<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
<TABLE>
<S> <C>
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ------------------------ TO
------------------------
COMMISSION FILE NUMBER 1-9281
</TABLE>
ATARI CORPORATION
(Registrant)
<TABLE>
<S> <C>
NEVADA 77-0034553
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
455 SOUTH MATHILDA AVENUE
SUNNYVALE, CA 94086
(Address of principal executive offices) (Zip Code)
</TABLE>
Telephone: (408) 328-0900
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock (par value $.01)
5 1/4% Convertible Subordinated Debentures
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based upon the closing sale price of its Common Stock on April
4, 1996 on the American Stock Exchange was approximately $69.5 million. Shares
of Common Stock held by each officer and director and by each person who owns 5%
or more of the outstanding Common Stock have been excluded and such persons may
under certain circumstances be deemed to be affiliates. This determination of
officer or affiliate status is not necessarily a conclusive determination for
other purposes.
Common Stock (par value $.01) of Registrant outstanding at April 4,
1996 -- 63,727,318 shares.
<PAGE> 2
PART I
ITEM 1. BUSINESS
This Annual Report on Form 10-K contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Actual results could differ materially from
those projected in the forward-looking statements as a result of the risk
related factors set forth herein.
This Annual Report on Form 10-K contains registered and other trademarks
and tradenames of Atari and other companies.
PROPOSED MERGER WITH JT STORAGE, INC.
On February 12, 1996, Atari Corporation ("Atari" or the "Company") entered
into a merger agreement with JT Storage, Inc. ("JTS") providing for the merger
of the Company and JTS (the "Merger"). On April 8, 1996, the merger agreement
was amended and restated. As a result of the Merger, Atari would be merged with
and into JTS, and each outstanding share of Atari Common Stock would be
exchanged and converted into one share of JTS Common Stock. JTS was incorporated
on February 3, 1994 to develop, market and manufacture hard disk drives. The
Merger must be approved by the stockholders of Atari and JTS and is subject to
certain other conditions. The Merger is expected to close late in the second
quarter of calendar year 1996.
In connection with the Merger, on February 13, 1996, Atari loaned $25.0
million to JTS pursuant to a Subordinated Secured Convertible Promissory Note
(the "Note") which is secured by substantially all of the assets of JTS.
Interest accrues on the unpaid principal amount of the Note at the rate of 8.5%
per annum. The Note provides that JTS shall repay the outstanding principal and
interest under the Note on September 30, 1996 if the Merger has not occurred
prior to such time. In the event that the Merger Agreement is terminated, either
party may, under certain conditions, elect to convert the outstanding
indebtedness under the Note into shares of JTS Series A Preferred Stock. The
Note is expressly subordinated to outstanding indebtedness in connection with
JTS' primary bank loan agreement, up to an amount of $5.0 million at any given
time.
Based on the number of shares of outstanding Atari Common Stock, JTS Common
Stock and JTS Series A Preferred Stock as of April 5, 1996, immediately after
consummation of the Merger, a total of 102,628,429 shares of JTS Common Stock
would be issued and outstanding, of which 63,727,318 shares, or 62%, would
represent shares issued in the Merger upon conversion of Atari Common Stock.
Upon the closing of the Merger, it is expected that the directors of JTS
will be Sirjang L. Tandon, David T. Mitchell, Alain L. Azan, Jean D. Deleage,
Roger W. Johnson, Lip-Bu Tan, Jack Tramiel and Michael Rosenberg. Messrs.
Tandon, Mitchell, Azan, Deleage, Johnson and Tan are currently directors of JTS,
and Messrs. Tramiel and Rosenberg are currently directors of Atari. The
executive officers of JTS immediately prior to the Merger are expected to be the
executive officers of JTS after the Merger. The parties have also agreed that
Jack Tramiel or a person designated by Jack Tramiel shall be a member of each
committee of the JTS Board of Directors after the Merger.
1
<PAGE> 3
BUSINESS
Atari was incorporated under the laws of Nevada in May 1984. From 1984 to
1992, Atari designed, manufactured and marketed proprietary personal computers
and video games and related software. Over the past several years, Atari has
undergone significant change. In 1992 and 1993, Atari significantly downsized
operations, decided to exit the computer business and focused on its video game
business. As a result, revenues from computer products as a percentage of total
revenues declined from 67% in 1993 to 16% in 1994 and 12% in 1995, while sales
of entertainment systems and related software and peripheral products and the
receipt of royalties represented the balance of revenues in each such year.
These actions resulted in significant restructuring charges for closed
operations and write-downs of computer and certain video game inventories in
1992 and 1993.
While restructuring, Atari developed its 64-bit Jaguar interactive
multimedia entertainment system, which was introduced in selected markets in the
fourth quarter of 1993. For 1995 and 1994, total sales of Jaguar and related
products were $9.9 million and $29.3 million, respectively, and represented 68%
and 76% of Atari's net revenues, respectively. These Jaguar sales were
substantially below Atari's expectations, and Atari's business and financial
results were materially adversely affected in 1995 as Atari continued to invest
heavily in Jaguar game development, entered into arrangements to publish certain
licensed titles and reduced the retail price for its Jaguar console unit. Atari
attributes the poor performance of Jaguar to a number of factors including (i)
extensive delays in development of software for the Jaguar which resulted in
reduced orders due to consumer concern as to when titles for the platform would
be released and how many titles would ultimately be available, and (ii) the
introduction of competing products by Sega and Sony in May 1995 and September
1995, respectively. Atari presently has a substantial unsold inventory of Jaguar
and related products and there can be no assurance that such inventory can be
sold at current prices.
By late 1995, Atari recognized that despite the significant commitment of
financial resources that were devoted to the Jaguar and related products, it was
unlikely that Jaguar would ever become a broadly accepted video game console or
that Jaguar technology would be broadly adopted by software title developers. As
a result, Atari decided to significantly downsize its Jaguar operations. This
downsizing resulted in significant reductions in Atari's workforce, and
significant curtailment of research and development and sales and marketing
activities for Jaguar and related products. Accordingly, Atari decided to focus
its efforts on selling its inventory of Jaguar and related products and to
emphasize its existing licensing and development activities related to
multimedia entertainment software for various platforms.
PRODUCTS
Atari's principal products are described below:
Jaguar Entertainment System. Atari introduced its 64-bit Jaguar
interactive multimedia entertainment system in late November 1993 into selected
markets. During 1994, Atari rolled out a nationwide program and commenced
initial shipments into Europe. From its launch through the end of 1994, Jaguar's
suggested retail price was $249.99. As a result of competition and cost
reductions, during the first quarter of 1995, Atari reduced the retail price of
Jaguar to $149.99. The current retail price of Jaguar is $99.99. Despite its
substantially lower retail price, sales of Jaguar continue to be disappointing,
and Atari is test marketing different price points and software bundles for the
Jaguar in an attempt to sell its substantial inventory of such product.
The Jaguar is a 64-bit interactive multimedia system that incorporates two
proprietary chips developed by Atari which are specialized for multimedia
entertainment. The proprietary chips include four processors (graphics
processing unit, object processor, blitter and digital signal processor) and a
standard Motorola 68000 microprocessor. The computational speed of the system is
approximately 44 MIPS and the bus bandwidth is 106.4 megabytes per second. The
video features include 24-bit graphics with up to 16.8 million colors and a 3-D
engine which can render 3-D shaded or texture mapped polygons in real time. The
sound system is based on a high-speed custom digital signal processor dedicated
to audio. The audio is 16-bit compact disk ("CD") quality from cartridge-based
software, and can be processed from simultaneous sources of audio data. This
allows for very realistic sounds in the software, including human voices.
Through the use of a compression
2
<PAGE> 4
technology customized by Atari (called "JAGPEG"), software developers can
compress data to the point that a 100-megabit game can fit into a 16-megabit ROM
cartridge. This allows for more exciting experiences both visually and in game
play due to the vast amount of data available.
Jaguar Software Titles. From 1994 through 1995, Atari developed titles for
the Jaguar primarily under contract with third party software developers. To
date, Atari has published approximately 45 software titles for the Jaguar. These
titles include an array of licensed and nonlicensed titles, some of which
utilize 3-D graphics, high speed animation, 16.8 million colors, full motion
video, motion capture techniques and 16-bit stereo sound. Atari's software
library includes titles which are cartridge based (ROM chips) and CD based.
Since 1995, the development of titles for Jaguar has been curtailed
substantially and Atari is currently developing a very limited number of titles
which it expects to publish in either cartridge or CD format. In addition to
Atari's software development efforts, in 1994 and 1995 Atari licensed
independent software vendors ("ISVs") to develop and publish titles for the
Jaguar. Atari is not aware of any current development of Jaguar titles by ISVs
and does not expect any such development in the foreseeable future.
Jaguar Peripherals. Atari offers a CD-ROM peripheral for the Jaguar that
enables software end users to have full motion video clips and more complex
games than are available on cartridges. Publishers can take advantage of lower
media cost and quicker turnaround on orders with CD-ROM software as compared to
a ROM cartridge. The CD-ROM peripheral is a double speed player that can play
Jaguar video games, regular audio CD's and CD + G (graphics). The suggested
retail price of the CD-ROM peripheral is $149.99. The success of the CD-ROM
peripheral is substantially dependent on the size of the installed base of
cartridge-based Jaguar consoles.
PC Software. As a result of Atari's investment in game design, art and
programming for its Jaguar software, Atari has ported certain of its Jaguar
titles to the IBM PC compatible platform. Atari intends to publish and/or
license these titles in 1996. In this regard, Atari commenced shipment of the PC
CD-ROM version of Tempest 2000 in Europe during the first quarter of 1996.
Library of Titles. In 1996, Atari plans to increase its efforts to license
titles from its game library to third party publishers. Atari has over 100
titles in its game library, including the following:
<TABLE>
<S> <C> <C> <C> <C>
Asteroids Combat Iron Soldier RealSport Baseball Tempest
Battlezone Crystal Castles Major Havoc RealSport Football Warbird
Bentley Bear Earthworld Millipede Space War Warlords
Breakout Food Fight Missile Command Star Raiders Yar's Revenge
Centipede Pong
</TABLE>
COMPETITION
The video game business is intensely competitive. Since its introduction in
late 1993, Jaguar has failed to achieve broad market acceptance. Atari does not
expect that Jaguar, even at its substantially reduced price, will ever become a
broadly accepted video game console, or that Jaguar technology will be broadly
adopted by software title developers. The video game industry is also
characterized by unpredictable and rapid shifts in the popularity of certain
platforms, by severe price competition, and by frequent new technology and
product introductions. In this regard, numerous companies have introduced or
have developed and are expected to introduce video game consoles that are or may
become competitive with Jaguar. In addition, an increasing number of
entertainment titles are being developed for or ported to the PC platform. Most
of Atari's competitors have greater experience and expertise in 3D graphics and
multimedia technology and have substantially greater engineering, marketing and
financial resources than Atari. Jaguar presently competes with products offered
by the following companies:
- Nintendo commenced development, in collaboration with Silicon Graphics,
Inc., of the Nintendo 64 player, expected to be released in Autumn 1996
in the United States. Nintendo also sells the 16 bit Super NES at a
retail price of $99.95.
- Sega commenced shipment of the Sega Saturn in the United States in May
1995 with a current retail price of $299.00. Sega also sells the 16 bit
Genesis at a retail price of $99.95.
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<PAGE> 5
- Sony released the Sony PlayStation in the United States in late 1995 with
a current retail price of $299.00.
- The 3DO Company licenses the 3DO Interactive Multiplayer System console
architecture for retail sale worldwide.
MARKETING AND DISTRIBUTION
Atari distributes its products domestically through various independent
channels. Jaguar is sold primarily through national retailers, consumer
electronic specialty stores and distributors of electronic products. European
sales are conducted from Atari's European headquarters in London, U.K. Jaguar
and Atari's PC titles are sold in European markets through substantially the
same channels of distribution as those in the United States. Net sales outside
North America for fiscal years 1995, 1994 and 1993 constituted approximately
44%, 40% and 75%, respectively, of total net revenues. No single customer
accounted for 10% or more of total net revenues for the years ended December 31,
1995, 1994 or 1993.
RESEARCH AND DEVELOPMENT
Most of Atari's products, including Jaguar, were developed by its internal
engineering and software groups as well as independent software developers under
contract with Atari. Atari's research and development expenses totaled $5.4
million, $5.8 million and $4.9 million in 1995, 1994, and 1993, respectively.
Atari has significantly downsized its research and development efforts and
currently has five employees dedicated to such efforts. As a result, Atari
expects its research and development expenses to decline substantially in 1996.*
Atari's current development efforts are dedicated to developing a limited
number of Jaguar software titles and porting certain existing Jaguar titles to
the PC platform. As part of this development process, Atari has agreements with
third parties to develop and/or license properties. Under these agreements,
Atari will make payments to these parties as either development fees and/or
advance royalties, and is obligated to make certain minimum royalty guarantees
on future sales. There can be no assurance that all payments for development
fees and/or advance royalties will be recoverable through future sales of
products.
MANUFACTURING
Atari has placed no manufacturing orders for the Jaguar console since
mid-1995. Based on current and expected sales and inventory levels, Atari does
not intend to pursue additional Jaguar manufacturing. The Jaguar console unit
was assembled in the United States by a third-party subcontractor under a
manufacturing arrangement. The agreement may be canceled by either party with 90
days' notice. Jaguar software products and accessories are manufactured by
several suppliers and are assembled by subcontractors. Atari believes that it
could readily replace these sources of supply and assembly, if necessary.
INTELLECTUAL PROPERTY RIGHTS
Atari has exclusive use of its "Atari" name and "Fuji" logo in all areas
other than coin-operated arcade video game use. Atari also has a portfolio of
other intellectual properties including patents, trademarks, and copyrights
associated with its video game and computer businesses. Atari believes its
patents, trademarks and other intellectual property are important assets. As of
December 31, 1995, Atari held over 150 patents in the United States and other
jurisdictions which expire from 1996 to 2010 and had applications pending for
three additional patents. There can be no assurance that any of these patent
rights will be upheld in the future or that Atari will be able to preserve any
of its other intellectual property rights. Atari has in the past received
communications from third parties asserting rights to certain of its
intellectual property. Atari has also been involved in several major lawsuits
regarding its intellectual property, including a suit with Nintendo which was
- ---------------
* This statement is a forward-looking statement reflecting current expectations.
Actual results could differ materially from those projected in the
forward-looking statement due to numerous factors, including the risk related
factors set forth herein.
4
<PAGE> 6
settled in March 1994 and a suit with Sega which was settled in September 1994.
In the event any third party were to make a valid claim with respect to Atari's
intellectual property and a license were not available on commercially
reasonable terms, Atari's business, financial condition and results of
operations would be materially and adversely affected. Litigation, which has in
the past and could in the future result in substantial costs and diversion of
resources, may also be necessary to enforce Atari's patents or other
intellectual property rights or to defend against third-party infringement
claims. The occurrence of litigation relating to patent infringement or other
intellectual property matters, regardless of the outcome, could have a material
adverse effect on Atari's business, financial condition and results of
operations.
BACKLOG
Orders are usually placed by purchasers on an as-needed basis, are
sometimes cancelable before shipment, and are usually filled from inventory
shortly after receipt. Atari currently has a substantial inventory of finished
products and product components for which there are no orders. Although Atari is
taking steps to realize revenue from such inventory, Atari recognized
substantial inventory write-downs in 1995 and there can be no assurance that
substantial additional write-downs will not be required.
EMPLOYEES
Due to disappointing sales of Jaguar and related products, Atari reduced
its workforce from 101 persons at December 31, 1994 to 73 persons at December
31, 1995 and 31 persons at March 31, 1996. Atari does not presently anticipate
any further reductions in its workforce. As of March 31, 1996, Atari had
approximately 25 employees in the U.S., including five in engineering and
product development, 12 in marketing, sales and distribution, two in purchasing
and six in general administration and management. In addition, Atari had six
employees outside the United States at March 31, 1996. None of the employees are
represented by a labor union. Atari considers its employee relations to be good.
ITEM 2. PROPERTIES
Atari leases its 7,200 square feet headquarters facility in Sunnyvale,
California under a lease which expires in 2001. Atari also leases a 33,600
square feet international sales facility in Slough, England and a 19,400 square
feet vacant facility in Viannen, Holland. Atari also holds certain properties in
Southern California and Texas for sale. Some of these properties are currently
being leased by Atari. These properties are reported as real estate held for
sale in the Consolidated Financial Statements. See Note 7 of Notes to
Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
Atari is a defendant in a civil action brought in the Superior Court of the
State of California in and for the County of Santa Clara by Citizen America
Corporation, a former supplier, in February 1994 seeking damages of
approximately $900,000 for alleged breach of contract and related claims. Atari
believes this action will have no material adverse effect on its business,
financial condition or results of operations.*
Atari is a defendant and counter claimant in a civil action for alleged
breach of contract brought in U.S. District Court for the Northern District of
New York, case number 95 Civ. 1945, by Tradewell, Inc., a New York corporation,
seeking specific performance for release of goods having a value of $1.6
million. Atari has counterclaimed seeking specific performance for the purchase
of media or, alternatively, damages in the amount of $3.3 million. As a result
of a partial settlement, Atari now seeks damages of approximately $1.3 million.
Atari believes this action will have no material adverse effect on its business,
financial condition or results of operations.*
- ---------------
* This statement is a forward-looking statement reflecting current expectations.
Actual results could differ materially from those projected in the
forward-looking statement due to numerous factors, including the risk related
factors set forth herein.
5
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Atari is a plaintiff in a civil action brought in the Superior Court of the
State of California in and for the County of Santa Clara brought against
Phillips Laser Magnetic Storage ("Phillips") for breach of contract and breach
of implied covenant of good faith and fair dealing arising out of Phillips'
failure to deliver goods to Atari. Atari has been advised that Phillips intends
to file an unspecified counterclaim. Atari believes this action will have no
material adverse effect on its business, financial condition or results of
operations.*
Atari is a plaintiff in a civil action brought in the Superior Court of the
State of California in and for the County of Santa Clara and removed to the
United States District Court, Northern District of California brought against
Probe Entertainment Limited and Acclaim Entertainment for breach of contract and
related claims. Counterclaims have been filed against Atari for alleged breach
of contract. Atari believes this action will have no material adverse effect on
its business, financial condition or results of operations.*
Atari is not aware of any other pending legal proceedings against Atari and
its consolidated subsidiaries other than routine litigation incidental to their
normal business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
Atari's Common Stock has traded on the American Stock Exchange under the
symbol "ATC" since November 7, 1986. As of the close of business on April 5,
1996, 63,727,318 shares of Atari Common Stock were outstanding and no shares of
Preferred Stock were outstanding. As of that date, there were approximately
2,800 stockholders of record of Atari Common Stock. The following table sets
forth the high and low sale prices of Atari's Common Stock for the periods
indicated as reported on the consolidated transaction system.
<TABLE>
<CAPTION>
HIGH LOW
---- ----
<S> <C> <C>
FISCAL YEAR 1996
First Quarter.................................................. $ 4 1/8 $1 5/8
FISCAL YEAR 1995
Fourth Quarter................................................. $ 3 5/16 $1 1/8
Third Quarter.................................................. 3 5/8 29/16
Second Quarter................................................. 3 1/8 2 1/2
First Quarter.................................................. 4 1/4 2 3/4
FISCAL YEAR 1994
Fourth Quarter................................................. $ 7 3/8 $39/16
Third Quarter.................................................. 7 3/4 2 7/8
Second Quarter................................................. 6 5/8 2 7/8
First Quarter.................................................. 8 1/8 5 5/8
</TABLE>
Atari has never paid cash dividends on its Common Stock and does not
anticipate a change in this practice in the foreseeable future.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data of Atari have been
derived from the historical consolidated financial statements of Atari, included
elsewhere herein, with the exception of the Consolidated Statement of Operations
Data prior to fiscal 1993 and the Consolidated Balance Sheet Data prior to
December 31, 1994 which were derived from historical consolidated financial
statements not included herein. The information set forth below should be read
in conjunction with the Company's Consolidated Financial Statements and notes
thereto and with Management's Discussion and Analysis of Financial Condition and
Results of Operations.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations
Data:
Total revenues........................ $ 14,626 $ 38,748 $ 29,108 $127,340 $257,992
Operating loss........................ (53,665) (24,047) (47,499) (79,008) (18,683)
Income (loss) from continuing
operations(1)...................... (50,158) 9,394 (48,866) (82,719) 23,659
Income (loss) before extraordinary
credit............................. (50,158) 9,394 (48,866) (73,719) 23,659
Net income (loss)..................... (49,576) 9,394 (48,866) (73,615) 25,619
Per common share data:
Income (loss) from continuing
operations......................... $ (0.79) $ 0.16 $ (0.85) $ (1.44) $ 0.41
Income (loss) before extraordinary
credit............................. (0.79) 0.16 (0.85) (1.29) 0.41
Net income (loss)..................... (0.78) 0.16 (0.85) (1.28) 0.44
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Current assets........................ $ 65,126 $113,188 $ 51,388 $109,551 $239,296
Working capital....................... 55,084 92,670 33,896 75,563 159,831
Total assets.......................... 77,569 131,042 74,833 138,508 253,486
Current liabilities................... 10,042 20,518 17,492 33,988 79,465
Long-term obligations................. 42,354 43,454 52,987 53,937 48,492
Shareholder's equity.................. 25,173 67,070 4,354 50,583 125,529
</TABLE>
- ---------------
(1) Includes a gain from the settlement of patent litigation of $32.1 million in
1994 and a gain from the sale of a Taiwan manufacturing facility of $40.9
million in 1991.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Annual Report on Form 10-K contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Actual results could differ materially from
those projected in the forward-looking statements as a result of certain
factors, including the risk related factors set forth herein.
Over the past several years, Atari has undergone significant change. In
1992 and 1993, Atari significantly downsized operations, decided to exit the
computer business and focused on its video game business. As a result, revenues
from computer products as a percentage of total revenues declined from 67% in
1993 to 16% in 1994 and 12% in 1995, while sales of entertainment systems and
related software and peripheral products and the receipt of royalties
represented the balance of revenues in each such year. These actions resulted in
significant restructuring charges for closed operations and write-downs of
computer and certain video game inventories in 1992 and 1993.
While restructuring, Atari developed its 64-bit Jaguar interactive
multimedia entertainment system, which was introduced in selected markets in the
fourth quarter of 1993. For 1995 and 1994, total sales of Jaguar and related
products were $9.9 million and $29.3 million, respectively, and represented 68%
and 76% of Atari's net revenues, respectively. These Jaguar sales were
substantially below Atari's expectations, and Atari's business and financial
results were materially adversely affected in 1995 as Atari continued to invest
heavily in Jaguar game development, entered into arrangements to publish certain
licensed titles and reduced the retail price for its Jaguar console unit. Atari
attributes the poor performance of Jaguar to a number of factors including (i)
extensive delays in development of software for the Jaguar which resulted in
reduced orders due to consumer concern as to when titles for the platform would
be released and how many titles would ultimately be available, and (ii) the
introduction of competing products by Sega and Sony in May 1995 and September
1995, respectively. Atari presently has a substantial unsold inventory of Jaguar
and related products and there can be no assurance that such inventory can be
sold at current prices.
By late 1995, Atari recognized that despite the significant commitment of
financial resources that were devoted to the Jaguar and related products, it was
unlikely that Jaguar would ever become a broadly accepted video game console or
that Jaguar technology would be broadly adopted by software title developers. As
a result, Atari decided to significantly downsize its Jaguar operations. This
downsizing resulted in significant reductions in Atari's workforce, and
significant curtailment of research and development and sales and marketing
activities for Jaguar and related products. Accordingly, Atari decided to focus
its efforts on selling its inventory of Jaguar and related products and to
emphasize its existing licensing and development activities related to
multimedia entertainment software for various platforms.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Total revenues for 1995 were $14.6 million compared to $38.7 million for
1994. Sales of Jaguar and related products represented 68% and 76% of total
revenues for 1995 and 1994, respectively, and sales of other products and
royalties represented the balance of revenues in each such year. The reduction
in revenues was primarily the result of lower unit volumes of Jaguar products
and lower average selling prices of Jaguar and certain of its software titles.
In the first quarter of 1995, Atari reduced the suggested retail price of Jaguar
from its original price of $249.99 to $149.99. The current suggested retail
price of Jaguar is $99.99. As a result of the Jaguar price reductions, the
substantial curtailment of sales and marketing activities for Jaguar and the
substantial curtailment of efforts by Atari and independent software developers
to develop additional software titles for Jaguar, Atari expects sales of Jaguar
and related products to decline substantially in 1996 and thereafter.*
- ---------------
* This statement is a forward-looking statement reflecting current expectations.
Actual results could differ materially from those projected in the
forward-looking statement due to numerous factors, including the risk related
factors set forth herein.
8
<PAGE> 10
Cost of revenues for 1995 was $44.2 million compared to $35.2 million for
1994. Included in cost of revenues for 1995 were accelerated amortization and
write-offs of capitalized game software development costs of $16.6 million and
inventory write-downs of $12.6 million primarily relating to Jaguar products. As
a result of these charges and lower selling prices for Jaguar products and
provisions for returns and allowances and price protection, gross margin for the
year was a loss of $29.6 million. For 1994, gross margin was $3.5 million, or
9.2% of revenues. Included in cost of revenues for 1994 were write-downs of
inventory of $3.6 million and amortization and the write-off of capitalized game
software development costs of $1.5 million. From the introduction of Jaguar in
late 1993 through the end of 1995, Atari sold approximately 125,000 units of
Jaguar. As of December 31, 1995, Atari had approximately 100,000 units of Jaguar
in inventory and the value of Jaguar inventory and related software was
approximately $9.9 million. Due to disappointing sales of Jaguar and increased
competition from products introduced by Sega and Sony, Atari reduced the
suggested retail price of Jaguar to $99.99 and recorded an inventory write-down
of $12.6 million in 1995. There can be no assurance that Atari's substantial
unsold inventory of Jaguar and related software can be sold at current or
reduced prices, if at all. In addition, any further decrease in the value of
such inventory could result in substantial additional inventory write-downs by
Atari.
Research and development expenses for 1995 were $5.4 million compared to
$5.8 million for 1994. During 1995 and 1994, a significant number of Atari
employees and consultants were devoted to developing hardware and software for
the Jaguar, and Atari contracted with third-party software developers to develop
Jaguar software titles. As a result of Jaguar's poor sales performance, in the
third and fourth quarters of 1995, Atari accelerated its amortization of
contracted software development which resulted in charges in those quarters of
$6.0 million and $10.6 million, respectively. At December 31, 1995 and 1994,
Atari had capitalized software development costs of $758,000 and $5.1 million,
respectively. In the fourth quarter of 1995, Atari eliminated its internal
Jaguar development teams and other development staff as titles for Jaguar were
completed. As a result, Atari expects research and development expenses will be
substantially lower for the foreseeable future.*
Marketing and distribution expenses for 1995 were $12.7 million compared to
$14.7 million for 1994. Such costs included television and print media,
promotions and other activities to promote Jaguar. Due to the substantial
curtailment of the Jaguar marketing program, Atari expects these expenses will
be substantially lower for the foreseeable future.*
General and administrative expenses for 1995 were $5.9 million compared to
$7.2 million for 1994. The decrease in such expenses was primarily a result of
staff reductions, reduced legal fees and other operating costs. Due to the
substantial reduction in general and administrative personnel in 1995 and the
first quarter of 1996, Atari expects these expenses will be substantially lower
for the foreseeable future.*
Atari experienced a gain on foreign currency exchange of $13,000 for 1995
compared to a gain of $1.2 million for 1994. These changes were a result of
lower foreign asset exposure and a greater percentage of sales made in U.S.
dollars which further reduced exposure to foreign currency transaction
fluctuations.
In 1994, Atari received $2.2 million in connection with the settlement of
litigation between Atari, Atari Games Corporation and Nintendo. In 1994, Atari
also reached an agreement with Sega, which resulted in a gain of $29.8 million,
after contingent legal fees, and the sale of 4,705,883 shares of Atari Common
Stock to Sega at $8.50 per share for an aggregate of $40.0 million.
During 1995, Atari sold a portion of its holdings in Dixon PLC, a retailer
in England, and realized a gain of $2.4 million, of which $1.8 million was
realized in the fourth quarter of 1995. In the first quarter of 1996, Atari sold
the remaining portion of its holdings and realized a gain of $6.1 million. The
1995 gain of $2.4 million together with other income items resulted in a total
other income of $2.7 million compared to $484,000 for 1994.
- ---------------
* This statement is a forward-looking statement reflecting current expectations.
Actual results could differ materially from those projected in the
forward-looking statement due to numerous factors, including the risk related
factors set forth herein.
9
<PAGE> 11
For each of 1995 and 1994, interest expense was approximately $2.3 million
on the Atari Convertible Subordinated Debentures (the "Atari Debentures"). In
1995, Atari repurchased a portion of the Atari Debentures and realized a gain of
$582,000. As of December 31, 1995, the outstanding balance of these debentures
was $42.4 million.
Interest income for 1995 and 1994 was $3.1 million and $2.0 million,
respectively. The increase in interest income was primarily attributable to
higher average cash balances in 1995.
As a result of Atari's operating losses, there was no provision for income
taxes in 1995. See Note 11 to the Consolidated Financial Statements.
As a result of the factors discussed above, Atari reported a net loss for
1995 of $49.6 million compared to net income of $9.4 million in 1994.
In connection with the restructuring of Atari's business in 1992 and 1993
and Atari's decision in late 1995 to significantly downsize its Jaguar
operations, Atari has terminated and plans to terminate numerous contracts and
business relationships, including several related to software development
activities. The termination of contracts and relationships has, from time to
time, resulted in litigation, diverting management and financial resources.
There can be no assurance that the parties to such contracts will not commence
or threaten to commence litigation related to such contracts. Any such
litigation or threatened litigation would further divert management and
financial resources and could have a material adverse effect on Atari's
business, operating results and financial condition. In addition, Atari holds
several properties for sale, some of which are currently being leased. The
ownership and use of such properties subjects Atari to numerous risks, including
risks of environmental and personal injury liabilities. Although Atari is
attempting to sell certain of such properties, such sales are not expected to
eliminate all the risks associated with Atari's ownership of such properties.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Total revenues for 1994 were $38.7 million compared to $29.1 million for
1993. The increased revenues were primarily a result of Atari's national rollout
of the Jaguar and related products. Sales of Jaguar products represented 76% of
revenues in 1994 compared to 13% of revenues in 1993. Jaguar was introduced in
selected markets in late 1993, and approximately 100,000 units were sold by the
end of 1994 at a suggested retail price of $249.99. Sales of Atari's proprietary
personal computers and certain discontinued video game products represented 24%
of revenues for 1994 compared to 87% of revenues for 1993.
Gross margin for 1994 was $3.5 million, or 9.2% of revenues, compared to a
gross loss of $13.7 million for 1993. Included in cost of revenues are inventory
write-downs of $3.6 million and $18.1 million for 1994 and 1993, respectively,
and a write-off of capitalized game software development costs of $804,000 in
1994. These write-downs of proprietary personal computers and video game
products to estimated realizable values were made concurrently with the
introduction and change in marketing focus to Jaguar products.
Research and development expenses for 1994 were $5.8 million compared to
$4.9 million for 1993. The increase resulted from increased expenditures for the
Jaguar product line.
Marketing and distribution expenses for 1994 were $14.7 million compared to
$9.0 million for 1993. The increase in expenditures was primarily the result of
the national rollout in 1994 of the Jaguar. Such costs included television and
print media promotions and other activities.
General and administrative expenses for 1994 were $7.2 million compared to
$7.6 million for 1993. The marginally lower general and administrative expenses
were primarily due to Atari's restructuring program in 1993. During 1993, Atari
made provisions for restructuring totaling $12.4 million, which included closing
many of Atari's operations in Europe, Asia and Australia, including, but not
limited to, severance payments, rental commitments and other closure costs.
For 1994, Atari experienced a gain on foreign currency exchange of $1.2
million compared to a loss on exchange of $2.2 million in 1993. This change was
a result of fluctuation in exchange rates, a lower foreign asset exposure and a
greater percentage of sales made in U.S. dollars, thereby further reducing
exposure to foreign currency transaction fluctuations.
10
<PAGE> 12
For each of 1994 and 1993, interest expense was approximately $2.3 million
on the Atari Debentures.
Atari utilized net operating loss carryforwards and, as a result, there was
no provision for income taxes in 1994.
As a result of the factors discussed above, Atari reported net income for
1994 of $9.4 million compared to a net loss of $48.9 million in 1993.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1995, Atari held cash and marketable securities of $50.6
million compared to $81.0 million at December 31, 1994. The decrease in cash and
marketable securities was primarily the result of operating losses incurred
during 1995.
During 1995, Atari sold a portion of its holding in Dixon PLC., a U.K.
retailer, and realized a gain on the sale of these securities in the amount of
$2.4 million. In the first quarter of 1996, Atari sold its remaining interest in
Dixon PLC. and realized a gain of $6.1 million. As of December 31, 1995, Atari's
balance sheet reflected an unrealized gain on marketable securities of $7.1
million.
In February 1996, Atari loaned $25.0 million to JTS in connection with the
Merger. The loan is due to be repaid by JTS in September 1996 and is secured by
substantially all of the assets of JTS. Atari's security interest in such assets
is junior to existing security interests in favor of a bank and certain
equipment lessors. In the event the Merger is not consummated, there can be no
assurance that Atari's security interest in such assets will adequately protect
Atari in the event JTS is unable to repay the loan. In addition, the loan is
convertible into shares of JTS Series A Preferred Stock at the option of Atari
or JTS upon the occurrence of certain conditions, including a breach of the
Merger Agreement by the other party. In the event such conversion occurs, Atari
would hold a significant percentage of JTS' outstanding equity securities and
would be subject to the numerous risks associated with JTS' business. There can
be no assurance that such securities would be freely tradeable at the time of
conversion, if ever.
As of December 31, 1995, Atari had $42.4 million of its 5 1/4% convertible
subordinated debentures due April 29, 2002 outstanding. The market value of the
Atari Debentures was approximately $20.0 million at December 31, 1995. The Atari
Debentures may be redeemed at Atari's option, upon payment of a premium. The
debentures, at the option of the holders, are convertible into Atari Common
Stock at $16.3125 per share. A default with respect to other indebtedness of
Atari in an aggregate amount exceeding $5 million would result in an event of
default whereby the Atari Debentures would be due and payable immediately.
Atari believes its existing cash balances are sufficient to meet its
requirements at least through 1996.*
- ---------------
* This statement is a forward-looking statement reflecting current expectations.
Actual results could differ materially from those projected in the
forward-looking statement due to numerous factors, including the risk related
factors set forth herein.
11
<PAGE> 13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ATARI CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
PAGES IN
THIS REPORT
-----------
<S> <C>
Consolidated Financial Statements:
Independent Auditors' Report.................................................... 13
Consolidated Balance Sheets at December 31, 1995 and 1994....................... 14
Consolidated Statements of Operations for the Years Ended December 31, 1995,
1994 and 1993................................................................ 15
Consolidated Statements of Shareholders' Equity for the Years Ended December 31,
1995, 1994 and 1993.......................................................... 16
Consolidated Statements of Cash Flows for the Years Ended December 31, 1995,
1994 and 1993................................................................ 17
Notes to Consolidated Financial Statements...................................... 18
Financial Statement Schedule:
II Valuation and Qualifying Accounts........................................... 33
</TABLE>
All other schedules are omitted because they are not required or the
required information is shown in the financial statements or the notes thereto.
12
<PAGE> 14
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
of Atari Corporation:
We have audited the accompanying consolidated balance sheets of Atari
Corporation and subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1995. Our audits also
included the financial statement schedule listed in the Index at Item 8. These
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on the
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Atari Corporation and subsidiaries
at December 31, 1995 and 1994, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1995 in
conformity with generally accepted accounting principles. Also, in our opinion,
such financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
DELOITTE & TOUCHE LLP
San Jose, California
March 1, 1996
(April 8, 1996 as to Note 16)
13
<PAGE> 15
ATARI CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1994
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents (including $700 and $4,450 held as restricted
balances in 1995 and 1994)...................................... $ 28,941 $ 22,592
Marketable securities.............................................. 21,649 58,432
Accounts receivable (less allowances for returns and doubtful
accounts:
1995, $4,221; 1994, $1,957)..................................... 2,468 9,262
Inventories........................................................ 10,934 18,185
Other current assets............................................... 1,134 4,717
--------- ---------
Total current assets....................................... 65,126 113,188
GAME SOFTWARE DEVELOPMENT COSTS -- Net............................... 758 5,145
EQUIPMENT AND TOOLING -- Net......................................... 671 1,315
REAL ESTATE HELD FOR SALE............................................ 10,468 10,741
OTHER ASSETS......................................................... 546 653
--------- ---------
TOTAL...................................................... $ 77,569 $ 131,042
========= =========
</TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable................................................... $ 4,954 $ 15,341
Accrued liabilities................................................ 5,088 5,177
--------- ---------
Total current liabilities.................................. 10,042 20,518
--------- ---------
LONG-TERM OBLIGATIONS................................................ 42,354 43,454
--------- ---------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 14)
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value -- authorized, 10,000,000 shares;
none outstanding................................................ -- --
Common stock, $.01 par value -- authorized, 100,000,000 shares;
outstanding: 1995, 63,687,118 shares; 1994, 63,648,535 shares... 637 636
Additional paid-in capital......................................... 196,209 196,138
Unrealized net gain on marketable securities....................... 7,088 542
Accumulated translation adjustments................................ (663) (1,724)
Accumulated deficit................................................ (178,098) (128,522)
--------- ---------
Total shareholders' equity...................................... 25,173 67,070
--------- ---------
TOTAL...................................................... $ 77,569 $ 131,042
========= =========
</TABLE>
See notes to consolidated financial statements.
14
<PAGE> 16
ATARI CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
REVENUES................................................... $ 14,626 $ 38,748 $ 29,108
COST AND EXPENSES:
Cost of revenues......................................... 44,234 35,200 42,768
Research and development................................. 5,410 5,775 4,876
Marketing and distribution............................... 12,726 14,651 8,980
General and administrative............................... 5,921 7,169 7,558
Restructuring charges.................................... -- -- 12,425
-------- -------- --------
Total operating expenses......................... 68,291 62,795 76,607
-------- -------- --------
OPERATING LOSS............................................. (53,665) (24,047) (47,499)
Settlements of patent litigation........................... -- 32,062 --
Exchange gain (loss)....................................... 13 1,184 (2,234)
Other income............................................... 2,670 484 854
Interest income............................................ 3,133 2,015 2,039
Interest expense........................................... (2,309) (2,304) (2,290)
-------- -------- --------
Income (loss) before income taxes................ (50,158) 9,394 (49,130)
Income tax credit.......................................... -- -- 264
-------- -------- --------
INCOME (LOSS) BEFORE EXTRAORDINARY CREDIT.................. (50,158) 9,394 (48,866)
Extraordinary credit -- gain on extinguishment of 5 1/4%
convertible subordinated debentures...................... 582 -- --
-------- -------- --------
NET INCOME (LOSS).......................................... $(49,576) $ 9,394 $(48,866)
======== ======== ========
EARNINGS (LOSS) PER COMMON SHARE:
Income (loss) before extraordinary credit................ $ (0.79) $ 0.16 $ (0.85)
Net income (loss)........................................ $ (0.78) $ 0.16 $ (0.85)
Number of shares used in computations.................... 63,697 58,962 57,148
</TABLE>
See notes to consolidated financial statements.
15
<PAGE> 17
ATARI CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
NOTES
RECEIVABLE UNREALIZED
FROM NET GAIN
COMMON STOCK ADDITIONAL SALE OF ACCUMULATED ON
----------------- PAID-IN COMMON TRANSLATION MARKETABLE ACCUMULATED
SHARES AMOUNT CAPITAL STOCK ADJUSTMENTS SECURITIES DEFICIT TOTAL
------ ------ ---------- ---------- ----------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES, JANUARY
1, 1993.......... 57,137 $571 $142,315 $(19) $(3,234) $ -- $ (89,050) $ 50,583
Stock options
exercised........ 89 1 191 192
Common stock
repurchased...... (11) (9) 9 --
Collection of notes
receivable....... 7 7
Translation
adjustments...... 2,438 2,438
Net loss........... (48,866) (48,866)
------ ---- -------- ---- ------- ------ ------ ---------
BALANCES, DECEMBER
31, 1993......... 57,215 572 142,497 (3) (796) -- (137,916) 4,354
Sale of common
stock............ 6,277 63 53,270 53,333
Stock options
exercised........ 157 1 371 372
Collection of notes
receivable....... 3 3
Translation
adjustments...... (928) (928)
Unrealized net gain
on marketable
securities....... 542 542
Net income......... 9,394 9,394
------ ---- -------- ---- ------- ------ ------ ---------
BALANCES, DECEMBER
31, 1994......... 63,649 636 196,138 -- (1,724) 542 (128,522) 67,070
Stock options
exercised........ 82 1 109 110
Stock
repurchased...... (44) (38) (38)
Translation
adjustments...... 1,061 1,061
Unrealized net gain
on marketable
securities....... 6,546 6,546
Net loss........... (49,576) (49,576)
------ ---- -------- ---- ------- ------ ------ ---------
BALANCES, DECEMBER
31, 1995......... 63,687 $637 $196,209 $ -- $ (663) $7,088 $(178,098) $ 25,173
====== ==== ======== ==== ======= ====== ====== =========
</TABLE>
See notes to consolidated financial statements.
16
<PAGE> 18
ATARI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss).......................................................................... $(49,576) $ 9,394 $(48,866)
Adjustments to reconcile net income (loss) to net cash provided (used) by operating
activities:
Gain from extinguishment of 5 1/4% convertible subordinated debentures..................... (582) -- --
Depreciation and amortization.............................................................. 1,970 2,619 361
Provision for production tooling........................................................... 300 -- --
Provision for doubtful accounts............................................................ 50 194 232
Provision for sales returns and allowances................................................. 5,028 1,563 457
Provision for restructuring................................................................ -- -- 12,425
Gain on sale of marketable securities...................................................... (2,377) -- (324)
Provision for inventory valuation.......................................................... 12,640 5,362 18,100
Utilization of advertising barter credits.................................................. 3,179 -- --
Write-off of game software development costs............................................... 16,578 804 --
Changes in operating assets and liabilities:
Accounts receivable...................................................................... 1,637 (5,383) 16,863
Inventories.............................................................................. (5,389) (14,177) 951
Other assets............................................................................. 395 (336) 3,178
Accounts payable......................................................................... (10,372) 3,763 (4,925)
Accrued liabilities...................................................................... (42) (660) (15,881)
-------- -------- --------
Net cash provided (used) by operations..................................................... (26,561) 3,143 (17,429)
-------- -------- --------
INVESTING ACTIVITIES:
Sales and maturities of marketable securities.............................................. 55,703 -- 2,525
Purchase of marketable securities.......................................................... (9,997) (50,000) --
Purchases of property, equipment and tooling............................................... (782) (1,207) (663)
Sale of property........................................................................... 29 7,543 --
Game software development costs............................................................ (12,791) (5,810) (789)
Other assets............................................................................... 107 482 541
-------- -------- --------
Net cash provided (used) by investing activities........................................... 32,269 (48,992) 1,614
-------- -------- --------
FINANCING ACTIVITIES:
5 1/4% convertible subordinated debentures extinguished.................................... (518) -- --
Repayments of borrowings................................................................... -- (7,642) (259)
Issuance of common stock, net.............................................................. 72 53,708 199
-------- -------- --------
Net cash provided (used) by financing activities........................................... (446) 46,066 (60)
-------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND EQUIVALENTS...................................... 1,087 (684) (356)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS.............................................. 6,349 (467) (16,231)
CASH AND EQUIVALENTS:
Beginning of year.......................................................................... 22,592 23,059 39,290
-------- -------- --------
End of year................................................................................ $ 28,941 $ 22,592 $ 23,059
======== ======== ========
OTHER CASH FLOW INFORMATION:
Interest paid.............................................................................. $ 2,309 $ 2,303 $ 3,023
======== ======== ========
Income taxes refunded...................................................................... $ -- $ (426) $ (225)
NONCASH INVESTING AND FINANCING ACTIVITIES:
Exchange of inventory for advertising services............................................. $ -- $ 3,179 $ --
======== ======== ========
Exchange of property for retirement of debt................................................ $ -- $ 1,891 $ --
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
17
<PAGE> 19
ATARI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. COMPANY
Nature of Operations -- The Company designs and markets interactive
multimedia entertainment systems and related software and peripheral products.
