrial
disturbances, failure of transport, accidents, wars, riots, insurrections or
acts of God.
10.7 Confidentiality. Distributor and Supplier shall hold in trust and
confidence and shall not disclose for a period of three (3) years from the date
of disclosure any information deemed "Confidential Information" by the
disclosing party and identified as such at the time of disclosure. Information
shall not be deemed "Confidential Information" for the purposes of this
Agreement that (i) is already known to the nondisclosing party at the time of
disclosure; (ii) is or becomes publicly known through no wrongful act of the
nondisclosing party, including by public announcement by the disclosing party;
(iii) is received from a third party without similar restrictions and without
breach of this Agreement; (iv) is independently developed by the non-
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disclosing party; or (v) is lawfully required to be disclosed by any
governmental agency or otherwise required to be disclosed by law.
10.8 Headings. The headings appearing in this Agreement are inserted only
as a matter of convenience and in no way define, limit, construe or describe the
scope or extent of such section or in any way affect such paragraph.
10.9 Counterparts. This Agreement may be executed in one or more
counterparts, all of which taken together shall constitute a single instrument
and agreement.
10.10 Notices. Any notices under this Agreement shall be in writing
addressed to both the President and Contract Administrator of such party at the
address set forth below (or such other address as a party may notify the other
party in accordance with these provisions), and shall be delivered by certified
mail, return receipt requested or by an overnight delivery service of national
standing.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date set forth below.
MERISEL AMERICAS, INC. CNF, Inc.
200 Continental Blvd. 7722 East Gray Road
P.O. Box 984 Scottsdale, AZ 85260
El Segundo, CA 90245-0984
By: /s/ Kris Rogers By: /s/ David G. Thompson
-------------------------------- -----------------------------------
Name: KRIS ROGERS Name: David G. Thompson
Title: SENIOR VICE PRESIDENT Title: CFO
GENERAL MANAGER, --------------------------------
U.S. DISTRIBUTION
Date: 1/7/99 Date: 12/28/98
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EXHIBIT A
Products
Suggested Distributor Reseller % U. S.
Product List Price Discount Price Mfctd.
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Rebate
Quarterly Sales Goal Rebate Percentage
During all subsequent years of the Agreement, the Quarterly Sales Goals and
Rebate Percentage for the year shall be as mutually agreed to by the parties
hereto and shall be based upon Distributor's sales of the Products during the
prior year. Any Quarterly Sales Goals shall, at Distributor's option, be amended
following the end of any calendar quarter.
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EXHIBIT B
Product Information Center and Technical Support Requirements
1. A new Product Set Up Form must be fully completed for each Product,
update, version change or new Product introduced by Supplier, which
Supplier wishes Merisel to distribute. The Product Set Up Form shall be
provided to Supplier by the Product Information Center.
2. Spec Sheets, Original Data Sheets and additional Supplier-provided
reference materials must be completely legible. Materials which are not
completely legible will be returned to Supplier and will not be used.
3. For each Product distributed by Distributor, Supplier is required to
provide the following:
3.1 Spec and Data Sheets.
3.1.1 Three (3) original Spec or Data Sheets for the Product and any
product information which is available on CD-ROM.
3.1.2 If Supplier is new to Distributor, Supplier must send fifteen
(15) Product family, or company product offering, brochures to
each of the persons listed below:
Director Director
Inside Sales, West Coast Inside Sales, East Coast
Merisel, Inc. Merisel, Inc.
200 Continental Blvd. 293 Boston Post Road West
El Segundo, CA 90245 Marlboro, MA 01752
3.1.3 Distributor part numbers must be affixed to three (3) of the Spec
Sheets referenced in Section 3.1.1. Distributor part numbers
must also be affixed to the back sides of Product photographs or
any sleeves containing transparencies.
3.1.4 If a Spec Sheet refers to multiple Products, all relevant
Distributor part numbers must be listed on such Spec or Data
Sheet.
3.1.5 If a Distributor part number is not available for a Product,
Supplier should refer to its own part number.
3.2 Logos and Photos.
3.2.1 Two Supplier logos scanned at 2400 dpi resolution into EPS or
TIFF files. One of the EPS or TIFF files must contain a black-
and-white logo and one of the EPS or TIFF files must contain a
color logo.
3.2.2 One (1) approximately 2" x 3" digitized color image of each
product in high resolution CMYK TIFF format ready for output up
to 2400 dpi. (Other formats such as native PhotoShop, EPS, etc.
are also acceptable.)
OR
11
<PAGE>
Digitized images are preferred, but if they are not available
please send: One (1) color photograph of each product (in 35-mm
slide, 2 1/4-inch or 4 X 5-inch transparency format). All photos
must be marked with Merisel SKU number and/or Manufacturer's UPC
code. Merisel SKU number and/or Manufacturer UPC code must also
be affixed to the back side of product photos or any sleeves
containing transparencies.
3.3 Empty Boxes. Two (2) empty boxes for each of Supplier's software and/or
accessory Product(s) distributed by Distributor.
4. Software and Hardware Product for Evaluation Testing.
4.1 For all Products which Distributor has not previously distributed,
including, but not limited to, new models or software updates
which differ significantly from previous releases, Supplier shall
provide fully-functional "NotFor-Resale" ("NFR") software or
hardware units of the Product(s) for a ninety (90) day evaluation
testing by Distributor's Technical Support department, as
follows:
4.1.1 Evaluation/NFR units of Products shall be sent to Distributor's
Technical Support operations as follows:
National Manager, Tech Support Tech Support Operations
Merisel, Inc. East Coast
200 Continental Blvd. Merisel, Inc.
El Segundo, CA 90245 293 Boston Post Road West
Marlboro, MA 01752
2 Fully-functional copies of Software 1 Fully-functional copy
1 unit of each Hardware Product of Software
4.2 Supplier must complete and FAX a "Product Tracking Form" to the
Distributor Product Information Center when any unit of evaluation/NFR
Product is shipped as set forth in Section 5.1 above. The Product
Tracking Form is available from Distributor's on-line FAX-back service;
Supplier may obtain the FAX number for such service from the Product
Information Center.
12
<PAGE>
EXHIBIT C
D.A.T.A. Bank Core Program
U.S. Program (U.S. dollars)
Supplier agrees to participate in the D.A.T.A. Bank Program under the following
terms and conditions:
Participation Details
1. Initial program period: Annual: August 1st - July 31st of each year (the
"Program Period"). Participation starting after August 1st of any year will be
prorated. Merisel will invoice Supplier every three months for the previous
three months through July 31st of each year.
2. If Supplier wishes to discontinue participation in the D.A.T.A. Bank Program,
Supplier must provide a minimum of thirty (30) days written termination
notification before the end of the initial, or any subsequent, Program Period,
to the Director of Marketing for Distributor's "The Information Company" and
Distributor's Contracts Administration Manager. If such notification is not
received within such thirty (30) day period, Supplier's participation in the
D.A.T.A. Bank Program will automatically renew for that year and each year
thereafter unless Supplier provides such thirty (30) day minimum written notice
of its intent to terminate its participation in the D.A.T.A. Bank Program prior
to the end of any Program Period. Merisel has the right to cancel Supplier's
program participation by providing a minimum of thirty (30) days written
cancellation notification to Supplier.
3. Supplier must participate in the D.A.T.A. Bank Core Program in order to
participate in unique, targeted Add-on Marketing Opportunities (a separate
contract will be provided for such Add-on Marketing Opportunities).
4. To ensure the D.A.T.A. Bank database remains current, reports will be
provided to participating Suppliers listing an inventory of library items per
SKU at least every two months.
5. Proof of performance will consist of one copy of SELline (one time only,
updates on-line), one copy of each CD-ROM and a listing of SKUs in the
Literature Fax-back System. By signing this agreement, Supplier waives all
rights to further proof of performance.