Manufacture of these products is performed by third parties. The principal
methods of distribution are through mass market retailers, consumer electronic
specialty stores and distributors of electronic products.
Product Focus -- Since 1992, the Company has focused its research and
development effort on its 64-bit Jaguar interactive multimedia entertainment
system. This product was introduced in 1993 and, in 1995 and 1994, 68% and 76%
of revenues, respectively, were associated with this product. Sales of the
Jaguar in 1995 were disappointing and the Company is currently test marketing
different price points and software bundles for the Jaguar in an attempt to sell
its substantial inventory of such products.
In December 1994, the Company planned price reductions beginning in early
1995 and recognized the impact of this decision on finished and in-process
inventory through a write down of inventory of $3.6 million, which is included
in cost of sales in the fourth quarter of 1994. In December 1995, the Company
planned further price reductions beginning in early 1996 and recognized the
impact of this decision through a $10.9 million write down of inventory, which
is included in cost of sales in the fourth quarter of 1995.
The Company continues to carry limited quantities of its older 8-bit and
16-bit video games and computer product lines. As a result of rapid
technological change and intense competition, the Company wrote down inventories
of these products by $18.1 million in 1993 which was included in cost of sales.
Estimates -- The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect recorded amounts of assets, liabilities, revenues
and expenses as of the dates and for the periods presented. In connection with
the change of the Company's focus, measurement of assets and liabilities is
dependent upon management's ability to accurately predict future operating
results. Actual results could differ from these estimates.
Restructuring -- The Company has active operations in the United States and
the United Kingdom. During 1993 and 1992, the Company significantly restructured
its operations around the world, closing operations in Australia and the Far
East, in several European countries and in Canada and Mexico. These operational
closures resulted in the bankruptcy of subsidiaries in Australia and Germany and
may result in the voluntary or involuntary liquidation or bankruptcy of other
subsidiary companies. Charges for restructuring have been separately reported in
the consolidated statements of operations for 1993. The remaining accruals of
$351,000 at December 31, 1995 relate to employee benefits in Italy and lease
obligations in the Netherlands.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation -- The consolidated financial statements
include the Company and its subsidiaries. All transactions and balances between
the companies are eliminated.
Cash and Equivalents -- Cash equivalents are stated at cost, which
approximates market value, have maturities not exceeding ninety days upon
acquisition and generally consist of certificates of deposit, time deposits,
treasury notes and commercial paper.
Marketable Securities -- Effective January 1, 1994, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Marketable securities are
carried as available-for-sale securities and reported at the fair market value.
The cumulative effect of adoption of SFAS 115 as of January 1, 1994 was not
material. Unrealized gains and losses are reported as a separate component of
shareholders' equity. Realized gains and losses are recorded in the statements
of operations and realized gains were $2.4 million in 1995. The cost of
securities sold is based on average cost.
18
<PAGE> 20
ATARI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Inventories -- Inventories are stated at the lower of cost or market. Cost
is computed using standard costs which approximate actual cost on a first-in,
first-out basis. Market for each of the Company's product lines is determined by
reference to expected sales prices less direct selling expenses.
Prepaid Advertising -- Included in other current assets at December 31,
1994 is $3.2 million of prepaid advertising resulting from a barter transaction.
The amount recorded as prepaid advertising equals the carrying value of certain
inventory exchanged for advertising credits. The Company expensed the prepaid
advertising as utilized during 1995.
Equipment and Tooling -- Equipment and tooling are stated at cost.
Depreciation on equipment is computed using the straight-line method based on
estimated useful lives of the assets of two to five years. Tooling is
depreciated on a units of production basis. Leasehold improvements are amortized
over the estimated useful life or lease term, as appropriate. Fully depreciated
assets, and related depreciation, are excluded from the consolidated financial
statements.
Real Estate Held for Sale -- Real property associated with closed
operations in the U.S. is stated at estimated market value as determined by
recent valuations, appraisals or pending sales offers.
Revenue Recognition -- Sale of consoles, software game cartridges and
related products are recorded as revenue at the time of shipment to customers.
Concurrently, the Company establishes reserves for estimated returns, which are
recorded as a reduction of sales, and for cooperative advertising allowances,
which are recorded as marketing and distribution expense. Royalty revenues are
recognized when earned and collection is probable.
Income Taxes -- The Company adopted SFAS No. 109 "Accounting for Income
Taxes" in the first quarter of 1993 which requires an asset and liability method
for financial accounting and reporting of income taxes. The impact of the
adoption of SFAS 109 was not material.
Foreign Currency Translation -- Assets and liabilities of operations
outside the United States are translated into United States dollars using
current exchange rates, and the effects of foreign currency translation
adjustments are deferred and included as a component of shareholders' equity.
Income (Loss) per Common Share -- Per share amounts are computed based on
the weighted average number of common and dilutive common equivalent shares
(stock options) outstanding during each period. The effect of the assumed
conversion of the 5 1/4% convertible subordinated debentures was antidilutive
for all periods presented and excluded from the computation.
Fiscal Year -- The Company uses a 52/53 week fiscal year which ends on the
Saturday closest to December 31. All fiscal years presented contain 52 weeks.
For simplicity of presentation, the date December 31 is used to represent the
fiscal year end.
Reclassifications -- Certain items have been reclassified in the 1994 and
1993 financial statements to conform to the 1995 presentation and had no effect
on operating results or shareholders' equity.
Recently Issued Pronouncements -- In October 1995, the Financial Accounting
Standards Board issued FASB No. 123, "Accounting for Stock-Based Compensation."
The new standard defines a fair value method of accounting for stock options and
other equity instruments, such as stock purchase plans. Under this method,
compensation cost is measured based on the fair value of the stock award when
granted and is recognized as an expense over the service period, which is
usually the vesting period. This standard will be effective for the Company
beginning in 1996, and requires measurement of awards made beginning in 1995.
The new standard permits companies to continue to account for equity
transactions with employees under existing accounting rules, but requires
disclosure in a note to the financial statements of the pro forma net income and
earnings per share as if the Company had applied the new method of accounting.
The Company intends to follow these
19
<PAGE> 21
ATARI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
disclosure requirements for its employee stock plans. As a result, adoption of
the new standard will not impact reported earnings or earnings per share, and
will have no effect on the Company's cash flows.
3. FINANCIAL INSTRUMENTS
Marketable Securities -- Marketable securities available for sale consist
of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
---------------------------------- ----------------------------------
GROSS GROSS
AMORTIZED MARKET UNREALIZED AMORTIZED MARKET UNREALIZED
ISSUE COST VALUE GAINS COST VALUE GAINS
- ---------------------------------------- --------- ------- ---------- --------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Equity securities --
Dixon common stock.................... $ 4,565 $11,606 $7,041 $ 7,890 $ 8,432 $ 542
Government securities --
Federal Home Loan Bank................ 4,993 5,026 33 -- -- --
Federal Home Loan Mortgage Corp....... 5,003 5,017 14 -- -- --
Foreign government debt securities --
Eurodollar notes...................... -- -- -- 50,000 50,000 --
----- ------- ------- ------
Total marketable securities......... $14,561 $21,649 $7,088 $57,890 $58,432 $ 542
===== ======= ======= ======
</TABLE>
The contractual maturities of the government securities range from two to
four years. The Eurodollar notes matured during 1995.
Concentration of Credit Risk -- The Company sells to mass market retailers,
consumer electronic specialty stores and to distributors of electronic products
throughout the United States and Europe. The Company makes ongoing credit
evaluations of customers and, at times, requires letters of credit from some
foreign customers. Sales to foreign customers are generally stated in the
currency of the customer. To date, the Company has not entered into hedges of
these foreign currency exposures.
Fair Value of Financial Instruments -- In accordance with the provisions of
SFAS No. 107, "Disclosure About Fair Value of Financial Instruments," which
requires the disclosure of fair value information about both on and off balance
sheet financial instruments where it is practicable to estimate the value, the
Company has estimated the fair value of its financial instruments. The estimated
fair value of the 5 1/4% convertible subordinated debentures at December 31,
1995 was approximately $20 million based primarily on quoted market prices. The
carrying amounts of the remainder of the Company's financial instruments,
including cash and equivalents, marketable securities, accounts receivable and
accounts payable, approximate fair values due to their short maturities.
4. INVENTORIES
Inventories at December 31 consist of the following (in thousands):
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Finished goods................................................... $ 9,927 $15,799
Raw materials and work-in-process................................ 1,007 2,386
------- -------
Total....................................................... $10,934 $18,185
======= =======
</TABLE>
5. GAME SOFTWARE DEVELOPMENT COSTS
Internal game software development costs are expensed as incurred as these
costs relate primarily to development tools. External development costs are
capitalized once technological feasibility has been determined. During 1995 and
1994, the Company capitalized $12.8 million and $5.8 million, respectively, of
20
<PAGE> 22
ATARI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
amounts paid to third parties, primarily as prepaid licenses, in connection with
game development for the Jaguar. The Company amortizes such costs over the
shorter of 12 months from game introduction or the estimated unit sales of the
game title. The Company assesses the recoverability of capitalized games
software development costs in light of many factors, including, but not limited
to, anticipated future revenues, estimated economic useful lives and changes in
software and hardware technologies. Amortization expense and adjustments for
management's assessment of recoverability were $17.1 million (including a
write-off of $16.6 million) and $1.5 million (including a write-off of $804,000)
for the years ended December 31, 1995 and 1994, respectively.
6. EQUIPMENT AND TOOLING
Equipment and tooling at December 31 consists of the following (in
thousands):
<TABLE>
<CAPTION>
1995 1994
------ -------
<S> <C> <C>
Equipment and tooling............................................. $1,526 $ 1,874
Furniture and fixtures............................................ 198 708
Leasehold improvements............................................ -- 43
------ -------
Total............................................................. 1,724 2,625
Accumulated depreciation and amortization......................... (753) (1,310)
Reserve for production tooling.................................... (300) --
------ -------
Equipment and tooling -- net...................................... $ 671 $ 1,315
====== =======
</TABLE>
7. REAL ESTATE HELD FOR SALE
Property held for sale at December 31, 1995 consists of nine properties in
California and Texas, from the discontinued consumer electronics and home
entertainment products operation. Certain of the properties have rental tenants,
although all properties are available for sale. Rental income, net of rental
expense and depreciation, is included in other income (expense) and was not
material. Disposals in 1994 represented the Company's building in Germany and
land and building in France, which were disposed of with no significant gain or
loss.
8. ACCRUED LIABILITIES
Accrued liabilities at December 31 consist of the following (in thousands):
<TABLE>
<CAPTION>
1995 1994
------ ------
<S> <C> <C>
Accrued interest........................................... $1,483 $1,513
Accrued game software development costs.................... 1,525 --
Accrued restructuring charge............................... 351 719
Accrued royalties.......................................... 28 320
Other...................................................... 1,701 2,625
------ ------
Total...................................................... $5,088 $5,177
====== ======
</TABLE>
9. LETTERS OF CREDIT AND RESTRICTED CASH
At December 31, 1995, cash balances of $700,000 were collateral for
outstanding commercial letters of credit associated with inventory components
and software development. At December 31, 1994, cash balances of $4.5 million
were collateral for outstanding letters of credit.
21
<PAGE> 23
ATARI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. LONG-TERM DEBT OBLIGATIONS
Convertible Subordinated Debentures -- The Company has $42.4 million of
5 1/4% convertible subordinated debentures due April 29, 2002. The debentures
may be redeemed at the Company's option, upon payment of a premium. The
debentures, at the option of the holders, are convertible into common stock at
$16.3125 per share. At December 31, 1995, 2,596,414 shares of common stock were
reserved for issuance upon conversion. Default with respect to other
indebtedness of Atari Corporation in an aggregate amount exceeding $5 million
would result in an event of default whereby the outstanding debentures would be
due and payable immediately.
In 1995, the Company reacquired in the open market and extinguished $1.1
million face value of these debentures for $500,000, resulting in an
extraordinary credit of $582,000.
Term Loans on Real Estate in Europe -- At December 31, 1993, the Company
had two secured term loans outstanding totaling $7.5 million for its building in
Germany and a term loan of $2.0 million for its land and building in France.
These loans were repaid or exchanged in 1994 from the sale or transfer of the
properties.
11. SETTLEMENTS OF PATENT LITIGATION
During the first quarter of 1994, the Company received $2.2 million with
respect to the settlement of litigation between the Company, Atari Games
Corporation and Nintendo. Although not part of the litigation, the Company sold
1,500,000 shares of its common stock to Time Warner (parent company of Atari
Games Corporation), Inc. for $12.8 million.
During the fourth quarter of 1994, the Company completed a comprehensive
agreement ("Agreement") with Sega Enterprises, Ltd. ("Sega") concerning
resolution of disputes, equity investment and patent and product licensing
agreements. The results of the Agreement were as follows: (i) Sega acquired
4,705,883 shares of the Company's common stock for $40.0 million; (ii) the
Company received a payment of $29.8 million ($50.0 million from Sega, net of
$20.2 million of legal fees and associated costs) in exchange for a license from
Atari covering the use of a library of Atari patents issued between 1977 through
1984 (excluding patents which exclusively claim elements of the Company's Jaguar
and Lynx products) through the year 2001; and (iii) the Company and Sega agreed
to cross-license up to five software game titles each year through the year
2001.
12. INCOME TAXES
The credit for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- -----
<S> <C> <C> <C>
Current:
Federal............................................. $-- $-- $ --
Foreign............................................. -- -- (264)
State............................................... -- -- --
-- --
-----
Income tax credit..................................... $-- $-- $(264)
== == =====
</TABLE>
At December 31, 1995, the Company has a U.S. income tax operating loss
carryforward of $165 million which expires in 2006 through 2010, a research and
development tax credit carryforward of $1.8 million which expires in 2002
through 2010, and a California income tax operating loss carryforward of $60
million which expires as follows: $16.4 million in 1997, $16.7 million in 1998,
$1.6 million in 1999 and $21.8 million in 2000.
22
<PAGE> 24
ATARI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The effective income tax rates for 1995, 1994 and 1993 were 0%, 0%, and
(1)%, respectively, and differ from the federal statutory rate of 35% as follows
(in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
-------- ------- --------
<S> <C> <C> <C>
Computed at federal statutory rates................. $(17,402) $ 3,288 $(17,103)
Valuation allowance................................. 18,604 (3,288) 16,821
Effect of foreign tax rates different than statutory
rates and utilization of foreign loss
carrybacks........................................ -- -- 16
Other............................................... (1,202) -- 2
-------- ------- --------
Income tax credit................................... $ -- $ -- $ (264)
======== ======= ========
</TABLE>
The components of the net deferred tax asset at December 31 consist of (in
thousands):
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Deferred tax assets:
U.S. operating loss carryforwards...................... $ 57,706 $ 42,149
State operating loss carryforwards..................... 3,820 2,321
Capital loss carryforwards............................. 1,035 1,804
Research and development tax credit carryforwards...... 1,813 1,370
Inventory reserves..................................... 3,237 2,781
Restructuring charges.................................. 50 239
Capitalized game software development costs............ 3,022 --
Other items............................................ 4,411 5,826
-------- --------
Subtotal............................................... 75,094 56,490
Valuation allowance.................................... (75,094) (56,490)
-------- --------
Net deferred tax asset................................. $ -- $ --
======== ========
</TABLE>
Due to the uncertainty surrounding the timing and realization of the
benefits of its favorable tax attributes in future years, the Company has
established a valuation allowance to offset its net deferred tax assets.
Current federal and state tax law includes certain provisions limiting the
use of net operating loss carryforwards in the event of certain defined changes
in stock ownership. The annual use of the Company's net operating loss
carryforwards could be limited according to these provisions, and there can be
no assurance that such limitations will not result in the loss of carryforward
benefits during the carryforward period.
13. STOCK OPTIONS
The Company's stock option plan and restricted stock plan provide for the
issuance of up to 3,000,000 shares of common stock through the issuance of
incentive stock options to employees and nonqualified stock options and
restricted stock to employees, directors and consultants. Under the plans, stock
options or restricted stock may be granted at not less than fair market value as
determined by the Board of Directors. Stock options become exercisable as
established by the Board (generally ratably over five years) and expire up to
ten years from date of grant. The Company's right to repurchase restricted stock
lapses over a maximum period of five years. At December 31, 1995, options for
551,925 shares were exercisable and options for 602,310 shares were available
for future grant. At December 31, 1995, no restricted stock under the restricted
stock plan had been issued.
23
<PAGE> 25
ATARI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Additional information with respect to the stock option plan is as follows:
<TABLE>
<CAPTION>
OPTION PRICE
RANGE PER SHARE
NUMBER OF ------------------
OPTIONS LOW HIGH TOTAL
--------- ------ ----- -----------
<S> <C> <C> <C> <C> <C>
Outstanding, January 1, 1993............... 970,400 $1.500 - $7.50 $ 3,131,450
Granted.................................... 535,583 0.875 - 4.75 1,045,093
Exercised.................................. (89,300) 0.875 - 3.00 (195,463)
Cancelled.................................. (222,500) 0.875 - 6.00 (831,625)
---------
Outstanding, December 31, 1993............. 1,194,183 0.875 - 7.50 3,149,455
Granted.................................... 289,500 2.250 - 7.00 1,467,750
Exercised.................................. (157,065) 0.875 - 6.25 (372,403)
Cancelled.................................. (18,160) 1.675 - 7.50 (93,980)
---------
Outstanding, December 31, 1994............. 1,308,458 0.875 - 7.00 4,150,822
Granted.................................... 1,487,000 1.438 - 3.81 3,970,814
Exercised.................................. (82,333) 0.875 - 2.00 (110,250)
Cancelled.................................. (615,600) 0.875 - 7.00 (2,135,175)
---------
Outstanding, December 31, 1995............. 2,097,525 $0.875 - $5.25 $ 5,876,211
=========
</TABLE>
14. SEGMENT INFORMATION
The Company operates in one industry segment -- the design and sale of
consumer electronic products.
The Company's foreign operations at December 31, 1995 consist of sales and
distribution facilities in Europe. Transfers between geographic areas are
accounted for at amounts generally above cost and in accordance with the rules
and regulations of the respective governing tax authorities. Corporate assets
are primarily cash and equivalents, marketable securities and real estate held
for sale.
The following tables present a summary of operations by geographic region
(in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Revenues from unaffiliated customers:
North America.............................. $ 8,163 $ 23,158 $ 7,390
Export sales from North America............ 1,868 8,538 --
Europe..................................... 4,595 7,052 18,548
Other...................................... -- -- 3,170
------- ------- -------
Total............................ $ 14,626 $ 38,748 $ 29,108
======= ======= =======
Transfer between geographic areas
(eliminated in consolidation):
North America.............................. $ 4,041 $ 1,046 $ 17,781
Europe..................................... 68 1,895 25,284
Other...................................... -- -- 102
------- ------- -------
Total............................ $ 4,109 $ 2,941 $ 43,167
======= ======= =======
</TABLE>
24
<PAGE> 26
ATARI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Operating loss:
North America.............................. $(51,036) $(21,600) $(14,025)
Europe..................................... (2,629) (2,447) (19,741)
Other...................................... -- -- (13,733)
------- ------- -------
Total............................ $(53,665) $(24,047) $(47,499)
======= ======= =======
Identifiable assets at December 31:
North America.............................. $ 14,588 $ 37,627 $ 17,369
Europe..................................... 1,856 1,650 5,801
Corporate assets........................... 61,125 91,765 51,663
------- ------- -------
Total............................ $ 77,569 $131,042 $ 74,833
======= ======= =======
</TABLE>
No single customer accounted for more than 10% of total revenues for the
years ended December 31, 1995, 1994 or 1993.
15. COMMITMENTS AND CONTINGENT LIABILITIES
The Company leases various facilities and equipment under noncancellable
operating lease arrangements. These leases generally provide renewal options of
five additional years. Minimum future lease payments under noncancellable
operating leases as of December 31, 1995 are as follows (in thousands):
<TABLE>
<S> <C>
1996................................................ $ 670
1997................................................ 460
1998................................................ 183
1999................................................ 85
2000................................................ 74
------
Total minimum lease payments.............. $1,472
======
</TABLE>
Rent expense for operating leases was $1,193,000, $1,218,000 and $1,251,000
for the years 1995, 1994 and 1993, respectively.
Certain claims and suits arising in the ordinary course of business have
been filed or are pending against the Company. The number of such claims has
increased as the Company significantly downsized its development operations. In
the opinion of management, all such matters have been adequately provided for,
are without merit, or are such that if settled unfavorably would not have a
material adverse effect on the Company's consolidated financial position and
results of operations.
16. SUBSEQUENT EVENT
On February 12, 1996, the Company entered into a merger agreement with JT
Storage, Inc. (JTS) providing for the merger of the Company and JTS. On April 8,
1996, the merger agreement was amended and restated. JTS was incorporated on
February 3, 1994 to develop, market and manufacture hard disk drives. The merger
requires shareholder approval and is expected to be consummated in the second
quarter of 1996. In connection with the merger, the Company extended a bridge
loan to JTS in the amount of $25.0 million maturing on September 30, 1996 with a
stated interest rate of 8 1/2% per annum. If the merger is not consummated, the
bridge loan is convertible at the option of Atari or JTS into shares of JTS
Series A Preferred Stock and warrants to acquire JTS Series A Preferred Stock,
subject to certain conditions.
25
<PAGE> 27
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table lists the names, ages and positions held by all
directors and executive officers of Atari as of March 31, 1996.
<TABLE>
<CAPTION>
NAME AGE POSITION(S) WITH ATARI
------------------------------- ----------------------------------------------
<S> <C> <C>
Jack Tramiel 67 Chairman of the Board
Sam Tramiel 45 Director, President, Chief Executive Officer
and Chief Financial Officer
Leonard I. Schreiber 81 Director
Michael Rosenberg 68 Director
August J. Liguori 44 Director
Laurence M. Scott, Jr. 50 Vice President, Manufacturing and Operations
Leonard Tramiel 41 Vice President, Advanced Software Development
</TABLE>
JACK TRAMIEL and a group of associates purchased the assets and liabilities
of Atari from Warner Communications in May 1984 and Mr. Tramiel has served as
Chairman of Atari's Board of Directors since such time. Mr. Tramiel served as
Atari's Chief Executive Officer from May 1984 through May 1988.
SAM TRAMIEL has served as President and as a member of the Board of
Directors of Atari since June 1984, as Chief Executive Officer of Atari since
May 1988 and as Chief Financial Officer of Atari since March 1996.
LEONARD I. SCHREIBER has served as a member of the Board of Directors of
Atari since May 1984. Mr. Schreiber was a partner of Schreiber & McBride, a
private law firm, from 1980 to 1995.
MICHAEL ROSENBERG has served as a member of the Board of Directors of Atari
since May 1987. Mr. Rosenberg has served as Chief Executive Officer of Ross &
Roberts, Inc., a plastics company, since September 1987. Mr. Rosenberg is a
Certified Public Accountant.
AUGUST J. LIGUORI has served as a member of the Board of Directors of Atari
since 1992. Since March 1996, Mr. Liguori has served as Vice President, Finance
of Marvel Entertainment Group, Inc. From October 1986 to February 1996, Mr.
Liguori served in several positions with Atari, including Vice President and
General Manager of Atari U.S. Corp., an Atari subsidiary, from October 1986 to
October 1989, Vice President of Atari Corporation from October 1989 to October
1990, and Vice President, Finance, Treasurer and Chief Financial Officer from
October 1990 to February 1996.
LAURENCE M. SCOTT, JR. has served as Vice President, Manufacturing and
Operations of Atari since 1992. Prior to joining Atari, Mr. Scott served as
President of Radofin Electronics (FE) Ltd., a contract manufacturing firm, from
1978 to 1991.
LEONARD TRAMIEL has served Vice President, Advanced Software Development of
Atari since March 1991. Mr. Tramiel served as Vice President, Software
Development of Atari from July 1984 to March 1991.
All directors hold office until the next annual meeting of stockholders and
until their successors have been duly elected and qualified. Executive officers
of Atari are appointed by and serve at the discretion of the Atari Board of
Directors. Jack Tramiel is the father of Sam Tramiel and Leonard Tramiel.
26
<PAGE> 28
SECTION 16(A) REPORTING DELINQUENCIES
Based solely on its review of copies of filings under Section 16(a) of the
Securities Exchange Act of 1934, as amended, received by it, or written
representations from certain reporting persons, the Company believes that during
fiscal 1995 all Section 16 filing requirements were met.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth all compensation earned during the past
three fiscal years by the Chief Executive Officer of the Company and the three
current and former executive officers of the Company other than the Chief
Executive Officer that were most highly compensated for services rendered to the
Company during the last fiscal year (collectively, "Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
----------------------------------------------------- AWARDS
OTHER ANNUAL ------------
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) OPTIONS(#)
- ------------------------------ ---- -------- -------- ------------------ ------------
<S> <C> <C> <C> <C> <C>
Sam Tramiel................... 1995 $150,000 -- $ 351 --
President and 1994 150,000 $250,000 206 25,000
Chief Executive Officer 1993 166,346 -- 239 25,000
August J. Liguori............. 1995 150,000 -- 206 --
Chief Financial Officer(2) 1994 142,834 50,000 190 --
1993 134,856 -- 175 36,250
Laurence Scott, Jr. .......... 1995 140,000 -- 524 --
Vice President,
Manufacturing 1994 133,425 -- 291 --
and Operations 1993 131,250 -- 2,247 10,500
Theodore Hoff................. 1995 116,827 -- 3,374 1,000,000
President, North America
Operations(3)
</TABLE>
- ---------------
(1) Represents payments for group term life insurance benefits.
(2) Mr. Liguori left the Company effective March 1, 1996.
(3) Mr. Hoff joined the Company in June 1995 and left the Company effective
December 31, 1995.
27
<PAGE> 29
STOCK OPTIONS
The following table sets forth information as to options to purchase Common
Stock granted to each of the Executive Officers during 1995.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
--------------------------------------------------------- VALUE AT ASSUMED ANNUAL
NUMBER OF % OF TOTAL RATES OF STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR OPTION
UNDERLYING GRANTED TO EXERCISE TERM
OPTIONS EMPLOYEES IN PRICE (PER EXPIRATION -----------------------
NAME GRANTED(#) FISCAL YEAR(3) SHARE) DATE 5% 10%
- --------------------------- ---------- -------------- ---------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Sam Tramiel................ -- -- -- -- -- --
August J. Liguori.......... -- -- -- -- -- --
Laurence Scott, Jr......... -- -- -- -- -- --
Theodore Hoff (1).......... 1,000,000 86.1% $2.625 -- -- --
</TABLE>
- ---------------
(1) This option was granted to Mr. Hoff pursuant to the Company's 1986 Stock
Option Plan, as amended. The exercise price of the option was equal to the
fair market value of the Company's Common Stock on the date of grant. These
options expired unexercisable when Mr. Hoff left the Company effective
December 31, 1995.
The following table is a summary of the stock options exercised by each of
the Executive Officers during fiscal 1995, and the number and value of stock
options held by each of the Executive Officers as of December 31, 1995.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT FISCAL YEAR END AT FISCAL YEAR END(1)
ACQUIRED ON VALUE ----------------------------- -----------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------ ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Sam Tramiel....... -- -- 185,000 40,000 $ -- $ --
August J.
Liguori......... 11,250 $29,721 10,000 15,000 -- --
Laurence Scott,
Jr. ............ 30,500 61,534 10,000 20,000 -- --
Theodore Hoff..... -- -- -- 1,000,000 -- --
</TABLE>
- ---------------
(1) The exercise price of each of the options was greater than the market value
of the Common Stock at year end ($1.375 on December 29, 1995).
COMPENSATION OF DIRECTORS
Each of the non-employee directors of Atari, Messrs. Jack Tramiel,
Rosenberg and Schreiber, receives $500 for each meeting of the Atari Board of
Directors which such individual attends. In 1995, each non-employee director
also received an option to purchase 20,000 shares of the Company's Common Stock
pursuant to the Company's 1986 Stock Option Plan, as amended. The exercise price
of the options was $2.69 per share, which was equal to the fair market value of
the Company's Common Stock on the date of grant. Each such option vests as to
20% of the shares on the anniversary of the date of grant such that the option
shall be vested in full on the fifth anniversary of the grant date. Each such
option expires six years after the date of grant, unless terminated earlier due
to such director's resignation or removal from the Company's Board of Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors consists of Messrs.
Jack Tramiel, Rosenberg and Schreiber, none of whom was an officer or employee
of the Company during fiscal 1995. Mr. Tramiel
28
<PAGE> 30
served as the Company's Chief Executive Officer from 1984 through 1988, and Mr.
Schreiber served as a Vice President of the Company from 1984 through 1986. No
member of the Compensation Committee or executive officer of the Company has a
relationship that would constitute an interlocking relationship with executive
officers or directors of another entity.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information, as of April 5, 1996, with
respect to beneficial ownership of Atari Common Stock owned by (a) each person
(or group of affiliated persons) known by Atari to be the beneficial owners of
more than 5% of Atari's Common Stock, (b) each of Atari's directors, (c) each of
Atari's Executive Officers and (d) all directors and executive officers as a
group.
<TABLE>
<CAPTION>
SHARES PERCENT
BENEFICIALLY BENEFICIALLY
NAME OF BENEFICIAL OWNER OWNED OWNED(1)
------------------------------------------------------------- ------------ ------------
<S> <C> <C>
Jack Tramiel(2)(3)........................................... 12,490,616 19.6%
455 South Mathilda Avenue
Sunnyvale, California 94086
Time Warner, Inc.(4)......................................... 8,670,000 13.6
75 Rockefeller Plaza
New York, New York 10019
Sam Tramiel(3)(5)............................................ 5,662,567 8.9
455 South Mathilda Avenue
Sunnyvale, California 94086
Leonard Tramiel(3)(6)........................................ 5,263,946 8.2
455 South Mathilda Avenue
Sunnyvale, California 94086
Bear Stearns & Co., Inc.(7).................................. 4,710,000 7.4
245 Park Avenue
New York, New York 10167
Sega Holdings USA Inc ....................................... 4,705,883 7.4
303 Twin Dolphin Drive, Suite 200
Redwood City, California 94065
Garry Tramiel(3)(8).......................................... 4,055,000 6.4
455 South Mathilda Avenue
Sunnyvale, California 94086
August J. Liguori(9)......................................... 262,000 *
Michael Rosenberg(10)........................................ 37,000 *
Leonard I. Schreiber(11)..................................... 206,000 *
Laurence M. Scott, Jr.(12)................................... 10,000 *
All directors and executive officers 23,932,129 37.3
as a group (seven persons)(13).............................
</TABLE>
- ---------------
* Less than 1%
(1) Based on 63,727,318 shares of Atari Common Stock outstanding as of April 5,
1996.
(2) Includes 11,597,315 shares held by Jack Tramiel's wife. Also includes
155,690 shares held by Mr. Tramiel's wife as trustee of trusts for the
benefit of Mr. Tramiel's minor grandchildren.
(3) In connection with the proposed Merger with JTS, Messrs. Jack Tramiel, Sam
Tramiel, Leonard Tramiel and Garry Tramiel have entered into Voting
Agreements with JTS. The terms of such Voting Agreements provide (i) that
such stockholders will not transfer (except as may be specifically required
by court order), sell, exchange, pledge (except in connection with a bona
fide loan transaction) or otherwise dispose of or encumber the shares of
Atari Common Stock beneficially owned by them, or any new shares of such
stock they may acquire, at any time prior to the effective time or earlier
termination of the Merger, and (ii) that such stockholders will vote all
shares of Atari Common Stock beneficially owned by them in favor of the
approval of the Merger Agreement and the Merger. Such voting
29
<PAGE> 31
agreements are accompanied by irrevocable proxies whereby such stockholders
provided to JTS the right to vote their shares on the proposals relating to
the Merger Agreement and the Merger at the Atari Shareholders Meeting which
will be called to vote on such matters.
(4) Includes 7,100,000 shares held by Warner Communications Investors, Inc.,
1,500,000 shares held by Warner Communications, Inc., and 70,000 shares
held by Atari Games, a subsidiary of Time Warner, Inc.
(5) Includes 352,062 shares held by Sam Tramiel as custodian on behalf of his
children, 8,100 shares held by Mr. Tramiel's wife and an aggregate of
97,416 shares held by Mr. Tramiel's minor children. Also includes 225,000
shares subject to options which are vested or become vested within 60 days
following March 31, 1996.
(6) Includes 40,000 shares held by Leonard Tramiel's wife and 10,000 shares
held by Mr. Tramiel's minor children.
(7) Based on a Schedule 13 G filed with the Securities and Exchange Commission
on February 7, 1996.
(8) Includes 55,000 shares subject to options which are vested or become vested
within 60 days following March 31, 1996.
(9) Includes 165,000 shares subject to options which are vested or become
vested within 60 days following March 31, 1996.
(10) Includes 12,000 shares subject to options which are vested or become vested
within 60 days following March 31, 1996.
(11) Includes 12,000 shares subject to options which are vested or become vested
within 60 days following March 31, 1996.
(12) Represents shares subject to options which are vested or become vested
within 60 days following March 31, 1996.
(13) Includes 479,000 shares subject to options which are vested or become
vested within 60 days following March 31, 1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report:
1. Financial Statements
The financial statements required to be filed hereunder are listed
in the accompanying Index to Consolidated Financial Statements and
Financial Statement Schedule on page 12 hereof.
2. Financial Statement Schedule
The financial statement schedule required to be filed hereunder are
listed in the accompanying Index to Consolidated Financial Statements
and Financial Statement Schedule on page 12 hereof.
3. Exhibits
The exhibits listed under Item 14(c) are filed as part of this
Annual Report on Form 10-K.
(b) Reports on Form 8-K: None.
(c) Exhibits
30
<PAGE> 32
<TABLE>
<CAPTION>
EXHIBIT NOTES DESCRIPTION
- ------- ----- -------------------------------------------------------------------------------
<S> <C> <C>
3.1 (1) Articles of Incorporation of Registrant, as filed May 17, 1984.
3.2 (1) Certificate of Amendment of Articles of Incorporation as filed July 11, 1984.
3.3 (1) Certificate of Amendment of Articles of Incorporation, as filed September 12,
1986.
3.4 (1) Amended and Restated Bylaws of Registrant.
4.1 (1) Form of Indenture.
10.1 (1) OEM Software License Agreement with Digital Research (California) Inc. dated
August 22, 1984.
10.2 (1) License Funding and Sale Agreement with Epyx Inc. dated January 5, 1990.
10.3 (2) Hardware Technology Assignment and License Agreement with Epyx Inc. dated June
3, 1989.
10.4 (2) Software Production and Distribution License Agreement with Epyx Inc. dated
June 3, 1989.
10.5 (2) Manufacturing Services Agreement with Epyx Inc. dated June 21, 1989.
10.6 (2) OEM Purchase and Distribution Agreement with Epyx Inc. dated June 12, 1989.
10.7
Lease by and between the Registrant and Victor H. Owen and Judith Owen Burns
1990 Revocable Trust, dated December 27, 1990, Judith Owen Burns trustee.
10.8 (1) Industrial Lease Agreement for Warehouse at 360 Caribbean Drive, Sunnyvale,
California, dated May 10, 1986.
10.9 (1) Industrial Lease Agreement for Warehouse at 390 Caribbean Drive, Sunnyvale,
California, dated December 17, 1986.
10.10 (3) Agreement and Plan of Merger with The Federated Group, Inc. dated August 28,
1987.
10.11 (2) Agreement for Sale of Assets dated November 8, 1989 among Silo California Inc.,
The Federated Group, Inc. and Atari Corporation.
10.12* (1) Amended 1986 Stock Option Plan.
10.13* (1) Amended form of Incentive Stock Option Agreement.
10.14* (4) Amended Stock Option Plan.
10.15 (1) Memorandum of Agreement among Registrant, Jack Tramiel, Atari Holdings, Inc.,
Productions et Editions Cinematographiques Francais S.A.R.L., Atari
International (UK) Inc., Warner Communications Inc. and certain subsidiaries of
Atari Holdings, Inc., dated August 29, 1986.
10.16 (1) Assets Purchase Agreement with Atari, Inc. and certain subsidiaries and
affiliates of Atari, Inc. dated July 1, 1984.
10.17 (1) Agreement with Atari, Inc. and Jack Tramiel dated July 1, 1984.
10.18 (1) Intellectual Property Rights Heads of Agreement with Atari, Inc. dated July 1,
1984.
10.19 (5) Agreement for Purchase and Sale of Real Estate -- Taiwan.
10.20 (5) General Agreement of Sale -- Irish Facility.
10.21 (6) Stock Purchase Agreement with Time Warner, Inc. dated March 24, 1994.
10.22 (7) Stock Purchase Agreement with Sega Holdings USA, Inc. dated September 26, 1994.
10.23
Amended and Restated Agreement and Plan of Reorganization by and between the
Registrant and JT Storage, Inc. ("JTS") dated as of April 8, 1996.
10.24
Subordinated Secured Convertible Promissory Note dated February 13, 1996
executed by JTS.
10.25
Security Agreement by and between the Registrant and JTS dated as of February
13, 1996.
22.1
Subsidiaries of the Company.
25.1
Power of Attorney (see page 34).
27.1 Financial Data Schedule.
</TABLE>
31
<PAGE> 33
- ---------------
* Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this Form 10-K pursuant to Item 14(c) of this report.
(1) Incorporated by reference to the Company's Form S-1 Registration Statement
(File No. 33-12753) filed with the Commission on July 2, 1987.
(2) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1989.
(3) Incorporated by reference to the Company's Form 14D-1 and 13D Statement,
filed with the Commission on August 28, 1987.
(4) Incorporated by reference to the Company's Proxy Statement relating to its
Annual Meeting of Shareholders held on May 16, 1989.
(5) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1991.
(6) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the fiscal period ended March 31, 1994.
(7) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the fiscal period ended September 30, 1994.
32
<PAGE> 34
SCHEDULE II
ATARI CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END OF
OF PERIOD EXPENSES DEDUCTIONS PERIOD
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
December 31, 1993:
Allowance for doubtful accounts................ $2,533 $ 232 $2,293(1) $ 472
Accrued sales returns and allowances........... 4,300 457 4,181(2) 576
December 31, 1994:
Allowance for doubtful accounts................ $ 472 $ 194 $ 72(1) $ 594
Accrued sales returns and allowances........... 576 1,563 776(2) 1,363
December 31, 1995:
Allowance for doubtful accounts................ $ 594 $ 50 $ 317(1) $ 327
Accrued sales returns and allowances........... 1,363 5,028 2,497(2) 3,894
</TABLE>
- ---------------
(1) Amounts written off, net
(2) Customer returns allowed
33
<PAGE> 35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized on this 11th day of
April 1996.
ATARI CORPORATION
By: /s/ SAM TRAMIEL
------------------------------------
Sam Tramiel, President
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Jack Tramiel and Sam Tramiel, and
each of them acting individually, as his attorney-in-fact, each with full power
of substitution, for him in any and all capacities, to sign any and all
amendments to this Report on Form 10-K, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming our signatures as they may
be signed by our said attorney to any and all amendments to said Report.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report on Form 10-K has been signed by the following persons in the capacities
and on the dates indicated.
<TABLE>
<S> <C>
/s/ JACK TRAMIEL April 11, 1996
- ------------------------------------------
Jack Tramiel
Chairman of the Board
/s/ SAM TRAMIEL April 11, 1996
- ------------------------------------------
Sam Tramiel
President, Chief Executive Officer,
Chief Financial Officer and Director
/s/ MICHAEL ROSENBERG April 11, 1996
- ------------------------------------------
Michael Rosenberg
Director
/s/ LEONARD I. SCHREIBER April 11, 1996
- ------------------------------------------
Leonard I. Schreiber
Director
/s/ AUGUST J. LIGUORI April 11, 1996
- ------------------------------------------
August J. Liguori
Director
</TABLE>
34
<PAGE> 1
EXHIBIT 10.7
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE--NET
(Do not use this form for Multi-Tenant Property)
1. BASIC PROVISIONS ("Basic Provisions")
1.1 PARTIES: This Lease ("Lease"), dated for reference purposes only,
February 16, 1996, is made by and between Victor H. Owen and Judith Owen Burns
1990 Revocable Trust, dated December 27, 1990, Judith Owen Burns Trustee
("Lessor") and Atari Corporation, a Nevada corporation ("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 455 South Mathilda Avenue, Sunnyvale, located in
the County of Santa Clara, State of California and generally described as
(describe briefly the nature of the property) a 7,208 square foot freestanding
concrete office building with at least 29 parking spaces in the adjacent common
parking area. The property is within a C-3 zoning ("Premises"). (See
Paragraph 2 for further provisions.)
1.3 TERM: Five (5) years and no months ("Original Term") commencing
March 1, 1996 ("Commencement Date") and ending February 28, 2001 ("Expiration
Date"). (See Paragraph 3 for further provisions.)
1.4 EARLY POSSESSION: Tenant may occupy two weeks prior to Lease
Commencement ("Early Possession Date"). (See Paragraphs 3.2 and 3.3 for
further provisions.)
1.5 BASE RENT: $6,126.80 per month ("Base Rent"), payable on the 1st
day of each month commencing March 1, 1996. (See Addendum Paragraph 53 for
rental escalation in the 37th month). (See Paragraph 4 for further
provisions.) / / If this box is checked, there are provisions in this Lease for
the Base Rent to be adjusted.
1.6 BASE RENT PAID UPON EXECUTION: $6,126.80 as Base Rent for the
period March 1-31, 1996.
1.7 SECURITY DEPOSIT: $6,000.00 ("Security Deposit"). (See Paragraph 5
for further provisions.)
1.8 PERMITTED USE: General office and related legal uses. (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): CPS
represents:
<TABLE>
<S> <C>
/x/ Lessor exclusively ("Lessor's Broker"); / / both Lessor and Lessee, and KG Real Estate, Inc. represents:
/x/ Lessee exclusively ("Lessee's Broker"); / / both Lessor and Lessee. (See Paragraph 15 for further provisions.)
</TABLE>
1.11 GUARANTOR: The obligations of the Lessee under this Lease are to be
guaranteed by _______________________________________
__________________________________________________________________________
("Guarantor"). (See Paragraph 37 for further provisions.)
1.12 ADDENDA: Attached hereto is an Addendum or Addenda consisting of
Paragraphs 49 through 54 and Exhibits __________________
_________________________________________________________________ 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 for a period of ninety (90) days
after 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 one hundred twenty (120) 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 Lessor's expense. If Lessee does
not give
<PAGE> 2
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'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
Lessor's 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 Premises. In
such event, Lessee shall, at Lessee's sole cost and expense, correct any
non-compliance of the Premises with said warranties.