6. Suppliers are encouraged to promote their participation in D.A.T.A. Bank with
the use of the SELline and D.A.T.A. Bank logos in their reseller communications.
7. Speed of upload of Supplier Information will depend on quality, volume and
timeliness of information submitted to Merisel by Supplier.
Participation Requirements
Supplier must maintain current information in Merisel libraries at all times by
providing the necessary coding and supporting materials through the ongoing
product set-up process to take full advantage of D.A.T.A. Bank (e.g., Product
Detail is driven by class codes submitted by Supplier during product set-up).
Participation Fees
Participation in D.A.T.A. Bank consolidates the distribution of your information
through Merisel's electronic media: SELline, Salesnet, CD-ROM, and Literature
Fax-back System.
13
<PAGE>
Annual fees (which include setup and maintenance) will be billed quarterly and
are based on current Merisel Price Book SKU count as of the date of billing
("baseline" SKU count) and up to 50MB of Library information storage space. If
Supplier SKU count is significantly exceeded (defined as 15% above baseline SKU
count), Supplier will be required to upgrade to the next participation level.
Add-on Marketing Opportunities are offered at additional fees.
Fees:
Up to 9 SKU's $2,200.00
10 to 15 SKU's $5,500.00
16 to 75 SKU's $8,500.00
76-150 SKU's $11,500.00
151-1000 SKU's $16,000.00
Over 1000 SKU's $16,000.00 Plus $5.00/Per SKU
[The D.A.T.A. Bank Program replaces the current On-Line Literature Library
(OLLL). This agreement supersedes any prior agreement or terms for the OLLL
program. By signing this agreement, Supplier authorizes Merisel to transfer
funds remaining in the OLLL to D.A.T.A. Bank Program equivalents.]
14
<PAGE>
EXHIBIT D
Certificate of Origin
(Document Original To Be Attached)
15
NOTE
Scottsdale, Arizona
__________ March 8, 1999
FOR VALUE RECEIVED, CNF, Inc. a California corporation (the "Borrower"),
hereby promises to pay to the order of, _____________, an individual residing at
_______________________________ (the "Lender"), the principal sum of
__________________ $_____________ payable in cash on the earlier of (i) the date
Borrower, or any successor thereto, completes a financing transaction pursuant
to which it obtains financing from the sale of equity securities in the amount
of at least $4,000,000 (the "Financing Transaction"), and (ii) one (1) year from
the date hereof with the earlier of such dates being the Maturity Date.
The entire principal amount together with interest at the rate of ten (10%)
percent per annum, shall be paid on the Maturity Date.
All payments (including prepayments) to be made by the Borrower hereunder,
whether on account of principal, interest or otherwise, shall be made without
set off or counterclaim and shall be made prior to 12:00 Noon, Pacific Standard
Time, on the Maturity Date thereof to the Lender at the address set forth above,
or such other place as Lender may from time to time designate in writing. If any
payment or action to be made or taken hereunder shall be stated to be or become
due on a day which is not a Business Day, such payment or action shall be made
or taken on the next following Business Day and such extension of time shall be
included in computing interest or fees, if any, in connection with such payment
or action.
Any failure to repay the principal or interest due hereunder upon the
Maturity Date or any failure to adhere to the terms of this Note shall be
considered an Event of Default. Upon the occurrence of an Event of Default the
entire amount of the indebtedness evidenced by this Note hereby shall be
immediately due and payable. Upon the acceleration of the obligations evidenced
by this Note and failure by the Borrower to pay amounts then due hereunder,
Lender may proceed to protect, exercise and enforce all of its rights and
remedies under this Note. The remedies provided in this Note are cumulative and
concurrent, may be pursued in any order, separately, successively or together,
may be exercised as often as occasion therefor may arise, and shall be in
addition to, and not in substitution for, the rights and remedies which would
otherwise be vested in Lender for the recovery of damages, or otherwise, in the
event of a breach of any of the undertakings of the Borrower hereunder. This
Agreement may not be modified, altered or amended, except by an agreement in
writing signed by the Borrower and the Lender. The Lender may not sell, assign
or transfer this Note or any portion hereof.
This Note shall bind the Borrower and its successors and assigns, and the
benefits hereof shall inure to the benefit of the Lender and its successors and
assigns. All references herein to the "Borrower" and the "Lender" shall be
deemed to apply to the Borrower and the Lender, respectively, and their
respective successors and assigns.
4
<PAGE>
Borrower may not prepay the loan evidenced by this Note, without the
consent of the Lender.
This Note and any other documents delivered in connection herewith and the
rights and obligations of the parties hereto and thereto shall for all purposes
be governed by and construed and enforced in accordance with the internal laws
of the State of Arizona without giving effect to its conflicts of law
principles.
IN WITNESS WHEREOF, the undersigned, intending to be legally bound hereby,
has executed this Note as of the date first written above with the intention
that this Note shall constitute a sealed instrument.
CNF, INC.
By: /s/ Paul Charles
--------------------
Name: Paul Charles
Title: President
Exhibit 10.13
January 27, 2000
{name}
{address]
Re: Promissory Note dated as of [____________] for $[______]
Dean [name]:
The books and records of CNF Technologies, Inc. (the "Company") indicate
that you have provided us with a loan in the principal amount of One Hundred
Thousand Dollars (US $100,000), as evidenced by a note dated [________] (the
"Note"). In order to induce an equity investment in the Company, this letter
will constitute your formal agreement to extend the "Maturity Date" of the Note
(as the term Maturity Date is defined with the Note) to January 30, 2001, and
such date shall hereafter be referred to as the "Maturity Date" of the Note, as
amended hereby.
All other terms and conditions of the Note shall remain in full force and
effect.
Would you kindly indicate your intention to be legally bound by the terms
set forth herein as a formal amendment to the Note, by placing your name and
signature on the line provided below. Thank you for your consideration and
cooperation in this matter.
Very truly yours,
CNF Technologies, Inc.
By:
----------------------
David G. Thompson, CFO
Acknowledged and Agreed to by:
- -----------------------------------
Signature
EXHIBIT "C"
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN TAKEN BY THE
REGISTERED OWNER FOR INVESTMENT, AND WITHOUT A VIEW TO RESALE OR DISTRIBUTION
THEREOF, AND MAY NOT BE TRANSFERRED OR DISPOSED OF WITHOUT AN OPINION OF COUNSEL
SATISFACTORY TO THE ISSUER THAT SUCH TRANSFER OR DISPOSITION DOES NOT VIOLATE
THE SECURITIES ACT OF 1933, AS AMENDED, OR THE RULES AND REGULATIONS THEREUNDER.
FORM OF
PROMISSORY NOTE
$________ Scottsdale, Arizona
______________,1999
FOR VALUE RECEIVED, CNF Technologies, Inc., a Delaware corporation (the
"Borrower"), hereby promises to pay to the order of, ___________________,
[a ______ corporation with a principal office at _____________________________
[an individual residing at __________________________________________________]
(the "Lender"), the principal sum of __________________________(US $__________)
payable in cash on the earlier of (i) the date the Company completes a private
placement of its equity securities which yields net proceeds to the Company of
at least $5,000,000; and (ii) June 30, 2001 with the earlier of such dates being
the "Maturity Date."
The entire principal amount together with interest at the rate of ten
(10%) percent per annum, shall be paid on the Maturity Date.
All payments (including prepayments) to be made by the Borrower hereunder,
whether on account of principal, interest or otherwise, shall be made without
set off or counterclaim and shall be made prior to 12:00 Noon, Pacific Standard
Time, on the Maturity Date thereof to the Lender at the address set forth above,
or such other place as Lender may from time to time designate in writing. If any
payment or action to be made or taken hereunder shall be stated to be or become
due on a day which is not a Business Day, such payment or action shall be made
or taken on the next following Business Day and such extension of time shall be
included in computing interest or fees, if any, in connection with such payment
or action.