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 Lessee totally or partially occupies the
Premises prior to the Commencement Date, the obligation to pay Base Rent shall
be abated for the period of such early possession. All other terms of this
Lease, however, (including but not limited to the obligations to pay Real
Property Taxes and insurance premiums and to maintain the Premises) 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. If for any reason Lessor cannot deliver
possession of the Premises to Lessee as agreed herein 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 thereafter, cancel this Lease, in which event the
Parties shall be discharged from all obligations hereunder; provided, however,
that if such written notice by Lessee is not received by Lessor within said ten
(10) day period, Lessee's right to cancel this Lease shall terminate and be of
no further force or effect. Except as may be otherwise provided, and
regardless of when the 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 what Lessee would otherwise have
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 cause payment of Base Rent and other rent
or charges, as the same may be adjusted from time to time, to be received by
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 (1) full calendar month shall be prorated based upon the actual
number of days of the calendar 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 at such other addresses as Lessor may from time to time designate in
writing to Lessee.
5. SECURITY DEPOSIT.
Lessee shall deposit with Lessor upon 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.
If Lessor uses or applies all or any portion of said Security Deposit, Lessee
shall within ten (10) days after written request therefor deposit moneys with
Lessor sufficient to restore said Security Deposit to the full amount required
by this Lease. 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 moneys to be paid by Lessee under this Lease.
6. USE.
6.1 USE. Lessee shall use and occupy the Premises only for the purposes
set forth in Paragraph 1.8, or any other use which is comparable thereto, and
for no other purpose. Lessee shall not use or permit the use of the Premises
in a manner that creates waste or a nuisance, or that disturbs owners and/or
occupants of, or causes damage to, neighboring premises or properties. 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 the Lessee, its assigns and subtenants, for a
modification of said permitted purpose for which the premises may be used or
occupied, so long as the same will not impair the structural integrity of the
improvements on the Premises, the mechanical or electrical systems therein, is
not significantly more burdensome to the Premises and the improvements thereon,
and
-2-
<PAGE> 3
is otherwise permissible pursuant to this Paragraph 6. If Lessor elects to
withhold such consent, Lessor shall within five (5) business days give a
written notification of same, which notice shall include an explanation of
Lessor's reasonable objections to the change in use. Lessee is permitted to
use general office equipment, laser printers, copying machines, etc.
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 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, by-products or
fractions thereof. Lessee shall not engage in any activity in, on 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 Law (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. Reportable Use shall also include Lessee's being
responsible for the presence in, on or about the Premises of a Hazardous
Substance with respect to which any Applicable Law requires 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
in compliance with all Applicable Law, use any ordinary and customary materials
reasonably required to be used by Lessee in the normal course of Lessee's
business permitted on the Premises, 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 the use or presence of any Hazardous Substance, activity or storage
tank 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 therefrom or therefor, including, but not limited to, the
installation (and 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, or a condition involving or
resulting from same, has come to be located in, on, under or about the
Premises, other than as previously consented to by Lessor, Lessee shall
immediately give written notice of such fact to Lessor. Lessee shall also
immediately give Lessor 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, or persons
entering or occupying the Premises, concerning the presence, spill, release,
discharge of, or exposure to, any Hazardous Substance or contamination in, on,
or about the Premises, including but not limited to all such documents as may
be involved in any Reportable Uses involving the Premises.
(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 loss of rents and/or damages,
liabilities, judgments, costs, claims, liens, expenses, penalties, permits and
attorney's and consultant's fees arising out of or involving any Hazardous
Substance or storage tank brought onto the Premises by or for Lessee or under
Lessee's control. Lessee's obligations under this Paragraph 6 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 consultant's and attorney's 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 or storage tanks, unless
specifically so agreed by Lessor in writing at the time of such agreement.
6.3 LESSEE'S COMPLIANCE WITH LAW. Except as otherwise provided in this
Lease, Lessee, shall, at Lessee's sole cost and expense, fully, diligently and
in a timely manner, comply with all "Applicable Law," which term is used in
this Lease to include 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 or storage
tank), now in effect or which may hereafter come into effect, and whether or
not reflecting a change in policy from any previously existing policy. 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 Law 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 Law.
6.4 INSPECTION; COMPLIANCE. Lessor and Lessor's Lender(s) (as defined
in Paragraph 8.3(a)) 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/or verifying compliance by Lessee
with this Lease and all Applicable Laws (as defined in Paragraph 6.3) and to
employ experts and/or consultants in connection therewith and/or to advise
Lessor with respect to Lessee's activities, including but not limited to the
installation, operation, use, monitoring, maintenance or removal of any
Hazardous Substance or storage tank 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, violation of Applicable Law, or a
contamination, caused or materially contributed to by Lessee is found to exist
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or 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.
7. MAINTENANCE; REPAIRS; UTILITY INSTALLATIONS; TRADE FIXTURES AND
ALTERATIONS.
7.1 LESSEE'S OBLIGATIONS.
(a) Subject to the provisions of Paragraphs 2.2 (Lessor's warranty
as to condition), 2.3 (Lessor's warranty as to compliance win covenants, etc.),
7.2 (Lessor's obligations to repair), 9 (damage and destruction), and 4
(condemnation), Lessee shall, at Lessee's sole cost and expense and at all
times, keep the Premises and every part thereof in good order, condition and
repair, and non-structural (whether or not such portion of the Premises
requiring repairs, 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 serving the Premises, such as plumbing,
heating, air conditioning, ventilating, electrical, lighting facilities,
boilers, fired or unfired pressure vessels, fire sprinkler and/or standpipe and
hose or other automatic fire extinguishing system, including fire alarm and/or
smoke detection systems and equipment, fire hydrants, fixtures, walls (interior
and exterior), foundations, ceilings, roofs, floors, windows, doors, plate
glass, skylights, landscaping, driveways, parking lots, fences, retaining
walls, signs, sidewalks and parkways located in, on, about, or adjacent to the
Premises. Lessee shall not cause or permit any Hazardous Substance to be
spilled or released in, on, under or about the Premises (including through the
plumbing or sanitary sewer system) and shall promptly, at Lessee's expense,
take all investigatory and/or remedial action reasonably recommended, whether
or not formally ordered or required, for the cleanup of any contamination of,
and for the maintenance, security and/or monitoring of the Premises, the
elements surrounding same, or neighboring properties, that was caused or
materially contributed to by Lessee, or pertaining to or involving any
Hazardous Substance and/or storage tank brought onto the Premises by or for
Lessee or under its control. 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. If Lessee occupies the Premises
for seven (7) years or more, Lessor may require Lessee to repaint the exterior
of the buildings on the Premises as reasonably required, but not more
frequently than once every seven (7) years.
(b) Lessee shall, at Lessee's sole cost and expense, procure and
maintain contracts, with copies to Lessor, in customary form and substance for,
and with contractors specializing and experienced in, the inspection,
maintenance and service of the following equipment and improvements, if any,
located on the Premises: (i) heating, air conditioning and ventilation
equipment, (ii) boiler, fired or unfired pressure vessels, (iii) fire sprinkler
and/or standpipe and hose or other automatic fire extinguishing systems,
including fire alarm and/or smoke detection, (iv) landscaping and irrigation
systems, (v) roof covering and drain maintenance and (vi) asphalt and parking
lot maintenance.
7.2 LESSOR'S OBLIGATIONS. Except for the warranties and agreements of
Lessor contained in Paragraphs 2.2 (relating to condition of the Premises), 2.3
(relating to compliance with covenants, restrictions and building code, 9
(relating to destruction of the Premises) and 14 (relating to condemnation of
the Premises), it is intended by the Parties hereto that Lessor have no
obligation, in any manner whatsoever, to repair and maintain the Premises, the
improvements located thereon, or the equipment therein, whether structural or
non-structural, all of which obligations are intended to be that of the Lessee
under Paragraph 7.1 hereof. It is the intention of the Parties that the terms
of this Lease govern the respective obligations of the Parties as to
maintenance and repair of the Premises. Lessee and Lessor expressly waive the
benefit of any statute now or hereafter in effect to the extent it is
inconsistent with the terms of this Lease with respect to, or which affords
Lessee the right to make repairs at the expense of Lessor or to terminate this
Lease by reason of any needed repairs.
7.3 UTILITY INSTALLATIONS; TRADE FIXTURES; ALTERATIONS.
(a) DEFINITIONS; CONSENT REQUIRED. The term "Utility
Installations" is used in this Lease to refer to all carpeting, window
coverings, air lines, power panels, electrical distribution, security, fire
protection systems, communication 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 that can be removed without doing material damage to the
Premises. The term "Alterations" shall mean any modification of the
improvements on the Premises from that which are provided by Lessor under the
terms of this Lease, other than Utility Installations or Trade Fixtures,
whether by addition or deletion. "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 as defined in Paragraph 7.4(a). Lessee
shall not make 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), as long as they are not visible from the outside, do not involve
puncturing, relocating or removing the roof or any existing walls, and the
cumulative cost thereof during the term of this Lease as extended does not
exceed $25,000. For purposes of this Lease, Lessor plans to replace the
existing landscape and parking lot at Lessor's expense. Lessee shall be
responsible for its share of maintenance after completion of the improvements.
(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 proposed 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 in compliance
with all Applicable Law. 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 $10,000 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
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cost of such Alteration or Utility Installation and/or upon Lessee's posting an
additional Security Deposit with Lessor under Paragraph 36 hereof.
(c) INDEMNIFICATION. 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
mechanics' 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 attorney's 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
or become the owner thereof as hereinafter provided in this Paragraph 7.4, all
Alterations and Utility Additions 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 and be surrendered by Lessee with the Premises.
(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
their installation may have been consented to by Lessor. Lessor may require
the removal at any time of all or any part of any Lessee Owned 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, with
all of the improvements, parts and surfaces thereof 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 in writing by Lessor, the Premises, as surrendered, shall
include the 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 Alterations and/or 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
Law and/or good service 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 FOR INSURANCE. Regardless of whether the Lessor or Lessee
is the Insuring Party, Lessee shall pay for all insurance required under this
Paragraph 8 except to the extent of the cost attributable to liability
insurance carried by Lessor in excess of $1,000,000 per occurrence. Premiums
for policy periods commencing prior to or extending beyond the Lease term shall
be prorated to correspond to the Lease term. Payment shall be made by Lessee
to Lessor within ten (10) days following receipt of an invoice for any amount
due.
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 and Lessor (as an additional insured) 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 Lessor of
Premises" Endorsement and contain the "Amendment of the Pollution Exclusion"
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. In the event Lessor is the Insuring Party,
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.
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<PAGE> 6
8.3 PROPERTY INSURANCE--BUILDING, IMPROVEMENTS AND RENTAL VALUE.
(a) BUILDING AND IMPROVEMENTS. The Insuring Party 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 the holders of any
mortgages, deeds of trust or ground leases on the Premises ("Lender(s)"),
insuring loss or damage to the Premises. The amount of such insurance shall be
equal to the full replacement cost of the Premises, as the same shall exist
from time to time, or the amount required by Lenders, but in no event more than
the commercially reasonable and available insurance value thereof if, by reason
of the unique nature or age of the improvements involved, such latter amount is
less than full replacement cost. If Lessor is the Insuring Party, however,
Lessee Owned Alternations and Utility Installations shall be insured by Lessee
under Paragraph 8.4 rather than by Lessor. If the coverage is available and
commercially appropriate, such 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 Premises 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 cause of loss. Said policy or policies
shall also contain an agreed valuation provision in lieu of any coinsurance
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. If
such insurance coverage has a deductible clause, the deductible amount shall
not exceed $1,000 per occurrence, and Lessee shall be liable for such
deductible amount in the event of an Insured Loss, as defined in Paragraph
9.1(c).
(b) RENTAL VALUE. The Insuring Party shall, in addition, 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 Lender(s), insuring the loss of
the full rental and other charges payable by Lessee to Lessor under this Lease
for one (1) year (including all real estate taxes, insurance costs, and any
scheduled rental increases). Said insurance shall 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 coinsurance clause, and the amount
of coverage shall be adjusted annually to reflect the projected rental income,
property taxes, insurance premium costs and other expenses, if any, otherwise
payable by Lessee, for the next twelve (12) month period. Lessee shall be
liable for any deductible amount in the event of such loss.
(c) ADJACENT PREMISES. If the Premises are part of a larger
building, or if the Premises are part of a group of buildings owned by Lessor
which are adjacent to the Premises, the Lessee shall pay for any increase in
the premiums for the property insurance of such building or buildings if said
increase is caused by Lessee's acts, omissions, use or occupancy of the
Premises.
(d) TENANT'S IMPROVEMENTS. If the Lessor is the Insuring Party,
the 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. If Lessee is the Insuring Party, the policy
carried by Lessee under this Paragraph 8.3 shall insure Lessee Owned
Alterations and Utility Installations.
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, Lessee Owned Alterations and
Utility Installations in, on, or about the Premises similar in coverage to that
carried by the Insuring Party under Paragraph 8.3. Such insurance shall be
full replacement cost coverage with a deducible of not to exceed $1,000 per
occurrence. The proceeds from any such insurance shall be used by Lessee for
the replacement of personal property or the restoration of Lessee Owned
Alterations and Utility Installations. Lessee shall be the Insuring Party with
respect to the insurance required by this Paragraph 8.4 and 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
having a lien on the Premises, as set forth in the most current issue of
"Best's Insurance Guide." Lessee shall not do or permit to be done anything
which shall invalidate the insurance policies referred to in this Paragraph 8.
If Lessee is the Insuring Party, Lessee shall cause to be delivered to Lessor
certified copies of policies of such insurance or certificates evidencing the
existence and amounts of such insurance with the insureds and loss payable
clauses as required by this Lease. No such policy shall be cancellable 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. If the Insuring Party shall fail to procure and maintain the insurance
required to be carried by the Insuring Party under this Paragraph 8, the other
Party may, but shall not be required to, procure and maintain the same, but at
Lessee's expense.
8.6 WAIVER OF SUBROGATION. Without affecting any other rights or
remedies, Lessee and Lessor ("Waiving Party") 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 of or damage to the Waiving Party's
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.
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, permits, attorney's and consultant's fees,
expenses and/or liabilities arising out of, involving, or in dealing 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 Lessee's part to be performed under this Lease.
The foregoing shall
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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, and whether
well founded or not. 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. Except for Lessor's negligence
and/or breach of express warranties, 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 the 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, or 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 tenant of Lessor. Notwithstanding Lessor's 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 Improvements on the Premises, other than Lessee Owned Alterations and
Utility Installations, the repair cost of which damage or destruction is less
than 50% of the then Replacement Cost of the Premises immediately prior to such
damage or destruction, excluding from such calculation the value of the land
and Lessee Owned Alterations and Utility Installations.
(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 50% or more of the then
Replacement Cost of the Premises immediately prior to such damage or
destruction, excluding from such calculation the value of the land and Lessee
Owned Alterations and Utility Installations.
(c) "INSURED LOSS" shall mean damage or destruction to
Improvements on the Premises, other than Lessee Owned Alterations and Utility
Installations, 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 PARTIAL DAMAGE--INSURED LOSS. If a 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; provided, however, that Lessee shall, at Lessor's
election, make the repair of any damage or destruction the total cost to repair
of which is $10,000 or less, and, in such event, Lessor shall make the
insurance proceeds available to Lessee on a reasonable basis for that purpose.
Notwithstanding the foregoing, if the required insurance was not in force or
the insurance proceeds are not sufficient to effect such repair, the Insuring
Party shall promptly contribute the shortage in proceeds (except as to the
deductible which is Lessee's responsibility) as and when required to complete
said repairs. In the event, however, the shortage in proceeds was due to the
fact that, by reason of the unique nature of the improvements, 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, the party responsible for making the repairs 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 in such case Lessor does not
so elect, 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 a 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, but subject to Lessor's
rights under Paragraph 13), 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 giving 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 expenses and without
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reimbursement from Lessor. Lessee shall provide Lessor with the required funds
or satisfactory assurance thereof within thirty (30) days following Lessee's
said commitment. 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 and 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 a
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 8.6.
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 (1) 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, within twenty (20) days following the occurrence of the
damage, or before the expiration of the time provided in such option for its
exercise, whichever is earlier ("Exercise Period"), (i) exercising such option
and (ii) providing Lessor with any shortage in insurance proceeds (or adequate
assurance thereof) needed to make the repairs. If Lessee duly exercises such
option during said Exercise 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 said Exercise Period,
then Lessor may at Lessor's option terminate this Lease as of the expiration of
said sixty (60) day period following the occurrence of such damage by giving
written notice to Lessee of Lessor's election to do so within ten (10) days
after the expiration of the Exercise Period, notwithstanding any term or
provision in the grant of option to the contrary.
9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES.
(a) In the event of damage described in Paragraph 9.2 (Partial
Damage--Insured), whether or not Lessor or Lessee repairs or restores the
Premises, the Base Rent, Real Property Taxes, insurance premiums, and other
charges, if any, payable by Lessee hereunder for the period during which such
damage, its repair or the restoration continues (not to exceed the period for
which rental value insurance is required under Paragraph 8.3(b)), shall be
abated in proportion to the degree to which Lessee's use of the Premises is
Impaired. Except for abatement of Base Rent, Real Property Taxes, insurance
premiums, 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 repair 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
Lessee's 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 receipt of such
notice, this Lease shall continue in full force and effect. "Commence" as used
in this Paragraph shall mean either the unconditional authorization of the
preparation of the required plans, or the beginning of the actual work on the
Premises, whichever first occurs.
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 Law
and this Lease shall continue in full force and effect; but subject to Lessor's
rights under 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 giving 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 investigation and remediation of such
Hazardous Substance Condition totally at Lessee's expense and without
reimbursement from Lessor except to the extent of 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 Lessee's said commitment.
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 and the required funds are available. If Lessee does not give such
notice and provide the required funds or assurance thereof within the times
specified above, this Lease shall terminate as of the date specified in
Lessor's notice of termination. If a Hazardous Substance Condition occurs for
which Lessee is not legally responsible, there shall be abatement of Lessee's
obligations under this Lease to the same extent as provided in Paragraph 9.6(a)
for a period of not to exceed twelve (12) months.
9.8 TERMINATION--ADVANCE PAYMENTS. Upon termination of this Lease
pursuant to this Paragraph 9, an equitable adjustment shall be made concerning
advance Base Rent and any other advance payments made by Lessee to Lessor.
Lessor shall, in addition, return to Lessee 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.
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9.9 WAIVE STATUTES. Lessor and Lessee agree that the terms of this
Lease shall govern the effect of any damage to or destruction of the Premises
with respect to the termination of this Lease and hereby waive the provisions
of any present or future statute to the extent inconsistent herewith.
10. REAL PROPERTY TAXES.
10.1 (a) PAYMENT OF TAXES. Lessee shall pay the Real Property Taxes,
as defined in Paragraph 10.2, applicable to the Premises during the term of
this Lease. Subject to Paragraph 10.1(b), all such payments shall be made to
Lessor at least twenty (20) calendar days prior to the delinquency date of the
applicable installment. Check to be made out to the appropriate taxing agency.
Lessee shall promptly furnish Lessor with satisfactory evidence that such taxes
have been paid. If any such taxes to be paid by Lessee shall cover any period
of time prior to or after the expiration or earlier termination of the term
hereof, Lessee's share of such taxes shall be equitably prorated to cover only
the period of time within the tax fiscal year this Lease is in effect, and
Lessor shall reimburse Lessee for any overpayment after such proration. If
Lessee shall fail to pay any Real Property Taxes required by this Lease to be
paid by Lessee, Lessor shall have the right to pay the same, and Lessee shall
reimburse Lessor therefor upon demand.
10.2 DEFINITION OF "REAL PROPERTY TAXES." 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 Premises 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 Premises or in the real property of which
the Premises are a part, 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 Premises 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.
10.3 JOINT ASSESSMENT. If the Premises are not separately assessed,
Lessee's liability 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.
10.4 PERSONAL PROPERTY TAXES. Lessee shall pay prior to delinquency all
taxes assessed against and levied upon Lessee Owned Alterations, Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee contained in the Premises or elsewhere. When possible, Lessee shall
cause its 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 personal property shall be assessed with Lessor's real
property, Lessee shall pay Lessor the taxes attributable to Lessee within ten
(10) days after receipt of a written statement setting forth the taxes
applicable to Lessee's property or, at Lessor's option, as provided in
Paragraph 10.1(b).
11. UTILITIES.
Lessee shall pay for all water, gas, heat, light, power, telephone, trash
disposal and other utilities and services supplied to the Premises, together
with any taxes thereon. If any such services are not separately metered to
Lessee, Lessee shall pay a reasonable proportion, to be determined by Lessor,
of all charges jointly metered with other premises.
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,
"assignment") or sublet all or any part of Lessee's interest in this Lease or
in the Premises without Lessor's prior written consent given and subject to the
terms of Paragraph 36.
See Addendum Paragraph 54, Subleasing Profits.
(b) Lessee's remedy for any breach of this Paragraph 12.1 by
Lessor shall be limited to compensatory damages and 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, or (iii) alter the primary
liability of Lessee for the payment of Base Rent and other sums due Lessor
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 or 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 sublessee.
However, Lessor may consent
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to subsequent sublettings and assignments of the sublease or any amendments or
modifications thereto without notifying Lessee or anyone else liable on the
Lease or sublease and without obtaining their consent, and such action shall
not relieve such persons from liability under this Lease or sublease.
(d) In the event of any Default or Breach of Lessee's obligations
under this Lease, Lessor may proceed directly against Lessee, any Guarantors or
any one else responsible for the performance of the Lessee's obligations under
this Lease, including the sublessee, without first exhausting Lessor's remedies
against any other person or entity responsible therefor to Lessor, or any
security held by Lessor or Lessee.
(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. 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.
(g) Lessor, as a condition to giving its consent to any assignment
or subletting, may require that the amount and adjustment structure of the
rent payable under this Lease be adjusted to what is then the market value
and/or adjustment structure for property similar to the Premises as then
constituted.
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
this 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 said 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 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 sublessee.
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" is defined as
a failure by the Lessee to observe, comply with or perform any of the terms,
covenants, conditions or rules applicable to Lessee under this Lease. A
"Breach" 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, 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.
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(b) Except as expressly otherwise provided in this Lease, the
failure by Lessee to make any payment of Base Rent or any other monetary
payment required to be made by Lessee hereunder, whether to Lessor or to a
third party, 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 Law
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(b), (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 (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 if 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.C. 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 (e) is contrary
to any applicable law, such provision shall be of no force or effect, and not
affect the validity of the remaining provisions.
(f) The discovery by Lessor that any financial statement given to
Lessor by Lessee or any Guarantor of Lessee's obligations hereunder 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 assurance or 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 time 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 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 proximately 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 reletting, including necessary
renovation and alteration of the Premises, reasonable attorneys' fees, and that
portion of the leasing commission paid by Lessor 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 prior sentence shall be computed by discounting such
amount at the discount rate of the Federal Reserve Bank of San Francisco 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. 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 therein 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 subparagraphs 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
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subparagraphs 13.1(b), (c) or (d). In such case, the applicable grace period
under subparagraphs 13.1(b), (c) or (d) and under the unlawful detainer statute
shall run concurrently after the one such statutory notice, and the failure of
Lessee to cure the Default within the greater of the two 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) after Lessee's
Breach and abandonment and recover the rent as it becomes due, provided Lessee
has the right to sublet or assign, subject only to reasonable limitations. See
Paragraphs 12 and 36 for the limitations on assignment and subletting which
limitations Lessee and Lessor agree 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 the 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.
(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 BREACH. 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 of this Lease by Lessee, as defined in Paragraph 13.1, 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 shall not be deemed a waiver by Lessor of the provisions of this
Paragraph unless specifically so stated in writing by Lessor at the time 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 trust deed covering the
Premises. Accordingly, if any installment of rent or any other sum due from
Lessee shall not be received by Lessor or Lessor's designee within five (5)
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 the holders of any ground Lease, mortgage or deed of trust
covering the Premises whose name and address shall have been furnished 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 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 land area not occupied
by any building, 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 building located on the Premises. No
reduction of Base Rent shall occur if the only portion of the Premises taken is
land on which there is no building. 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 in 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 the legal and other expenses incurred by Lessor in the
condemnation matter, repair any damage to the Premises caused by
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such condemnation, except to the extent that Lessee has been reimbursed
therefor by the condemning authority. Lessee shall be responsible for the
payment of any amount in excess of such net severance damages required to
complete such repair.
15. BROKER'S FEE.
15.1 The Brokers named in Paragraph 1.10 are the procuring causes of this
Lease.
15.2 Upon execution of this Lease by both Parties, Lessor shall pay to
said Brokers 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 Brokers (or in the event there is no separate written agreement
between Lessor and said Brokers, the sum of $PER LISTING AGREEMENT for
brokerage services rendered by said Brokers to Lessor in this transaction.
15.3 Unless Lessor and Brokers have otherwise agreed in writing, Lessor
further agrees that: (a) If Lessee exercises any Option (as defined in
Paragraph 39.1) or any Option subsequently granted which is substantially
similar to an Option granted to Lessee in this Lease, or (b) if Lessee acquires
any rights to the Premises or other premises described in this Lease which are
substantially similar to what Lessee would have acquired had an Option herein
granted to Lessee been exercised, 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 Brokers a fee in accordance with the schedule of said Brokers in
effect at the time of the execution of this Lease.
15.4 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 a
third party beneficiary of the provisions 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.
15.5 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 the
Brokers, if any, named in Paragraph 1.10) 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 Brokers is
entitled to any commission or finder's fee in connection with said transaction.
Lessee and Lessor do each hereby agree to indemnify, 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, attorneys' fees reasonably incurred with respect thereto.
15.6 Lessor and Lessee hereby consent to and approve all agency
relationships, including any dual agencies, indicated in Paragraph 1.10.
16. TENANCY STATEMENT.
16.1 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 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 If Lessor desires to finance, refinance, or sell the Premises, any
part thereof, or the building of which the Premises are a part, Lessee and all
Guarantors of Lessee's performance hereunder 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, or, if this is a sublease, of the
Lessee's interest in the prior Lease. 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, 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 thirty (30) days following the date on which it was
due, shall bear interest from the thirty-first (31st) day after it was due at
the rate of 12% per annum, but not exceeding the maximum rate allowed by law,
in addition to the late charge provided for in Paragraph 13.4.
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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.
23. NOTICES.
23.1 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, 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 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 date 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 States Express Mail or overnight courier that guarantees
next day delivery shall be deemed given twenty-four (24) hours after delivery
of the same to the United States Postal Service or courier. If any notice is
transmitted by facsimile transmission or similar means, the same shall be
deemed served or delivered upon telephone confirmation of receipt of the
transmission thereof, provided a copy is also delivered via delivery or mail.
It notice is received on a Sunday or 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 of any other term, covenant or condition hereof. Lessor's
consent to, or approval of, any 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 preceding Default or
Breach by Lessee of any provision hereof, other than the failure of Lessee to
pay the particular rent so accepted. 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.
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.
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<PAGE> 15
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 and
allow such Lender thirty (30) days following receipt of such notice for the
cure of said default before invoking any remedies Lessee may have by reason
thereof. 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 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 (1) 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 the 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. ATTORNEY'S FEES.
If any Party or Broker brings an action or proceeding to enforce the terms
hereof or declare rights hereunder, the Prevailing Party (as hereafter defined)
or Broker in any such proceeding, action, or appeal thereon, shall be entitled
to reasonable attorney's 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
attorney's fees award shall not be computed in accordance with any court fee
schedule, but shall be such as to fully reimburse all attorney's fees
reasonably incurred. Lessor shall be entitled to attorney's fees, costs and
expenses incurred in the 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.
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 purposes 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 of which they are a part, 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 twenty (120) 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 Premises, 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. 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 and the right to install, and
all revenues from the installation of, such advertising signs on the Premises,
including the roof, as do not unreasonably interfere with the conduct of
Lessee's business.
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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' or 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, practice or storage tank, shall be paid by Lessee to
Lessor upon receipt of an invoice and supporting documentation therefor.
Subject to Paragraph 12.2(e) (applicable to assignment or subletting), 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.
Except as otherwise provided, 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 imposition
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 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 said 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 called for by Paragraph 16.
37.2 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 including
in the case of a corporate Guarantor, a certified copy of a resolution of its
board of directors authorizing the making of such guaranty, together with a
certificate of incumbency showing the signature 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 observance and
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.
39. OPTIONS.
39.1 DEFINITION. As used in this Paragraph 39 the word "Option" has the
following meaning: (a) the right to extend the term 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: (i)
during the period commencing with the giving of any notice of Default under
Paragraph 13.1 and continuing until the
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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 Default under Paragraph 13.1, whether or not the Defaults are cured,
during the twelve (12) month period immediately preceding the exercise of the
Option.
(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, if, 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 Default 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. MULTIPLE BUILDINGS.
If the Premises are part of a group of buildings controlled by Lessor,
Lessee agrees that it will abide to, keep and observe all reasonable 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 such other buildings and their invitees, and that
Lessee will pay its fair share of common expenses incurred in connection
therewith.
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 to itself the right, from time to time, to grant, without
the consent or joinder of Lessee, such easements, rights and dedications that
Lessor deems necessary, and to cause the recordation of parcel maps and
restrictions, so long as such easements, rights, dedications, maps and
restrictions do not unreasonably 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 Lessor or Lessor's agent and submission of
same to Lessee shall not be deemed an offer to Lease to Lessee. This Lease is
not intended to be binding until executed 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
non-monetary 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.
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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.
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.
IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR SUBMISSION TO
YOUR ATTORNEY FOR HIS APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED TO
EVALUATE THE CONDITION OF THE PROPERTY AS TO THE POSSIBLE PRESENCE OF
ASBESTOS, STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO REPRESENTATION OR
RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
OR BY THE REAL ESTATE BROKER(S) OR THEIR AGENTS OR EMPLOYEES AS TO THE
LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE
TRANSACTION TO WHICH IT RELATES; THE PARTIES SHALL RELY SOLELY UPON THE
ADVICE OF THEIR OWN COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS
LEASE. IF THE SUBJECT PROPERTY IS LOCATED IN A STATE OTHER THAN CALIFORNIA
AN ATTORNEY FROM THE STATE WHERE THE PROPERTY IS LOCATED SHOULD BE
CONSULTED.
The parties hereto have executed this Lease at the place on the dates specified
above to their respective signatures.
<TABLE>
<S> <C>
Executed at Santa Clara, CA Executed at Sunnyvale, CA
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on 2-22-96 on 2-22-96
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by LESSOR: by LESSEE:
Victor H. Owen & Judith Owen Burns Atari Corporation, a Nevada corporation
--------------------------------------------------- ---------------------------------------------------
1990 Revocable Trust, dated 12-27-90,
--------------------------------------------------- ---------------------------------------------------
Judith Owen Burns, Trustee
--------------------------------------------------- ---------------------------------------------------
By /s/ Judith Owen Burns, Trustee By /s/ Laurence M. Scott
------------------------------------------------ ------------------------------------------------
Name Printed: Judith Owen Burns Name Printed: Laurence M. Scott
------------------------------------- -------------------------------------
Title: Co-owner Title: Vice President, Operations
-------------------------------------------- --------------------------------------------
By By
------------------------------------------------ ------------------------------------------------
Name Printed: Name Printed:
------------------------------------- -------------------------------------
Title: Title:
-------------------------------------------- --------------------------------------------
Address: Address:
------------------------------------------ ------------------------------------------
--------------------------------------------------- ---------------------------------------------------
Tel. No. ( ) Fax No. ( ) Tel. No. ( ) Fax No. ( )
----------------- ---------------- ---------------- -----------------
</TABLE>
NOTICE: These forms are often modified to meet changing requirements of law
and industry needs. always write or call to make sure you are
utilizing the most current form: American Industrial Real Estate
Association, 345 South Figueroa Street, Suite M-1, Los Angeles, CA
90071. (213) 687-8777, Fax. No. (213) 687-8616.
-18-
<PAGE> 19
ADDENDUM
49. CARPET REPLACEMENT: Lessor, at Lessee's request, shall provide Lessee a
carpet replacement allowance of up to $14,416.00 to replace the existing
floor coverings. The installation of carpet shall be professionally done.
50. PAINT: Lessor shall paint and repair all walls prior to Commencement Date.
51. REMOVAL OF SHELVING IN SAFE: Lessor agrees to remove all shelving in the
vault at Lessor's expense prior to Commencement Date, and to either remove
or box in the safe door.
52. RECEPTION AREA: Lessor agrees, at Lessor's expense and at Lessee's
request, to provide a reception area at the entry to the north end of the
building, which would include carpeting, a door and hard walls. The
configuration and expense to be mutually agreed upon by Lessor and Lessee.
53. RENT ESCALATION: The base rent will be adjusted beginning the 1st day of
the 37th month of the Lease term, based on the change in the Consumer Price
Index as determined by the Department of Labor, Bureau of Labor Statistics:
All Items, for the San Francisco-Oakland Metropolitan Area. The minimum
rental adjustment will be the cumulative increase of three percent (3%) per
annum with a ceiling of seven percent (7%) per annum.
54. SUBLEASING/ASSIGNMENT: Lessee shall have the right to sublease/assign all
or any portion of its Premises during the term of the Lease to a qualified
tenant or tenants, subject to Lessor's approval, which shall not be
unreasonably withheld or delayed. No response within ten (10) days shall
be deemed as Lessor's approval. Any premium earned via sublease will be
divided 50/50 between Lessor and Lessee. Any costs associated with
Lessee's subleasing of the Premises shall be borne by Lessee. Any
improvements to the Premises shall be approved by Lessor and be at the
expense of Lessee.
55. CALIFORNIA TITLE 24 DISABLED ACCESS REGULATION: Lessor agrees, at Lessor's
expense and at Lessee's request, to upgrade the existing restrooms to ADA
standards.
56. SIGNAGE: Lessor and Lessee shall work toward an agreement to allow Lessee
to place a sign on the building which shall meet the City of Sunnyvale's
sign ordinance and be consistent with other signage Lessor has within the
building complex.
-19-
<PAGE> 1
AMENDED AND RESTATED
AGREEMENT AND PLAN OF REORGANIZATION
BY AND BETWEEN
ATARI CORPORATION
AND
JT STORAGE, INC.
APRIL 8, 1996
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE I -- THE MERGER............................................................. 2
1.1 The Merger....................................................................... 2
1.2 Closing; Effective Time.......................................................... 2
1.3 Effect of the Merger............................................................. 2
1.4 Certificate of Incorporation; Bylaws............................................. 2
1.5 Directors and Executive Officers................................................. 3
1.6 Effect on Capital Stock.......................................................... 3
1.7 Surrender of Certificates........................................................ 4
1.8 No Further Ownership Rights in Atari Stock....................................... 5
1.9 Lost, Stolen or Destroyed Certificates........................................... 5
1.10 Tax Consequences................................................................. 5
1.11 Taking of Necessary Action; Further Action....................................... 5
ARTICLE II -- REPRESENTATIONS AND WARRANTIES OF JTS................................. 6
2.1 Organization, Standing and Power................................................. 6
2.2 Capital Structure................................................................ 7
2.3 Authority........................................................................ 8
2.4 Financial Statements............................................................. 9
2.5 Absence of Certain Changes....................................................... 9
2.6 Absence of Undisclosed Liabilities............................................... 9
2.7 Litigation....................................................................... 10
2.8 Restrictions on Business Activities.............................................. 10
2.9 Governmental Authorization....................................................... 10
2.10 Title to Property................................................................ 10
2.11 Intellectual Property............................................................ 11
2.12 Environmental Matters............................................................ 11
2.13 Tax.............................................................................. 11
2.14 Employee Benefit Plans........................................................... 12
2.15 Certain Agreements Affected by the Merger........................................ 13
2.16 Employee Matters................................................................. 13
2.17 Interested Party Transactions.................................................... 14
2.18 Insurance........................................................................ 14
2.19 Compliance With Laws............................................................. 14
2.20 Minute Books..................................................................... 14
2.21 Complete Copies of Materials..................................................... 14
2.22 Brokers' and Finders' Fees....................................................... 15
2.23 Registration Statement; Proxy Statement/Prospectus............................... 15
2.24 Vote Required.................................................................... 15
2.25 Board Approval................................................................... 15
2.26 Underlying Documents............................................................. 15
2.27 Representations Complete......................................................... 16
ARTICLE III -- REPRESENTATIONS AND WARRANTIES OF ATARI.............................. 16
3.1 Organization, Standing and Power................................................. 16
3.2 Capital Structure................................................................ 16
3.3 Authority........................................................................ 17
3.4 SEC Documents; Financial Statements.............................................. 18
3.5 Absence of Certain Changes....................................................... 18
</TABLE>
i
<PAGE> 3
TABLE OF CONTENTS -- (CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
3.6 Absence of Undisclosed Liabilities............................................... 19
3.7 Litigation....................................................................... 19
3.8 Restrictions on Business Activities.............................................. 19
3.9 Governmental Authorization....................................................... 19
3.10 Title to Property................................................................ 19
3.11 Intellectual Property............................................................ 20
3.12 Environmental Matters............................................................ 20
3.13 Tax.............................................................................. 21
3.14 Employee Benefit Plans........................................................... 21
3.15 Certain Agreements Affected by the Merger........................................ 22
3.16 Employee Matters................................................................. 22
3.17 Interested Party Transactions.................................................... 23
3.18 Insurance........................................................................ 23
3.19 Compliance With Laws............................................................. 23
3.20 Minute Books..................................................................... 23
3.21 Complete Copies of Materials..................................................... 24
3.22 Broker's and Finders' Fees....................................................... 24
3.23 Registration Statement; Proxy Statement/Prospectus............................... 24
3.24 Opinion of Financial Advisor..................................................... 24
3.25 Board Approval................................................................... 24
3.26 Vote Required.................................................................... 24
3.27 Underlying Documents............................................................. 24
3.28 Representations Complete......................................................... 25
ARTICLE IV -- CONDUCT PRIOR TO THE EFFECTIVE TIME................................... 25
4.1 Conduct of Business of JTS and Atari............................................. 25
4.2 Conduct of Business of JTS....................................................... 26
4.3 Conduct of Business of Atari..................................................... 27
4.4 No Other JTS Negotiations........................................................ 28
4.5 No Other Atari Negotiations...................................................... 29
ARTICLE V -- ADDITIONAL AGREEMENTS.................................................. 30
5.1 Proxy Statement/Prospectus; Registration Statement............................... 30
5.2 Meetings of Stockholders......................................................... 30
5.3 Access to Information............................................................ 31
5.4 Public Disclosure................................................................ 31
5.5 Consents; Cooperation............................................................ 31
5.6 Continuity of Interest Certificates.............................................. 31
5.7 Voting Agreements................................................................ 32
5.8 FIRPTA........................................................................... 32
5.9 Legal Requirements............................................................... 32
5.10 Blue Sky Laws.................................................................... 32
5.11 Atari Employee Benefit Plans..................................................... 33
5.12 Atari Debentures................................................................. 33
5.13 Form S-8......................................................................... 33
5.14 Tax-Free Reorganization; Tax Returns............................................. 33
5.15 Registration Rights.............................................................. 33
</TABLE>
ii
<PAGE> 4
TABLE OF CONTENTS -- (CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
5.16 Indemnification of Officers and Directors........................................ 33
5.17 Listing of JTS Common Stock...................................................... 34
5.18 Atari Consent to JTS Transaction with Moduler.................................... 34
5.19 Atari SEC Documents.............................................................. 34
5.20 Best Efforts and Further Assurances.............................................. 34
ARTICLE VI -- CONDITIONS TO THE MERGER.............................................. 34
6.1 Conditions to Obligations of Each Party to Effect the Merger..................... 34
6.2 Additional Conditions to Obligations of JTS...................................... 36
6.3 Additional Conditions to the Obligations of Atari................................ 37
ARTICLE VII -- TERMINATION, AMENDMENT AND WAIVER.................................... 38
7.1 Termination...................................................................... 38
7.2 Effect of Termination............................................................ 39
7.3 Expenses......................................................................... 39
7.4 Amendment........................................................................ 39
7.5 Extension; Waiver................................................................ 40
ARTICLE VIII -- GENERAL PROVISIONS.................................................. 40
8.1 Non-Survival at Effective Time................................................... 40
8.2 Absence of Third Party Beneficiary Rights........................................ 40
8.3 Notices.......................................................................... 40
8.4 Interpretation................................................................... 41
8.5 Counterparts..................................................................... 41
8.6 Entire Agreement; Nonassignability; Parties in Interest.......................... 41
8.7 Severability..................................................................... 42
8.8 Remedies Cumulative.............................................................. 42
8.9 Governing Law.................................................................... 42
8.10 Rules of Construction............................................................ 42
8.11 Amendment and Restatement........................................................ 42
</TABLE>
iii
<PAGE> 5
SCHEDULES
JTS Disclosure Schedule
Atari Disclosure Schedule
<TABLE>
<S> <C>
Schedule 5.6(a) -- JTS Significant Stockholders
Schedule 5.6(b) -- Atari Significant Shareholders
Schedule 5.7(a) -- JTS Voting Agreement Signatories
Schedule 5.7(b) -- Atari Voting Agreement Signatories
Schedule 5.15 -- Registration Rights Holders
</TABLE>
iv
<PAGE> 6
EXHIBITS
<TABLE>
<S> <C>
Exhibit A Form of Amended and Restated Certificate of Incorporation
Exhibit B Form of Amended and Restated Bylaws
Exhibit C-1 Form of JTS Voting Agreement
Exhibit C-2 Form of Atari Voting Agreement
</TABLE>
v
<PAGE> 7
AMENDED AND RESTATED
AGREEMENT AND PLAN OF REORGANIZATION
This AMENDED AND RESTATED AGREEMENT AND PLAN OF REORGANIZATION (the
"Agreement") is made and entered into as of April 8, 1996, by and between Atari
Corporation, a Nevada corporation ("Atari"), and JT Storage, Inc., a Delaware
corporation ("JTS").
RECITALS
A. Atari is in the business of designing, manufacturing and selling
computers, computer peripheral products and video games.
B. JTS is in the business of designing, manufacturing and selling computer
peripheral products including mass storage computer disc drives.
C. The Boards of Directors of JTS and Atari believe it is in the best
interests of their respective companies and the stockholders of their respective
companies that JTS and Atari combine into a single company through the statutory
merger of Atari with and into JTS (the "Merger") and, in furtherance thereof,
have approved the Merger.
D. In connection with the Merger, among other things, the outstanding
shares of Atari Common Stock, $.01 par value ("Atari Common Stock"), shall be
converted into shares of JTS Common Stock, $.000001 par value ("JTS Common
Stock"), at the rate set forth herein.
E. JTS and Atari desire to make certain representations and warranties and
other agreements in connection with the Merger.
F. The parties intend, by executing this Agreement, to adopt a plan of
reorganization within the meaning of Section 368 of the Internal Revenue Code of
1986, as amended (the "Code"), and to cause the Merger to qualify as a
reorganization under the provisions of Section 368(a)(1)(A) of the Code.
G. This Agreement amends and restates that certain Agreement and Plan of
Reorganization by and among Atari, JTS and JTS Acquisition Corporation dated as
of February 12, 1996.
NOW, THEREFORE, in consideration of the covenants and representations set
forth herein, and for other good and valuable consideration, the parties agree
as follows:
ARTICLE I
THE MERGER
1.1 The Merger. At the Effective Time (as defined in Section 1.2) and
subject to and upon the terms and conditions of this Agreement, a Certificate of
Merger prepared in accordance with Delaware Law (as defined herein) and Nevada
Law (as defined herein) and reasonably acceptable to counsel to JTS and counsel
to Atari (the "Certificate of Merger"), and the applicable provisions of the
Delaware General Corporation Law ("Delaware Law") and Nevada General Corporation
Law ("Nevada Law"), Atari shall be merged with and into JTS, the separate
corporate existence of Atari shall cease and JTS shall continue as the surviving
corporation. JTS as the surviving corporation after the Merger is hereinafter
sometimes referred to as the "Surviving Corporation."
1.2 Closing; Effective Time. The closing of the transactions contemplated
hereby (the "Closing") shall take place as soon as practicable after the
satisfaction or waiver of each of the conditions set forth in Article VI hereof
or at such other time as the parties hereto agree (the "Closing Date"). The
Closing shall take place at the offices of Wilson Sonsini Goodrich & Rosati,
P.C., 650 Page Mill Road, Palo Alto, California, or at such other location as
the parties hereto agree. In connection with the Closing, the parties hereto
shall cause the Merger to be consummated by filing the Certificate of Merger
with (i) the Secretary of State of the State of Delaware and with the Recorder
of the County in which the registered office of JTS is located, in
<PAGE> 8
accordance with the relevant provisions of Delaware Law and (ii) the Secretary
of State of the State of Nevada, in accordance with the relevant provisions of
Nevada Law (the time of such filings being the "Effective Time").
1.3 Effect of the Merger. At the Effective Time, the effect of the Merger
shall be as provided in this Agreement, the Certificate of Merger and the
applicable provisions of Delaware Law and Nevada Law. Without limiting the
generality of the foregoing, and subject thereto, at the Effective Time, all the
property, rights, privileges, powers and franchises of Atari shall vest in the
Surviving Corporation, and all debts, liabilities and duties of Atari shall
become the debts, liabilities and duties of the Surviving Corporation.
1.4 Certificate of Incorporation; Bylaws.
(a) At the Effective Time, the Certificate of Incorporation of JTS, as in
effect immediately prior to the Effective Time, shall be the Certificate of
Incorporation of the Surviving Corporation until thereafter amended as provided
by Delaware Law and such Certificate of Incorporation; provided, however, that
the Certificate of Incorporation of the Surviving Corporation shall be amended
and restated in the form attached hereto as Exhibit A.
(b) The Bylaws of JTS, as in effect immediately prior to the Effective
Time, shall be the Bylaws of the Surviving Corporation until thereafter amended;
provided, however, that the Bylaws of the Surviving Corporation shall be amended
and restated in the form attached hereto as Exhibit B.
1.5 Directors and Executive Officers. At the Effective Time, the directors
of the Surviving Corporation shall be Sirjang Lal Tandon, David T. Mitchell,
Jean D. Deleage, Alan Azan, Roger W. Johnson, LipBu Tan, Jack Tramiel and
Michael Rosenberg. The executive officers of JTS immediately prior to the
Effective Time shall constitute the only executive officers of the Surviving
Corporation as of the Effective Time, unless otherwise designated by JTS.
1.6 Effect on Capital Stock. By virtue of the Merger and without any
action on the part of JTS, Atari or the holders of any of the following
securities:
(a) Conversion of Atari Common Stock. At the Effective Time, each
share of Atari Common Stock issued and outstanding immediately prior to the
Effective Time (other than any shares of Atari Common Stock to be canceled
pursuant to Section 1.6(b)) will be canceled and extinguished and be
converted automatically into the right to receive one (1) share of JTS
Common Stock (the "Exchange Ratio").
(b) Cancellation of Certain Stock. At the Effective Time, each share
of Atari Common Stock owned by JTS or any direct or indirect wholly-owned
subsidiary of JTS immediately prior to the Effective Time shall be canceled
and extinguished without any conversion thereof.
(c) Atari Stock Options. At the Effective Time, all options to
purchase Atari Common Stock then outstanding under the Atari Amended 1986
Stock Option Plan (the "Atari Stock Option Plan") shall be assumed by JTS
in accordance with Section 5.11.
(d) Atari Debentures. At the Effective Time, JTS shall assume all
obligations of Atari under Atari's 5 1/4% Convertible Subordinated
Debentures Due 2002 (the "Atari Debentures"), and such debentures shall be
convertible into shares of JTS Common Stock in accordance with Section
5.12.
(e) Federated Debentures. To the extent required by that certain
Indenture dated as of April 15, 1985 from the The Federated Group, Inc. to
Security Pacific National Bank, as trustee, together with the first
supplemental indenture thereto dated as of September 24, 1987, at the
Effective Time, JTS shall assume any obligations of Atari under the 7 1/2%
Convertible Subordinated Debentures due April 15, 2010 of The Federated
Group, Inc. (the "Federated Debentures").
(f) Adjustments to Exchange Ratio. The Exchange Ratio shall be adjusted to
reflect fully the effect of any stock split, reverse split, stock dividend
(including any dividend or distribution of securities convertible into Atari
Common Stock or JTS Common Stock), reorganization, recapitalization or other
like change with
2
<PAGE> 9
respect to Atari Common Stock, JTS Common Stock or JTS Series A Preferred Stock,
$.000001 par value ("JTS Series A Preferred Stock"), occurring after the date
hereof and prior to the Effective Time.
(g) Fractional Shares. No fraction of a share of JTS Common Stock will be
issued, but in lieu thereof each holder of shares of Atari Common Stock who
would otherwise be entitled to a fraction of a share of JTS Common Stock (after
aggregating all fractional shares of JTS Common Stock to be received by such
holder) shall receive from JTS an amount of cash (rounded to the nearest whole
cent) equal to the product of (i) such fraction, multiplied by (ii) the closing
price of a share of Atari Common Stock on the trading day immediately prior to
the Effective Time, as reported by the American Stock Exchange.
1.7 Surrender of Certificates.
(a) Exchange Agent. Registrar and Transfer Company, Cranford, NJ, shall
act as exchange agent (the "Exchange Agent") in the Merger.
(b) JTS to Provide Common Stock and Cash. Promptly after the Effective
Time, JTS shall make available to the Exchange Agent for exchange in accordance
with this Article I, through such procedures as JTS may reasonably adopt, (i)
the shares of JTS Common Stock issuable pursuant to Section 1.6(a) in exchange
for shares of Atari Common Stock outstanding immediately prior to the Effective
Time and (ii) cash in an amount sufficient to permit payment of cash in lieu of
fractional shares pursuant to Section 1.6(g).
(c) Exchange Procedures. Promptly after the Effective Time, the Surviving
Corporation shall cause to be mailed to each holder of record of a certificate
or certificates (the "Certificates") which immediately prior to the Effective
Time represented outstanding shares of Atari Common Stock, whose shares were
converted into the right to receive shares of JTS Common Stock (and cash in lieu
of fractional shares) pursuant to Section 1.6, (i) a letter of transmittal
(which shall specify that delivery shall be effected, and risk of loss and title
to the Certificates shall pass, only upon receipt of the Certificates by the
Exchange Agent, and shall be in such form and have such other provisions as JTS
may reasonably specify) and (ii) instructions for use in effecting the surrender
of the Certificates in exchange for certificates representing shares of JTS
Common Stock (and cash in lieu of fractional shares). Upon surrender of a
Certificate for cancellation to the Exchange Agent or to such other agent or
agents as may be appointed by JTS, together with such letter of transmittal,
duly completed and validly executed in accordance with the instructions thereto,
the holder of such Certificate shall be entitled to receive in exchange therefor
a certificate representing the number of whole shares of JTS Common Stock and
payment in lieu of fractional shares which such holder has the right to receive
pursuant to Section 1.6, and the Certificate so surrendered shall forthwith be
canceled. Until so surrendered, each outstanding Certificate that, prior to the
Effective Time, represented shares of Atari Common Stock will be deemed from and
after the Effective Time, for all corporate purposes, other than the payment of
dividends, to evidence the ownership of the number of full shares of JTS Common
Stock into which such shares of Atari Common Stock shall have been so converted
and the right to receive an amount in cash in lieu of the issuance of any
fractional shares in accordance with Section 1.6.
(d) Distributions With Respect to Unexchanged Shares. No dividends or
other distributions with respect to JTS Common Stock with a record date after
the Effective Time will be paid to the holder of any unsurrendered Certificate
with respect to the shares of JTS Common Stock represented thereby until the
holder of record of such Certificate shall surrender such Certificate. Subject
to applicable law, following surrender of any such Certificate, there shall be
paid to the record holder of the certificates representing whole shares of JTS
Common Stock issued in exchange therefor, without interest, at the time of such
surrender, the amount of any such dividends or other distributions with a record
date after the Effective Time theretofore payable (but for the provisions of
this Section 1.7(d)) with respect to such shares of JTS Common Stock.
(e) Transfers of Ownership. If any certificate for shares of JTS Common
Stock is to be issued in a name other than that in which the Certificate
surrendered in exchange therefor is registered, it will be a condition of the
issuance thereof that the Certificate so surrendered will be properly endorsed
and otherwise in proper form for transfer and that the person requesting such
exchange will have paid to JTS or any agent designated by it any transfer or
other taxes required by reason of the issuance of a certificate for shares of
JTS
3
<PAGE> 10
Common Stock in any name other than that of the registered holder of the
Certificate surrendered, or established to the satisfaction of JTS or any agent
designated by it that such tax has been paid or is not payable.
(f) No Liability. Notwithstanding anything to the contrary in this Section
1.7, none of the Exchange Agent, the Surviving Corporation or any party hereto
shall be liable to any person for any amount properly paid to a public official
pursuant to any applicable abandoned property, escheat or similar law.
1.8 No Further Ownership Rights in Atari Stock. All shares of JTS Common
Stock issued upon the surrender for exchange of shares of Atari Common Stock in
accordance with the terms hereof (including any cash paid in lieu of fractional
shares) shall be deemed to have been issued in full satisfaction of all rights
pertaining to such shares of Atari Common Stock, and there shall be no further
registration of transfers on the records of the Surviving Corporation of shares
of Atari Common Stock which were outstanding immediately prior to the Effective
Time. If, after the Effective Time, Certificates are presented to the Surviving
Corporation for any reason, they shall be canceled and exchanged as provided in
this Article I.
1.9 Lost, Stolen or Destroyed Certificates. In the event any Certificates
shall have been lost, stolen or destroyed, the Exchange Agent shall issue in
exchange for such lost, stolen or destroyed Certificates, upon the making of an
affidavit of that fact by the holder thereof, such shares of JTS Common Stock
(and cash in lieu of fractional shares) as may be required pursuant to Section
1.6; provided, however, that JTS may, in its discretion and as a condition
precedent to the issuance thereof, require the owner of such lost, stolen or
destroyed Certificates to deliver a bond in such sum as it may reasonably direct
as indemnity against any claim that may be made against JTS, the Surviving
Corporation or the Exchange Agent with respect to the Certificates alleged to
have been lost, stolen or destroyed.
1.10 Tax Consequences. It is intended by the parties hereto that the
Merger shall constitute a reorganization within the meaning of Section 368 of
the Code.
1.11 Taking of Necessary Action; Further Action. If, at any time after the
Effective Time, any further action is necessary or desirable to carry out the
purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges, powers
and franchises of Atari, the officers and directors of Atari are fully
authorized in the name of the corporation or otherwise to take, and will take,
all such lawful and necessary action, so long as such action is not inconsistent
with this Agreement.
1.12 Dissenting JTS Shares.
(a) Notwithstanding any provision of this Agreement to the contrary, any
shares of JTS Common Stock or JTS Series A Preferred Stock held by a holder who
has exercised dissenters' rights for such shares in accordance with Delaware Law
or California General Corporation Law to the extent such law is applicable by
virtue of Section 2115 thereof ("California Law") and who, as of the Effective
Time, has not effectively withdrawn or lost such dissenters' rights ("Dissenting
Shares"), shall be entitled to such rights as are granted by Delaware Law or
California Law.
(b) JTS shall give Atari (i) prompt notice of any written demands received
by JTS for an appraisal of shares of capital stock of JTS pursuant to Section
262 of Delaware Law or Chapter 13 of California Law, withdrawals of such
demands, and any other related instruments served pursuant to Delaware Law or
California Law and received by JTS and (ii) the opportunity to participate in
all negotiations and proceedings with respect to such demands. JTS shall not,
except with the prior written consent of Atari, voluntarily make any payment
with respect to any such demands or offer to settle or settle any such demands.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF JTS
In this Agreement, any reference to any event, change, condition or effect
being "material" with respect to any entity or group of entities means any
material event, change, condition or effect related to the condition
4
<PAGE> 11
(financial or otherwise), properties, assets (including intangible assets),
liabilities, business, operations, results of operations or prospects of such
entity or group of entities. In this Agreement, any reference to a "Material
Adverse Effect" with respect to any entity or group of entities means any event,
change or effect that is materially adverse to the condition (financial or
otherwise), properties, assets, liabilities, business, operations, results of
operations or prospects of such entity and its subsidiaries, taken as a whole.
In this Agreement, any reference to a party's "knowledge" means such
party's actual knowledge after due and diligent inquiry.
Except as disclosed in a document of even date herewith and delivered by
JTS to Atari prior to the execution and delivery of this Agreement and referring
to the representations and warranties in this Agreement (the "JTS Disclosure
Schedule"), JTS represents and warrants to Atari as follows:
2.1 Organization, Standing and Power. Each of JTS and its subsidiaries is
a corporation duly organized, validly existing and in good standing under the
laws of its jurisdiction of organization. Each of JTS and its subsidiaries has
the corporate power to own its properties and to carry on its business as now
being conducted and as proposed to be conducted and is duly qualified to do
business and is in good standing in each jurisdiction in which the failure to be
so qualified and in good standing would have a Material Adverse Effect on JTS
and its subsidiaries, taken as a whole. JTS has delivered a true and correct
copy of the Certificate of Incorporation and Bylaws or other charter documents,
as applicable, of JTS and each of its subsidiaries, each as amended to date, to
Atari. Neither JTS nor any of its subsidiaries is in violation of any of the
provisions of its Certificate of Incorporation or Bylaws or equivalent
organizational documents. JTS is the owner of all outstanding shares of capital
stock of each of its subsidiaries and all such shares are duly authorized,
validly issued, fully paid and nonassessable. All of the outstanding shares of
capital stock of each such subsidiary are owned by JTS free and clear of all
liens, charges, claims or encumbrances or rights of others. There are no
outstanding subscriptions, options, warrants, puts, calls, rights, exchangeable
or convertible securities or other commitments or agreements of any character
relating to the issued or unissued capital stock or other securities of any such
subsidiary, or otherwise obligating JTS or any such subsidiary to issue,
transfer, sell, purchase, redeem or otherwise acquire any such securities.
Except as disclosed in the JTS Disclosure Schedule, JTS does not directly or
indirectly own any equity or similar interest in, or any interest convertible or
exchangeable or exercisable for, any equity or similar interest in, any
corporation, partnership, joint venture or other business association or entity.
2.2 Capital Structure. The authorized capital stock of JTS consists of
90,000,000 shares of Common Stock, $.000001 par value, and 70,000,000 shares of
Preferred Stock, $.000001 par value, all of which is designated Series A
Preferred Stock, of which there were issued and outstanding as of the close of
business on April 5, 1996, 9,204,741 shares of Common Stock and 29,696,370
shares of Series A Preferred. The JTS Disclosure Schedule contains a true and
complete list of the holders of JTS Common Stock and JTS Series A Preferred
Stock and the number of shares held by each such holder on April 5, 1996. There
are no other outstanding shares of capital stock or voting securities. Each
outstanding share of JTS Series A Preferred Stock is convertible into one (1)
share of JTS Common Stock. All outstanding shares of JTS Common Stock and JTS
Series A Preferred Stock are duly authorized, validly issued, fully paid and
non-assessable and are free of any liens or encumbrances other than any liens or
encumbrances created by or imposed upon the holders thereof, and are not subject
to preemptive rights or rights of first refusal created by statute, the
Certificate of Incorporation or Bylaws of JTS or any agreement to which JTS is a
party or by which it is bound. As of the close of business on April 5, 1996, JTS
has reserved (i) 4,300,000 shares of JTS Common Stock for issuance to employees
and consultants pursuant to the JTS 1995 Stock Option Plan (the "JTS Stock
Option Plan"), of which 37,554 shares have been issued pursuant to option
exercises and 3,680,358 shares are subject to outstanding, unexercised options,
(ii) 600,000 shares of JTS Common Stock for issuance upon the exercise of
outstanding, unexercised JTS Warrants and (iii) 32,500,000 shares of JTS Series
A Preferred Stock and JTS Common Stock for issuance upon conversion of the note
issued to Atari on February 13, 1996 and upon exercise of the warrants issuable
to Atari pursuant to such note. Since April 5, 1996, JTS has not issued or
granted additional options under the JTS Stock Option Plan. Other than pursuant
to this Agreement, there are no other options, warrants, calls, rights,
commitments or agreements of any character to which JTS is a party or by which
it is bound obligating JTS to issue, deliver, sell, repurchase or redeem, or
cause to be
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issued, delivered, sold, repurchased or redeemed, any shares of capital stock of
JTS or obligating JTS to grant, extend, accelerate the vesting of, change the
price of, or otherwise amend or enter into any such option, warrant, call,
right, commitment or agreement. The terms of the JTS Stock Option Plan and the
JTS Warrants permit the assumption or substitution of options or warrants, as
applicable, to purchase Atari Common Stock as provided in this Agreement,
without the consent or approval of the holders of such securities, the JTS
stockholders, or otherwise. True and complete copies of all agreements and
instruments relating to or issued under the JTS Stock Option Plan or JTS
Warrants have been made available to Atari and such agreements and instruments
have not been amended, modified or supplemented, and there are no agreements to
amend, modify or supplement such agreements or instruments in any case from the
form made available to Atari. The shares of JTS Common Stock to be issued
pursuant to the Merger will be duly authorized, validly issued, fully paid, and
non-assessable.
2.3 Authority. JTS has all requisite corporate power and authority to
enter into this Agreement and to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of JTS, subject only to the approval of the Merger
by JTS's stockholders as contemplated by Section 6.1(a). This Agreement has been
duly executed and delivered by JTS and constitutes the valid and binding
obligation of JTS. The execution and delivery of this Agreement by JTS does not,
and the consummation of the transactions contemplated hereby will not, conflict
with, or result in any violation of, or default under (with or without notice or
lapse of time, or both), or give rise to a right of termination, cancellation or
acceleration of any obligation or loss of any benefit under (i) any provision of
the Certificate of Incorporation or Bylaws of JTS or any of its subsidiaries, as
amended, or (ii) any material mortgage, indenture, lease, contract or other
agreement or instrument, permit, concession, franchise, license, judgment,
order, decree, statute, law, ordinance, rule or regulation applicable to JTS or
any of its subsidiaries or any of their properties or assets. No consent,
approval, order or authorization of, or registration, declaration or filing
with, any court, administrative agency or commission or other governmental
authority or instrumentality ("Governmental Entity") is required by or with
respect to JTS or any of its subsidiaries in connection with the execution and
delivery of this Agreement or the consummation of the transactions contemplated
hereby, except for (i) the filing of the Certificate of Merger as provided in
Section 1.2, (ii) such consents, approvals, orders, authorizations,
registrations, declarations and filings as may be required under applicable
state securities laws and the securities laws of any foreign country; (iii) such
filings as may be required under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended ("HSR"); and (iv) such other consents, authorizations,
filings, approvals and registrations which, if not obtained or made, would not
have a Material Adverse Effect on JTS and its subsidiaries, taken as a whole,
and would not prevent, alter or materially delay any of the transactions
contemplated by this Agreement. The JTS Disclosure Schedule sets forth a full
and complete list of all necessary consents, waivers and approvals of third
parties applicable to the operations of JTS that are required to be obtained by
JTS in connection with the execution and delivery of this Agreement or the
Merger Agreement by JTS or the consummation by JTS of the transactions
contemplated hereby or thereby, except any such consents, waivers and approvals,
which, if not obtained, would not have a Material Adverse Effect on JTS and its
subsidiaries, taken as a whole. Prior to the Closing Date, JTS will obtain all
such consents.
The Stock Purchase Agreement dated as of April 4, 1996 between JTS and
Lunenburg, S.A., a Panama corporation, together with all documents executed in
connection therewith (the "Moduler Agreement"), has been duly executed and
delivered by JTS, the transactions contemplated thereby have been consummated,
and the Moduler Agreement constitutes a valid and binding obligation of JTS. JTS
has provided to Atari a true, correct and complete copy of the Moduler
Agreement, and has performed all obligations required to be performed by it to
date under the Moduler Agreement. To JTS' best knowledge, (a) the other parties
to the Moduler Agreement have performed all obligations required to be performed
by them to date under such agreement, (b) as to such other parties, the Moduler
Agreement is valid, binding and enforceable in accordance with its terms and (c)
the Moduler Agreement is in full force and effect with no default or dispute or
basis therefor existing with respect thereto.
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2.4 Financial Statements. JTS has furnished to Atari its audited
consolidated balance sheet, consolidated statements of operations and
consolidated statements of stockholders equity and cash flows as of and for the
year ended January 28, 1996, and the audited statement of assets and
liabilities, statement of revenues and expenses and cash flows of The Hard Disk
Drive Division of Moduler as of and for the year ended January 28, 1996
(collectively, the "JTS Financial Statements"). The JTS Financial Statements,
including the notes thereto, were complete and correct in all material respects
as of their respective dates, complied as to form in all material respects with
applicable accounting requirements as of their respective dates, and have been
prepared in accordance with generally accepted accounting principles applied on
a basis consistent throughout the periods indicated and consistent with each
other (except as may be indicated in the notes thereto). The JTS Financial
Statements are in accordance with the books and records of JTS and fairly
present the consolidated financial condition and operating results of JTS and
its subsidiaries at the dates and during the periods indicated therein. There
has been no change in JTS accounting policies except as described in the notes
to the JTS Financial Statements.
2.5 Absence of Certain Changes. Since January 28, 1996, (the "JTS Balance
Sheet Date"), JTS has conducted its business in the ordinary course consistent
with past practice and there has not occurred: (i) any change, event or
condition (whether or not covered by insurance) that has resulted in, or might
reasonably be expected to result in, a Material Adverse Effect to JTS and its
subsidiaries, taken as a whole; (ii) any acquisition, sale or transfer of any
material asset of JTS or any of its subsidiaries other than in the ordinary
course of business and consistent with past practice; (iii) any change in
accounting methods or practices (including any change in depreciation or
amortization policies or rates) by JTS or any revaluation by JTS of any of its
or any of its subsidiaries' assets; (iv) any issuance or agreement to issue or
any commitment to issue any equity security, bond, note or other security of JTS
or any of its subsidiaries; (v) any declaration, setting aside, or payment of a
dividend or other distribution with respect to the shares of JTS, or any direct
or indirect redemption, purchase or other acquisition by JTS of any of its
shares of capital stock; (vi) any material contract entered into by JTS or any
of its subsidiaries, other than in the ordinary course of business and as
provided to Atari, or any amendment or termination of, or default under, any
material contract to which JTS or any of its subsidiaries is a party or by which
it is bound; or (vii) any negotiation or agreement by JTS or any of its
subsidiaries to do any of the things described in the preceding clauses (i)
through (vii) (other than negotiations with Atari regarding the transactions
contemplated by this Agreement).
2.6 Absence of Undisclosed Liabilities. JTS has no material obligations or
liabilities of any nature (matured or unmatured, fixed or contingent) other than
(i) those set forth or adequately provided for in the JTS balance sheet and the
Moduler statement of assets and liabilities, each as included in the JTS
Financial Statements, and true, correct and complete copies of which have been
provided to Atari, (collectively, the "JTS Balance Sheet"), (ii) those incurred
in the ordinary course of business and not required to be set forth in the JTS
Balance Sheet under generally accepted accounting principles, and (iii) those
incurred in the ordinary course of business since the JTS Balance Sheet Date and
consistent with past practice.
2.7 Litigation. There is no private or governmental action, suit,
proceeding, claim, arbitration or investigation pending before any agency, court
or tribunal, foreign or domestic, or, to the knowledge of JTS or any of its
subsidiaries, threatened against JTS or any of its subsidiaries or any of their
respective properties or any of their respective officers or directors (in their
capacities as such) that, individually or in the aggregate, could have a
Material Adverse Effect on JTS and its subsidiaries, taken as a whole. There is
no judgment, decree or order against JTS or any of its subsidiaries, or, to the
knowledge of JTS and its subsidiaries, any of their respective directors or
officers (in their capacities as such), that could prevent, enjoin, alter or
delay any of the transactions contemplated by this Agreement, or that could have
a Material Adverse Effect on JTS and its subsidiaries, taken as a whole.
2.8 Restrictions on Business Activities. There is no agreement, judgment,
injunction, order or decree binding upon JTS or any of its subsidiaries which
has or could have the effect of prohibiting or materially impairing any current
or future business practice of JTS or any of its subsidiaries, any acquisition
of property by JTS or any of its subsidiaries or the conduct of business by JTS
or any of its subsidiaries as currently conducted or as proposed to be conducted
by JTS or any of its subsidiaries.
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2.9 Governmental Authorization. JTS and each of its subsidiaries have
obtained each federal, state, county, local or foreign governmental consent,
license, permit, grant, or other authorization of a Governmental Entity (i)
pursuant to which JTS or any of its subsidiaries currently operates or holds any
interest in any of its properties or (ii) which is required for the operation of
JTS's or any of its subsidiaries' business or the holding of any such interest
(herein collectively called "JTS Authorizations"), and all of such JTS
Authorizations are in full force and effect, except where the failure to obtain
or have any of such JTS Authorizations could not reasonably be expected to have
a Material Adverse Effect on JTS and its subsidiaries, taken as a whole.
2.10 Title to Property. JTS and its subsidiaries have good and marketable
title to all of their respective properties, interests in properties and assets,
real and personal, reflected in the JTS Balance Sheet or acquired after the JTS
Balance Sheet Date (except properties, interests in properties and assets sold
or otherwise disposed of since the JTS Balance Sheet Date thereof in the
ordinary course of business), free and clear of all mortgages, liens, pledges,
charges or encumbrances of any kind or character, except (i) the lien of current
taxes not yet due and payable, (ii) such imperfections of title, liens and
easements as do not and will not materially detract from or interfere with the
use of the properties subject thereto or affected thereby, or otherwise
materially impair business operations involving such properties and (iii) liens
securing debt which is reflected on the JTS Balance Sheet. The plants, property
and equipment of JTS and its subsidiaries that are used in the operations of
their businesses are in good operating condition and repair. All properties used
in the operations of JTS and its subsidiaries are reflected in the JTS Balance
Sheet to the extent generally accepted accounting principles require the same to
be reflected. The JTS Disclosure Schedule identifies each parcel of real
property owned or leased by JTS or any of its subsidiaries.
2.11 Intellectual Property. JTS and its subsidiaries own, or are licensed
or otherwise possess legally enforceable rights to use all patents, trademarks,
trade names, service marks, copyrights, and any applications therefor,
maskworks, net lists, schematics, technology, know-how, computer software
programs or applications (in both source code and object code form), and
tangible or intangible proprietary information or material ("Intellectual
Property") that are used or proposed to be used in the business of JTS and its
subsidiaries as currently conducted or as proposed to be conducted by JTS and
its subsidiaries. To the knowledge of JTS and its subsidiaries, there is no
material unauthorized use, disclosure, infringement or misappropriation of any
Intellectual Property rights of JTS or any of its subsidiaries, any trade secret
material to JTS or any of its subsidiaries, or any Intellectual Property right
of any third party to the extent licensed by or through JTS or any of its
subsidiaries, by any third party, including any employee or former employee of
JTS or any of its subsidiaries. Neither JTS nor any of its subsidiaries has
entered into any agreement to indemnify any other person against any charge of
infringement of any Intellectual Property, other than indemnification provisions
(i) listed on the JTS Disclosure Schedule or (ii) contained in purchase orders
arising in the ordinary course of business.
2.12 Environmental Matters.
(a) To the knowledge of JTS and its subsidiaries, no substance that is
regulated by any foreign, federal, state or local governmental authority or that
has been designated by any such authority to be radioactive, toxic, hazardous or
otherwise a danger to health or the environment (herein a "Hazardous Material")
is present in, on or under any property that JTS or any of its subsidiaries has
at any time owned, operated, occupied or leased (herein a "JTS Facility"),
except to the extent that such presence has not had and could not reasonably be
expected to have a Material Adverse Effect on JTS and its subsidiaries, taken as
a whole.
(b) To the knowledge of JTS and its subsidiaries, neither JTS nor any of
its subsidiaries has transported, stored, used, disposed of, manufactured,
released or exposed its employees or any other person to Hazardous Materials
("Hazardous Materials Activity") in material violation of any applicable
foreign, federal, state or local statute, rule, regulation, order or law.
(c) To the knowledge of JTS and its subsidiaries, each of JTS and its
subsidiaries is and at all times has been in compliance with all foreign,
federal, state and local laws relating to emissions, discharges, releases or
threatened releases of Hazardous Materials, except to the extent noncompliance
with such laws has not had and could not reasonably be expected to have a
Material Adverse Effect on JTS and its subsidiaries, taken as a whole.
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(d) No action, proceeding, permit revocation, writ, injunction or claim is
pending, or to the knowledge of JTS and its subsidiaries threatened, concerning
the Hazardous Materials Activities of JTS or any of its subsidiaries and/or any
JTS Facilities. Neither JTS nor any of its subsidiaries is aware of any fact or
circumstance which could impose any material environmental liability upon JTS or
any of its subsidiaries.
2.13 Taxes. JTS and each of its subsidiaries, and any consolidated,
combined, unitary or aggregate group for Tax purposes of which JTS or any of its
subsidiaries is or has been a member have timely filed all Tax Returns required
to be filed by it, have paid all Taxes shown thereon to be due and has provided
adequate accruals in accordance with generally accepted accounting principles in
its financial statements for any Taxes that have not been paid, whether or not
shown as being due on any Tax Returns. Except as disclosed in the JTS Disclosure
Schedule, (i) no material claim for Taxes has become a lien against the property
of JTS or any of its subsidiaries or is being asserted against JTS or any of its
subsidiaries other than liens for Taxes not yet due and payable, (ii) no audit
of any Tax Return of JTS or any of its subsidiaries is being conducted by a Tax
authority, (iii) no extension of the statute of limitations on the assessment of
any Taxes has been granted by JTS or any of its subsidiaries and is currently in
effect, and (iv) there is no agreement, contract or arrangement to which JTS or
any of its subsidiaries is a party that may result in the payment of any amount
that would not be deductible by reason of Sections 280G, 162 or 404 of the Code.
Neither JTS nor any of its subsidiaries is a party to any tax sharing or tax
allocation agreement nor does JTS or any of its subsidiaries owe any amount
under any such agreement. As used herein, "Taxes" shall mean all taxes of any
kind, including, without limitation, those on or measured by or referred to as
income, gross receipts, sales, use, ad valorem, franchise, profits, license,
withholding, payroll, employment, excise, severance, stamp, occupation, premium,
value added, property or windfall profits taxes, customs, duties or similar
fees, assessments or charges of any kind whatsoever, together with any interest
and any penalties, additions to tax or additional amounts imposed by any
governmental authority, domestic or foreign. As used herein, "Tax Return" shall
mean any return, report or statement required to be filed with any governmental
authority with respect to Taxes. JTS and each of its subsidiaries are in full
compliance with all terms and conditions of any Tax exemptions or other Tax-
sharing agreement or order of a foreign government and the consummation of the
Merger shall not have any adverse effect on the continued validity and
effectiveness of any such Tax exemptions or other Tax-sharing agreement or
order.
2.14 Employee Benefit Plans.
(a) The JTS Disclosure Schedule lists, with respect to JTS, any trade or
business (whether or not incorporated) which is treated as a single employer
with JTS (an "ERISA Affiliate") within the meaning of Section 414(b), (c), (m)
or (o) of the Code or any subsidiary of JTS (i) all employee benefit plans (as
defined in Section 3(3) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), (ii) all loans to employees in excess of $50,000, loans to
officers, and any stock option, stock purchase, phantom stock, stock
appreciation right, supplemental retirement, severance, sabbatical, disability,
employee relocation, cafeteria (Code section 125), life insurance or accident
insurance plans, programs or arrangements, (iii) all bonus, deferred
compensation or incentive plans, programs or arrangements, (iv) other material
fringe or employee benefit plans, programs or arrangements that apply to senior
management of JTS and that do not generally apply to all employees, and (v) any
current or former employment or executive compensation or severance agreements,
written or otherwise, as to which current or contingent obligations of JTS of
greater than $50,000 exist for the benefit of, or relating to, any current or
former employee, consultant or director of JTS (together, the "JTS Employee
Plans"), and a copy of each such JTS Employee Plan and each summary plan
description and annual report on the Form 5500 series required to be filed with
any government agency for each JTS Employee Plan for the three most recent Plan
years has been delivered to Atari.
(b) (i) None of the JTS Employee Plans promises or provides retiree medical
or other retiree welfare benefits to any person; (ii) there has been no
"prohibited transaction," as such term is defined in Section 406 of ERISA and
Section 4975 of the Code, with respect to any JTS Employee Plan, which could
reasonably be expected to have, in the aggregate, a Material Adverse Effect on
JTS or its subsidiaries; (iii) all JTS Employee Plans have been administered in
compliance with the requirements prescribed by any and all statutes, rules and
regulations (including ERISA and the Code, orders, or governmental rules and
regulations currently in effect with respect thereto and including all
applicable requirements for notification to participants
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or to the Department of Labor, Internal Revenue Service or Secretary of the
Treasury), except as would not have, in the aggregate, a Material Adverse Effect
on JTS or its subsidiaries, and JTS and each of its subsidiaries have performed
all obligations required to be performed by them under, are not in any material
respect in default under or violation of, and have no knowledge of any material
default or violation by any other party to, any of the JTS Employee Plans; (iv)
each JTS Employee Plan intended to qualify under Section 401(a) of the Code and
each trust intended to qualify under Section 501(a) of the Code has received a
favorable determination letter from the Internal Revenue Service (the "IRS") as
to such qualification, and nothing has occurred which could reasonably be
expected to cause the loss of such qualification or exemption; (v) all material
contributions required to be made by JTS or any of its subsidiaries to any JTS
Employee Plan have been made on or before their due dates and a reasonable
amount has been accrued for contributions to each JTS Employee Plan for the
current plan years; and (vi) no JTS Employee Plan is covered by, and neither JTS
nor any subsidiary has incurred or expects to incur any liability under Title IV
of ERISA or Section 412 of the Code.
(c) With respect to each JTS Employee Plan that constitutes a group health
plan within the meaning of Section 5000(b)(1) of the Code or Section 607(1) of
ERISA, JTS and each of its United States subsidiaries have complied with the
applicable health care continuation and notice provisions of the Consolidated
Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA"), and the
proposed regulations thereunder, except to the extent that such failure to
comply would not, in the aggregate, have a Material Adverse Effect on JTS and
its subsidiaries.
2.15 Certain Agreements Affected by the Merger. Neither the execution and
delivery of this Agreement nor the consummation of the transaction contemplated
hereby will (i) result in any payment (including, without limitation, severance,
unemployment compensation, golden parachute, bonus or otherwise) becoming due to
any director or employee of JTS or any of its subsidiaries, (ii) increase any
benefits otherwise payable by JTS or (iii) result in the acceleration of the
time of payment or vesting of any such benefits.
2.16 Employee Matters. Except as to matters which could not, in the
aggregate, have a Material Adverse Effect on JTS and its subsidiaries, taken as
a whole, JTS and each of its subsidiaries are in compliance in all respects with
all currently applicable laws and regulations respecting employment,
discrimination in employment, terms and conditions of employment, wages, hours
and occupational safety and health and employment practices, and is not engaged
in any unfair labor practice. There are no pending claims against JTS or any of
its subsidiaries under any workers compensation plan or policy or for long term
disability. Neither JTS nor any of its subsidiaries has any material obligations
under COBRA with respect to any former employees or qualifying beneficiaries
thereunder. There are no controversies pending or, to the knowledge of JTS or
any of its subsidiaries, threatened, between JTS or any of its subsidiaries and
any of their respective employees, which controversies have or could have a
Material Adverse Effect on JTS and its subsidiaries, taken as a whole. Neither
JTS nor any of its subsidiaries is a party to any collective bargaining
agreement or other labor unions contract nor does JTS nor any of its
subsidiaries know of any activities or proceedings of any labor union or
organize any such employees.
2.17 Interested Party Transactions. Except as disclosed in the JTS
Disclosure Schedule, neither JTS nor any of its subsidiaries is indebted to any
director, officer, employee or agent of JTS or any of its subsidiaries (except
for amounts due as normal salaries and in reimbursement of ordinary expenses),
and no such person is indebted to JTS or any of its subsidiaries. Except as
disclosed in the JTS Disclosure Schedule, no officer, director or stockholder of
JTS or any affiliate of such person has, either directly or indirectly, (i) an
interest in any corporation, partnership, firm or other person or entity which
furnishes or sells services or products which are similar to those furnished or
sold by JTS or (ii) a beneficial interest in a contract or agreement to which
JTS is a party or by which JTS may be bound. For purposes of this Section 2.17,
there shall be disregarded any interest which arose solely from the ownership of
less than a one percent (1%) equity interest in a corporation whose stock is
regularly traded on a national securities exchange or over-the-counter market.
2.18 Insurance. JTS and each of its subsidiaries have policies of
insurance and bonds of the type and in amounts customarily carried by persons
conducting businesses or owning assets similar to those of JTS and its
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subsidiaries. There is no claim pending under any of such policies or bonds as
to which coverage has been questioned, denied or disputed by the underwriters of
such policies or bonds. All premiums due and payable under all such policies and
bonds have been paid and JTS and its subsidiaries are otherwise in compliance
with the terms of such policies and bonds. JTS has no knowledge of any
threatened termination of, or premium increase with respect to, any of such
policies.
2.19 Compliance With Laws. Each of JTS and its subsidiaries has complied
with, are not in violation of, and have not received any notices of violation
with respect to, any federal, state, local or foreign statute, law or regulation
with respect to the conduct of its business, or the ownership or operation of
its business, except for such violations or failures to comply as could not be
reasonably expected to have a Material Adverse Effect on JTS and its
subsidiaries, taken as a whole.
2.20 Minute Books. The minute books of JTS and its subsidiaries made
available to Atari contain a complete and accurate summary of all meetings of
directors and stockholders or actions by written consent since the time of
incorporation of JTS and the respective subsidiaries through the date of this
Agreement, and reflect all transactions referred to in such minutes accurately
in all material respects.
2.21 Complete Copies of Materials. JTS has delivered or made available
true and complete copies of each document which has been requested by Atari or
its counsel in connection with their legal and accounting review of JTS and its
subsidiaries.
2.22 Brokers' and Finders' Fees. JTS has not incurred, nor will it incur,
directly or indirectly, any liability for brokerage or finders' fees or agents'
commissions or investment bankers' fees or any similar charges in connection
with this Agreement or any transaction contemplated hereby.
2.23 Registration Statement; Proxy Statement/Prospectus. The information
supplied by JTS for inclusion in the registration statement on Form S-4 (or such
other or successor form as shall be appropriate, the "Registration Statement")
pursuant to which the shares of JTS Common Stock to be issued in the Merger will
be registered with the Securities and Exchange Commission (the "SEC") shall not
at the time the Registration Statement (including any amendments or supplements
thereto) is declared effective by the SEC contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The information
supplied by JTS for inclusion in the proxy statement/prospectus to be sent to
the stockholders of JTS and Atari in connection with the meeting of JTS's
stockholders to consider the Merger (the "JTS Stockholders Meeting") and in
connection with the meeting of Atari's stockholders to consider the Merger (the
"Atari Stockholders Meeting") (such proxy statement/prospectus as amended or
supplemented is referred to herein as the "Proxy Statement") shall not, on the
date the Proxy Statement is first mailed to JTS's stockholders and Atari's
stockholders, at the time of the JTS Stockholders Meeting, at the time of the
Atari Stockholders Meeting and at the Effective Time, contain any statement
which, at such time and in light of the circumstances under which it is made, is
false or misleading with respect to any material fact, or omit to state any
material fact necessary in order to make the statements made therein not false
or misleading; or omit to state any material fact necessary to correct any
statement in any earlier communication with respect to the solicitation of
proxies for the JTS Stockholders Meeting or the Atari Stockholders Meeting which
has become false or misleading. If at any time prior to the Effective Time any
event or information should be discovered by JTS which should be set forth in an
amendment to the Registration Statement or a supplement to the Proxy Statement,
JTS shall promptly inform Atari. Notwithstanding the fore going, JTS makes no
representation, warranty or covenant with respect to any information supplied by
Atari which is contained in any of the foregoing documents.
2.24 Vote Required. The affirmative votes of the holders of (i) a majority
of the shares of JTS Common Stock and JTS Series A Preferred Stock outstanding
on the record date set for the JTS Stockholders Meeting, voting together, (ii) a
majority of the shares of JTS Common Stock outstanding on the record date set
for the JTS Stockholders Meeting, voting separately as a class, and (iii) at
least two-thirds of the shares of JTS Series A Preferred outstanding on the
record date set for the JTS Stockholders Meeting, voting separately as a class,
are the only votes of the holders of any of JTS's capital stock necessary to
approve this Agreement and the transactions contemplated hereby.
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2.25 Board Approval. The Board of Directors of JTS has unanimously (i)
approved this Agreement and the Merger, (ii) determined that the Merger is in
the best interests of the stockholders of JTS and is on terms that are fair to
such stockholders and (iii) recommended that the stockholders of JTS approve
this Agreement and the Merger.
2.26 Underlying Documents. True and complete copies of all underlying
documents set forth on the JTS Disclosure Schedule or described as having been
disclosed or delivered to Atari pursuant to this Agreement have been furnished
to Atari.
2.27 Representations Complete. None of the representations or warranties
made by JTS herein or in any Schedule hereto, including the JTS Disclosure
Schedule, or certificate furnished by JTS pursuant to this Agreement, when all
such documents are read together in their entirety, contains or will contain at
the Effective Time any untrue statement of a material fact, or omits or will
omit at the Effective Time to state any material fact necessary in order to make
the statements contained herein or therein, in the light of the circumstances
under which made, not misleading.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF ATARI
Except as disclosed in the Atari SEC Documents (as defined in Section 3.4)
or in a document of even date herewith and delivered by Atari to JTS prior to
the execution and delivery of this Agreement and referring to the
representations and warranties in this Agreement (the "Atari Disclosure
Schedule"), Atari represents and warrants to JTS as follows:
3.1 Organization, Standing and Power. The Atari Disclosure Schedule
identifies each subsidiary of Atari that is a "significant subsidiary" of Atari
as defined by Rule 1-02(v) of Regulation S-X (the "Significant Subsidiaries").
Atari and each of its Significant Subsidiaries is a corporation duly organized,
validly existing and in good standing under the laws of its jurisdiction of
organization. Each of Atari and its Significant Subsidiaries has the corporate
power to own its properties and to carry on its business as now being conducted
and as proposed to be conducted and is duly qualified to do business and is in
good standing in each jurisdiction in which the failure to be so qualified and
in good standing would have a Material Adverse Effect on Atari and its
subsidiaries, taken as a whole. Atari has delivered a true and correct copy of
the Articles of Incorporation and Bylaws or other charter documents, as
applicable, of Atari and each of its Significant Subsidiaries, each as amended
to date, to JTS. Neither Atari nor any of its Significant Subsidiaries is in
violation of any of the provisions of its Articles of Incorporation or Bylaws or
equivalent organizational documents. Atari is the owner of all outstanding
shares of capital stock of each of its subsidiaries and all such shares are duly
authorized, validly issued, fully paid and nonassessable. All of the outstanding
shares of capital stock of each such subsidiary are owned by Atari free and
clear of all liens, charges, claims or encumbrances or rights of others. There
are no outstanding subscriptions, options, warrants, puts, calls, rights,
exchangeable or convertible securities or other commitments or agreements of any
character relating to the issued or unissued capital stock or other securities
of any such subsidiary, or otherwise obligating Atari or any such subsidiary to
issue, transfer, sell, purchase, redeem or otherwise acquire any such
securities. Except as disclosed in the Atari SEC Documents (as defined in
Section 3.4), Atari does not directly or indirectly own any equity or similar
interest in, or any interest convertible or exchangeable or exercisable for, any
equity or similar interest in, any corporation, partnership, joint venture or
other business association or entity.