Any failure to repay the principal or interest due hereunder upon the
Maturity Date or any failure to adhere to the terms of this Note shall be
considered an Event of Default. Upon the occurrence of an Event of Default the
entire amount of the indebtedness evidenced by this Note hereby shall be
immediately due and payable. Upon the acceleration of the obligations evidenced
by this Note and failure by the Borrower to pay amounts then due hereunder,
Lender may proceed to protect, exercise and enforce all of its rights and
remedies under this Note. The remedies provided in this Note are cumulative and
concurrent, may be pursued in any order,
<PAGE>
separately, successively or together, may be exercised as often as occasion
therefor may arise, and shall be in addition to, and not in substitution for,
the rights and remedies which would otherwise be vested in Lender for the
recovery of damages, or otherwise, in the event of a breach of any of the
undertakings of the Borrower hereunder.
This Note may not be modified, altered or amended, except by an agreement
in writing signed by the Borrower and the Lender.
The Lender may not sell, assign or transfer this Note or any portion
hereof.
This Note shall bind the Borrower and its successors and assigns, and the
benefits hereof shall inure to the benefit of the Lender and its successors and
assigns. All references herein to the "Borrower" and the "Lender" shall be
deemed to apply to the Borrower and the Lender, respectively, and their
respective successors and assigns.
Borrower may not prepay the loan evidenced by this Note, without the
consent of the Lender.
This Note and any other documents delivered in connection herewith and the
rights and obligations of the parties hereto and thereto shall for all purposes
be governed by and construed and enforced in accordance with the internal laws
of the State of Arizona without giving effect to its conflicts of law
principles.
IN WITNESS WHEREOF, the undersigned, intending to be legally bound hereby,
has executed this Note effective as of the date above indicated.
CNF TECHNOLOGIES, INC.
By:
-----------------------------------------
Name:
Title:
EXHIBIT 21.1
1. CNF Mobile Solutions, Inc.
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to the Registration Statement of
CNF Technologies, Inc. on Form SB-2 of our report dated May 25, 1999 (June 11,
1999 as to paragraph 1 of Note 1, paragraph 2 of Note 4, and paragraphs 4, 5 and
7 of Note 13), (which report expresses an unqualified opinion and includes an
explanatory paragraph regarding the Company's ability to continue as a going
concern) appearing in the prospectus, which is part of this Registration
Statement.
We also consent to the reference to us under the heading "Experts" in such
prospectus.
DELOITTE & TOUCHE LLP
Phoenix, Arizona
February 29, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CNF
TECHNOLOGIES, INC'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED MARCH
31, 1999 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH STATEMENT.