3.2 Capital Structure. The authorized capital stock of Atari consists of
100,000,000 shares of Common Stock, $.01 par value, and 10,000,000 shares of
Preferred Stock, $.01 par value, of which there were issued and outstanding as
of the close of business on March 29, 1996, 63,727,318 shares of Common Stock
and no shares of Preferred Stock. There are no other outstanding shares of
capital stock or voting securities of Atari, other than shares of Atari Common
Stock issued after March 29, 1996 upon the exercise of options issued under the
Atari 1986 Stock Option Plan (the "Atari Stock Option Plan"). All outstanding
shares of Atari have been duly authorized, validly issued, fully paid and are
nonassessable and free of any liens or encumbrances other than any liens or
encumbrances created by or imposed upon the holders thereof, and are not subject
to
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preemptive rights or rights of first refusal created by statute, the Articles of
Incorporation or Bylaws of Atari or any agreement to which Atari is a party or
by which it is bound. As of the close of business on March 29, 1996, Atari has
reserved 3,000,000 shares of Common Stock for issuance to employees, directors
and consultants pursuant to the Atari Stock Option Plan, of which 599,674 shares
have been issued pursuant to option exercises, and 899,125 shares are subject to
outstanding, unexercised options. Since March 29, 1996, Atari has not issued or
granted additional options under the Atari Stock Option Plan. There are no other
options, warrants, calls, rights, commitments or agreements of any character to
which Atari is a party or by which it is bound obligating Atari to issue,
deliver, sell, repurchase or redeem, or cause to be issued, delivered, sold,
repurchased or redeemed, any shares of the capital stock of Atari or obligating
Atari to grant, extend or enter into any such option, warrant, call, right,
commitment or agreement.
3.3 Authority. Atari has all requisite corporate power and authority to
enter into this Agreement and to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of Atari, subject only to the approval of the
Merger by the Atari stockholders as contemplated by Section 6.1(a). This
Agreement has been duly executed and delivered by Atari and constitutes the
valid and binding obligations of Atari. The execution and delivery of this
Agreement do not, and the consummation of the transactions contemplated hereby
will not, conflict with, or result in any violation of, or default under (with
or without notice or lapse of time, or both), or give rise to a right of
termination, cancellation or acceleration of any obligation or loss of any
benefit under (i) any provision of the Articles of Incorporation or Bylaws of
Atari or any of its Significant Subsidiaries, as amended, or (ii) any material
mortgage, indenture, lease, contract or other agreement or instrument, permit,
concession, franchise, license, judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to Atari or any of its Significant
Subsidiaries or any of their properties or assets. No consent, approval, order
or authorization of, or registration, declaration or filing with, any
Governmental Entity, is required by or with respect to Atari or any of its
Significant Subsidiaries in connection with the execution and delivery of this
Agreement by Atari or the consummation by Atari of the transactions contemplated
hereby, except for (i) the filing of the Certificate of Merger as provided in
Section 1.2, (ii) the filing with the SEC and the American Stock Exchange of the
Proxy Statement relating to the Atari Stockholders Meeting, (iii) the filing of
a Form 8-K and Form 10-C with the SEC and the American Stock Exchange within 15
days and 10 days, respectively, after the Closing Date, (iv) any filings as may
be required under applicable state securities laws and the securities laws of
any foreign country, (v) such filings as may be required under HSR, (vi) such
filings as may be required under the rules and regulations of the American Stock
Exchange, and (vii) such other consents, authorizations, filings, approvals and
registrations which, if not obtained or made, would not have a Material Adverse
Effect on Atari and its subsidiaries, taken as a whole, and would not prevent,
alter or materially delay any of the transactions contemplated by this
Agreement. The Atari Disclosure Schedule sets forth a full and complete list of
all necessary consents, waivers and approvals of third parties applicable to the
operations of Atari that are required to be obtained by Atari in connection with
the execution and delivery of this Agreement or the Merger Agreement by Atari or
the consummation by Atari of the transactions contemplated hereby or thereby,
except any such consents, waivers and approvals, which, if not obtained, would
not have a Material Adverse Effect on Atari and its subsidiaries, taken as a
whole. Prior to the Closing Date, Atari will obtain all such consents.
3.4 SEC Documents; Financial Statements. Atari has furnished to JTS a true
and complete copy of each report, registration statement, definitive proxy
statement, and other filings filed with the SEC by Atari since January 1, 1993
(other than filings pursuant to Section 16 of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and any registration statement on Form
S-8), and prior to the Effective Time, Atari will have furnished JTS with true
and complete copies of any additional documents (other than filings pursuant to
Section 16 of the Exchange Act, and any registration statement on Form S-8)
filed with the SEC by Atari prior to the Effective Time (collectively, the
"Atari SEC Documents"). As of their respective filing dates, the Atari SEC
Documents complied in all material respects with the requirements of the
Exchange Act and the Securities Act, and none of the Atari SEC Documents
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements made
therein, in light of the circumstances in which they were made, not misleading,
except to the
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extent corrected by a subsequently filed Atari SEC Document. The financial
statements of Atari, including the notes thereto, included in the Atari SEC
Documents (the "Atari Financial Statements") were complete and correct in all
material respects as of their respective dates, complied as to form in all
material respects with applicable accounting requirements and with the published
rules and regulations of the SEC with respect thereto as of their respective
dates, and have been prepared in accordance with generally accepted accounting
principles applied on a basis consistent throughout the periods indicated and
consistent with each other (except as may be indicated in the notes thereto or,
in the case of unaudited statements included in Quarterly Reports on Form 10-Qs,
as permitted by Form 10-Q of the SEC). The Atari Financial Statements are in
accordance with the books and records of Atari and fairly present the
consolidated financial condition and operating results of Atari and its
subsidiaries at the dates and during the periods indicated therein (subject, in
the case of unaudited statements, to normal, recurring year-end adjustments).
There has been no change in Atari accounting policies except as described in the
notes to the Atari Financial Statements.
3.5 Absence of Certain Changes. Since December 31, 1995 (the "Atari
Balance Sheet Date"), Atari has conducted its business in the ordinary course
consistent with past practice and there has not occurred: (i) any change, event
or condition (whether or not covered by insurance) that has resulted in, or
might reasonably be expected to result in, a Material Adverse Effect to Atari
and its subsidiaries, taken as a whole; (ii) any acquisition, sale or transfer
of any material asset of Atari or any of its subsidiaries other than in the
ordinary course of business and consistent with past practice; (iii) any change
in accounting methods or practices (including any change in depreciation or
amortization policies or rates) by Atari or any revaluation by Atari of any of
its assets; (iv) any issuance or agreement to issue or any commitment to issue
any equity security, bond, note or other security of Atari or any of its
subsidiaries; (v) any declaration, setting aside, or payment of a dividend or
other distribution with respect to the shares of Atari, or any direct or
indirect redemption, purchase or other acquisition by Atari of any of its shares
of capital stock; (vi) any material contract entered into by Atari, other than
in the ordinary course of business and as provided to JTS, or any amendment or
termination of, or default under, any material contract to which Atari is a
party or by which it is bound; or (vii) any negotiation or agreement by Atari or
any of its subsidiaries to do any of the things described in the preceding
clauses (i) through (vii) (other than negotiations with JTS regarding the
transactions contemplated by this Agreement).
3.6 Absence of Undisclosed Liabilities. Atari has no material obligations
or liabilities of any nature (matured or unmatured, fixed or contingent) other
than (i) those set forth or adequately provided for in the Balance Sheet
included in Atari's Annual Report on Form 10-K for the period ended December 31,
1995 (the "Atari Balance Sheet"), (ii) those incurred in the ordinary course of
business and not required to be set forth in the Atari Balance Sheet under
generally accepted accounting principles, and (iii) those incurred in the
ordinary course of business since the Atari Balance Sheet Date and consistent
with past practice.
3.7 Litigation. There is no private or governmental action, suit,
proceeding, claim, arbitration or investigation pending before any agency, court
or tribunal, foreign or domestic, or, to the knowledge of Atari or any of its
subsidiaries, threatened against Atari or any of its subsidiaries or any of
their respective properties or any of their respective officers or directors (in
their capacities as such) that, individually or in the aggregate, could have a
Material Adverse Effect on Atari and its subsidiaries, taken as a whole. There
is no judgment, decree or order against Atari or any of its subsidiaries or, to
the knowledge of Atari or any of its subsidiaries, any of their respective
directors or officers (in their capacities as such) that could prevent, enjoin,
alter or delay any of the transactions contemplated by this Agreement, or that
could have a Material Adverse Effect on Atari and its subsidiaries, taken as a
whole. The outcome of the matter In re The Federated Group, Inc. Alleged Debtor
U.S.B.C. (N.D.Cal. Div. 5) No. 92-50412-JRG Chapter 7, is not reasonably likely
to have a Material Adverse Effect on Atari and its subsidiaries, taken as a
whole.
3.8 Restrictions on Business Activities. There is no agreement, judgment,
injunction, order or decree binding upon Atari or any of its subsidiaries which
has or could have the effect of prohibiting or materially impairing any current
or future business practice of Atari or any of its subsidiaries, any acquisition
of property by Atari or any of its subsidiaries or the conduct of business by
Atari or any of its subsidiaries as currently conducted or as proposed to be
conducted by Atari or any of its subsidiaries.
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3.9 Governmental Authorization. Atari and each of its subsidiaries have
obtained each federal, state, county, local or foreign governmental consent,
license, permit, grant, or other authorization of a Governmental Entity (i)
pursuant to which Atari or any of its subsidiaries currently operates or holds
any interest in any of its properties or (ii) which is required for the
operation of Atari's or any of its subsidiaries' business or the holding of any
such interest (herein collectively called "Atari Authorizations"), and all of
such Atari Authorizations are in full force and effect, except where the failure
to obtain or have any of such Atari Authorizations could not reasonably be
expected to have a Material Adverse Effect on Atari and its subsidiaries, taken
as a whole.
3.10 Title to Property. Atari and its Significant Subsidiaries have good
and marketable title to all of their respective properties, interests in
properties and assets, real and personal, reflected in the Atari Balance Sheet
or acquired after the Atari Balance Sheet Date (except properties, interests in
properties and assets sold or otherwise disposed of since the Atari Balance
Sheet Date thereof in the ordinary course of business), free and clear of all
mortgages, liens, pledges, charges or encumbrances of any kind or character,
except (i) the lien of current taxes not yet due and payable, (ii) such
imperfections of title, liens and easements as do not and will not materially
detract from or interfere with the use of the properties subject thereto or
affected thereby, or otherwise materially impair business operations involving
such properties and (iii) liens securing debt which is reflected on the Atari
Balance Sheet. The plants, property and equipment of Atari and its Significant
Subsidiaries that are used in the operations of their businesses are in good
operating condition and repair. All properties used in the operations of Atari
and its Significant Subsidiaries are reflected in the Atari Balance Sheet to the
extent generally accepted accounting principles require the same to be
reflected. The Atari Disclosure Schedule identifies each parcel of real property
owned or leased by Atari or any of its Significant Subsidiaries
3.11 Intellectual Property. Atari and its Significant Subsidiaries own, or
are licensed or otherwise possess legally enforceable rights to use all
Intellectual Property that are used or proposed to be used in the business of
Atari and its Significant Subsidiaries as currently conducted or as proposed to
be conducted by Atari and its subsidiaries, except to the extent that the
failure to have such rights have not had and could not reasonably be expected to
have a Material Adverse Effect on Atari and its subsidiaries, taken as a whole.
To the knowledge of Atari and its Significant Subsidiaries, there is no material
unauthorized use, disclosure, infringement or misappropriation of any
Intellectual Property rights of Atari or any of its subsidiaries, any trade
secret material to Atari or any of its subsidiaries, or any Intellectual
Property right of any third party to the extent licensed by or through Atari or
any of its subsidiaries, by any third party, including any employee or former
employee of Atari or any of its subsidiaries. Neither Atari nor any of its
subsidiaries has entered into any agreement to indemnify any other person
against any charge of infringement of any Intellectual Property, other than
indemnification provisions (i) listed on the Atari Disclosure Schedule or (ii)
contained in purchase orders arising in the ordinary course of business.
3.12 Environmental Matters.
(a) To the knowledge of Atari and its Significant Subsidiaries, no
Hazardous Material is present in, on or under any property that Atari or any of
its subsidiaries has at any time owned, operated, occupied or leased (herein an
"Atari Facility"), except to the extent that such presence has not had and could
not reasonably be expected to have a Material Adverse Effect on Atari and its
subsidiaries, taken as a whole.
(b) To the knowledge of Atari and its Significant Subsidiaries, neither
Atari nor any of its subsidiaries has engaged in a Hazardous Materials Activity
in material violation of any applicable foreign, federal, state or local
statute, rule, regulation, order or law.
(c) To the knowledge of Atari and its Significant Subsidiaries, each of
Atari and its subsidiaries is and at all times has been in compliance with all
foreign, federal, state and local laws relating to emissions, discharges,
releases or threatened releases of Hazardous Materials, except to the extent
noncompliance with such laws has not had and could not reasonably be expected to
have a Material Adverse Effect on Atari and its subsidiaries, taken as a whole.
(d) No action, proceeding, permit revocation, writ, injunction or claim is
pending, or to the knowledge of Atari and its subsidiaries threatened,
concerning the Hazardous Materials Activities of Atari or any of its
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subsidiaries and/or any Atari Facilities. Neither Atari nor any of its
Significant Subsidiaries is aware of any fact or circumstance which could impose
any material environmental liability upon Atari or any of its subsidiaries.
3.13 Taxes. Atari and each of its subsidiaries, and any consolidated,
combined, unitary or aggregate group for Tax purposes of which Atari or any of
its subsidiaries is or has been a member have timely filed all Tax Returns
required to be filed by it, have paid all Taxes shown thereon to be due and has
provided adequate accruals in accordance with generally accepted accounting
principles in its financial statements for any Taxes that have not been paid,
whether or not shown as being due on any Tax Returns. Except as disclosed in the
Atari SEC Documents, (i) no material claim for Taxes has become a lien against
the property of Atari or any of its subsidiaries or is being asserted against
Atari or any of its subsidiaries other than liens for Taxes not yet due and
payable, (ii) no audit of any Tax Return of Atari or any of its subsidiaries is
being conducted by a Tax authority, (iii) no extension of the statute of
limitations on the assessment of any Taxes has been granted by Atari or any of
its subsidiaries and is currently in effect, and (iv) there is no agreement,
contract or arrangement to which Atari or any of its subsidiaries is a party
that may result in the payment of any amount that would not be deductible by
reason of Sections 280G, 162 or 404 of the Code. Neither Atari nor any of its
subsidiaries is a party to any tax sharing or tax allocation agreement nor does
Atari or any of its subsidiaries owe any amount under any such agreement. As
used herein, "Taxes" shall mean all taxes of any kind, including, without
limitation, those on or measured by or referred to as income, gross receipts,
sales, use, ad valorem, franchise, profits, license, withholding, payroll,
employment, excise, severance, stamp, occupation, premium, value added, property
or windfall profits taxes, customs, duties or similar fees, assessments or
charges of any kind whatsoever, together with any interest and any penalties,
additions to tax or additional amounts imposed by any governmental authority,
domestic or foreign. As used herein, "Tax Return" shall mean any return, report
or statement required to be filed with any governmental authority with respect
to Taxes. Atari and each of its subsidiaries are in full compliance with all
terms and conditions of any Tax exemptions or other Tax-sharing agreement or
order of a foreign government and the consummation of the Merger shall not have
any adverse effect on the continued validity and effectiveness of any such Tax
exemption or other Tax-sharing agreement or order.
3.14 Employee Benefit Plans.
(a) The Atari Disclosure Schedule lists, with respect to Atari, any ERISA
affiliate of Atari or any subsidiary of Atari (i) all employee benefit plans (as
defined in Section 3(3) of ERISA), (ii) all loans to employees in excess of
$50,000, loans to officers, and any stock option, stock purchase, phantom stock,
stock appreciation right, supplemental retirement, severance, sabbatical,
disability, employee relocation, cafeteria (Code section 125), life insurance or
accident insurance plans, programs or arrangements, (iii) all bonus, deferred
compensation or incentive plans, programs or arrangements, (iv) other material
fringe or employee benefit plans, programs or arrangements that apply to senior
management of Atari and that do not generally apply to all employees, and (v)
any current or former employment or executive compensation or severance
agreements, written or otherwise, as to which current or contingent obligations
of Atari of greater than $50,000 exist for the benefit of, or relating to, any
current or former employee, consultant or director of Atari (together, the
"Atari Employee Plans"), and a copy of each such Atari Employee Plan and each
summary plan description and annual report on the Form 5500 series required to
be filed with any government agency for each Atari Employee Plan for the three
most recent Plan years has been delivered to JTS.
(b) (i) None of the Atari Employee Plans promises or provides retiree
medical or other retiree welfare benefits to any person; (ii) there has been no
"prohibited transaction," as such term is defined in Section 406 of ERISA and
Section 4975 of the Code, with respect to any Atari Employee Plan, which could
reasonably be expected to have, in the aggregate, a Material Adverse Effect on
Atari or its subsidiaries; (iii) all Atari Employee Plans have been administered
in compliance with the requirements prescribed by any and all statutes, rules
and regulations (including ERISA and the Code, orders, or governmental rules and
regulations currently in effect with respect thereto and including all
applicable requirements for notification to participants or to the Department of
Labor, Internal Revenue Service or Secretary of the Treasury), except as would
not have, in the aggregate, a Material Adverse Effect on Atari or its
subsidiaries, and Atari and each of its subsidiaries have performed all
obligations required to be performed by them under, are not in any material
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respect in default under or violation of, and have no knowledge of any material
default or violation by any other party to, any of the Atari Employee Plans;
(iv) each Atari Employee Plan intended to qualify under Section 401(a) of the
Code and each trust intended to qualify under Section 501(a) of the Code has
received a favorable determination letter from the IRS as to such qualification,
and nothing has occurred which could reasonably be expected to cause the loss of
such qualification or exemption; (v) all material contributions required to be
made by Atari or any of its subsidiaries to any Atari Employee Plan have been
made on or before their due dates and a reasonable amount has been accrued for
contributions to each Atari Employee Plan for the current plan years; and (vi)
no Atari Employee Plan is covered by, and neither Atari nor any subsidiary has
incurred or expects to incur any liability under Title IV of ERISA or Section
412 of the Code.
(c) With respect to each Atari Employee Plan that constitutes a group
health plan within the meaning of Section 5000(b)(1) of the Code or Section
607(1) of ERISA, Atari and each of its United States subsidiaries have complied
with the applicable health care continuation and notice provisions of COBRA and
the proposed regulations thereunder, except to the extent that such failure to
comply would not, in the aggregate, have a Material Adverse Effect on Atari and
its subsidiaries.
3.15 Certain Agreements Affected by the Merger. Neither the execution and
delivery of this Agreement nor the consummation of the transaction contemplated
hereby will (i) result in any payment (including, without limitation, severance,
unemployment compensation, golden parachute, bonus or otherwise) becoming due to
any director or employee of Atari or any of its subsidiaries, (ii) increase any
benefits otherwise payable by Atari or (iii) result in the acceleration of the
time of payment or vesting of any such benefits.
3.16 Employee Matters. Except as to matters which could not, in the
aggregate, have a Material Adverse Effect on Atari and its subsidiaries, taken
as a whole, Atari and each of its Significant Subsidiaries are in compliance in
all respects with all currently applicable laws and regulations respecting
employment, discrimination in employment, terms and conditions of employment,
wages, hours and occupational safety and health and employment practices, and is
not engaged in any unfair labor practice. There are no pending claims against
Atari or any of its subsidiaries under any workers compensation plan or policy
or for long term disability. Neither Atari nor any of its subsidiaries has any
material obligations under COBRA with respect to any former employees or
qualifying beneficiaries thereunder. There are no controversies pending or, to
the knowledge of Atari or any of its subsidiaries, threatened, between Atari or
any of its subsidiaries and any of their respective employees, which
controversies have or could have a Material Adverse Effect on Atari and its
subsidiaries, taken as a whole. Neither Atari nor any of its subsidiaries is a
party to any collective bargaining agreement or other labor unions contract nor
does Atari nor any of its subsidiaries know of any activities or proceedings of
any labor union or organize any such employees.
3.17 Interested Party Transactions. Except as disclosed in the Atari
Disclosure Schedule or the Atari SEC Documents, neither Atari nor any of its
subsidiaries is indebted to any director, officer, employee or agent of Atari or
any of its subsidiaries (except for amounts due as normal salaries and in
reimbursement of ordinary expenses), and no such person is indebted to Atari or
any of its subsidiaries. Except as disclosed in the Atari Disclosure Schedule or
the Atari SEC Documents, no officer, director or shareholder of Atari or any
affiliate of such person has, either directly or indirectly, (i) an interest in
any corporation, partnership, firm or other person or entity which furnishes or
sells services or products which are similar to those furnished or sold by Atari
or (ii) a beneficial interest in a contract or agreement to which Atari is a
party or by which Atari may be bound. For purposes of this Section 3.17, there
shall be disregarded any interest which arose solely from the ownership of less
than a one percent (1%) equity interest in a corporation whose stock is
regularly traded on a national securities exchange or over-thecounter market.
3.18 Insurance. Atari and each of its Significant Subsidiaries have
policies of insurance and bonds of the type and in amounts customarily carried
by persons conducting businesses or owning assets similar to those of Atari and
its subsidiaries. There is no claim pending under any of such policies or bonds
as to which coverage has been questioned, denied or disputed by the underwriters
of such policies or bonds. All premiums due and payable under all such policies
and bonds have been paid and Atari and its Significant Subsidiaries are
otherwise in compliance with the terms of such policies and bonds. Atari has no
knowledge of any threatened termination of, or premium increase with respect to,
any of such policies.
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3.19 Compliance With Laws. Each of Atari and its Significant Subsidiaries
has complied with, are not in violation of, and have not received any notices of
violation with respect to, any federal, state, local or foreign statute, law or
regulation with respect to the conduct of its business, or the ownership or
operation of its business, except for such violations or failures to comply as
could not be reasonably expected to have a Material Adverse Effect on Atari and
its subsidiaries, taken as a whole.
3.20 Minute Books. The minute books of Atari and its subsidiaries made
available to JTS contain a complete and accurate summary of all meetings of
directors and stockholders or actions by written consent since the time of
incorporation of Atari and the respective subsidiaries through the date of this
Agreement, and reflect all transactions referred to in such minutes accurately
in all material respects.
3.21 Complete Copies of Materials. Atari has delivered or made available
true and complete copies of each document which has been requested by JTS or its
counsel in connection with their legal and accounting review of Atari and its
subsidiaries.
3.22 Broker's and Finders' Fees. Atari has not incurred, nor will it
incur, directly or indirectly, any liability for brokerage or finders' fees or
agents' commissions or investment bankers' fees or any similar charges in
connection with this Agreement or any transaction contemplated hereby.
3.23 Registration Statement; Proxy Statement/Prospectus. The information
supplied by Atari for inclusion in the Registration Statement shall not, at the
time the Registration Statement (including any amendments or supplements
thereto) is declared effective by the SEC, contain any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The information supplied by Atari for inclusion in the Proxy
Statement shall not, on the date the Proxy Statement is first mailed to JTS's
stockholders and Atari's stockholders, at the time of the JTS Stockholders
Meeting, at the time of the Atari Stockholders Meeting and at the Effective
Time, contain any statement which, at such time and in light of the
circumstances under which it is made, is false or misleading with respect to any
material fact, or omit to state any material fact necessary in order to make the
statements therein not false or misleading; or omit to state any material fact
necessary to correct any statement in any earlier communication with respect to
the solicitation of proxies for the JTS Stockholders Meeting or the Atari
Stockholders Meeting which has become false or misleading. If at any time prior
to the Effective Time any event or information should be discovered by Atari
which should be set forth in an amendment to the Registration Statement or a
supplement to the Proxy Statement, Atari will promptly inform JTS.
Notwithstanding the foregoing, Atari makes no representation, warranty or
covenant with respect to any information supplied by JTS which is contained in
any of the foregoing documents.
3.24 Opinion of Financial Advisor. Atari has been advised in writing by
its financial advisor, Montgomery Securities, that in such advisor's opinion, as
of the date hereof, the consideration to be paid by Atari hereunder is fair,
from a financial point of view, to Atari.
3.25 Board Approval. The Board of Directors of Atari has unanimously (i)
approved this Agreement and the Merger, (ii) determined that the Merger is in
the best interests of its stockholders and is on terms that are fair to such
stockholders and (iii) recommended that its stockholders approve this Agreement
and the Merger.
3.26 Vote Required. The affirmative vote of the holders of a majority of
the shares of Atari Common Stock outstanding on the record date set for the
Atari Stockholders Meeting is the only vote of the holders of any of Atari's
capital stock necessary to approve this Agreement and the transactions
contemplated hereby. No shareholder of Atari will be entitled to statutory
dissenters rights under Nevada Law as a result of the Merger.
3.27 Underlying Documents. True and complete copies of all underlying
documents set forth on the Atari Disclosure Schedule or described as having been
disclosed or delivered to JTS pursuant to this Agreement have been furnished to
JTS.
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3.28 Representations Complete. None of the representations or warranties
made by Atari herein or in any Schedule hereto, including the Atari Disclosure
Schedule, or certificate furnished by Atari pursuant to this Agreement, or the
Atari SEC Documents, when all such documents are read together in their
entirety, contains or will contain at the Effective Time any untrue statement of
a material fact, or omits or will omit at the Effective Time to state any
material fact necessary in order to make the statements contained herein or
therein, in the light of the circumstances under which made, not misleading.
ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME
4.1 Conduct of Business of JTS and Atari. During the period from the date
of this Agreement and continuing until the earlier of the termination of this
Agreement or the Effective Time, each of JTS and Atari agrees (except to the
extent expressly contemplated by this Agreement or as consented to in writing by
the other), to carry on its and its subsidiaries' business in the usual, regular
and ordinary course in substantially the same manner as heretofore conducted, to
pay and to cause its subsidiaries to pay debts and taxes when due (subject to
good faith disputes over such debts or taxes) and to pay or perform other
obligations when due. Each of JTS and Atari agrees to promptly notify the other
of any event or occurrence not in the ordinary course of its or its
subsidiaries' business, and of any event which could have a Material Adverse
Effect on it and its subsidiaries, taken as a whole. Without limiting the
foregoing, except as expressly contemplated by this Agreement, neither JTS nor
Atari shall do, cause or permit any of the following, or allow, cause or permit
any of its subsidiaries to do, cause or permit any of the following, without the
prior written consent of the other:
(a) Charter Documents. Cause or permit any amendments to its
Certificate of Incorporation or Bylaws (except as contemplated by Section
1.4 hereof);
(b) Issuance of Securities. Issue, deliver or sell or authorize or
propose the issuance, delivery or sale of, or purchase or propose the
purchase of, any shares of its capital stock or securities convertible
into, or subscriptions, rights, warrants or options to acquire, or other
agreements or commitments of any character obligating it to issue any such
shares or other convertible securities, other than the issuance of shares
of its Common Stock pursuant to the exercise of stock options, warrants or
other rights therefor outstanding as of the date of this Agreement;
provided, however, that in addition to any grants specifically described on
the JTS Disclosure Schedule, JTS may, in the ordinary course of business
consistent with past practice, grant options for the purchase of up to
250,000 shares of JTS Common Stock under the JTS Stock Option Plan and
issue shares of JTS Common Stock upon the exercise of such options; and
provided, further, that Atari may issue securities under the Atari Option
Plan.
(c) Dividends; Changes in Capital Stock. Declare or pay any dividends
on or make any other distributions (whether in cash, stock or property) in
respect of any of its capital stock, or split, combine or reclassify any of
its capital stock or issue or authorize the issuance of any other
securities in respect of, in lieu of or in substitution for shares of its
capital stock, or repurchase or otherwise acquire, directly or indirectly,
any shares of its capital stock except from former employees, directors and
consultants in accordance with agreements providing for the repurchase of
shares in connection with any termination of service to it or its
subsidiaries;
(d) Acquisitions. Acquire or agree to acquire by merging or
consolidating with, or by purchasing a substantial portion of the assets
of, or by any other manner, any business or any corporation, partnership,
association or other business organization or division thereof, or
otherwise acquire or agree to acquire any assets which are material,
individually or in the aggregate, to its and its parent's/subsidiaries'
business, taken as a whole;
(e) Taxes. Other than in the ordinary course of business, make or
change any material election in respect of Taxes, adopt or change any
accounting method in respect of Taxes, file any material Return or any
amendment to a material Return, enter into any closing agreement, settle
any claim or assessment in respect of Taxes, or consent to any extension or
waiver of the limitation period applicable to any claim or assessment in
respect of Taxes;
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(f) Stock Option Plans, Etc. Accelerate, amend or change the period
of exercisability of options, warrants or other rights granted under its
employee stock plans or authorize cash payments in exchange for any
options, warrants or other rights granted under any of such plans;
(g) Other. Take, or agree in writing or otherwise to take, any of the
actions described in Sections 4.1(a) through (f) above, or any action which
would make any of its representations or warranties contained in this
Agreement untrue or incorrect or prevent it from performing or cause it not
to perform its covenants hereunder.
4.2 Conduct of Business of JTS. During the period from the date of this
Agreement and continuing until the earlier of the termination of this Agreement
or the Effective Time, except as expressly contemplated by this Agreement, JTS
shall not do, cause or permit any of the following, or allow, cause or permit
any of its subsidiaries to do, cause or permit any of the following, without the
prior written consent of Atari:
(a) Material Contracts. Enter into any material contract or
commitment, or violate, amend or otherwise modify or waive any of the terms
of any of its material contracts, other than in the ordinary course of
business consistent with past practice;
(b) Intellectual Property. Transfer to any person or entity any
rights to its Intellectual Property other than in the ordinary course of
business consistent with past practice;
(c) Dispositions. Sell, lease, license or otherwise dispose of or
encumber any of its properties or assets which are material, individually
or in the aggregate, to its and its subsidiaries' business, taken as a
whole, except in the ordinary course of business consistent with past
practice;
(d) Indebtedness. Incur any indebtedness for borrowed money (except
amounts borrowed under JTS's existing revolving credit line or drawdowns of
existing credit facilities for working capital or construction purposes
only) or guarantee any such indebtedness or issue or sell any debt
securities or guarantee any debt securities of others;
(e) Revaluation. Revalue any of its assets, including without
limitation writing down the value of inventory or writing off notes or
accounts receivable other than in the ordinary course of business and other
than as disclosed in the JTS Disclosure Schedule;
(f) Payment of Obligations. Pay, discharge or satisfy in an amount in
excess of $50,000 in any one case or $250,000 in the aggregate, any claim,
liability or obligation (absolute, accrued, asserted or unasserted,
contingent or otherwise) arising other than in the ordinary course of
business, other than the payment, discharge or satisfaction of liabilities
reflected or reserved against in the JTS Financial Statements;
(g) Termination or Waiver. Terminate or waive any right of
substantial value, other than in the ordinary course of business;
(h) Employee Benefit Plans. Adopt or amend any employee benefit or
stock purchase or option plan;
(i) Lawsuits. Commence a lawsuit other than (i) for the routine
collection of bills, (ii) in such cases where it in good faith determines
that failure to commence suit would result in the material impairment of a
valuable aspect of its business, provided that it consults with Atari prior
to the filing of such a suit, (iii) in such cases in which the damages or
legal fees are not reasonably expected to material, or (iv) for a breach of
this Agreement; or
(j) Other. Take, or agree in writing or otherwise to take, any of the
actions described in Sections 4.2(a) through (i) above, or any action which
would make any of its representations or warranties contained in this
Agreement untrue or incorrect or prevent it from performing or cause it not
to perform its covenants hereunder.
4.3 Conduct of Business of Atari. During the period from the date of this
Agreement and continuing until the earlier of the termination of this Agreement
or the Effective Time, except as expressly contemplated
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by this Agreement, Atari shall not do, cause or permit any of the following, or
allow, cause or permit any of its subsidiaries to do, cause or permit any of the
following, without the prior written consent of JTS:
(a) Material Contracts. Enter into any material contract or
commitment, or violate, amend or otherwise modify or waive any of the terms
of any of its material contracts, other than in the ordinary course of
business consistent with past practice;
(b) Intellectual Property. Transfer to any person or entity any
rights to its Intellectual Property other than in the ordinary course of
business consistent with past practice;
(c) Dispositions. Sell, lease, license or otherwise dispose of or
encumber any of its properties or assets which are material, individually
or in the aggregate, to its and its subsidiaries' business, taken as a
whole, except in the ordinary course of business consistent with past
practice;
(d) Indebtedness. Incur any indebtedness for borrowed money (except
amounts borrowed under JTS's existing revolving credit line or drawdowns of
existing credit facilities for working capital or construction purposes
only) or guarantee any such indebtedness or issue or sell any debt
securities or guarantee any debt securities of others;
(e) Revaluation. Revalue any of its assets, including without
limitation writing down the value of inventory or writing off notes or
accounts receivable other than in the ordinary course of business and other
than as disclosed in the Atari Disclosure Schedule;
(f) Payment of Obligations. Pay, discharge or satisfy in an amount in
excess of $50,000 in any one case or $250,000 in the aggregate, any claim,
liability or obligation (absolute, accrued, asserted or unasserted,
contingent or otherwise) arising other than in the ordinary course of
business, other than the payment, discharge or satisfaction of liabilities
reflected or reserved against in the Atari Financial Statements;
(g) Capital Expenditures. Make any capital expenditures, capital
additions or capital improvements except in the ordinary course of business
and consistent with past practice, and in any event not to exceed $25,000
per quarter;
(h) Termination or Waiver. Terminate or waive any right of
substantial value, other than in the ordinary course of business;
(i) Employee Benefit Plans. Adopt or amend any employee benefit or
stock purchase or option plan;
(j) Lawsuits. Commence a lawsuit other than (i) for the routine
collection of bills, (ii) in such cases where it in good faith determines
that failure to commence suit would result in the material impairment of a
valuable aspect of its business, provided that it consults with JTS prior
to the filing of such a suit, (iii) in such cases in which the damages or
legal fees are not reasonably expected to material, or (iv) for a breach of
this Agreement; or
(k) Other. Take, or agree in writing or otherwise to take, any of the
actions described in Sections 4.3(a) through (j) above, or any action which
would make any of its representations or warranties contained in this
Agreement untrue or incorrect or prevent it from performing or cause it not
to perform its covenants hereunder.
4.4 No Other JTS Negotiations. From and after the date of this Agreement
until the earlier of the Effective Time or the termination of this Agreement in
accordance with its terms, JTS shall not, directly or indirectly (i) solicit,
initiate discussion or engage in negotiations with any person (whether such
negotiations are initiated by JTS or otherwise) or take any other action
intended or designed to facilitate the efforts of any person, other than Atari,
relating to the possible acquisition of JTS or any of its subsidiaries (whether
by way of merger, purchase of capital stock, purchase of assets of otherwise) or
any of its or their capital stock or any material portion of its or their assets
(with any such efforts by any such person, including a firm proposal to make
such an acquisition, to be referred to as a "JTS Acquisition Proposal") (ii)
provide non-public information with respect to JTS or any of its subsidiaries to
any person, other than Atari, relating to a possible
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JTS Acquisition Proposal by any person, other than Atari, (iii) enter into an
agreement with any person, other than Atari, providing for a possible JTS
Acquisition Proposal, or (iv) make or authorize any statement, recommendation or
solicitation in support of any possible JTS Acquisition Proposal by any person
other than Atari. If JTS or any of its subsidiaries receives any unsolicited
offer or proposal to enter negotiations relating to a JTS Acquisition Proposal,
JTS shall immediately notify Atari thereof, including information as to the
identity of the party making any such offer or proposal and the specific terms
of such offer or proposal, as the case may be. JTS recognizes and acknowledges
that a breach of this Section 4.4 may cause irreparable and material loss and
damage to Atari as to which Atari may not have an adequate remedy at law or in
damages and that, accordingly, JTS agrees that the issuance of an injunction or
other equitable remedy is the appropriate remedy for any such breach.
4.5 No Other Atari Negotiations. From and after the date of this Agreement
until the earlier of the Effective Time or the termination of this Agreement in
accordance with its terms, Atari shall not, directly or indirectly (i) solicit,
initiate discussion or engage in negotiations with any person (whether such
negotiations are initiated by Atari or otherwise) or take any other action
intended or designed to facilitate the efforts of any person, other than JTS,
relating to the possible acquisition of Atari (whether by way of merger,
purchase of capital stock, purchase of assets of otherwise) or any of its
capital stock or any material portion of its assets (with any such efforts by
any such person, including a firm proposal to make such an acquisition, to be
referred to as an "Atari Acquisition Proposal") (ii) provide non-public
information with respect to Atari to any person, other than JTS, relating to a
possible Atari Acquisition Proposal by any person, other than JTS, (iii) enter
into an agreement with any person, other than JTS, providing for a possible
Atari Acquisition Proposal, or (iv) make or authorize any statement,
recommendation or solicitation in support of any possible Atari Acquisition
Proposal by any person other than JTS. If Atari receives any unsolicited offer
or proposal to enter negotiations relating to an Atari Acquisition Proposal,
Atari shall immediately notify JTS thereof, including information as to the
identity of the party making any such offer or proposal and the specific terms
of such offer or proposal, as the case may be. Atari recognizes and acknowledges
that a breach of this Section 4.5 may cause irreparable and material loss and
damage to JTS as to which JTS may not have an adequate remedy at law or in
damages and that, accordingly, JTS agrees that the issuance of an injunction or
other equitable remedy is the appropriate remedy for any such breach.
Notwithstanding the foregoing, nothing contained in this Agreement (i) shall
prevent the Board of Directors of Atari from referring any third party to this
Section 4.5 or providing a copy of this Agreement (other than the JTS Disclosure
Schedule) to any third party, (ii) shall prevent the Board of Directors of Atari
from considering, negotiating, approving and recommending to the shareholders of
Atari an unsolicited bona fide written Atari Acquisition Proposal which the
Board of Directors of Atari determines in good faith (after consultation with
its financial advisors and after consultation with outside counsel as to whether
the Board of Directors is required to do so in order to discharge properly its
fiduciary duties to shareholders under applicable law) would result in a
transaction more favorable to the Company's shareholders from a financial point
of view than the transaction contemplated by this Agreement (any such Atari
Acquisition Proposal being referred to herein as a "Superior Atari Proposal").
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Proxy Statement/Prospectus; Registration Statement. As promptly as
practicable after the execution of this Agreement, JTS and Atari shall prepare,
and Atari shall file with the SEC, preliminary proxy materials relating to the
approval of the Merger and the transactions contemplated hereby by the
stockholders of each of JTS and Atari and, as promptly as practicable following
receipt of SEC comments thereon, JTS and Atari shall file with the SEC a
Registration Statement on Form S-4 (or such other or successor form as shall be
appropriate), which complies in form with applicable SEC requirements and shall
use all reasonable efforts to cause the Registration Statement to become
effective as soon thereafter as practicable. The Proxy Statement shall include
the recommendation of the Board of Directors of JTS in favor of the Merger;
provided that such recommendation may not be included or may be withdrawn if
previously included if JTS's Board of Directors, upon written advice of its
outside legal counsel, shall determine that to include such recommenda-
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tion or not withdraw such recommendation if previously included would constitute
a breach of the Board's fiduciary duty under applicable law. The Proxy Statement
shall include the recommendation of the Board of Directors of Atari in favor of
the Merger; provided that such recommendation may not be included or may be
withdrawn if previously included if Atari's Board of Directors, upon written
advice of its outside legal counsel, shall determine that to include such
recommendation or not withdraw such recommendation if previously included would
constitute a breach of the Board's fiduciary duty under applicable law.
5.2 Meetings of Stockholders.
(a) JTS shall promptly after the date hereof take all action necessary in
accordance with Delaware Law and its Certificate of Incorporation and Bylaws to
convene the JTS Stockholders Meeting on or prior to June 30, 1996 or as soon
thereafter as is practicable. JTS shall consult with Atari and use all
reasonable efforts to hold the JTS Stockholders Meeting on the same day as the
Atari Stockholders Meeting and shall not postpone or adjourn (other than for the
absence of a quorum) the JTS Stockholders Meeting without the consent of Atari.
JTS shall use its best efforts to solicit from stockholders of JTS proxies in
favor of the Merger and shall take all other action necessary or advisable to
secure the vote or consent of stockholders required to effect the Merger.
(b) Atari shall promptly after the date hereof take all action necessary in
accordance with Nevada Law and its Articles of Incorporation and Bylaws to
convene the Atari Stockholders Meeting on or prior to June 30, 1996 or as soon
thereafter as is practicable. Atari shall consult with JTS and shall use all
reasonable efforts to hold the Atari Stockholders Meeting on the same day as the
JTS Stockholders Meeting and shall not postpone or adjourn (other than for the
absence of a quorum) the Atari Stockholders Meeting without the consent of JTS.
Atari shall use its best efforts to solicit from stockholders of Atari proxies
in favor of the Merger and shall take all other action necessary or advisable to
secure the vote or consent of stockholders required to effect the Merger.
5.3 Access to Information. JTS shall afford Atari and its accountants,
counsel and other representatives, reasonable access during normal business
hours during the period prior to the Effective Time to (i) all of JTS's and its
subsidiaries' properties, books, contracts, commitments and records, and (ii)
all other information concerning the business, properties and personnel of JTS
and its subsidiaries as Atari may reasonably request. JTS agrees to provide to
Atari and its accountants, counsel and other representatives copies of internal
financial statements promptly upon request. Atari shall afford JTS and its
accountants, counsel and other representatives, reasonable access during normal
business hours during the period prior to the Effective Time to (i) all of
Atari's and its subsidiaries' properties, books, contracts, commitments and
records, and (ii) all other information concerning the business, properties and
personnel of Atari and its subsidiaries as JTS may reasonably request. Atari
agrees to provide to JTS and its accountants, counsel and other representatives
copies of internal financial statements promptly upon request. No information or
knowledge obtained in any investigation pursuant to this Section 5.3 shall
affect or be deemed to modify any representation or warranty contained herein or
the conditions to the obligations of the parties to consummate the Merger.
5.4 Public Disclosure. Atari and JTS shall consult with each other before
issuing any press release or otherwise making any public statement or making any
other public (or non-confidential) disclosure regarding the terms of this
Agreement and the transactions contemplated hereby, and neither shall issue any
such press release or make any such statement or disclosure without the prior
approval of the other (which approval shall not be unreasonably withheld),
except as may be required by law.
5.5 Consents; Cooperation. Each of Atari and JTS shall promptly apply for
or otherwise seek, and use its best efforts to obtain, all consents and
approvals required to be obtained by it for the consummation of the Merger,
including those required under HSR, and shall use its best efforts to obtain all
necessary consents, waivers and approvals under any of its material contracts in
connection with the Merger for the assignment thereof or otherwise. The parties
hereto will consult and cooperate with one another, and consider in good faith
the views of one another, in connection with any analyses, appearances,
presentations, memoranda, briefs, arguments, opinions and proposals made or
submitted by or on behalf of any party hereto in connection with proceedings
under or relating to HSR or any other federal or state antitrust or fair trade
law.
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5.6 Continuity of Interest Certificates.
(a) Schedule 5.6(a) sets forth those persons who hold one percent (1%) or
more of the outstanding shares of JTS capital stock (the "JTS Significant
Stockholders"). JTS shall provide Atari such information and documents as Atari
shall reasonably request for purposes of reviewing such list. JTS shall use its
best efforts to deliver or cause to be delivered to Atari, concurrently with the
execution of this Agreement (and in each case prior to the Effective Time) from
each of the JTS Significant Stockholders, an executed Continuity of Interest
Certificate in a form reasonably satisfactory to counsel to Atari. The Surviving
Company shall be entitled to place appropriate legends on the certificates
evidencing any JTS Common Stock held by such JTS Significant Stockholders, and
to issue appropriate stop transfer instructions to the transfer agent for JTS
Common Stock, consistent with the terms of such Continuity of Interest
Certificates.
(b) Schedule 5.6(b) sets forth those persons who hold five percent (5%) or
more of the outstanding shares of Atari capital stock (the "Atari Significant
Stockholders"). Atari shall provide JTS such information and documents as JTS
shall reasonably request for purposes of reviewing such list. Atari shall use
its best efforts to deliver or cause to be delivered to JTS, concurrently with
the execution of this Agreement (and in each case prior to the Effective Time)
from each of the Atari Significant Stockholders, an executed Continuity of
Interest Certificate in a form reasonably satisfactory to counsel to JTS. The
Surviving Company shall be entitled to place appropriate legends on the
certificates evidencing any JTS Common Stock to be received by such Atari
Significant Stockholders pursuant to the terms of this Agreement, and to issue
appropriate stop transfer instructions to the transfer agent for JTS Common
Stock, consistent with the terms of such Continuity of Interest Certificates.
5.7 Voting Agreements.
(a) Prior to or concurrently with the execution of this Agreement, each JTS
stockholder named in Schedule 5.7(a) shall have executed and delivered to Atari
a Voting Agreement substantially in the form of Exhibit C-1 attached hereto.
(b) Prior to or concurrently with the execution of this Agreement, each
Atari stockholder named in Schedule 5.7(b) shall have executed and delivered to
JTS a Voting Agreement substantially in the form of Exhibit C-2 attached hereto.
5.8 FIRPTA. Promptly following the Closing, JTS and Atari shall deliver to
the IRS appropriate notices that their capital stock is not a "U.S. Real
Property Interest" as defined in and in accordance with the requirements of
Treasury Regulation Section 1.897-2(h)(2).
5.9 Legal Requirements. Each of Atari and JTS will, and will cause their
respective subsidiaries to, take all reasonable actions necessary to comply
promptly with all legal requirements which may be imposed on them with respect
to the consummation of the transactions contemplated by this Agreement and will
promptly cooperate with and furnish information to any party hereto necessary in
connection with any such requirements imposed upon such other party in
connection with the consummation of the transactions contemplated by this
Agreement and will take all reasonable actions necessary to obtain (and will
cooperate with the other parties hereto in obtaining) any consent, approval,
order or authorization of, or any registration, declaration or filing with, any
Governmental Entity or other person, required to be obtained or made in
connection with the taking of any action contemplated by this Agreement.
5.10 Blue Sky Laws. JTS shall take such steps as may be necessary to
comply with the securities and blue sky laws of all jurisdictions which are
applicable to the issuance of the JTS Common Stock in connection with the
Merger. Atari shall use its best efforts to assist JTS as may be necessary to
comply with the securities and blue sky laws of all jurisdictions which are
applicable in connection with the issuance of JTS Common Stock in connection
with the Merger.
5.11 Atari Employee Benefit Plans. At the Effective Time, each outstanding
option to purchase shares of Atari Common Stock under the Atari Stock Option
Plan whether vested or unvested, will be assumed by JTS. Each such option so
assumed by JTS under this Agreement shall continue to have, and be subject to,
the same terms and conditions set forth in the Atari Stock Option Plan
immediately prior to the Effective Time,
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except that (i) such option will be exercisable for that number of whole shares
of JTS Common Stock equal to the product of the number of shares of Atari Common
Stock that were issuable upon exercise of such option immediately prior to the
Effective Time multiplied by the Exchange Ratio, rounded down to the nearest
whole number of shares of JTS Common Stock, and (ii) the per share exercise
price for the shares of JTS Common Stock issuable upon exercise of such assumed
option will be equal to the quotient determined by dividing the exercise price
per share of Atari Common Stock at which such option was exercisable immediately
prior to the Effective Time by the Exchange Ratio, rounded up to the nearest
whole cent. It is the intention of the parties that the options so assumed by
JTS qualify following the Effective Time as incentive stock options as defined
in Section 422 of the Code to the extent such options qualified as incentive
stock options prior to the Effective Time.
5.12 Atari Debentures. Each Atari Debenture, upon its surrender to JTS at
any time at or following the Closing, shall be exchanged for a debenture in
substantially identical form (i) representing the right to convert into that
number of shares of JTS Common Stock equal to the number of shares of Atari
Common Stock for which such debenture was previously convertible multiplied by
the Exchange Ratio, rounded down to the nearest whole number of shares of JTS
Common Stock, and (ii) with a per share conversion price for the shares of JTS
Common Stock issuable upon exercise of such assumed debenture equal to the
quotient determined by dividing the conversion price per share of JTS Common
Stock at which such debenture was convertible immediately prior to the Effective
Time by the Exchange Ratio, rounded up to the nearest whole cent.
5.13 Form S-8. JTS agrees to file, no later than five (5) days after the
Closing, a registration statement on Form S-8 covering the shares of JTS Common
Stock issuable pursuant to outstanding options under the Atari Stock Option Plan
assumed by JTS.
5.14 Tax-Free Reorganization; Tax Returns. Atari and JTS shall each use
its best efforts to cause the Merger to be treated as a "reorganization" within
the meaning of Section 368(a)(1)(A) of the Code and shall report the Merger as
such in all federal and, to the extent permitted, all state and local tax
returns filed after the Effective Time of the Merger.
5.15 Registration Rights. At or prior to the Closing, JTS shall provide to
the holders of Atari Common Stock listed on Schedule 5.15 hereto, the
registration rights set forth in that certain Registration Rights Agreement
dated as of February 3, 1995 by and among JTS and the entities listed on Exhibit
A thereto, by amending such agreement in a form reasonably acceptable to counsel
to Atari.
5.16 Indemnification of Officers and Directors. After the Effective Time,
the Surviving Corporation shall (to the extent not prohibited by law) indemnify
and hold harmless, and pay in advance expenses, costs, damages, settlements and
fees to each director or officer of Atari serving as such as of the date hereof
as provided in the Nevada law or the Articles of Incorporation or bylaws of
Atari or any indemnification agreement to which Atari and such officer or
director is a party, in each case as in effect at the date hereof, which
provisions shall survive the Merger and shall continue in full force and effect
after the Effective Time.
5.17 Listing of JTS Common Stock. Atari and JTS shall each use its best
efforts to cause the JTS Common Stock to be approved for listing on the Nasdaq
National Market or the American Stock Exchange, such that trading in JTS Common
Stock shall commence on the first trading day following the Closing.
5.18 Atari Consent to JTS Transaction with Moduler. JTS covenants and
agrees with Atari that JTS will not amend or modify the Moduler Agreement
without the prior written consent of Atari.
5.19 Atari SEC Documents. Atari covenants and agrees with JTS that from
and after the date hereof, Atari will timely file all reports which it is
required to file with the SEC pursuant to the Exchange Act.
5.20 Best Efforts and Further Assurances. Each of the parties to this
Agreement shall use its best efforts to effectuate the transactions contemplated
hereby and to fulfill or cause to be fulfilled the conditions to closing under
this Agreement. Each party hereto, at the reasonable request of another party
hereto, shall execute and deliver such other instruments and do and perform such
other acts and things as may be necessary
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or desirable for effecting completely the consummation of this Agreement and the
transactions contemplated hereby.
ARTICLE VI
CONDITIONS TO THE MERGER
6.1 Conditions to Obligations of Each Party to Effect the Merger. The
respective obligations of each party to this Agreement to consummate and effect
this Agreement and the transactions contemplated hereby shall be subject to the
satisfaction at or prior to the Effective Time of each of the following
conditions, any of which may be waived, in writing, by agreement of all the
parties hereto:
(a) Stockholder Approval. This Agreement and the Merger shall have
been approved and adopted by (i) the holders of a majority of the shares of
JTS Common Stock and JTS Series A Preferred Stock outstanding as of the
record date set for the JTS Stockholders Meeting, voting together, (ii) a
majority of the shares of JTS Common Stock outstanding on the record date
set for the JTS Stockholders Meeting, voting separtely as a class, (iii)
the holders of at least two-thirds of the shares of JTS Series A Preferred
outstanding as of the record date set for the JTS Stockholders Meeting,
voting separately as a class, and (iv) the holders of a majority of the
shares of Atari Common Stock outstanding as of the record date set for the
Atari Stockholders Meeting.
(b) Registration Statement Effective. The SEC shall have declared the
Registration Statement effective. No stop order suspending the
effectiveness of the Registration Statement or any part thereof shall have
been issued and no proceeding for that purpose, and no similar proceeding
in respect of the Proxy Statement, shall have been initiated or threatened
by the SEC; and all requests for additional information on the part of the
SEC shall have been complied with to the reasonable satisfaction of the
parties hereto.
(c) Exchange Act Registration Statement Effective. JTS shall have
filed a Registration Statement on Form 8-A with the SEC pursuant to the
Exchange Act (the "Form 8-A"). The SEC shall have declared the Form 8-A
effective. No stop orders suspending the effectiveness of the Form 8-A or
any part thereof shall have been issued and no proceeding for that purpose,
shall have been initiated or threatened by the SEC.
(d) No Injunctions or Restraints; Illegality. No temporary
restraining order, preliminary or permanent injunction or other order
issued by any court of competent jurisdiction or other legal or regulatory
restraint or prohibition preventing the consummation of the Merger, nor
shall any proceeding brought by an administrative agency or commission or
other governmental authority or instrumentality, domestic or foreign,
seeking any of the foregoing be pending; nor shall there be any action
taken, or any statute, rule, regulation or order enacted, entered, enforced
or deemed applicable to the Merger, which makes the consummation of the
Merger illegal. In the event an injunction or other order shall have been
issued, each party agrees to use its reasonable diligent efforts to have
such injunction or other order lifted.
(e) Governmental Approval. Atari and JTS and their respective
subsidiaries shall have timely obtained from each Governmental Entity all
approvals, waivers and consents, if any, necessary for consummation of or
in connection with the Merger and the several transactions contemplated
hereby, including such approvals, waivers and consents as may be required
under the Securities Act, under state Blue Sky laws, and under HSR.
(f) Tax Opinion. Atari and JTS shall have received substantially
identical written opinions of Wilson Sonsini Goodrich & Rosati, P.C., and
Cooley Godward Castro Huddleson & Tatum, in form and substance reasonably
satisfactory to them, to the effect that the Merger will constitute a
reorganization within the meaning of Section 368(a) of the Code, and such
opinions shall not have been withdrawn. In rendering such opinions, counsel
shall be entitled to rely upon representations of Atari and JTS and certain
stockholders of Atari and JTS.
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<PAGE> 33
(g) Listing of JTS Common Stock. The JTS Common Stock shall have been
approved for quotation on the Nasdaq National Market or the American Stock
Exchange.
(h) Limit on JTS Dissenting Shares. No more than 5.0% of the shares
of JTS Common Stock and JTS Series A Preferred Stock shall be Dissenting
Shares or entitled to exercise any dissenters or appraisal rights with
respect to the Merger.
(i) Continuity of Interest Certificates. Atari shall have received
from each of the JTS Significant Stockholders an executed Continuity of
Interest Certificate as contemplated by Section 5.6 hereof. JTS shall have
received from each of the Atari Significant Shareholders an executed
Continuity of Interest Certificate as contemplated by Section 5.6 hereof.
(j) Supplemental Indentures. To the extent required by the indenture
related to the Atari Debentures or the indenture related to the Federated
Debentures, Atari and JTS shall have entered into supplemental indentures
with the trustees for such debentures, such supplemental indentures to be
in a form reasonably satisfactory to counsel to Atari and counsel to JTS.
6.2 Additional Conditions to Obligations of JTS. The obligations of JTS to
consummate and effect this Agreement and the transactions contemplated hereby
shall be subject to the satisfaction at or prior to the Effective Time of each
of the following conditions, any of which may be waived, in writing, by JTS:
(a) Representations, Warranties and Covenants. (i) The
representations and warranties of Atari in this Agreement shall be true and
correct in all respects on and as of the Effective Time as though such
representations and warranties were made on and as of such time, except to
the extent that the failure of such representations and warranties to be
true and accurate in such respects has not had and could not reasonably be
expected to have a Material Adverse Effect on Atari and its subsidiaries
and (ii) Atari shall have performed and complied in all respects with all
covenants, obligations and conditions of this Agreement required to be
performed and complied with by it as of the Effective Time, except to the
extent that the failure to so perform or comply has not had and could not
reasonably be expected to have a Material Adverse Effect on Atari and its
subsidiaries.
(b) Certificate of Atari. JTS shall have been provided with a
certificate executed on behalf of Atari by its President and its Chief
Financial Officer to the effect that, as of the Effective Time:
(i) all representations and warranties made by Atari under this
Agreement are true and complete in all respects except to the extent
that the failure of such representations and warranties to be true and
accurate in such respects has not had and could not reasonably be
expected to have a Material Adverse Effect on Atari and its
subsidiaries; and
(ii) all covenants, obligations and conditions of this Agreement to
be performed by Atari on or before such date have been so performed in
all respects except to the extent that the failure to so perform or
comply has not had and could not reasonably be expected to have a
Material Adverse Effect on Atari and its subsidiaries.
(c) Third Party Consents. JTS shall have been furnished with evidence
satisfactory to it of the consent or approval of those persons whose
consent or approval shall be required in connection with the Merger under
any material contract of Atari or any of its Significant Subsidiaries or
otherwise.
(d) Injunctions or Restraints on Conduct of Business. No temporary
restraining order, preliminary or permanent injunction or other order
issued by any court of competent jurisdiction or other legal or regulatory
restraint provision limiting or restricting JTS' conduct or operation of
the business of Atari and its subsidiaries, following the Merger shall be
in effect, nor shall any proceeding brought by an administrative agency or
commission or other Governmental Entity, domestic or foreign, seeking the
foregoing be pending.
(e) Legal Opinions. JTS shall have received legal opinions from
Wilson Sonsini Goodrich & Rosati, P.C. and Atari's Nevada counsel, which
opinions shall be reasonably satisfactory to counsel to JTS.
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<PAGE> 34
(f) No Material Adverse Changes. There shall not have occurred any
material adverse change in the condition (financial or otherwise),
properties, assets (including intangible assets), liabilities, business,
operations, results of operations or prospects of Atari and its
subsidiaries, taken as a whole.
6.3 Additional Conditions to the Obligations of Atari. The obligations of
Atari to consummate and effect this Agreement and the transactions contemplated
hereby shall be subject to the satisfaction at or prior to the Effective Time of
each of the following conditions, any of which may be waived, in writing, by
Atari:
(a) Representations, Warranties and Covenants. (i) The
representations and warranties of JTS in this Agreement shall be true and
correct in all respects on and as of the Effective Time as though such
representations and warranties were made on and as of such time, except to
the extent that the failure of such representations and warranties to be
true and accurate in such respects has not had and could not reasonably be
expected to have a Material Adverse Effect on JTS and its subsidiaries and
(ii) JTS shall have performed and complied in all respects with all
covenants, obligations and conditions of this Agreement required to be
performed and complied with by it as of the Effective Time, except to the
extent that the failure to so perform or comply has not had and could not
reasonably be expected to have a Material Adverse Effect on JTS and its
subsidiaries.
(b) Certificate of JTS. Atari shall have been provided with a
certificate executed on behalf of JTS by its Chief Executive Officer and
Chief Financial Officer to the effect that, as of the Effective Time:
(i) all representations and warranties made by JTS under this
Agreement are true and complete in all respects; except to the extent
that the failure of such representations and warranties to be true and
accurate in such respects has not had and could not reasonably be
expected to have a Material Adverse Effect on JTS and its subsidiaries;
and
(ii) all covenants, obligations and conditions of this Agreement to
be performed by JTS on or before such date have been so performed in all
respects except to the extent that the failure to so perform or comply
has not had and could not reasonably be expected to have a Material
Adverse Effect on JTS and its subsidiaries.
(c) Third Party Consents. Atari shall have been furnished with
evidence satisfactory to it of the consent or approval of those persons
whose consent or approval shall be required in connection with the Merger
under any material contract of JTS or any of its subsidiaries or otherwise.
(d) Injunctions or Restraints on Conduct of Business. No temporary
restraining order, preliminary or permanent injunction or other order
issued by any court of competent jurisdiction or other legal or regulatory
restraint provision limiting or restricting JTS' conduct or operation of
the business of JTS and its subsidiaries, following the Merger shall be in
effect, nor shall any proceeding brought by an administrative agency or
commission or other Governmental Entity, domestic or foreign, seeking the
foregoing be pending.
(e) Legal Opinion. Atari shall have received a legal opinion from
Cooley Godward Castro Huddleson & Tatum, which opinion shall be reasonably
satisfactory to counsel to Atari.
(f) No Material Adverse Changes. There shall not have occurred any
material adverse change in the condition (financial or otherwise),
properties, assets (including intangible assets), liabilities, business,
operations, results of operations or prospects of JTS and its subsidiaries,
taken as a whole.
(g) Conversion of JTS Series A Preferred Stock. Each outstanding
share of JTS Series A Preferred Stock shall be converted into one (1) share
of JTS Common Stock.
(h) Right of First Refusal and Co-Sale Agreement. The provisions of
the Right of First Refusal and Co-Sale Agreement dated as of February 3,
1995 by and among JTS and certain other parties, as amended, shall have
terminated.
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<PAGE> 35
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
7.1 Termination. Notwithstanding approval of this Agreement by the
stockholders of JTS or Atari, this Agreement may be terminated and the Merger
abandoned at any time prior to the Effective Time:
(a) by mutual written consent of JTS and Atari;
(b) by Atari if (i) it is not in material breach of its obligations
under this Agreement and there has been a breach of any representation,
warranty, covenant or agreement contained in this Agreement on the part of
JTS, which has or can reasonably be expected to have a Material Adverse
Effect on JTS and its subsidiaries, taken as a whole, and such breach has
not been cured within five (5) days after written notice to JTS (provided
that, no cure period shall be required for a breach which by its nature
cannot be cured) or (ii) there shall be any final action taken, or any
statute, rule, regulation or order enacted, promulgated or issued or deemed
applicable to the Merger by any Governmental Entity, which would prohibit
JTS's ownership or operation of all or a material portion of the business
of Atari or any of its subsidiaries, or compel Atari or any of Atari's
subsidiaries or JTS or any of JTS's subsidiaries to dispose of or hold
separate or otherwise relinquish all or a material portion of the business
or assets of JTS or any of JTS's subsidiaries or Atari or any of Atari's
subsidiaries as a result of the Merger.
(c) by JTS if (i) it is not in material breach of its obligations
under this Agreement and there has been a breach of any representation,
warranty, covenant or agreement contained in this Agreement on the part of
Atari, which has or can reasonably be expected to have a Material Adverse
Effect on Atari and its subsidiaries, taken as a whole, and such breach has
not been cured within five (5) days after written notice to Atari (provided
that, no cure period shall be required for a breach which by its nature
cannot be cured) or (ii) there shall be any final action taken, or any
statute, rule, regulation or order enacted, promulgated or issued or deemed
applicable to the Merger by any Governmental Entity, which would prohibit
JTS's ownership or operation of all or a material portion of the business
of JTS or any of its subsidiaries, or compel Atari or any of Atari's
subsidiaries or JTS or any of JTS's subsidiaries to dispose of or hold
separate or otherwise relinquish all or a material portion of the business
or assets of JTS or any of JTS's subsidiaries or Atari or any of Atari's
subsidiaries as a result of the Merger.
(d) by any party hereto if: (i) the Closing has not occurred by July
31, 1996, (ii) there shall be a final, non-appealable order of a federal or
state court in effect preventing consummation of the Merger; (iii) there
shall be any final action taken, or any statute, rule, regulation or order
enacted, promulgated or issued or deemed applicable to the Merger by any
Governmental Entity which would make consummation of the Merger illegal;
(iv) if JTS's stockholders do not approve the Merger and this Agreement by
the requisite vote at JTS Stockholders Meeting; (v) if Atari's stockholders
do not approve the Merger and this Agreement by the requisite vote at the
Atari Stockholders Meeting; or (vi) if the Atari Board of Directors shall
have accepted, approved or recommended to the shareholders of Atari a
Superior Atari Proposal.
Where action is taken to terminate this Agreement pursuant to this Section
7.1, it shall be sufficient for such action to be authorized by the Board of
Directors of the party taking such action and for such party to then notify the
other parties in writing of such action.
7.2 Effect of Termination. In the event of termination of this Agreement
as provided in Section 7.1, this Agreement shall forthwith become void and there
shall be no liability or obligation on the part of Atari and JTS or their
respective officers, directors, stockholders or affiliates, except to the extent
that such termination results from the breach by a party hereto of any of its
representations, warranties or covenants set forth this Agreement; provided
that, the provisions of Section 7.3 (Expenses) and this Section 7.2 shall remain
in full force and effect and survive any termination of this Agreement.
7.3 Expenses. Whether or not the Merger is consummated, all costs and
expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such expense, except
that expenses incurred in connection with printing the Proxy Materials and the
S-4
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<PAGE> 36
Registration Statement, registration and filing fees incurred in connection with
the S-4 Registration Statement and the Proxy Materials and fees, costs and
expenses associated with compliance with applicable state securities laws,
listing of the JTS Common Stock on the Nasdaq National Market or the American
Stock Exchange, and with HSR in connection with the Merger shall be shared
equally by JTS and Atari.
7.4 Amendment. The boards of directors of the parties hereto may cause
this Agreement to be amended at any time by execution of an instrument in
writing signed on behalf of each of the parties hereto; provided that an
amendment made subsequent to adoption of the Agreement by the stockholders of
JTS or Atari shall not (i) alter or change the amount or kind of consideration
to be received on conversion of the Atari Common Stock, (ii) alter or change any
term of the Certificate of Incorporation of the Surviving Corporation to be
effected by the Merger, or (iii) alter or change any of the terms and conditions
of the Agreement if such alteration or change would adversely affect the holders
of Atari Common Stock.
7.5 Extension; Waiver. At any time prior to the Effective Time any party
hereto may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties hereto,
(ii) waive any inaccuracies in the representations and warranties made to such
party contained herein or in any document delivered pursuant hereto and (iii)
waive compliance with any of the agreements or conditions for the benefit of
such party contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party.
ARTICLE VIII
GENERAL PROVISIONS
8.1 Non-Survival at Effective Time. The representations, warranties and
agreements set forth in this Agreement shall terminate at the Effective Time,
except that the agreements set forth in Article I, Section 5.8 (FIRPTA), Section
5.11 (Employee Benefit Plans), Section 5.12 (Atari Debentures), Section 5.13
(Form S-8), Section 5.14 (Tax Free Reorganization; Tax Returns), Section 5.16
(Indemnification), Section 5.20 (Best Efforts and Further Assurances), 7.3
(Expenses), and this Article VIII shall survive the Effective Time.
8.2 Absence of Third Party Beneficiary Rights. No provisions of this
Agreement are intended, nor will be interpreted, to provide or create any third
party beneficiary rights or any other rights of any kind in any client,
customer, affiliate, stockholder, partner or employee of any party hereto or any
other person or entity unless specifically provided otherwise herein, and,
except as so provided, all provisions hereof will be personal solely between the
parties to this Agreement.
8.3 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or by commercial
delivery service, or mailed by registered or certified mail (return receipt
requested) or sent via facsimile (with confirmation of receipt) to the parties
at the following addresses (or at such other address for a party as shall be
specified by like notice):
(a) if to Atari, to:
Atari Corporation
455 South Mathilda Avenue
Sunnyvale, California 94086
Attention: Jack Tramiel
Facsimile No.: (408) 328-0909
Telephone No.: (408) 328-0900
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<PAGE> 37
with a copy to:
Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, California 94304-1050
Attention: Jeffrey D. Saper, Esq.
Facsimile No.: (415) 493-6811
Telephone No.: (415) 493-9300
(b) if to JTS, to:
JTS Corporation
166 Baypointe Parkway
San Jose, California 95134
Attention: David T. Mitchell
Facsimile No.: (408) 468-1619
Telephone No.: (408) 468-1800
with a copy to:
Cooley Godward Castro Huddleson & Tatum
Five Palo Alto Square
Palo Alto, California 94306
Attention: Andrei M. Manoliu, Esq.
Facsimile No.: (415) 857-0663
Telephone No.: (415) 843-5000
8.4 Interpretation. When a reference is made in this Agreement to
Exhibits, such reference shall be to an Exhibit to this Agreement unless
otherwise indicated. The words "include," "includes" and "including" when used
herein shall be deemed in each case to be followed by the words "without
limitation." The table of contents and headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
8.5 Counterparts. This Agreement may be executed in counterparts, both of
which shall be considered one and the same agreement and shall become effective
when one or more counterparts have been signed by each of the parties and
delivered to the other parties, it being understood that all parties need not
sign the same counterpart.
8.6 Entire Agreement; Nonassignability; Parties in Interest. This
Agreement and the documents and instruments and other agreements specifically
referred to herein or delivered pursuant hereto, including the Exhibits, the
Schedules, including the JTS Disclosure Schedule and the Atari Disclosure
Schedule (a) constitute the entire agreement among the parties with respect to
the subject matter hereof and supersede all prior agreements and understandings,
both written and oral, among the parties with respect to the subject matter
hereof; (b) are not intended to confer upon any other person any rights or
remedies hereunder; and (c) shall not be assigned by operation of law or
otherwise.
8.7 Severability. In the event that any provision of this Agreement, or
the application thereof, becomes or is declared by a court of competent
jurisdiction to be illegal, void or unenforceable, the remainder of this
Agreement will continue in full force and effect and the application of such
provision to other persons or circumstances will be interpreted so as reasonably
to effect the intent of the parties hereto. The parties further agree to replace
such void or unenforceable provision of this Agreement with a valid and
enforceable provision that will achieve, to the extent possible, the economic,
business and other purposes of such void or unenforceable provision.
8.8 Remedies Cumulative. Except as otherwise provided herein, any and all
remedies herein expressly conferred upon a party will be deemed cumulative with
and not exclusive of any other remedy conferred hereby, or by law or equity upon
such party, and the exercise by a party of any one remedy will not preclude the
exercise of any other remedy.
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8.9 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California, regardless of the laws that
might otherwise govern under applicable principles of conflicts of law. Each of
the parties hereto irrevocably consents to the exclusive jurisdiction of any
court located in the County of Santa Clara, California, in connection with any
matter based upon or arising out of this Agreement or the matters contemplated
herein, agrees that process may be served upon them in any manner authorized by
the laws of the State of California for such persons and waives and covenants
not to assert or plead any objection which they might otherwise have to such
jurisdiction and such process.
8.10 Rules of Construction. The parties hereto agree that they have been
represented by counsel during the negotiation, preparation and execution of this
Agreement and, therefore, waive the application of any law, regulation, holding
or rule of construction providing that ambiguities in an agreement or other
document will be construed against the party drafting such agreement or
document.
8.11 Amendment and Restatement. The parties hereto hereby consent and
agree that this Agreement shall constitute an amendment and restatement of that
certain Agreement and Plan of Reorganization by and among Atari, JTS and JTS
Acquisition Corporation dated as of February 12, 1996.
IN WITNESS WHEREOF, JTS and Atari have caused this Agreement to be executed
and delivered by their respective officers thereunto duly authorized, all as of
the date first written above.
JT STORAGE, INC.
By: /s/ David T. Mitchell
------------------------------------
President
ATARI CORPORATION
By: /s/ Sam Tramiel
------------------------------------
President
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<PAGE> 1
EXHIBIT 10.24
THIS NOTE AND THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THEY MAY NOT
BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF
AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID
ACT OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE
CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED.
SUBORDINATED SECURED CONVERTIBLE PROMISSORY NOTE
$25,000,000.00 February 13, 1996
San Jose, California
FOR VALUE RECEIVED, JT Storage, Inc., a Delaware corporation (the
"Company"), promises to pay to Atari Corporation, a Nevada corporation (the
"Holder"), or its assigns, the principal sum of Twenty Five Million Dollars
($25,000,000.00), or such lesser amount as shall equal the outstanding
principal amount hereof, together with interest from the date of this Note on
the unpaid principal balance at a rate equal to eight and one-half percent
(8.5%) per annum, computed on the basis of the actual number of days elapsed
and a year of 365 days. All unpaid principal, together with any then unpaid
and accrued interest and other amounts payable hereunder, shall be due and
payable on the "Maturity Date" which date shall be the earlier of (i) September
30 , 1996, or (ii) when such amounts are declared due and payable by the Holder
(or made automatically due and payable) upon or after the occurrence of an
Event of Default (as defined below).
THE OBLIGATIONS DUE UNDER THIS NOTE ARE SECURED BY A SECURITY
AGREEMENT (THE "SECURITY AGREEMENT") DATED AS OF THE DATE HEREOF AND EXECUTED
BY THE COMPANY IN FAVOR OF THE HOLDER. ADDITIONAL RIGHTS OF THE HOLDER ARE SET
FORTH IN THE SECURITY AGREEMENT.
The following is a statement of the rights of the Holder and the
conditions to which this Note is subject, and to which the Holder, by the
acceptance of this Note, agrees:
1. DEFINITIONS. As used in this Note, the following capitalized
terms have the following meanings:
(a) the "Company" includes the corporation initially
executing this Note and any Person which shall succeed to or assume the
obligations of the Company under this Note.
(b) "Certificate" shall mean the Restated Certificate of
Incorporation of Company as in effect on the date hereof.
<PAGE> 2
(c) "Equity Securities" of any Person shall mean (a) all
common stock, preferred stock, participations, shares, partnership interests or
other equity interests in and of such Person (regardless of how designated and
whether or not voting or non-voting) and (b) all warrants, options and other
rights to acquire any of the foregoing.
(d) "Event of Default" has the meaning given in Section 7
hereof.
(e) "Financial Statements" shall mean, with respect to
any accounting period for any Person, statements of operations, retained
earnings and cash flows of such Person for such period, and balance sheets of
such Person as of the end of such period, setting forth in each case in
comparative form figures for the corresponding period in the preceding fiscal
year if such period is less than a full fiscal year or, if such period is a
full fiscal year, corresponding figures from the preceding fiscal year, all
prepared in reasonable detail and in accordance with generally accepted
accounting principles (except, with respect to monthly or quarterly financials,
for footnotes and year end adjustments). Unless otherwise indicated, each
reference to Financial Statements of any Person shall be deemed to refer to
Financial Statements prepared on a consolidated basis.
(f) "Holder" shall mean the Person specified in the
introductory paragraph of this Note or any Person who shall at the time be the
holder of this Note.
(g) "Indebtedness" shall mean and include the aggregate
amount of, without duplication (a) all obligations for borrowed money, (b) all
obligations evidenced by bonds, debentures, notes or other similar instruments,
(c) all obligations to pay the deferred purchase price of property or services
(other than accounts payable incurred in the ordinary course of business
determined in accordance with generally accepted accounting principals), (d)
all obligations with respect to capital leases, (e) all guaranty obligations;
(f) all obligations created or arising under any conditional sale or other
title retention agreement with respect to property acquired by such Person, (g)
all reimbursement and other payment obligations, contingent or otherwise, in
respect of letters of credit.
(h) "Investment" of any Person shall mean any loan or
advance of funds by such Person to any other Person (other than advances to
employees of such Person for moving and travel expense, drawing accounts and
similar expenditures in the ordinary course of business), any purchase or other
acquisition of any Equity Securities or Indebtedness of any other Person, any
capital contribution by such Person to or any other investment by such Person
in any other Person (including, without limitation, any Indebtedness incurred
by such Person of the type described in clauses (a) and (b) of the definition
of "Indebtedness" on behalf of any other Person); provided, however, that
Investments shall not include accounts receivable or other indebtedness owed by
customers of such Person which are current assets and arose from sales or
non-exclusive licensing in the ordinary course of such Person's business.
(i) "Lien" shall mean, with respect to any property, any
security interest, mortgage, pledge, lien, claim, charge or other encumbrance
in, of, or on such property or the income therefrom, including, without
limitation, the interest of a vendor or lessor under a conditional sale
agreement, capital lease or other title retention agreement, or any agreement
to provide any of the foregoing, and the filing
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<PAGE> 3
of any financing statement or similar instrument under the Uniform Commercial
Code or comparable law of any jurisdiction.
(j) "Material Adverse Effect" shall mean a material
adverse effect on (a) the business, assets, operations, or financial or other
condition of the Company; (b) the ability of the Company to pay or perform the
Obligations in accordance with the terms of this Note and the other Transaction
Documents and to avoid a default or Event of Default under any Transaction
Document; or (c) the rights and remedies of Holder under this Note, the other
Transaction Documents or any related document, instrument or agreement.
(k) "Merger Agreement" shall mean that certain Agreement
and Plan of Reorganization dated as of February 12, 1996 by and between the
Company and the Holder.
(l) "Obligations" has the meaning given in Section 1 of
the Security Agreement.
(m) "Permitted Indebtedness" means:
(i) Indebtedness of Company in favor of the
Holder arising under this Note;
(ii) The existing Indebtedness disclosed on the
JTS Disclosure Schedule (as defined in the Merger Agreement) (the "Schedule");
(iii) Indebtedness to trade creditors, including,
without limitation, affiliates of Company, incurred in the ordinary course of
business, provided that the amount of such Indebtedness related to Moduler
Electronics (India) Pvt. Ltd. shall not exceed $30.0 million at any time;
(iv) Other Indebtedness of Company, not exceeding
$1.0 million in the aggregate outstanding at any time;
(v) Contingent obligations of Company consisting
of guarantees (and other credit support) of the obligations of vendors and
suppliers of Company in respect of transactions entered into in the ordinary
course of business;
(vi) Indebtedness with respect to capital lease
obligations and Indebtedness secured by Permitted Liens;
(vii) Extensions, renewals, refundings,
refinancings, modifications, amendments and restatements of any of the items of
Permitted Indebtedness (a) through (f) above, provided that the principal
amount thereof is not increased or the terms thereof are not modified to impose
more burdensome terms upon Company.
(n) "Permitted Investments" shall mean and include: (a)
deposits with commercial banks organized under the laws of the United States or
a state thereof to the extent such deposits are fully insured by the Federal
Deposit Insurance Corporation; (b) Investments in marketable obligations issued
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<PAGE> 4
or fully guaranteed by the United States and maturing not more than one (1)
year from the date of issuance; (c) Investments in open market commercial paper
rated at least "A1" or "P1" or higher by a national credit rating agency and
maturing not more than one (1) year from the creation thereof; (d) Investments
pursuant to or arising under currency agreements or interest rate agreements
entered into in connection with bona fide hedging arrangements; (e) Investments
consisting of deposit accounts of the Company in which the Holder has a
perfected security interest and deposit accounts of its Subsidiaries maintained
in the ordinary course of business; (f) Investments existing on the Closing
Date disclosed in the Schedule; (g) Extensions of credit in the nature of
accounts receivable or notes receivable arising from the same or lease of goods
or services in the ordinary course of business; (h) Investments consisting of
the endorsement of negotiable instruments for deposit or collection or similar
transactions in the ordinary course of business; (i) Investments (including
debt obligations) received in connection with the bankruptcy or reorganization
of customers or suppliers and in settlement of delinquent obligations of, and
other disputes with, customers or suppliers arising in the ordinary course of
business; (j) Investments consisting of (i) compensation of employees, officers
and directors of borrower so long as the Board of Directors of Company
determines that such compensation is in the best interests of Company, (ii)
travel advances, employee relocation loans and other employee loans and
advances in the ordinary course of business, (iii) loans to employees, officers
or directors relating to the purchase of equity securities of Company, (iv)
other loans to officers and employees approved by the Board of Directors; and
(k) other Investments aggregating not in excess of $1,000,000 at any time.
(o) "Permitted Liens" shall mean and include: (i) Liens
for taxes or other governmental charges not at the time delinquent or
thereafter payable without penalty or being contested in good faith, provided
provision is made to the reasonable satisfaction of Holder for the eventual
payment thereof if subsequently found payable; (ii) Liens of carriers,
warehousemen, mechanics, materialmen, vendors, and landlords incurred in the
ordinary course of business for sums not overdue or being contested in good
faith, provided provision is made to the reasonable satisfaction of Holder for
the eventual payment thereof if subsequently found payable; (iii) deposits
under workers' compensation, unemployment insurance and social security laws or
to secure the performance of bids, tenders, contracts (other than for the
repayment of borrowed money) or leases, or to secure statutory obligations of
surety or appeal bonds or to secure indemnity, performance or other similar
bonds in the ordinary course of business; (iv) Liens securing obligations under
a capital lease if such lease is permitted under the Security Agreement and
such Liens do not extend to property other than the property leased under such
capital lease; (v) Liens upon any equipment acquired or held by Company or any
of its Subsidiaries to secure the purchase price of such equipment or
indebtedness incurred solely for the purpose of financing the acquisition of
such equipment; (vi) easements, reservations, rights of way, restrictions,
minor defects or irregularities in title and other similar charges or
encumbrances affecting real property in a manner not materially or adversely
affecting the value or use of such property; (vii) Liens in favor of the
Holder; (viii) Liens existing on the date hereof in favor of holders of Senior
Indebtedness; (ix) any liens existing as of the date hereof and disclosed in
the Schedule; (x) liens on equipment leased by Company pursuant to an operating
lease in the ordinary course of business (including proceeds thereof and
accessions thereto) incurred solely for the purpose of financing the lease of
such equipment (including Liens arising from UCC financing statements regarding
such leases); (xi) liens arising from judgements, decrees or attachments to the
extent and only so long as such judgment, decree or attachment does not
constitute an Event of Default under 7(h); (xii) liens in favor of customs and
revenue authorities arising as a matter of law to secure payment
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<PAGE> 5
of customs duties in connection with the importation of goods; (xiii) liens
arising solely by virtue of any statutory or common law provision relating to
banker's liens, rights off setoff or similar rights and remedies as to deposit
accounts or other funds maintained with a creditor depository institution; and
(xiv) liens incurred in connection with the extension, renewal, refunding,
refinancing, modification, amendment or restatement of the indebtedness secured
by Liens of the type described in clauses (i) and (xiii) above, provided that
any extension, renewal or replacement Lien shall be limited to the property
encumbered by the existing Lien and the principal amount of the indebtedness
being extended, renewed or refinanced does not increase.
(p) "Person" shall mean and include an individual, a
partnership, a corporation (including a business trust), a joint stock company,
a limited liability company, an unincorporated association, a joint venture or
other entity or a governmental authority.
(q) "Senior Indebtedness" shall mean the principal of,
unpaid interest on and other amounts due in connection with the Company's
Business Loan Agreement dated as of December 18, 1995 with Silicon Valley Bank
in an amount not to exceed $5.0 million at any time.
(r) "Series A Preferred" shall mean the Company's
presently authorized Series A Preferred Stock.
(s) "Subsidiary" shall mean (a) any corporation of which
more than 50% of the issued and outstanding equity securities having ordinary
voting power to elect a majority of the Board of Directors of such corporation
is at the time directly or indirectly owned or controlled by Company, (b) any
partnership, joint venture, or other association of which more than 50% of the
equity interest having the power to vote, direct or control the management of
such partnership, joint venture or other association is at the time directly or
indirectly owned and controlled by Company (c) any other entity included in the
financial statements of Company on a consolidated basis.
(t) "Transaction Documents" shall mean this Note, the
Security Agreement, the Warrant (as defined in Section 11 hereof) and the
Merger Agreement.
2. REPRESENTATIONS AND WARRANTIES OF COMPANY. The Company
represents and warrants to the Holder that except as disclosed in the JTS
Disclosure Schedule (as defined in the Merger Agreement) delivered concurrently
herewith:
(a) Due Incorporation and Qualification. Each of Company
and its Subsidiaries (i) is a corporation duly organized, validly existing and
in good standing under the laws of its jurisdiction of incorporation; (ii) has
the power and authority to own, lease and operate its properties and carry on
its business as now conducted and as proposed to be conducted; and (iii) is
duly qualified, licensed to do business and in good standing as a foreign
corporation in each jurisdiction where the failure to be so qualified or
licensed could reasonably be expected to have a Material Adverse Effect.
(b) Authority. The execution, delivery and performance
by Company of each Transaction Document to be executed by Company and the
consummation of the transactions
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<PAGE> 6
contemplated thereby (i) are within the power of Company and (ii) have been
duly authorized by all necessary actions on the part of Company.
(c) Enforceability. Each Transaction Document executed,
or to be executed, by Company has been, or will be, duly executed and delivered
by Company and constitutes, or will constitute, a legal, valid and binding
obligation of Company, enforceable against Company in accordance with its
terms, except as limited by bankruptcy, insolvency or other laws of general
application relating to or affecting the enforcement of creditors' rights
generally and general principles of equity.
(d) Non-Contravention. The execution and delivery by
Company of the Transaction Documents executed by Company and the performance
and consummation of the transactions contemplated thereby do not and will not
(i) violate the Certificate of Incorporation or Bylaws of the Company or any
material judgment, order, writ, decree, statute, rule or regulation applicable
to Company; (ii) violate any provision of, or result in the breach or the
acceleration of, or entitle any other Person to accelerate (whether after the
giving of notice or lapse of time or both), any material mortgage, indenture,
agreement, instrument or contract to which Company is a party or by which it is
bound; or (iii) result in the creation or imposition of any Lien upon any
property, asset or revenue of Company (other than any Lien arising under the
Transaction Documents) or the suspension, revocation, impairment, forfeiture,
or nonrenewal of any material permit, license, authorization or approval
applicable to Company, its business or operations, or any of its assets or
properties.
(e) Approvals. No consent, approval, order or
authorization of, or registration, declaration or filing with, any governmental
authority or other Person (including, without limitation, the shareholders of
any Person) is required in connection with the execution and delivery of the
Transaction Documents executed by Company and the performance and consummation
of the transactions contemplated thereby, except such as may be required
pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, in connection with any conversion of the principal balance of this
Note pursuant to Section 10 hereof.
(f) No Violation or Default. None of the Company or the
Company's Subsidiaries is in violation of or in default with respect to (i) its
Certificate of Incorporation or Bylaws or equivalent charter document or any
material judgment, order, writ, decree, statute, rule or regulation applicable
to such Person; (ii) any material mortgage, indenture, agreement, instrument or
contract to which such Person is a party or by which it is bound (nor is there
any waiver in effect which, if not in effect, would result in such a violation
or default), where, in each case, such violation or default, individually, or
together with all such violations or defaults, could reasonably be expected to
have a Material Adverse Effect.
(g) Litigation. No actions (including, without
limitation, derivative actions), suits, proceedings or investigations are
pending or, to the knowledge of the Company, threatened against the Company or
the Company's Subsidiaries at law or in equity in any court or before any other
governmental authority which if adversely determined (i) would (alone or in the
aggregate) have a Material Adverse Effect or (ii) seeks to enjoin, either
directly or indirectly, the execution, delivery or performance by the Company
of the Transaction Documents or the transactions contemplated thereby.
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<PAGE> 7
(h) Title. The Company and the Company's Subsidiaries
own and have good and marketable title in fee simple absolute to, or a valid
leasehold interest in, all their respective real properties and good title to
their other respective assets and properties as reflected in the most recent
Financial Statements delivered to Purchasers (except those assets and
properties disposed of in the ordinary course of business since the date of
such Financial Statements) and all respective assets and properties acquired by
Company and Company's Subsidiaries since such date (except those disposed of in
the ordinary course of business). Such assets and properties are subject to no
Lien, except for Permitted Liens.
(i) Equity Securities. The authorized capital stock of
the Company consists of 90,000,000 shares of Common Stock, $.000001 par value,
and 70,000,000 shares of Preferred Stock, $.000001 par value, all of which is
designated Series A Preferred Stock, of which there are issued and outstanding,
7,466,729 shares of Common Stock and 28,696,370 shares of Series A Preferred.