</LEGEND>
<CURRENCY> U.S. DOLLARS
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 9-MOS
<FISCAL-YEAR-END> MAR-31-1999 MAR-31-2000
<PERIOD-START> APR-01-1998 APR-01-1999
<PERIOD-END> MAR-31-1999 DEC-31-1999
<EXCHANGE-RATE> 1 1
<CASH> 184,663 1,500
<SECURITIES> 0 0
<RECEIVABLES> 1,224,383 1,768,938
<ALLOWANCES> (390,000) (340,000)
<INVENTORY> 1,656,001 1,595,550
<CURRENT-ASSETS> 2,915,282 3,260,535
<PP&E> 805,974 981,756
<DEPRECIATION> (223,741) (353,410)
<TOTAL-ASSETS> 3,538,687 3,919,551
<CURRENT-LIABILITIES> 5,978,025 4,996,651
<BONDS> 0 0
0 0
0 416
<COMMON> 1,000 1,145
<OTHER-SE> (2,727,637) (1,309,169)
<TOTAL-LIABILITY-AND-EQUITY> 3,538,687 3,919,551
<SALES> 9,425,947 8,510,873
<TOTAL-REVENUES> 9,425,947 8,510,873
<CGS> 6,088,549 6,048,172
<TOTAL-COSTS> 6,088,549 6,048,172
<OTHER-EXPENSES> 6,208,781 5,814,094
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 248,342 2,473,297
<INCOME-PRETAX> (3,119,725) (5,824,690)
<INCOME-TAX> (45,200) 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (3,074,525) (5,824,690)
<EPS-BASIC> (1.23) (.69)
<EPS-DILUTED> (1.23) (.69)
</TABLE>
PART B -- ISSUE FEE TRANSMITTAL
Complete and mail this form, together with
applicable fees, to: Box ISSUE FEE
Assistant Commissioner for
Patents
Washington, D.C. 20231
<TABLE>
<S> <C>
MAILING INSTRUCTIONS: This form should be used for transmitting the ISSUE FEE. Note: The certificate of mailing below can
Blocks 1 through 4 should be completed where appropriate. All further only be used for domestic mailings of the
correspondence including the Issue Fee Receipt, the Patent, advance orders and Issue Fee Transmittal. This certificate
notification of maintenance fees will be mailed to the current correspondence cannot be used for any other accompanying
address as indicated unless corrected below or directed otherwise in Block 1, papers. Each additional paper, such as an
by (a) specifying a new correspondence address; and/or (b) indicating a separate assignment or formal drawing, must have its
"FEE ADDRESS" for maintenance fee notifications. own certificate of mailing.
Certificate of Mailing
CURRENT CORRESPONDENCE ADDRESS (Note: Legibly mark-up with any corrections or
use Block 1) I hereby certify that this Issue Fee
Transmittal is being deposited with the
020451 LM61/0902 United States Postal Service with
GRANT R CLAYTON sufficient postage for first class mail in
CLAYTON HOWARTH & CANNON, PC an envelope addressed to the Box Issue Fee
P O BOX 1909 address above on the date indicated below.
SANDY UT 84091-1909
(Depositor's name)
-------------------------------------------
(Signature)
-------------------------------------------
(Date)
-------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
APPLICATION NO. FILING DATE TOTAL CLAIMS EXAMINER AND GROUP ART UNIT DATE MAILED
08/737,201 01/24/97 030 FREJD, R 2763 09/02/99
First Named
Applicant CHARLES, 35 USC 154(b) term ext. = 0 DAYS.
TITLE OF
INVENTION SYSTEM AND METHOD FOR EXPANSION OF A COMPUTER
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
ATTY'S DOCKET NO. CLASS-SUBCLASS BATCH NO. APPLN. TYPE SMALL ENTITY FEE DUE DATE DUE
2 T-2844.US 395-500.460 B02 UTILITY YES $605.00 12/02/99
</TABLE>
<TABLE>
<S> <C> <C>
1. Change of correspondence address or indication of 2. For printing on the patent front page, list 1 COHEN & SMITH
"Fee Address" (37 CFR 1.363). Use of PTO form(s) (1) the names of up to 3 registered patent
and Customer Number are recommended, but not attorneys or agents OR, alternatively, (2) the 2 ______________
required. name of a single firm (having as a member
a registered attorney or agent) and the names 3 ______________
|X| Change of correspondence address (or Change of of up to 2 registered patent attorneys or
Correspondence Address form PTO/SB/122) agents. If no name is listed, no name will be
attached. printed.
|X| "Fee Address" indication (or "Fee Address"
Indication form PTO/SB/47) attached.