There are no other outstanding shares of capital stock or voting securities.
Each outstanding share of the Company's Series A Preferred Stock is convertible
into one (1) share of the Company's Common Stock. All outstanding shares of
the Company's Common Stock and the Company's Series A Preferred Stock are duly
authorized, validly issued, fully paid and non-assessable and are free of any
Liens other than any Liens created by or imposed upon the holders thereof, and
are not subject to preemptive rights or rights of first refusal created by
statute, the Certificate of Incorporation or Bylaws of the Company or any
agreement to which the Company is a party or by which it is bound. The Company
has reserved (i) 4,300,000 shares of Common Stock for issuance to employees and
consultants pursuant to the Company's 1995 Stock Option Plan, of which 16,729
shares have been issued pursuant to option exercises, and 3,885,747 shares are
subject to outstanding, unexercised options, and (ii) 600,000 shares of Common
Stock for issuance upon the exercise of outstanding, unexercised warrants.
There are no other options, warrants, calls, rights, commitments or agreements
of any character to which the Company is a party or by which it is bound
obligating the Company to issue, deliver, sell, repurchase or redeem, or cause
to be issued, delivered, sold, repurchased or redeemed, any shares of capital
stock of the Company or obligating the Company to grant, extend, accelerate the
vesting of, change the price of, or otherwise amend or enter into any such
option, warrant, call, right, commitment or agreement. Except as set forth in
the Registration Rights Agreement dated as of February 3, 1995 by and among the
Company and certain other persons and as contemplated by Section 11(g) hereof,
no Person has the right to demand or other rights to cause Company to file any
registration statement under the Securities Act of 1933, as amended (the
"Securities Act"), relating to any Equity Securities of Company presently
outstanding or that may be subsequently issued, or any right to participate in
any such registration statement.
3. REPRESENTATIONS AND WARRANTIES OF HOLDER. The Holder
represents and warrants to the Company that such Holder has been advised that
neither this Note nor the securities which may be issued upon the conversion
hereof have been registered under the Securities Act, or any state securities
laws and, therefore, cannot be resold unless registered under the Securities
Act and applicable state securities laws or unless an exemption from such
registration requirements is available. Such Holder is aware that the Company
is under no obligation to effect any such registration with respect to the Note
or to file for or comply with any exemption from registration. Such Holder has
not been formed solely for the purpose of making this investment and is
purchasing the Note to be acquired by such Holder hereunder for its own account
for investment, not as a nominee or agent, and not with a view to, or for
resale in connection
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<PAGE> 8
with, the distribution thereof. Such Holder has such knowledge and experience
in financial and business matters that such Purchaser is capable of evaluating
the merits and risks of such investment, is able to incur a complete loss of
such investment and is able to bear the economic risk of such investment for an
indefinite period of time. Such Holder is an accredited investor as such term
is defined in Rule 501 of Regulation D under the Securities Act.
4. INTEREST. Accrued interest on the outstanding principal
balance on this Note shall be payable on the Maturity Date.
5. PREPAYMENT. Upon fifteen (15) days prior written notice to
the Holder, the Company may prepay this Note in whole or in part; provided that
any such prepayment will be applied first to the payment of expenses due under
this Note, second to interest accrued on this Note and third, if the amount of
prepayment exceeds the amount of all such expenses and accrued interest, to the
payment of principal of this Note.
6. CERTAIN COVENANTS. While any amount is outstanding under the
Note, without the prior written consent of the Holder:
(a) Indebtedness. Neither Company nor any of its
Subsidiaries shall create, incur, assume or permit to exist any Indebtedness
except Senior Indebtedness and Permitted Indebtedness.
(b) Liens. Neither the Company nor any of its
Subsidiaries shall create, incur, assume or permit to exist any Lien on or with
respect to any of its assets or property of any character, whether now owned or
hereafter acquired, except for Permitted Liens.
(c) Asset Dispositions. Neither the Company nor any of
its Subsidiaries shall sell, lease, transfer, license or otherwise dispose of
any of its assets or property (collectively, a "Transfer"), whether now owned
or hereafter acquired, except (i) transfers in the ordinary course of its
business consisting of the sale of inventory and sales of worn-out or obsolete
equipment and (ii) transfers not in excess of $3.0 million for fair value and
other than to any affiliate of the Company.
(d) Mergers, Acquisitions, Etc. Neither the Company nor
any of its Subsidiaries shall consolidate with or merge into any other Person
or permit any other Person to merge into it, or acquire all or substantially
all of the assets or capital stock of any other Person.
(e) Investments. Neither the Company nor any of its
Subsidiaries shall make any Investment except for Permitted Investments.
(f) Dividends, Redemptions, Etc. Neither the Company nor
any of its Subsidiaries shall (i) pay any dividends or make any distributions
on its equity securities; (ii) purchase, redeem, retire, decease or otherwise
acquire for value any of its equity securities; (iii) return any capital to any
holder of its equity securities; (iv) make any distribution of assets, Equity
Securities, obligations or securities to any holder of its Equity Securities;
or (v) set apart any sum for any such purpose; other than payments of principal
and interest on outstanding bridge loans and repurchases of shares from
terminated employees
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<PAGE> 9
pursuant to the terms of restricted stock purchase agreements, and provided,
however, that any Subsidiary may pay cash dividends to Company.
(g) Indebtedness Payments. Except as set forth on JTS
Disclosure Schedule (as defined in the Merger Agreement), neither the Company
nor any of its Subsidiaries shall (i) prepay, redeem, purchase, decrease or
otherwise satisfy in any manner prior to the scheduled repayment thereof any
Indebtedness for borrowed money (other than (A) amounts due under this Note and
(B) Senior Indebtedness) or lease obligations, (ii) amend, modify or otherwise
change the terms of any Indebtedness for borrowed money (other than (A)
Obligations under this Note and (B) Senior Indebtedness) or lease obligations
so as to accelerate the scheduled repayment thereof or (iii) repay any notes to
officers, directors or stockholders.
(h) Information Rights; Notices. The Company shall
furnish to the Holder the following:
(i) Monthly Financial Statements. Within thirty
(30) days after the last day of each month, a copy of the Financial
Statements of the Company for such quarter and for the fiscal year to
date, certified by the chief financial officer or controller of the
Company to present fairly the financial condition, results of
operations and other information presented therein and to have been
prepared in accordance with generally accepted accounting principals
consistently applied, subject to normal year end adjustments and
except that no footnotes need be included with such Financial
Statements;
(ii) Annual Financial Statements. Within ninety
(90) days after the close of each fiscal year of the Company, (i)
copies of the audited Financial Statements of Company for such year,
audited by nationally recognized independent certified public
accountants, (ii) copies of the unqualified opinions and management
letters delivered by such accountants in connection with such
Financial Statements, and (iii) a report containing a description of
projected business prospects (including capital expenditures) and
management's discussion and analysis of financial condition and
results of operation of Company and its Subsidiaries;
(iii) SEC Reports. At such time as the Company is
subject to the reporting requirement of the Exchange Act, as soon as
possible and in no event later than five (5) days after they are sent,
made available or filed, copies of all registration statements and
reports filed by Company with the Securities and Exchange Commission
and all reports, proxy statements and financial statements sent or
made available by Company to its stockholders generally; and
(iv) Notice of Defaults. Promptly upon the
occurrence thereof, written notice of the occurrence of any Event of
Default hereunder or any event of default with respect to any Senior
Indebtedness.
(i) Inspection Rights. The Holder and its
representatives shall have the right, at any time during normal business hours,
upon reasonable prior notice, to visit and inspect the properties of the
Company and its corporate, financial and operating records, and make abstracts
therefrom, and to discuss
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<PAGE> 10
the Company's affairs, finances and accounts with its directors, officers and
independent public accountants.
(j) Use of Proceeds. The Company shall use the proceeds
from all borrowings under this Note solely for (A) interim financing for
capital equipment prior to obtaining lease financing for such equipment, (B)
leasehold improvements, tooling and other fixed assets in an aggregate amount
not to exceed $5.3 million, (C) repayment of the Bridge Notes (as defined in
the JTS Disclosure Schedule) in the aggregate principal amount of $2,005,000,
and (D) working capital purposes.
7. EVENTS OF DEFAULT. The occurrence of any of the following
shall constitute an "Event of Default" under this Note and the other
Transaction Documents:
(a) Failure to Pay. The Company shall fail to pay (i)
when due any principal payment on the due date hereunder or (ii) any interest
or other payment required under the terms of this Note or any other Transaction
Document on the date due and such payment shall not have been made within five
(5) days of Company's receipt of the Holder's written notice to Company of such
failure to pay; or
(b) Breaches of Certain Covenants. The Company or any of
its Subsidiaries shall fail to observe or perform any covenant, obligation,
condition or agreement set forth in Section 6(d), 6(f) or 6(j) of this Note;
or
(c) Breaches of Other Covenants. The Company or any of
its Subsidiaries shall fail to observe or perform any other covenant,
obligation, condition or agreement contained in this Note or the other
Transaction Documents (other than those specified in Sections 7(a) and 7(b))
and (i) such failure shall continue for fifteen (15) days, or (ii) if such
failure does not result from the payment of money or the failure to pay money
and is not curable within such fifteen (15) day period, but is reasonably
capable of cure within forty-five (45) days, either (A) such failure shall
continue for forty-five (45) days or (B) the Company or its Subsidiary shall
not have commenced a cure in a manner reasonably satisfactory to the Holder
within the initial fifteen (15) day period; or
(d) Representations and Warranties. Any representation,
warranty, certificate, or other statement (financial or otherwise) made or
furnished by or on behalf of the Company to the Holder in writing in connection
with this Note or any of the other Transaction Documents, or as an inducement
to the Holder to enter into this Note and the other Transaction Documents,
shall be false, incorrect, incomplete or misleading in any respect when made or
furnished, except any such false, incorrect, incomplete or misleading statement
which will not result in a Material Adverse Effect on the Company; or
(e) Other Payment Obligations. Except pursuant to the
Company's Business Loan Agreement with Silicon Valley Bank and the capital
equipment loan from Venture Lending and Leasing, Inc., each as described in the
JTS Disclosure Schedule (as defined in the Merger Agreement), the Company or
any of its Subsidiaries shall (i)(A) fail to make any payment when due under
the terms of any bond, debenture, note or other evidence of Indebtedness,
including the Senior Indebtedness, to be paid by such Person (excluding this
Note and the other Transaction Documents but including any other
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<PAGE> 11
evidence of Indebtedness of Company or any of its Subsidiaries to the Holder)
and such failure shall continue beyond any period of grace provided with
respect thereto, or (B) default in the observance or performance of any other
agreement, term or condition contained in any such bond, debenture, note or
other evidence of Indebtedness, and (ii) the effect of such failure or default
is to cause, or permit the holder or holders thereof to cause, Indebtedness in
an aggregate amount of Two Hundred Fifty Thousand Dollars ($250,000) or more to
become due prior to its stated date of maturity, unless such acceleration shall
have been rescinded and such failure to pay cured within thirty (30) days from
the date of such acceleration; or
(f) Voluntary Bankruptcy or Insolvency Proceedings. The
Company or any of its Subsidiaries shall (i) apply for or consent to the
appointment of a receiver, trustee, liquidator or custodian of itself or of all
or a substantial part of its property, (ii) be unable, or admit in writing its
inability, to pay its debts generally as they mature, (iii) make a general
assignment for the benefit of its or any of its creditors, (iv) be dissolved or
liquidated in full or in part, (v) become insolvent (as such term may be
defined or interpreted under any applicable statute), (vi) commence a voluntary
case or other proceeding seeking liquidation, reorganization or other relief
with respect to itself or its debts under any bankruptcy, insolvency or other
similar law now or hereafter in effect or consent to any such relief or to the
appointment of or taking possession of its property by any official in an
involuntary case or other proceeding commenced against it, or (vii) take any
action for the purpose of effecting any of the foregoing; or
(g) Involuntary Bankruptcy or Insolvency Proceedings.
Proceedings for the appointment of a receiver, trustee, liquidator or custodian
of the Company or any of its Subsidiaries or of all or a substantial part of
the property thereof, or an involuntary case or other proceedings seeking
liquidation, reorganization or other relief with respect to the Company or any
of its Subsidiaries or the debts thereof under any bankruptcy, insolvency or
other similar law now or hereafter in effect shall be commenced and an order
for relief entered or such proceeding shall not be dismissed or discharged
within sixty (60) days of commencement; or
(h) Judgments. A final judgment or order for the payment
of money in excess of Two Hundred Fifty Thousand Dollars ($250,000) (exclusive
of amounts covered by insurance issued by an insurer not an affiliate of
Company) shall be rendered against the Company or any of its Subsidiaries and
the same shall remain undischarged for a period of thirty (30) days during
which execution shall not be effectively stayed, or any judgment, writ,
assessment, warrant of attachment, or execution or similar process shall be
issued or levied against a substantial part of the property of the Company or
any of its Subsidiaries and such judgment, writ, or similar process shall not
be released, stayed, vacated or otherwise dismissed within thirty (30) days
after issue or levy; or
(i) Transaction Documents. Any Transaction Document
(other than the Merger Agreement) or any material term thereof shall cease to
be, or be asserted by the Company not to be, a legal, valid and binding
obligation of Company enforceable in accordance with its terms or if the Liens
of the Holder in any of the assets of Company or its Subsidiaries shall cease
to be or shall not be valid and perfected Liens or the Company or any
Subsidiary shall assert that such Liens are not valid and perfected Liens.
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<PAGE> 12
8. RIGHTS OF HOLDER UPON DEFAULT. Upon the occurrence or
existence of any Event of Default (other than an Event of Default referred to
in Sections 7(f) and 7(g)) and at any time thereafter during the continuance of
such Event of Default, the Holder may, by written notice to the Company,
declare all outstanding Obligations payable by the Company hereunder to be
immediately due and payable without presentment, demand, protest or any other
notice of any kind, all of which are hereby expressly waived, anything
contained herein or in the other Transaction Documents to the contrary
notwithstanding. Upon the occurrence or existence of any Event of Default
described in Sections 7(f) and 7(g), immediately and without notice, all
outstanding Obligations payable by Company hereunder shall automatically become
immediately due and payable, without presentment, demand, protest or any other
notice of any kind, all of which are hereby expressly waived, anything
contained herein or in the other Transaction Documents to the contrary
notwithstanding. In addition to the foregoing remedies, upon the occurrence or
existence of any Event of Default, the Holder may exercise any other right,
power or remedy granted to it by the Transaction Documents or otherwise
permitted to it by law, either by suit in equity or by action at law, or both.
9. SUBORDINATION. The indebtedness evidenced by this Note is
hereby expressly subordinated, to the extent and in the manner hereinafter set
forth, in right of payment to the prior payment in full of the Senior
Indebtedness.
(a) Insolvency Proceedings. If there shall occur any
receivership, insolvency, assignment for the benefit of creditors, bankruptcy,
reorganization, or arrangements with creditors (whether or not pursuant to
bankruptcy or other insolvency laws), sale of all or substantially all of the
assets, dissolution, liquidation, or any other marshaling of the assets and
liabilities of the Company, (i) no amount shall be paid by the Company in
respect of the principal of, interest on or other amounts due with respect to
this Note at the time outstanding, unless and until the principal of and
interest on the Senior Indebtedness then outstanding shall be paid in full, and
(ii) no claim or proof of claim shall be filed with the Company by or on behalf
of Holder of this Note which shall assert any right to receive any payments in
respect of the principal of and interest on this Note except subject to the
payment in full of the principal of and interest on all of the Senior
Indebtedness then outstanding.
(b) Default on Senior Indebtedness. If there shall occur
an event of default which has been declared in writing with respect to any
Senior Indebtedness, as defined therein, or in the instrument under which it is
outstanding, permitting the holder to accelerate the maturity thereof and the
Holder shall have received written notice thereof from the holder of such
Senior Indebtedness, then, unless and until such event of default shall have
been cured or waived or shall have ceased to exist, or all Senior Indebtedness
shall have been paid in full, no payment shall be made in respect of the
principal of or interest on this Note, unless within one hundred eighty (180)
days after the happening of such event of default, the maturity of such Senior
Indebtedness shall not have been accelerated. Not more than one notice may be
given to Holder pursuant to the terms of this Section 9(b) during any 360 day
period.
(c) Further Assurances. By acceptance of this Note, the
Holder agrees to execute and deliver customary forms of subordination agreement
requested from time to time by holders of Senior Indebtedness, and as a
condition to the Holder's rights hereunder, the Company may require that the
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<PAGE> 13
Holder execute such forms of subordination agreement; provided that such forms
shall not impose on the Holder terms less favorable than those provided herein
and in the Security Agreement.
(d) Other Indebtedness. No indebtedness which does not
constitute Senior Indebtedness shall be senior in any respect to the
indebtedness represented by this Note.
(e) Subrogation. Subject to the payment in full of all
Senior Indebtedness, the Holder shall be subrogated to the rights of the
holder(s) of such Senior Indebtedness (to the extent of the payments or
distributions made to the holder(s) of such Senior Indebtedness pursuant to the
provisions of this Section 9) to receive payments and distributions of assets
of the Company applicable to the Senior Indebtedness. No such payments or
distributions applicable to the Senior Indebtedness shall, as between the
Company and its creditors, other than the holders of Senior Indebtedness and
the Holder, be deemed to be a payment by the Company to or on account of this
Note; and for purposes of such subrogation, no payments or distributions to the
holders of Senior Indebtedness to which the Holder would be entitled except for
the provisions of this Section 9 shall, as between the Company and its
creditors, other than the holders of Senior Indebtedness and the Holder, be
deemed to be a payment by the Company to or on account of the Senior
Indebtedness.
(f) No Impairment. Subject to the rights, if any, of the
holders of Senior Indebtedness under this Section 9 to receive cash, securities
or other properties otherwise payable or deliverable to the Holder, nothing
contained in this Section 9 shall impair, as between the Company and the
Holder, the obligation of the Company, subject to the terms and conditions
hereof, to pay to the Holder the principal hereof and interest hereon as and
when the same become due and payable, or shall prevent the Holder, upon default
hereunder, from exercising all rights, powers and remedies otherwise provided
herein or by applicable law.
(g) Lien Subordination. Any Lien of the Holder, whether
now or hereafter existing in connection with the amounts due under this Note,
on any assets or property of the Company or any proceeds or revenues therefrom
which the Holder may have at any time as security for any amounts due and
obligations under this Note shall be subordinate to all Liens now or hereafter
granted to a holder of Senior Indebtedness by Company or by law,
notwithstanding the date, order or method of attachment or perfection of any
such Lien or the provisions of any applicable law.
(h) Reliance of Holders of Senior Indebtedness. The
Holder, by its acceptance hereof, shall be deemed to acknowledge and agree that
the foregoing subordination provisions are, and are intended to be, an
inducement to and a consideration of each holder of Senior Indebtedness,
whether such Senior Indebtedness was created or acquired before or after the
creation of the indebtedness evidenced by this Note, and each such holder of
Senior Indebtedness shall be deemed conclusively to have relied on such
subordination provisions in acquiring and holding, or in continuing to hold,
such Senior Indebtedness.
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<PAGE> 14
10. CONVERSION.
(a) Conversion by Holder. In the event that the Merger
Agreement is terminated pursuant to Section 8(a), 8(b) or 8(d) (i) through
8(d)(iv) thereof or upon the occurrence of an Event of Default hereunder, then
from and after such date, the Holder shall have the right, at such Holder's
option, at any time prior to payment in full of the principal balance of this
Note, to convert this Note, in accordance with the provisions of Section 10(c)
hereof, in whole or in part, into fully paid and nonassessable shares of Series
A Preferred, provided that the Holder shall provide at least thirty (30) days
notice to the Company of Holder's election to convert this Note into shares of
Series A Preferred upon the occurrence of an Event of Default. The number of
shares of Series A Preferred into which this Note may be converted shall be
determined by dividing the aggregate amount of this Note to be converted by the
Conversion Price (as defined below) in effect at the time of such conversion.
The initial "Conversion Price" shall be equal to $1.00 per share. The
Conversion Price shall be subject to adjustment from time to time pursuant to
Section 12 hereof and the terms of the Company's Certificate.
(b) Conversion by the Company. In the event that the
Merger Agreement is terminated pursuant to Section 8(c), 8(d)(v) or 8(d)(vi)
thereof, the Company shall have the right, at the Company's option, to convert
this Note, in accordance with the provisions of Section 10(c) hereof, in whole
or in part, into fully paid and nonassessable shares of Series A Preferred.
The number of shares of Series A Preferred into which this Note may be
converted shall be determined by dividing the aggregate amount of this Note to
be converted by the Conversion Price in effect at the time of such conversion.
(c) Conversion Procedure.
(i) Conversion Pursuant to Section 10(a). Before
the Holder shall be entitled to convert this Note into shares of Series A
Preferred, it shall surrender this Note, duly endorsed, at the office of the
Company and shall give written notice, postage prepaid, to the Company at its
principal corporate office, of the election to convert the same pursuant to
Section 10(a), and shall state therein the amount of the unpaid principal
amount of this Note to be converted and the name or names in which the
certificate or certificates for shares of Series A Preferred are to be issued.
The Company shall, as soon as practicable thereafter (but in any event within
ten (10) days thereafter), issue and deliver to the Holder of this Note a
certificate or certificates for the number of shares of Series A Preferred to
which the Holder shall be entitled upon conversion (bearing such legends as are
required by applicable state and federal securities laws), together with a
replacement Note (if any principal amount is not converted) and any other
securities and property to which the Holder is entitled upon such conversion
under the terms of this Note, including a check payable to Holder for any cash
amounts payable as described in Section 10(d). The conversion shall be deemed
to have been made immediately prior to the close of business on the date of the
surrender of this Note, and the Person or Persons entitled to receive the
shares of Series A Preferred upon such conversion shall be treated for all
purposes as the record holder or holders of such shares of Series A Preferred
as of such date.
(ii) Conversion Pursuant to Section 10(b). If
this Note is converted by the Company pursuant to Section 10(b), written notice
shall be delivered to the Holder notifying the Holder
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<PAGE> 15
of the conversion to be effected, specifying the Conversion Price, the
principal amount of the Note to be converted, the date on which such conversion
is expected to occur and calling upon such Holder to surrender to Company, in
the manner and at the place designated, the Note. Upon such conversion of this
Note, the Holder shall surrender this Note, duly endorsed, at the principal
office of Company. At its expense, the Company shall, as soon as practicable
thereafter (but in any event within ten (10) days thereafter), issue and
deliver to such Holder a certificate or certificates for the number of shares
to which Holder shall be entitled upon such conversion (bearing such legends as
are required by applicable state and federal securities laws), together with
any other securities and property to which the Holder is entitled upon such
conversion under the terms of this Note, including a check payable to the
Holder for any cash amounts payable as described in Section 10(d). Any
conversion of this Note pursuant to Section 10(b) shall be deemed to have been
made immediately prior to the closing of the issuance and sale of shares as
described in Section 10(b) and on and after such date the Person entitled to
receive the shares issuable upon such conversion shall be treated for all
purpose as the record Holder of such shares as of such date.
(d) Fractional Shares; Interest; Effect of Conversion.
No fractional shares shall be issued upon conversion of this Note. In lieu of
the Company issuing any fractional shares to the Holder upon the conversion of
this Note, the Company shall pay to the Holder an amount equal to the product
obtained by multiplying the Conversion Price by the fraction of a share not
issued pursuant to the previous sentence. In addition, the Company shall pay
to the Holder any interest accrued on the amount converted and on the amount to
be paid to the Company pursuant to the previous sentence. Upon conversion of
this Note in full and the payment of the amounts specified in this Section
10(d), the Company shall be forever released from all its obligations and
liabilities under this Note.
11. ISSUANCES OF WARRANTS. In the event that the Holder elects to
convert all or any portion of this Note into shares of Series A Preferred
pursuant to Section 10(a) hereof, or in the event the Company elects to convert
all or any portion of this Note into shares of Series A Preferred pursuant to
Section 10(b) hereof the Company hereby agrees to issue to the Holder warrants
to purchase shares of Series A Preferred (the "Warrant") as set forth below:
(a) No Warrant shall be issued if the principal amount of
this Note to be converted together with any principal amount of this Note
previously converted is less than $5,000,001.
(b) If the principal amount of this Note to be converted
together with any principal amount of this Note previously converted is more
than $5,000,000, the Company shall issue to the Holder concurrent with the
issuance of the shares of Series A Preferred to be issued upon such conversion,
a Warrant to purchase up to 7,500,000 shares of Series A Preferred. The number
of shares subject to the first Warrant to be issued shall be determined by
multiplying 7,500,000 times a fraction, the numerator of which is the amount by
which the aggregate principal amount to be converted exceeds $5,000,000 and the
denominator of which is $20,000,000. The number of shares subject to any
subsequent Warrant to be issued shall be determined by multiplying 7,500,000
times a fraction, the numerator of which is the aggregate principal amount to
be converted and the denominator of which is $20,000,000.
-15-
<PAGE> 16
(c) Each Warrant to be issued by the Company pursuant to
this Section 11 shall have an exercise price of $2.00 per share, a term of five
(5) years and such other terms as are set forth in the form of Warrant attached
hereto as Exhibit A.
(d) The shares of Series A Preferred issuable upon the
exercise of any Warrants issued pursuant to this Section 11 shall be entitled
to registration rights which are pari passu with the registration rights held
by the holders of the Company's Series A Preferred Stock.
12. CONVERSION PRICE ADJUSTMENTS.
(a) Adjustments for Stock Splits and Subdivisions. In
the event the Company should at any time or from time to time after the date of
issuance hereof fix a record date for the effectuation of a split or
subdivision of the outstanding shares of Series A Preferred or the
determination of holders of Series A Preferred entitled to receive a dividend
or other distribution payable in additional shares of Series A Preferred or
other securities or rights convertible into, or entitling the holder thereof to
receive directly or indirectly, additional shares of Series A Preferred
(hereinafter referred to as "Series A Preferred Equivalents") without payment
of any consideration by such holder for the additional shares of Series A
Preferred or the Series A Preferred Equivalents (including the additional
shares of Series A Preferred issuable upon conversion or exercise thereof),
then, as of such record date (or the date of such dividend distribution, split
or subdivision if no record date is fixed), the Conversion Price of this Note
shall be appropriately decreased so that the number of shares of Series A
Preferred issuable upon conversion of this Note shall be increased in
proportion to such increase of outstanding shares.
(b) Adjustments for Reverse Stock Splits. If the number
of shares of Series A Preferred outstanding at any time after the date hereof
is decreased by a combination of the outstanding shares of Series A Preferred,
then, following the record date of such combination, the Conversion Price for
this Note shall be appropriately increased so that the number of shares of
Series A Preferred issuable on conversion hereof shall be decreased in
proportion to such decrease in outstanding shares.
(c) Conversion or Redemption of Series A Preferred Stock.
Should all of Company's Series A Preferred Stock be, or if outstanding would
be, at any time prior to full payment of this Note, redeemed or converted into
shares of Company's Common Stock in accordance with the Certificate, then this
Note shall immediately become convertible into that number of shares of
Company's Common Stock equal to the number of shares of the Common Stock that
would have been received if this Note had been converted in full and the Series
A Preferred Stock received thereupon had been simultaneously converted
immediately prior to such event, and the Conversion Price shall be immediately
adjusted to equal the quotient obtained by dividing (x) the aggregate
Conversion Price of the maximum number of shares of Series A Preferred Stock
into which this Note was convertible immediately prior to such conversion or
redemption, by (y) the number of shares of Common Stock for which this Note is
convertible immediately after such conversion or redemption.
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<PAGE> 17
(d) Notices of Record Date, etc. In the event of:
(i) Any taking by the Company of a record of the
holders of any class of securities of the Company for the purpose of
determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend payable out of earned surplus at
the same rate as that of the last such cash dividend theretofore paid)
or other distribution, or any right to subscribe for, purchase or
otherwise acquire any shares of stock of any class or any other
securities or property, or to receive any other right; or
(ii) Any capital reorganization of the Company,
any reclassification or recapitalization of the capital stock of the
Company or any transfer of all or substantially all of the assets of
the Company to any other Person or any consolidation or merger
involving the Company; or
(iii) Any voluntary or involuntary dissolution,
liquidation or winding-up of the Company,
the Company will mail to Holder of this Note at least ten (10) days prior to
the earliest date specified therein, a notice specifying (A) the date on which
any such record is to be taken for the purpose of such dividend, distribution
or right, and the amount and character of such dividend, distribution or right;
and (B) the date on which any such reorganization, reclassification, transfer,
consolidation, merger, dissolution, liquidation or winding-up is expected to
become effective and the record date for determining stockholders entitled to
vote thereon.
(e) Reservation of Stock Issuable Upon Conversion. The
Company shall at all times reserve and keep available out of its authorized but
unissued shares of Series A Preferred solely for the purpose of effecting the
conversion of this Note such number of its shares of Series A Preferred (and
shares of its Common Stock for issuance on conversion of such Series A
Preferred) as shall from time to time be sufficient to effect the conversion of
the Note; and if at any time the number of authorized but unissued shares of
Series A Preferred (and shares of its Common Stock for issuance on conversion
of such Series A Preferred) shall not be sufficient to effect the conversion of
the entire outstanding principal amount of this Note, without limitation of
such other remedies as shall be available to the holder of this Note, the
Company will use its best efforts to take such corporate action as may, in the
opinion of counsel, be necessary to increase its authorized but unissued shares
of Series A Preferred (and shares of its Common Stock for issuance on
conversion of such Series A Preferred) to such number of shares as shall be
sufficient for such purposes.
13. SUCCESSORS AND ASSIGNS. Neither this Note nor any of the
rights, interests or obligations hereunder may be assigned, by operation of law
or otherwise, in whole or in part, by the Company without the prior written
consent of the Holder or, prior to the termination of the Merger Agreement, by
the Holder without the prior written consent of the Company. Subject to the
foregoing and the restrictions on transfer described in Section 15 below, the
rights and obligations of the Company and the Holder shall be binding upon and
benefit the successors, assigns, heirs, administrators and transferees of the
parties.
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<PAGE> 18
14. WAIVER AND AMENDMENT. Any provision of this Note may be
amended, waived or modified upon the written consent of the Company and the
Holder.
15. TRANSFER OF THIS NOTE OR SECURITIES ISSUABLE ON CONVERSION
HEREOF. With respect to any offer, sale or other disposition of this Note or
any securities into which this Note may be converted, the Holder will give
written notice to the Company prior thereto, describing briefly the manner
thereof, together with a written opinion of the Holder's counsel, to the effect
that such offer, sale or other distribution may be effected without
registration or qualification under any federal or state law then in effect.
Promptly upon receiving such written notice and reasonably satisfactory
opinion, if so requested and subject to Section 13, the Company, as promptly as
practicable, shall notify the Holder that the Holder may sell or otherwise
dispose of this Note or such securities, all in accordance with the terms of
the notice delivered to the Company. If a determination has been made pursuant
to this Section 15 that the opinion of counsel for the Holder is not reasonably
satisfactory to the Company, the Company shall so notify the Holder promptly
after such determination has been made. Each Note thus transferred and each
certificate representing the securities thus transferred shall bear a legend as
to the applicable restrictions on transferability in order to ensure compliance
with the Act, unless in the opinion of counsel for the Company such legend is
not required in order to ensure compliance with the Act. The Company may issue
stop transfer instructions to its transfer agent in connection with such
restrictions.
16. NOTICES. Any notice, request or other communication required
or permitted hereunder shall be in writing and shall be deemed to have been
duly given if personally delivered or mailed by registered or certified mail,
postage prepaid, or by recognized overnight courier or personal delivery,
addressed (i) if to the Holder, at such Holder's address set forth at the end
of this Agreement, or at such other address as such Holder shall have furnished
the Company in writing, or (ii) if to the Company, at its address set forth at
the end of this Agreement, or at such other address as the Company shall have
furnished to the Holder in writing. Any party hereto may by notice so given
change its address for future notice hereunder. Notice shall conclusively be
deemed to have been given when received.
17. PAYMENT. Payment shall be made in lawful tender of the United
States.
18. DEFAULT RATE; USURY. During any period in which an Event of
Default has occurred and is continuing, the Company shall pay interest on the
unpaid principal balance hereof at a rate per annum equal to the rate
otherwise applicable hereunder plus two percent (2%). In the event any
interest is paid on this Note which is deemed to be in excess of the then legal
maximum rate, then that portion of the interest payment representing an amount
in excess of the then legal maximum rate shall be deemed a payment of principal
and applied against the principal of this Note.
19. EXPENSES; WAIVERS. If action is instituted to collect
this Note, the Company promises to pay all costs and expenses, including,
without limitation, reasonable attorneys' fees and costs, incurred in
connection with such action. The Company hereby waives notice of default,
presentment or demand for payment, protest or notice of nonpayment or dishonor
and all other notices or demands relative to this instrument. The Company
shall pay on demand all reasonable fees and expenses, including reasonable
attorneys' fees and expenses, incurred by the Holder with respect to the
enforcement or attempted enforcement of any of the obligations of the Company
to the Holder under the Transaction
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<PAGE> 19
Documents or in preserving any of the Holder's rights and remedies (including,
without limitation, all such fees and expenses incurred in connection with any
"workout" or restructuring affecting the Transaction Documents or the
obligations thereunder or any bankruptcy or similar proceeding involving
Company or any of its Subsidiaries).
20. FINANCING STATEMENTS. The Company agrees to execute all UCC-1
financing statements and other documents and instruments which the Holder may
reasonably request to perfect its security interest in the collateral described
in the Security Agreement.
21. REPLACEMENT NOTE. Upon receipt by the Company of evidence
reasonably satisfactory to it of the ownership of and the loss, theft,
destruction or mutilation of any Note and (a) in the case of loss, theft or
destruction, of indemnity reasonably satisfactory to it; or (b) in the case of
mutilation, upon surrender thereof; the Company, at its expense, will execute
and deliver in lieu thereof a new Note executed in the same manner as the Note
being replaced, in the same principal amount as the unpaid principal amount of
such Note and dated the date to which interest shall have been paid on such
Note or, if no interest shall have yet been so paid, dated the date of such
Note.
22. GOVERNING LAW. This Note and all actions arising out of or in
connection with this Note shall be governed by and construed in accordance with
the laws of the State of California, without regard to the conflicts of law
provisions of the State of California or of any other state.
IN WITNESS WHEREOF, the Company has caused this Note to be
issued as of the date first written above.
JT STORAGE, INC.
a Delaware corporation
By: /s/David T. Mitchell
--------------------------------
Title: President
Accepted and Agreed to:
ATARI CORPORATION
a Nevada corporation
By: /s/Sam Tramiel
----------------------------------
Title: President
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<PAGE> 20
EXHIBIT A TO
SUBORDINATED CONVERTIBLE SECURED PROMISSORY NOTE
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR ANY STATE SECURITIES LAWS. NO SALE OR DISPOSITION MAY
BE EFFECTED WITHOUT (i) AN EFFECTIVE REGISTRATION STATEMENT RELATED
THERETO, (ii) AN OPINION OF COUNSEL FOR THE HOLDER, REASONABLY
SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATION IS NOT REQUIRED,
(iii) RECEIPT OF A NO-ACTION LETTER FROM THE APPROPRIATE GOVERNMENTAL
AUTHORITIES, OR (iv) OTHERWISE COMPLYING WITH THE PROVISIONS OF
SECTION 7 OF THIS WARRANT.
JT STORAGE, INC.
WARRANT TO PURCHASE __________ SHARES
OF SERIES A PREFERRED STOCK
THIS CERTIFIES THAT, for value received, Atari Corporation, a Nevada
Corporation, is entitled to subscribe for and purchase up to ________ shares of
the fully paid and nonassessable Series A Preferred Stock, $0.00001 par value
(as adjusted pursuant to Section 4 hereof, the "Shares"), of JT Storage, Inc.,
a Delaware corporation (the "Company"), at a price of $2.00 per share (such
price and such other price as shall result, from time to time, from the
adjustments specified in Section 4 hereof is herein referred to as the "Warrant
Price"), subject to the provisions and upon the terms and conditions
hereinafter set forth. As used herein, (a) the term "Series A Preferred" shall
mean the Company's presently authorized Series A Preferred Stock, and any stock
into or for which such Series A Preferred Stock may hereafter be converted or
exchanged, (b) the term "Date of Grant" shall mean __________, 1996 and (c) the
term "Other Warrants" shall mean any other warrants issued by the Company in
connection with the transaction with respect to which this Warrant was issued,
and any warrant issued upon transfer or partial exercise of this Warrant. The
term "Warrant" as used herein shall be deemed to include Other Warrants unless
the context clearly requires otherwise.
1. Term. The purchase right represented by this Warrant is
exercisable, in whole or in part, at any time and from time to time from the
Date of Grant through five (5) years after the Date of Grant.
2. Method of Exercise: Payment: Issuance of New Warrant. Subject
to Section 1 hereof, the purchase right represented by this Warrant may be
exercised by the holder hereof, in whole or in part and from time to time, by
either, at the election of the holder hereof, (a) the surrender of this Warrant
(with the notice of exercise form attached hereto as Exhibit A-1 duly executed)
at the principal office of the Company and by the payment to the Company, by
check, of an amount equal to the then applicable Warrant Price multiplied by
the number of Shares then being purchased, or (b) if in connection with a
registered public offering of the Company's securities, the surrender of this
Warrant (with the notice of
<PAGE> 21
exercise form attached hereto as Exhibit A-2 duly executed) at the principal
office of the Company together with notice of arrangements reasonably
satisfactory to the Company and the managing underwriters of any such public
offering for payment to the Company either by check or from the proceeds of the
sale of shares to be sold by the holder in such public offering of an amount
equal to the then applicable Warrant Price per share multiplied by the number
of Shares then being purchased. The person or persons in whose name(s) any
certificate(s) representing shares of Series A Preferred shall be issuable upon
exercise of this Warrant shall be deemed to have become the holder(s) of record
of, and shall be treated for all purposes as the record holder(s) of, the
shares represented thereby (and such shares shall be deemed to have been
issued) immediately prior to the close of business on the date or dates upon
which this Warrant is exercised. In the event of any exercise of the rights
represented by this Warrant, certificates for the shares of stock so purchased
shall be delivered to the holder hereof as soon as possible and in any event
within ten (10) days after such exercise and, unless this Warrant has been
fully exercised or expired, a new Warrant representing the portion of the
Shares, if any, with respect to which this Warrant shall not then have been
exercised shall also be issued to the holder hereof as soon as possible and in
any event within such ten (10)-day period.
3. Stock Fully Paid: Reservation of Shares. All Shares that may
be issued upon the exercise of the rights represented by this Warrant will,
upon issuance pursuant to the terms and conditions herein, be fully paid and
nonassessable, and free from all taxes, liens and charges with respect to the
issue thereof. During the period within which the rights represented by this
Warrant may be exercised, the Company will at all times have authorized, and
reserved for the purpose of the issue upon exercise of the purchase rights
evidenced by this Warrant, a sufficient number of shares of its Series A
Preferred to provide for the exercise of the rights represented by this Warrant
and a sufficient number of shares of its Common Stock to provide for the
conversion of the Series A Preferred into Common Stock.
4. Adjustment of Warrant Price and Number of Shares. The number
and kind of securities purchasable upon the exercise of this Warrant and the
Warrant Price shall be subject to adjustment from time to time upon the
occurrence of certain events, as follows:
(a) Reclassification or Merger. In case of any
reclassification, change or conversion of securities of the class issuable upon
exercise of this Warrant (other than a change in par value, or from par value
to no par value, or from no par value to par value, or as a result of a
subdivision or combination), or in case of any merger of the Company with or
into another corporation (other than a merger with another corporation in which
the Company is the acquiring and the surviving corporation and which does not
result in any reclassification or change of outstanding securities issuable
upon exercise of this Warrant), or in case of any sale of all or substantially
all of the assets of the Company, the Company, or such successor or purchasing
corporation, as the case may be, shall duly execute and deliver to the holder
of this Warrant a new Warrant (in form and substance reasonably satisfactory to
the holder of this Warrant), so that the holder of this Warrant shall have the
right to receive, at a total purchase price not to exceed that payable upon the
exercise of the unexercised portion of this Warrant, and in lieu of the shares
of Series A Preferred theretofore issuable upon exercise of this Warrant, the
kind and amount of shares of stock, other securities, money and property
receivable upon such reclassification, change or merger by a holder of the
number of shares of Series A Preferred then purchasable under this Warrant.
Such new Warrant shall provide for adjustments that shall be as nearly
equivalent as may be practicable
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<PAGE> 22
to the adjustments provided for in this Section 4. The provisions of this
subparagraph (a) shall similarly apply to successive reclassifications,
changes, mergers, consolidations and transfers.
(b) Subdivision or Combination of Shares. If the Company
at any time while this Warrant remains outstanding and unexpired shall
subdivide or combine its outstanding shares of Series A Preferred, the Warrant
Price shall be proportionately decreased in the case of a subdivision or
increased in the case of a combination, effective at the close of business on
the date the subdivision or combination becomes effective.
(c) Stock Dividends and Other Distributions. If the
Company at any time while this Warrant is outstanding and unexpired shall (i)
pay a dividend with respect to Series A Preferred payable in Series A
Preferred, or (ii) make any other distribution with respect to Series A
Preferred (except any distribution specifically provided for in the foregoing
subparagraphs (a) and (b)) then the Warrant Price shall be adjusted, from and
after the date of determination of shareholders entitled to receive such
dividend or distribution, to that price determined by multiplying the Warrant
Price in effect immediately prior to such date of determination by a fraction
(i) the numerator of which shall be the total number of shares of Series A
Preferred outstanding immediately prior to such dividend or distribution, and
(ii) the denominator of which shall be the total number of shares of Series A
Preferred outstanding immediately after such dividend or distribution.
(d) Adjustment of Number of Shares. Upon each adjustment
in the Warrant Price pursuant to this Section 4, the number of Shares of Series
A Preferred purchasable hereunder shall be adjusted, to the nearest whole
share, to the product obtained by multiplying the number of Shares purchasable
immediately prior to such adjustment in the Warrant Price by a fraction, the
numerator of which shall be the Warrant Price immediately prior to such
adjustment and the denominator of which shall be the Warrant Price immediately
thereafter.
(e) Antidilution Rights. The other antidilution rights
applicable to the Series A Preferred are set forth in Section 4(d) of Article
III of the Company's Restated Certificate of Incorporation, as amended through
the Date of Grant (the "Charter"), a true and complete copy of which is
attached hereto as Exhibit C. Such antidilution rights shall not be restated,
amended, modified or waived in any manner without the prior written consent of
the holders of a majority of the shares of Series A Preferred, including, for
purposes of this Section 4(e), shares of Series A Preferred issuable upon
exercise of this Warrant. The Company shall promptly provide the holder hereof
with any restatement, amendment, modification or waiver of the Charter promptly
after the same has been made.
5. Notice of Adjustments. Whenever the Warrant Price or the
number of Shares purchasable hereunder shall be adjusted pursuant to Section 4
hereof, the Company shall make a certificate signed by its chief financial
officer setting forth, in reasonable detail, the event requiring the
adjustment, the amount of the adjustment, the method by which such adjustment
was calculated, and the Warrant Price and the number of Shares purchasable
hereunder after giving effect to such adjustment, which shall be mailed to the
holder of this Warrant. In addition, whenever the conversion price or
conversion ratio of the Series A Preferred shall be adjusted, the Company shall
make a certificate signed by its chief financial officer setting forth, in
reasonable detail, the event requiring the adjustment, the amount of the
adjustment, the
-3-
<PAGE> 23
method by which such adjustment was calculated, and the conversion price or
ratio of the Series A Preferred after giving effect to such adjustment, and
shall cause copies of such certificate to be mailed to the holder of this
Warrant.