</TABLE>
<TABLE>
<S> <C>
3. ASSIGNEE NAME AND RESIDENCE DATA TO BE PRINTED ON THE PATENT (print or type) 4a. The following fees are enclosed (make
PLEASE NOTE: Unless an assignee is identified below; no assignee data will check payable to Commissioner of Patents
appear on the patent. Inclusion of assignee data is only appropriate when an and Trademarks):
assignment has been previously submitted to the PTO or is being submitted
under separate cover. Completion of this form is NOT a substitute for filing |X| Issue Fee
an assignment. | | Advance Order - # of Copies ________
(A) NAME OF ASSIGNEE
CNF Technologies, Inc. 4b. The following fees or deficiency in these
(B) RESIDENCE: (CITY & STATE OR COUNTRY) fees should be charged to:
Scottsdale, AZ DEPOSIT ACCOUNT NUMBER _________________
Please check the appropriate assignee category indicated below (will not be (ENCLOSE AN EXTRA COPY OF THIS FORM)
printed on the patent) | | Issue Fee
| | Individual |X| corporation or other private group entity | | government | | Advance Order - # of Copies ________
</TABLE>
The COMMISSIONER OF PATENTS AND TRADEMARKS IS requested to apply the Issue
Fee to the application identified above.
(Authorized Signature) (Date)
Burton Scheiner /s/ Burton Scheiner 12-2-99
NOTE: The Issue Fee will not be accepted from anyone other than the applicant;
a registered attorney or agent; or the assignee or other party in interest as
shown by the records of the Patent and Trademark Office.
Burden Hour Statement: This form is estimated to take 0.2 hours to complete.
Time will vary depending on the needs of the individual case. Any comments on
the amount of time required to complete this form should be sent to the Chief
Information Officer, Patent and Trademark Office, Washington, D.C. 20231. DO NOT
SEND FEES OR COMPLETED FORMS TO THIS ADDRESS. SEND FEES AND THIS FORM TO: Box
Issue Fee, Assistant Commissioner for Patents, Washington, D.C. 20231
Under the Paperwork Reduction Act of 1995, no persons are required to respond to
a collection of information unless it displays a valid OMB control number.
TRANSMIT THIS FORM WITH FEE
PTOL-85B (REV. 10-96) Approved for use through 06/30/99. OMB 0651-0033
Patent and Trademark Office; U.S. DEPARTMENT OF COMMERCE
<PAGE>
UNITED STATES DEPARTMENT OF COMMERCE
[LOGO] Patent and Trademark Office
NOTICE OF ALLOWANCE AND ISSUE FEE DUE
020451 LM61/0902
GRANT R CLAYTON
CLAYTON HOWARTH & CANNON, PC
P O BOX 1909
SANDY UT 84091-1909
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
APPLICATION NO. FILING DATE TOTAL CLAIMS EXAMINER AND GROUP ART UNIT DATE MAILED
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
08/787,201 01/24/97 030 FREJD, R 2763 09/02/99
- ---------------------------------------------------------------------------------------------
FIRST NAMED
APPLICANT CHARLES 35 USC 154(b) term ext. = 0 Days.
- ---------------------------------------------------------------------------------------------
TITLE OF
INVENTION SYSTEM AND METHOD FOR EXPANSION OF A COMPUTER
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
ATTY'S DOCKET NO. CLASS-SUBCLASS BATCH NO. APPLN. TYPE SMALL ENTITY FEE DUE DATE DUE
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
2 T-2844.US 395-500.460 B02 UTILITY YES $605.00 12/02/99
- ---------------------------------------------------------------------------------------------
</TABLE>
THE APPLICATION IDENTIFIED ABOVE HAS BEEN EXAMINED AND IS ALLOWED FOR ISSUANCE
AS A PATENT. PROSECUTION ON THE MERITS IS CLOSED.
THE ISSUE FEE MUST BE PAID WITHIN THREE MONTHS FROM THE MAILING DATE OF THIS
NOTICE OR THIS APPLICATION SHALL BE REGARDED AS ABANDONED. THIS STATUTORY PERIOD
CANNOT BE EXTENDED.
<TABLE>
HOW TO RESPOND TO THIS NOTICE:
<S> <C>
I. Review the SMALL ENTITY status shown above.
If the SMALL ENTITY is shown as YES, verify your If the SMALL ENTITY is shown as NO:
current SMALL ENTITY status:
A. If the status is changed, pay twice the amount of the
FEE DUE shown above and notify the Patent and A. Pay FEE DUE shown above, or
Trademark Office of the change in status, or
B. If the status is the same, pay the FEE DUE shown
above. B. File verified statement of Small Entity Status before, or with,
payment of 1/2 the FEE DUE shown above.
II. Part B-Issue Fee Transmittal should be completed and returned to the Patent and Trademark Office (PTO) with your
ISSUE FEE. Even is the ISSUE FEE has already been paid by charge to deposit account, Part B Issue Fee Transmittal
should be completed and returned. If you are charging the ISSUE FEE to your deposit account, section "4b" of Part
B-Issue Fee Transmittal should be completed and an extra copy of the form should be submitted.
All communications regarding this application must give application number and batch number.
Please direct all communications prior to issuance to Box ISSUE FEE unless advised to the contrary.
IMPORT REMINDER: Utility patents issuing on applications filed on or after Dec. 12, 1980 may require payment of
maintenance fees. It is patentee's responsibility to ensure timely payment of maintenance
fees when due.
</TABLE>
YOUR COPY
<TABLE>
<S> <C>
??96) Approved for use through 06/30/99. (0651-0033) *U.S. GPO: 1998-437 639/80023
</TABLE>
/ / Notice of References Cited, PTO-892
/ / Information Disclosure Statement(s), PTO-1449, Paper No(s). ________________
/X/ Notice of Draftsperson's Patent Drawing Review, PTO-948
/ / Notice of Informal Patent Application, PTO-152
================================
[LOGO] Letters patent
NO.
Commonwealth Patents Act of 1990 707588
of Australia
STANDARD PATENT
I, Vivienne Joyce Thom, Commissioner of Patents, grant a Standard Patent with
the following particulars:
Name and Address of Patentee:
CNF Technologies, Inc., 7722 East Gray Road, Scottsdale, Arizona 85260,
United States Of America
Names of Actual Inventors: Paul Charles and Walter C Peschke
Title of Invention: System and method for expansion of a computer
Application Number: 53059/96
Term of Letters Patent: Twenty years commencing on 7 March 1998
Priority Details:
Number Date Filed With
08/399728 7 March 1995 UNITED STATES OF AMERICA
Dated this 28 day of October 1999
/s/ V.J. Thom
--------------------------------
V.J. THOM
[LOGO] COMMISSIONER OF PATENTS
<PAGE>
Your Ref: T2844 - Australia Our Ref: 74660
PATENT REGISTRATION DETAILS
---------------------------
COUNTRY: Australia
TITLE: SYSTEM AND METHOD FOR EXPANSION OF A COMPUTER
PATENT NO: 707588
PATENTEE: CNF Technologies, Inc.
APPLICATION DATE: 7 March 1996
PRIORITY DETAILS: United States Of America (US) 08/399728 07 MAR 1995
PATENT ISSUE DATE: 28 October 1999
PATENT EXPIRY DATE: 7 March 2016
RENEWALS DUE FROM: 7 March 2001
This patent results from Application No 53059/96 which was filed with a Complete
Specification on 7 March 1996. It claims a convention priority date of 7 March
1995.
The term of this patent is 20 years from the date of application.
Please note that the Publication Date on the attached Patent Abridgement may
differ from the International Publication Date on the PCT Pamphlet. The
Publication Date is the date the PCT Pamphlet was made open to public inspection
by the Australian Patent Office. The Publication Journal Date is the date of
advertisement in the Australian Official Journal of Patents that the PCT
Pamphlet has been made open to public inspection.
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compulsory licence if the reasonable requirements of the public in relation to
the invention have not been met within three years from patent grant. Third
parties may also seek revocation of the patent if the public's requirements are
still not met within two years of the grant of a compulsory licence. In
practice, however, these provisions are generally regarded as ineffectual as no
compulsory licences have been granted and no patents revoked on these grounds.
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