6. Fractional Shares. No fractional shares of Series A Preferred
will be issued in connection with any exercise hereunder, but in lieu of such
fractional shares the Company shall make a cash payment therefor based on the
fair market value of the Series A Preferred on the date of exercise as
reasonably determined in good faith by the Company's Board of Directors.
7. Compliance with Securities Act: Disposition of Warrant or
Shares of Series A Preferred.
(a) Compliance with Securities Act. The holder of this
Warrant, by acceptance hereof, agrees that this Warrant, and the shares of
Series A Preferred to be issued upon exercise hereof and any Common Stock
issued upon conversion thereof are being acquired for investment and that such
holder will not offer, sell or otherwise dispose of this Warrant, or any shares
of Series A Preferred to be issued upon exercise hereof or any Common Stock
issued upon conversion thereof except under circumstances which will not result
in a violation of the Act. Upon exercise of this Warrant, unless the Shares
being acquired are registered under the Act or an exemption from such
registration is available, the holder hereof shall confirm in writing, by
executing the form attached as Exhibit B hereto, that the shares of Series A
Preferred so purchased (and any shares of Common Stock issued upon conversion
thereof) are being acquired for investment and not with a view toward
distribution or resale. This Warrant and all shares of Series A Preferred
issued upon exercise of this Warrant and all shares of Common Stock issued upon
conversion thereof (unless registered under the Act) shall be stamped or
imprinted with a legend in substantially the following form:
"THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. NO
SALE OR DISPOSITION MAY BE EFFECTED WITHOUT (i) AN EFFECTIVE
REGISTRATION STATEMENT RELATED THERETO, (ii) AN OPINION OF COUNSEL FOR
THE HOLDER, REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH
REGISTRATION IS NOT REQUIRED, (iii) RECEIPT OF A NO-ACTION LETTER FROM
THE APPROPRIATE GOVERNMENTAL AUTHORITIES, OR OTHERWISE COMPLYING WITH
THE PROVISIONS OF SECTION 7 OF THE WARRANT UNDER WHICH THESE
SECURITIES WERE ISSUED, DIRECTLY OR INDIRECTLY."
In addition, in connection with the issuance of this Warrant, the
holder specifically represents to the Company by acceptance of this Warrant as
follows:
(1) The holder is aware of the Company's business
affairs and financial condition, and has acquired information about the Company
sufficient to reach an informed and knowledgeable decision to acquire this
Warrant. The holder is acquiring this Warrant for its own account for
investment purposes only and not with a view to, or for the resale in
connection with, any "distribution" thereof for purposes of the Act.
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<PAGE> 24
(2) The holder understands that this Warrant has
not been registered under the Act in reliance upon a specific exemption
therefrom, which exemption depends upon, among other things, the bona fide
nature of the holder's investment intent as expressed herein. In this
connection, the holder understands that, in the view of the SEC, the statutory
basis for such exemption may be unavailable if the holder's representation was
predicated solely upon a present intention to hold the Warrant for the minimum
capital gains period specified under tax statutes, for a deferred sale, for or
until an increase or decrease in the market price of the Warrant, or for a
period of one year or any other fixed period in the future.
(3) The holder further understands that this
Warrant must be held indefinitely unless subsequently registered under the Act
and any applicable state securities laws, or unless exemptions from
registration are otherwise available.
(4) The holder is aware of the provisions of Rule
144 and 144A, promulgated under the Act, which, in substance, permit limited
public resale of "restricted securities" acquired, directly or indirectly, from
the issuer thereof (or from an affiliate of such issuer), in a non-public
offering subject to the satisfaction of certain conditions, if applicable,
including, among other things: The availability of certain public information
about the Company, the resale occurring not less than two years after the party
has purchased and paid for the securities to be sold; the sale being made
through a broker in an unsolicited "broker's transaction" or in transactions
directly with a market maker (as said term is defined under the Securities
Exchange Act of 1934, as amended) and the amount of securities being sold
during any three-month period not exceeding the specified limitations stated
therein.
(5) The holder further understands that at the
time it wishes to sell this Warrant there may be no public market upon which to
make such a sale, and that, even if such a public market then exists, the
Company may not be satisfying the current public information requirements of
Rule 144 and 144A, and that, in such event, the holder may be precluded from
selling this Warrant under Rule 144 and 144A even if the two-year minimum
holding period had been satisfied.
(6) The holder further understands that in the
event all of the requirements of Rule 144 and 144A are not satisfied,
registration under the Act, compliance with Regulation A, or some other
registration exemption will be required; and that, notwithstanding the fact
that Rule 144 and 144A are not exclusive, the Staff of the SEC has expressed
its opinion that persons proposing to sell private placement securities other
than in a registered offering and otherwise than pursuant to Rule 144 and 144A
will have a substantial burden of proof in establishing that an exemption from
registration is available for such offers or sales, and that such persons and
their respective brokers who participate in such transactions do so at their
own risk.
(b) Disposition of Warrant or Shares. With respect to
any offer, sale or other disposition of this Warrant or any shares of Series A
Preferred acquired pursuant to the exercise of this Warrant or any shares of
Common Stock issued upon conversion of the Series A Preferred, in each case
prior to registration of such Warrant or shares, the holder hereof and each
subsequent holder of this Warrant agrees to give written notice to the Company
prior thereto, describing the manner thereof, together with a written opinion
of such holder's counsel, if reasonably requested by the Company, to the
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<PAGE> 25
effect that such offer, sale or other disposition may be effected without
registration or qualification (under the Act as then in effect or any federal
or state law then in effect) of this Warrant or such shares of Series A
Preferred or Common Stock and indicating whether or not under the Act
certificates for this Warrant or such shares of Series A Preferred to be sold
or otherwise disposed of require any restrictive legend as to applicable
restrictions on transferability in order to ensure compliance with such laws.
Promptly upon receiving such written notice and reasonably satisfactory
opinion, if so requested, the Company, as promptly as practicable, shall notify
such holder that such holder may sell or otherwise dispose of this Warrant or
such shares of Series A Preferred or Common Stock, all in accordance with the
terms of the notice delivered to the Company. If a determination has been made
pursuant to this subsection (b) that the opinion of counsel for the holder is
not reasonably satisfactory to the Company, the Company shall so notify the
holder promptly after such determination has been made and shall specify its
reasons for any such conclusion. Notwithstanding the foregoing, this Warrant
or such shares of Series A Preferred or Common Stock may, as to such federal
laws, be offered, sold or otherwise disposed of in accordance with Rule 144 or
144A under the Act, provided that the Company shall have been furnished with
such information as the Company may reasonably request to provide assurance
that the provisions of Rule 144 or 144A have been satisfied. Each certificate
representing this Warrant or the shares of Series A Preferred or Common Stock
thus transferred (except a transfer pursuant to Rule 144 or 144A) shall bear a
legend as to the applicable restrictions on transferability in order to ensure
compliance with such laws, unless in the aforesaid opinion of counsel for the
holder, such legend is not required in order to ensure compliance with such
laws. The Company may issue stop transfer instructions to its transfer agent
in connection with such restrictions.
(c) Excepted Transfers. Neither any restrictions of any
legend described in this Warrant nor the requirements of Section 7(b) above
shall apply to any transfer without any additional consideration of, or grant
of a security interest in, this Warrant or any part hereof (i) to a partner of
the holder if the holder is a partnership, (ii) by the holder to a partnership
of which the holder is a general partner, or (iii) to any affiliate of the
holder if the holder is a corporation; provided, however in any such transfer,
the transferee shall on the Company's request agree in writing to be bound by
the terms of this Warrant as if an original signatory hereto.
8. Rights as Shareholders: Information. No holder of this
Warrant, as such, shall be entitled to vote or receive dividends or be deemed
the holder of Series A Preferred or any other securities of the Company which
may at any time be issuable on the exercise hereof for any purpose, nor shall
anything contained herein be construed to confer upon the holder of this
Warrant, as such, any of the rights of a shareholder of the Company or any
right to vote for the election of directors or upon any matter submitted to
shareholders at any meeting thereof, or to receive notice of meetings, or to
receive dividends or subscription rights or otherwise until this Warrant shall
have been exercised and the Shares purchasable upon the exercise hereof shall
have become deliverable, as provided herein. Notwithstanding the foregoing, the
Company will transmit to the holder of this Warrant such information,
documents, notices and reports as are generally distributed to the holders of
any class or series of the securities of the Company concurrently with the
distribution thereof to the shareholders.
-6-
<PAGE> 26
9. Registration Rights. The Company covenants and agrees as
follows:
9.1 Definitions. For purposes of this Section 9:
(a) The term "Registrable Shares" means (i) the
Common Stock issuable or issued upon conversion of the Series A Preferred
issuable or issued upon exercise or conversion of this Warrant or upon exercise
or conversion of the Other Warrants, and (ii) any Common Stock of the Company
issued as (or issuable upon the conversion or exercise of any warrant, right or
other security which is issued as) a dividend or other distribution with
respect to, or in exchange for or in replacement of, such Common Stock or
Series A Preferred; provided, however, that Registrable Shares shall not
include any (A) shares of Common Stock which have previously been registered,
or (B) shares of Common Stock which have previously been sold to the public;
(b) The term "Shareholder" means any person
owning or having the right to acquire Registrable Shares or any assignee
thereof; and
(c) The term "Registration Rights Agreement"
means that certain Registration Rights Agreement, dated as of February 3, 1995,
as amended, by and among the Company and certain persons named therein.
9.2 Grant of Rights. The Company hereby grants to the
Shareholders the rights set forth in the Registration Rights Agreement. A true
and complete copy of the Registration Rights Agreement is attached hereto as
Exhibit D. The Company represents and warrants to the Shareholders that the
Company has obtained all consents of parties to the Registration Rights
Agreement and of any other persons that are required in order for the
Registrable Shares to be included in the definition of "Registrable Securities"
and for the Shareholders to be included in the definition of "Holders," as such
terms are used in the Registration Rights Agreement.
9.3 No Conflicting Agreements. The Company represents
and warrants to the Shareholders that the Company is not a party to any
agreement that conflicts in any manner with the Shareholders' rights to cause
the Company to register Registrable Shares pursuant to the Registration Rights
Agreement and this Section 9. The Company covenants and agrees that it shall
not, without the prior written consent of the Shareholders holding a majority
of the outstanding Registrable Shares, amend, modify or restate the
Registration Rights Agreement if the rights of the Shareholders would be
subordinated, diminished or otherwise adversely affected.
9.4 Rights and Obligations Survive Exercise and
Expiration of Warrant. The rights and obligations of the Company, of the
holder of this Warrant and of the Registrable Shares contained in the
Registration Rights Agreement and this Section 9 shall survive exercise,
conversion and expiration of this Warrant.
-7-
<PAGE> 27
10. Right to Convert Warrant into Common Stock: Net Issuance.
10.1 Right to Convert. In addition to and without
limiting the rights of the holder under the terms of this Warrant, but only to
the extent this Warrant has not otherwise been exercised, the holder shall have
the right to convert this Warrant or any portion thereof (the "Conversion
Right") into shares of Series A Preferred (or Common Stock if the Series A
Preferred has been automatically converted into Common Stock) as provided in
this Section 10 at any time or from time to time during the term of this
Warrant. Upon exercise of the Conversion Right with respect to a particular
number of shares subject to this Warrant (the "Converted Warrant Shares"), the
Company shall deliver to the holder (without payment by the holder of any
exercise price or any cash or other consideration) (X) that number of shares of
fully paid and nonassessable Series A Preferred (or Common Stock if the Series
A Preferred has been automatically converted into Common Stock) equal to the
quotient obtained by dividing the value of this Warrant (or the specified
portion hereof) on the Conversion Date (as defined in Section 10.2 hereof),
which value shall be determined by subtracting (A) the aggregate Warrant Price
of the Converted Warrant Shares immediately prior to the exercise of the
Conversion Right from (B) the aggregate fair market value of the Converted
Warrant Shares issuable upon exercise of this Warrant (or the specified portion
hereof) on the Conversion Date (as herein defined) by (Y) the fair market value
of one share of Series B Preferred (or Common Stock if the Series A Preferred
has been automatically converted into Common Stock) on the Conversion Date (as
herein defined).
Expressed as a formula, such conversion shall be computed as follows:
X= B - A
-------
Y
Where: X = the number of shares of Series A Preferred
(or Common Stock) that may be issued to holder
Y = the fair market value (FMV) of one share
of Series A Preferred (or Common Stock)
A = the aggregate Warrant Price (i.e., Converted
Warrant Shares x Warrant Price)
B = the aggregate FMV (i.e., FMV x Converted
Warrant Shares)
No fractional shares shall be issuable upon exercise of the Conversion
Right, and, if the number of shares to be issued determined in accordance with
the foregoing formula is other than a whole number, the Company shall pay to
the holder an amount in cash equal to the fair market value of the resulting
fractional share on the Conversion Date (as hereinafter defined).
10.2 Method of Exercise. The Conversion Right may be
exercised by the holder by the surrender of this Warrant at the principal
office of the Company together with a written statement
-8-
<PAGE> 28
specifying that the holder thereby intends to exercise the Conversion Right and
indicating the number of shares subject to this Warrant which are being
surrendered (referred to in Section 10.1 hereof as the Converted Warrant
Shares) in exercise of the Conversion Right. Such conversion shall be
effective upon receipt by the Company of this Warrant together with the
aforesaid written statement, or on such later date as is specified therein (the
"Conversion Date"), and, at the election of the holder hereof, may be made
contingent upon the closing of the sale of the Company's Common Stock to the
public in a public offering pursuant to a Registration Statement under the Act
(a "Public Offering"). Certificates for the shares issuable upon exercise of
the Conversion Right and, if applicable, a new warrant evidencing the balance
of the shares remaining subject to this Warrant, shall be issued as of the
Conversion Date and shall be delivered to the holder within ten (10) days
following the Conversion Date. Any conversion from Series A Preferred to
Common Stock shall be in a ratio of one (1) share of Common Stock for each
share of Series A Preferred (as adjusted herein and in the Charter).
10.3 Determination of Fair Market Value. For purposes of
this Section 10.3, "fair market value" of a share of Series A Preferred (or
Common Stock if the Series A Preferred has been automatically converted into
Common Stock) as of a particular date (the "Determination Date") shall mean:
(a) If the Conversion Right is exercised in
connection with and contingent upon a Public Offering, and if the Company's
Registration Statement relating to such Public Offering ("Registration
Statement") has been declared effective by the SEC, then the initial "Price to
Public" specified in the final prospectus with respect to such offering
multiplied by the number of shares of Common Stock into which each share of
Series A Preferred is then convertible.
(b) If the Conversion Right is not exercised in
connection with and contingent upon a Public Offering, then as follows:
(i) If traded on a securities exchange,
the fair market value of the Common Stock shall be deemed to be the closing
price of the Common Stock on such exchange on the trading day prior to the
Determination Date, and the fair market value of the Series A Preferred shall
be deemed to be such fair market value of the Common Stock multiplied by the
number of shares of Common Stock into which each share of Series A Preferred is
then convertible;
(ii) If traded over-the-counter, the fair
market value of the Common Stock shall be deemed to be the closing bid price of
the Common Stock on the trading day prior to the Determination Date, and the
fair market value of the Series A Preferred shall be deemed to be such fair
market value of the Common Stock multiplied by the number of shares of Common
Stock into which each share of Series A Preferred is then convertible; and
(iii) If there is no public market for the
Common Stock, then fair market value shall be determined by mutual agreement of
the holder of this Warrant and the Company, and if the holder and the Company
are unable to so agree, by an appraiser approved by both the Company and the
holder of this Warrant, such approvals not to be unreasonably withheld. The
fees and expenses of such appraiser shall be borne equally by the parties.
-9-
<PAGE> 29
11. Representations and Warranties. The Company represents and
warrants to the holder of this Warrant as follows:
(a) This Warrant has been duly authorized and executed by
the Company and is a valid and binding obligation of the Company enforceable in
accordance with its terms, subject to laws of general application relating to
bankruptcy, insolvency and the relief of debtors and the rules of law or
principles at equity governing specific performance, injunctive relief and
other equitable remedies;
(b) The Shares have been duly authorized and reserved for
issuance by the Company and, when issued in accordance with the terms hereof,
will be validly issued, fully paid and nonassessable;
(c) The rights, preferences, privileges and restrictions
granted to or imposed upon the Series A Preferred and the holders thereof are
as set forth in the Charter, as amended to the Date of the Grant, a true and
complete copy of which has been delivered to the original holder of this
Warrant and is attached hereto as Exhibit C;
(d) The shares of Common Stock issuable upon conversion
of the Shares have been duly authorized and reserved and, when issued in
accordance with the terms of the Charter, as amended, will be validly issued,
fully paid and nonassessable; and
(e) The execution and delivery of this Warrant are not,
and the issuance of the Shares upon exercise of this Warrant in accordance with
the terms hereof will not be, inconsistent with the Company's Certificate of
Incorporation or by-laws, do not and will not contravene any material law,
governmental rule or regulation, judgment or order applicable to the Company,
and do not and will not conflict with or contravene any provision of, or
constitute a default under, any material indenture, mortgage, contract or other
instrument of which the Company is a party or by which it is bound or require
the consent or approval of, the giving of notice to, the registration or filing
with or the taking of any action in respect of or by, any federal, state or
local government authority or agency or other person, except for the filing of
notices pursuant to federal and state securities laws, which filings will be
effected by the time required thereby.
(f) There are no actions, suits, audits, investigations
or proceedings pending or, to the knowledge of the Company, threatened against
the Company in any court or before any governmental commission, board or
authority which, if adversely determined, will have a material adverse effect
on the ability of the Company to perform its obligations under this Warrant.
12. Modification and Waiver. This Warrant and any provision
hereof may be changed, waived, discharged or terminated only by an instrument
in writing signed by the party against which enforcement of the same is sought.
13. Notices. Any notice, request, communication or other document
required or permitted to be given or delivered to the holder hereof or the
Company shall be delivered, or shall be sent by certified or registered mail,
postage prepaid, to each such holder at its address as shown on the books
-10-
<PAGE> 30
of the Company or to the Company at the address indicated therefor on the
signature page of this Warrant.
14. Binding Effect on Successors. Except as otherwise set forth
herein, this Warrant shall be binding upon any corporation succeeding the
Company by merger, consolidation or acquisition of all or substantially all of
the Company's assets, and all of the obligations of the Company relating to the
Series A Preferred issuable upon the exercise or conversion of this Warrant
shall survive the exercise, conversion and termination of this Warrant and all
of the covenants and agreements of the Company shall inure to the benefit of
the successors and assigns of the holder hereof. The Company will, at the time
of the exercise or conversion of this Warrant, in whole or in part, upon
request of the holder hereof but at the Company's expense, acknowledge in
writing its continuing obligation to the holder hereof in respect of any rights
(including, without limitation, any right to registration of the Registrable
Shares) to which the holder hereof shall continue to be entitled after such
exercise or conversion in accordance with this Warrant; provided, that the
failure of the holder hereof to make any such request shall not affect the
continuing obligation of the Company to the holder hereof in respect of such
rights.
15. Lost Warrants or Stock Certificates. The Company covenants to
the holder hereof that, upon receipt of evidence reasonably satisfactory to the
Company of the loss, theft, destruction or mutilation of this Warrant or any
stock certificate and, in the case of any such loss, theft or destruction, upon
receipt of an indemnity reasonably satisfactory to the Company, or in the case
of any such mutilation upon surrender and cancellation of such Warrant or stock
certificate, the Company will make and deliver a new Warrant or stock
certificate, of like tenor, in lieu of the lost, stolen, destroyed or mutilated
Warrant or stock certificate.
16. Descriptive Headings. The descriptive headings of the several
paragraphs of this Warrant are inserted for convenience only and do not
constitute a part of this Warrant.
17. Governing Law. This Warrant shall be construed and enforced
in accordance with, and the rights of the parties shall be governed by, the
laws of the State of California.
18. Survival of Representations, Warranties and Agreements. All
representations and warranties of the Company and the holder hereof contained
herein shall survive the Date of Grant, the exercise or conversion of this
Warrant (or any part hereof) or the termination or expiration of rights
hereunder. All agreements of the Company and the holder hereof contained
herein shall survive indefinitely until, by their respective terms, they are no
longer operative.
19. Remedies. In case any one or more of the covenants and
agreements contained in this Warrant shall have been breached, the holders
hereof (in the case of a breach by the Company), or the Company (in the case of
a breach by a holder), may proceed to protect and enforce their or its rights
either by suit in equity and/or by action at law, including, but not limited
to, an action for damages as a result of any such breach and/or an action for
specific performance of any such covenant or agreement contained in this
Warrant.
-11-
<PAGE> 31
20. No Impairment of Rights. The Company will not, by amendment
of its Certificate of Incorporation or through any other means, avoid or seek
to avoid the observance or performance of any of the terms of this Warrant, but
will at all times in good faith assist in the carrying out of all such terms
and in the taking of all such action as may be necessary or appropriate in
order to protect the rights of the holder of this Warrant against impairment.
JT STORAGE, INC.
By:
------------------------------------------
Title:
---------------------------------------
Address:
------------------------------------
------------------------------------
Date: __________, 1996
Accepted and Agreed to:
ATARI CORPORATION
By:
----------------------
Title:
-------------------
-12-
<PAGE> 32
EXHIBIT A-1
NOTICE OF EXERCISE
To: JT Storage, Inc.
1. The undersigned hereby elects to purchase __________ shares of
Series A Preferred Stock of JT Storage, Inc. pursuant to the terms of the
attached Warrant, and tenders herewith payment of the purchase price of such
shares in full.
2. Please issue a certificate or certificates representing said
shares in the name of the undersigned or in such other name or names as are
specified below:
--------------------------------------------
(Name)
--------------------------------------------
--------------------------------------------
(Address)
3. The undersigned represents that the aforesaid shares are being
acquired for the account of the undersigned for investment and not with a view
to, or for resale in connection with, the distribution thereof and that the
undersigned has no present intention of distributing or reselling such shares.
In support thereof, the undersigned has executed an Investment Representation
Statement attached hereto as Schedule 1.
--------------------------------------------
(Signature)
- --------------------------
(Date)
<PAGE> 33
EXHIBIT A-2
NOTICE OF EXERCISE
To: JT Storage, Inc. (the "Company")
1. Contingent upon and effective immediately prior to
the closing (the "Closing") of the Company's public offering contemplated by
the Registration Statement on Form S-______-_____ filed _______________, 199_,
the undersigned hereby elects to purchase ________ shares of Series A Preferred
Stock of the Company (or such lesser number of shares as may be sold on behalf
of the undersigned at the Closing) pursuant to the terms of the attached
Warrant.
2. Please deliver to the custodian for the selling
shareholders a stock certificate representing such _______ shares.
3. The undersigned has instructed the custodian for the
selling shareholders to deliver to the Company $___________ or, if less, the
net proceeds due the undersigned from the sale of shares in the aforesaid
public offering. If such net proceeds are less than the purchase price for
such shares, the undersigned agrees to deliver the difference to the Company
prior to the Closing at which time the shares of Series A Preferred Stock will
be purchased.
-----------------------------
(Signature)
- ----------------------------------
(Date)
<PAGE> 34
EXHIBIT B
INVESTMENT REPRESENTATION STATEMENT
Purchaser:
Company: JT Storage, Inc.
Security: Series A Preferred Stock
Amount:
Date:
In connection with the purchase of the above-listed securities and
underlying Common Stock issuable upon conversion of the securities
(collectively, the "Securities"), the undersigned (the "Purchaser") represents
to the Company as follows:
(a) The Purchaser is aware of the Company's business affairs and
financial condition, and has acquired sufficient information about the Company
to reach an informed and knowledgeable decision to acquire the Securities. The
Purchaser is purchasing the Securities for its own account for investment
purposes only and not with a view to, or for the resale in connection with, any
"distribution" thereof for purposes of the Securities Act of 1933, as amended
(the "Act").
(b) The Purchaser understands that the Securities have not been
registered under the Act in reliance upon a specific exemption therefrom, which
exemption depends upon, among other things, the bona fide nature of the
Purchaser's investment intent as expressed herein. In this connection, the
Purchaser understands that, in the view of the Securities and Exchange
Commission ("SEC"), the statutory basis for such exemption may be unavailable
if the Purchaser's representation was predicated solely upon a present
intention to hold these Securities for the minimum capital gains period
specified under tax statutes, for a deferred sale, for or until an increase or
decrease in the market price of the Securities, or for a period of one year or
any other fixed period in the future.
(c) The Purchaser further understands that the Securities must be
held indefinitely unless subsequently registered under the Act or unless an
exemption from registration is otherwise available. Moreover, the Purchaser
understands that the Company is under no obligation to register the Securities
except as set forth in the Warrant under which the Securities are being
acquired. In addition, the Purchaser understands that the certificate
evidencing the Securities will be imprinted with the legend referred to in the
Warrant under which the Securities are being purchased.
(d) The Purchaser is aware of the provisions of Rule 144 and 144A,
promulgated under the Act, which, in substance, permit limited public resale of
"restricted securities" acquired, directly or indirectly, from the issuer
thereof (or from an affiliate of such issuer), in a non-public offering subject
to the satisfaction of certain conditions, if applicable, including, among
other things: The availability of
<PAGE> 35
certain public information about the Company, the resale occurring not less
than two years after the party has purchased and paid for the securities to be
sold; the sale being made through a broker in an unsolicited "broker's
transaction" or in transactions directly with a market maker (as said term is
defined under the Securities Exchange Act of 1934, as amended) and the amount
of securities being sold during any three-month period not exceeding the
specified limitations stated therein.
(e) The Purchaser further understands that at the time it wishes
to sell the Securities there may be no public market upon which to make such a
sale, and that, even if such a public market then exists, the Company may not
be satisfying the current public information requirements of Rule 144 and 144A,
and that, in such event, the Purchaser may be precluded from selling the
Securities under Rule 144 and 144A even if the two-year minimum holding period
had been satisfied.
(f) The Purchaser further understands that in the event all of the
requirements of Rule 144 and 144A are not satisfied, registration under the
Act, compliance with Regulation A, or some other registration exemption will be
required; and that, notwithstanding the fact that Rule 144 is not exclusive,
the Staff of the SEC has expressed its opinion that persons proposing to sell
private placement securities other than in a registered offering and otherwise
than pursuant to Rule 144 will have a substantial burden of proof in
establishing that an exemption from registration is available for such offers
or sales, and that such persons and their respective brokers who participate in
such transactions do so at their own risk.
Purchaser:
---------------------------------------------------
Date: 199
------------------------------------ ------
-2-
<PAGE> 1
EXHIBIT 10.25
SECURITY AGREEMENT
This SECURITY AGREEMENT, dated as of February 12, 1996, is executed by
JT Storage, Inc., a Delaware corporation ("Debtor"), in favor of Atari
Corporation, a Nevada corporation ("Secured Party").
RECITALS
A. Debtor has executed a Subordinated Secured Convertible
Promissory Note (the "Note") in favor of Secured Party. Terms not otherwise
defined herein shall have the meanings given to such terms in the Note.
B. In order to induce Secured Party to extend the credit
evidenced by the Note, Debtor has agreed to enter into this Security Agreement
and to grant Secured Party the security interest in the Collateral described
below.
AGREEMENT
NOW, THEREFORE, in consideration of the above recitals and for other
good and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, Debtor hereby agrees with Secured Party as follows:
1. Definitions and Interpretation. When used in this Security
Agreement, the following terms shall have the following respective meanings:
"Account Debtor" shall have the meaning given to that term in
Section 3 hereof.
"Collateral" shall have the meaning given to that term in
Section 2 hereof.
"Equipment" shall have the meaning given to that term in
Attachment 1 hereto.
"Inventory" shall have the meaning given to that term in
Attachment 1 hereto.
"Obligations" shall mean and include all loans, advances,
debts, liabilities and obligations, howsoever arising, owed by Debtor
to the Secured Party of every kind and description (whether or not
evidenced by any note or instrument and whether or not for the payment
of money), now existing or hereafter arising under or pursuant to the
terms of the Note and the other Transaction Documents, including, all
interest, fees, charges, expenses, reasonable attorneys' fees and
costs and accountants' fees and costs chargeable to and payable by
Debtor hereunder and thereunder, in each case, whether direct or
indirect, absolute or contingent, due or to become due, and whether or
not arising after the commencement of a proceeding under Title 11 of
the United States Code (11 U.S.C. Section 101 et seq.), as amended
from time to time (including post-petition interest) and whether or
not allowed or allowable as a claim in any such proceeding.
"Receivables" shall have the meaning given to that term in
Attachment 1 hereto.
"UCC" shall mean the Uniform Commercial Code as in effect in
the State of California from time to time.
<PAGE> 2
All capitalized terms not otherwise defined herein shall have the respective
meanings given in the Note. Unless otherwise defined herein, all terms defined
in the UCC shall have the respective meanings given to those terms in the UCC.
2. Grant of Security Interest. As security for the Obligations,
Debtor hereby pledges and assigns to Secured Party and grants to Secured Party
a security interest in all right, title and interests of Debtor in and to the
property described in Attachment 1 hereto (collectively and severally, the
"Collateral"), which Attachment 1 is incorporated herein by this reference.
3. Representations and Warranties. Debtor represents and
warrants to Secured Party that (a) Debtor is the owner of the Collateral (or,
in the case of after-acquired Collateral, at the time Debtor acquires rights in
the Collateral, will be the owner thereof) and that no other Person has (or, in
the case of after-acquired Collateral, at the time Debtor acquires rights
therein, will have) any right, title, claim or interest (by way of Lien or
otherwise) in, against or to the Collateral, other than Permitted Liens; (b)
Secured Party has (or in the case of after-acquired Collateral, at the time
Debtor acquires rights therein, will have) a perfected security interest in the
Collateral to the extent that Lien can be perfected by the filing of a UCC-1
financing statement, except for Permitted Liens; (c) all Inventory has been
(or, in the case of hereafter produced Inventory, will be) produced in
compliance with applicable laws, including the Fair Labor Standards Act; (d)
each Receivable is genuine and enforceable against the party obligated to pay
the same (an "Account Debtor"); and (e) all information set forth in Attachment
2 hereto, when delivered, shall be true and correct.
4. Covenants Relating to Collateral. Debtor hereby agrees from
time to time (a) to perform all acts that may be necessary to maintain,
preserve, protect and perfect the Collateral, the Lien granted to Secured Party
therein and the first priority of such Lien, except for Permitted Liens; (b)
not to use or permit any Collateral to be used (i) in violation of any
provision of any Transaction Document, (ii) in violation of any applicable law,
rule or regulation, or (iii) in violation of any policy of insurance covering
the Collateral; (c) to pay promptly when due all taxes and other governmental
charges, all Liens and all other charges now or hereafter imposed upon or
affecting any Collateral except for the Permitted Liens; (d) without prior
written notice to Secured Party, (i) not to change Debtor's name or place of
business (or, if Debtor has more than one place of business, its chief
executive office), or the office in which Debtor's records relating to
Receivables are kept, (ii) not to keep Collateral consisting of chattel paper
at any location other than its chief executive office set forth in item 1 of
Attachment 2 hereto, and (iii) not to keep Collateral consisting of Equipment
or Inventory at any location other than the locations set forth in item 6 of
Attachment 2 hereto, (e) to deposit, or cause to be deposited, all remittances
and checks received with respect to Receivables to an account of Debtor at a
bank or other depository institution which has been given notice of Secured
Party's security interest in such account in substantially the form of the
Notice of Security Interest which is attached hereto as Attachment 3, and in
which account Secured Party has a perfected security interest; (f) to procure,
execute and deliver from time to time any endorsements, assignments, financing
statements and other writings reasonably deemed necessary or appropriate by
Secured Party to perfect, maintain and protect its Lien hereunder and the
priority thereof and, at Secured Party's request, to deliver promptly to
Secured Party all originals of Collateral consisting of instruments other than
negotiable instruments received in the ordinary course of business; (g) to
appear in and defend any action or proceeding which may affect its title to or
Secured Party's interest in the Collateral; (h) if Secured Party gives value to
enable Debtor to acquire rights in or the use of any Collateral, to use such
value for such purpose; (i) to keep separate, accurate and complete records of
the Collateral and to provide Secured Party with such records and such other
reports and information relating to the Collateral as Secured Party may
reasonably request from time to time; (j) except as permitted under the terms
of the Note, not to surrender or lose possession of (other than to Secured
Party), sell, encumber, lease, rent, or otherwise dispose of or transfer any
Collateral or right or interest therein, and to keep the Collateral free of all
Liens except Permitted Liens; (k) upon request by Secured Party, to type, print
or stamp conspicuously on
-2-
<PAGE> 3
the face of all original copies of all Collateral consisting of chattel paper a
legend satisfactory to Secured Party indicating that such chattel paper is
subject to the security interest granted hereby; (m) to collect, enforce and
receive delivery of the Receivables in accordance with past practice until
otherwise notified by Secured Party; (n) to comply with all material
requirements of law relating to the production, possession, operation,
maintenance and control of the Collateral (including the Fair Labor Standards
Act); and (o) to complete and deliver Attachment 2 to Secured Party as promptly
as practicable after the date hereof, and in any event within ten (10) days
following the date hereof.
5. Authorized Action by Agent. Debtor hereby irrevocably
appoints Secured Party as its attorney-in-fact and agrees that Secured Party
may perform (but Secured Party shall not be obligated to and shall incur no
liability to Debtor or any third party for failure so to do) any act which
Debtor is obligated by this Security Agreement to perform, and to exercise such
rights and powers as Debtor might exercise with respect to the Collateral,
including the right to (a) collect by legal proceedings or otherwise and
endorse, receive and receipt for all dividends, interest, payments, proceeds
and other sums and property now or hereafter payable on or on account of the
Collateral; (b) enter into any extension, reorganization, deposit, merger,
consolidation or other agreement pertaining to, or deposit, surrender, accept,
hold or apply other property in exchange for the Collateral; (c) insure,
process and preserve the Collateral; (d) make any compromise or settlement, and
take any action it deems advisable, with respect to the Collateral; (e) pay any
Indebtedness of Debtor relating to the Collateral; and (f) execute UCC
financing statements and other documents, instruments and agreements required
hereunder; provided, however, that Secured Party shall not exercise any such
powers prior to the occurrence of an Event of Default and shall only exercise
such powers during the continuance of an Event of Default. Debtor agrees to
reimburse Secured Party upon demand for any reasonable costs and expenses,
including reasonable attorneys' fees, Secured Party may incur while acting as
Debtor's attorney-in-fact hereunder, all of which costs and expenses are
included in the Obligations. It is further agreed and understood between the
parties hereto that such care as Secured Party gives to the safekeeping of its
own property of like kind shall constitute reasonable care of the Collateral
when in Secured Party's possession; provided, however, that Secured Party shall
not be required to make any presentment, demand or protest, or give any notice
and need not take any action to preserve any rights against any prior party or
any other person in connection with the Obligations or with respect to the
Collateral.
6. Default and Remedies. Debtor shall be deemed in default under
this Security Agreement upon the occurrence and during the continuance of an
Event of Default (as defined in the Note). Upon the occurrence and during the
continuance of any such Event of Default, Secured Party shall have the rights
of a secured creditor under the UCC, all rights granted by this Security
Agreement and by law, including the right to: (a) require Debtor to assemble
the Collateral and make it available to Secured Party at a place to be
designated by Secured Party; and (b) prior to the disposition of the
Collateral, store, process, repair or recondition it or otherwise prepare it
for disposition in any manner and to the extent Secured Party deems appropriate
and in connection with such preparation and disposition, without charge, use
any trademark, trade name, copyright, patent or technical process used by
Debtor. Debtor hereby agrees that ten (10) days' notice of any intended sale
or disposition of any Collateral is reasonable. In furtherance of Secured
Party's rights hereunder, Debtor hereby grants to Secured Party an irrevocable,
non-exclusive license (exercisable without royalty or other payment by Secured
Party, but only in connection with the exercise of remedies hereunder) to use,
license or sublicense any patent, trademark, trade name, copyright or other
intellectual property in which Debtor now or hereafter has any right, title or
interest together with the right of access to all media in which any of the
foregoing may be recorded or stored.
7. Miscellaneous.
(a) Notices. Except as otherwise provided herein, all
notices, requests, demands, consents, instructions or other communications to
or upon Debtor or Secured Party under this Security Agreement shall be
-3-
<PAGE> 4
by telecopy or in writing and telecopied, mailed or delivered to each party at
telecopier number or its address set forth below (or to such other telecopy
number or address as the recipient of any notice shall have notified the other
in writing). All such notices and communications shall be effective (a) when
sent by Federal Express or other overnight service of recognized standing, on
the Business Day following the deposit with such service; (b) when mailed, by
registered or certified mail, first class postage prepaid and addressed as
aforesaid through the United States Postal Service, upon receipt; (c) when
delivered by hand, upon delivery; and (d) when telecopied, upon confirmation of
receipt.
Secured Party: Atari Corporation
1196 Borregas Avenue
Sunnyvale, CA 94089-1302
Attn: Jack Tramiel
Telephone No.: (408) 745-2000
Telecopier No.: (408) 745-8800
Debtor: JT Storage, Inc.
166 Baypointe Parkway
San Jose, CA 95134
Attn: David T. Mitchell
Telephone No.: (408) 468-1800
Telecopier No.: (408) 468-1619
(b) Nonwaiver. No failure or delay on Secured Party's
part in exercising any right hereunder shall operate as a waiver thereof or of
any other right nor shall any single or partial exercise of any such right
preclude any other further exercise thereof or of any other right.
(c) Amendments and Waivers. This Security Agreement may
not be amended or modified, nor may any of its terms be waived, except by
written instruments signed by Debtor and Secured Party. Each waiver or consent
under any provision hereof shall be effective only in the specific instances
for the purpose for which given.
(d) Assignments. This Security Agreement shall be
binding upon and inure to the benefit of Secured Party and Debtor and their
respective successors and assigns; provided, however, that Debtor may not sell,
assign or delegate its rights and obligations hereunder without the prior
written consent of Secured Party, and prior to the termination of the Merger
Agreement, Secured Party may not sell, assign, or delegate its rights and
obligations hereunder without the written consent of Debtor.
(e) Cumulative Rights, etc. The rights, powers and
remedies of Secured Party under this Security Agreement shall be in addition to
all rights, powers and remedies given to Secured Party by virtue of any
applicable law, rule or regulation of any Governmental Authority, any
Transaction Document or any other agreement, all of which rights, powers, and
remedies shall be cumulative and may be exercised successively or concurrently
without impairing Secured Party's rights hereunder. Debtor waives any right to
require Secured Party to proceed against any Person or to exhaust any
Collateral or to pursue any remedy in Secured Party's power.
(f) Payments Free of Taxes, Etc. All payments made by
Debtor under this Security Agreement shall be made by Debtor free and clear of
and without deduction for any and all present and future taxes, levies,
charges, deductions and withholdings. In addition, Debtor shall pay upon
demand any stamp or
-4-
<PAGE> 5
other taxes, levies or charges of any jurisdiction with respect to the
execution, delivery, registration, performance and enforcement of this Security
Agreement. Upon request by Secured Party, Debtor shall furnish evidence
satisfactory to Secured Party that all requisite authorizations and approvals
by, and notices to and filings with, governmental authorities and regulatory
bodies have been obtained and made and that all requisite taxes, levies and
charges have been paid.
(g) Partial Invalidity. If at any time any provision of
this Security Agreement is or becomes illegal, invalid or unenforceable in any
respect under the law or any jurisdiction, neither the legality, validity or
enforceability of the remaining provisions of this Security Agreement nor the
legality, validity or enforceability of such provision under the law of any
other jurisdiction shall in any way be affected or impaired thereby.
(h) Expenses. Debtor shall pay on demand all reasonable
fees and expenses, including reasonable attorneys' fees and expenses, incurred
by Secured Party in connection with custody, preservation or sale of, or other
realization on, any of the Collateral or the enforcement or attempt to enforce
any of the Obligations which is not performed as and when required by this
Security Agreement.
(i) Headings. Headings in this Security Agreement and
each of the other Transaction Documents are for convenience of reference only
and are not part of the substance hereof or thereof.
(j) Plural Terms. All terms defined in this Security
Agreement or any other Transaction Document in the singular form shall have
comparable meanings when used in the plural form and vice versa.
(k) Construction. Each of this Security Agreement and
the other Transaction Documents is the result of negotiations among, and has
been reviewed by, Debtor, Secured Party and their respective counsel.
Accordingly, this Security Agreement and the other Transaction Documents shall
be deemed to be the product of all parties hereto, and no ambiguity shall be
construed in favor of or against Debtor or Secured Party.
(l) Entire Agreement. This Security Agreement and each
of the other Transaction Documents, taken together, constitute and contain the
entire agreement of Debtor and Secured Party and supersede any and all prior
agreements, negotiations, correspondence, understandings and communications
among the parties, whether written or oral, respecting the subject matter
hereof.
(m) Other Interpretive Provisions. References in this
Security Agreement and each of the other Transaction Documents to any document,
instrument or agreement (a) shall include all exhibits, schedules and other
attachments thereto, (b) shall include all documents, instruments or agreements
issued or executed in replacement thereof, and (c) shall mean such document,
instrument or agreement, or replacement or predecessor thereto, as amended,
modified and supplemented from time to time and in effect at any given time.
The words "hereof," "herein" and "hereunder" and words of similar import when
used in this Security Agreement or any other Transaction Document shall refer
to this Security Agreement or such other Transaction Document, as the case may
be, as a whole and not to any particular provision of this Security Agreement
or such other Transaction Document, as the case may be. The words "include"
and "including" and words of similar import when used in this Security
Agreement or any other Transaction Document shall not be construed to be
limiting or exclusive.
(n) Governing Law. This Security Agreement shall be
governed by and construed in accordance with the laws of the State of
California without reference to conflicts of law rules (except to the extent
governed by the UCC).
-5-
<PAGE> 6
(o) Jury Trial. EACH OF DEBTOR AND SECURED PARTY, TO THE
FULLEST EXTENT PERMITTED BY APPLICABLE LAW, HEREBY IRREVOCABLY WAIVES ALL RIGHT
TO TRIAL BY JURY AS TO ANY ISSUE RELATING HERETO IN ANY ACTION, PROCEEDING, OR
COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS SECURITY AGREEMENT.
IN WITNESS WHEREOF, Debtor has caused this Security Agreement
to be executed as of the day and year first above written.
JT STORAGE, INC.,
a Delaware corporation
By: /s/David T. Mitchell
------------------------------
Name: David T. Mitchell
Title: President
AGREED:
ATARI CORPORATION,
a Nevada corporation
By: /s/Sam Tramiel
--------------------------------
Name: Sam Tramiel
Title: President
-6-
<PAGE> 7
ATTACHMENT 1
TO SECURITY AGREEMENT
All right, title and interest of Debtor now owned or hereafter
acquired in and to the following:
(a) All equipment and fixtures (including, without limitation,
furniture, vehicles and other machinery and office equipment), together with
all additions and accessions thereto and replacements therefor (collectively,
the "Equipment");
(b) All inventory (including, without limitation, (i) all raw
materials, work in process and finished goods and (ii) all such goods which are
returned to or repossessed by Debtor), together with all additions and
accessions thereto, replacements therefor, products thereof and documents
therefor (collectively, the "Inventory");
(c) All accounts, chattel paper, contract rights and rights to the
payment of money (collectively, the "Receivables");
(d) All general intangibles, including, without limitation, (i)
customer and supplier lists and contracts, books and records, insurance
policies, tax refunds, contracts for the purchase of real or personal property;
(ii) all patents, copyrights, trademarks, trade names, service marks and other
intellectual property rights, (iii) all licenses to use, applications for, and
other rights to, such patents, copyrights, trademarks, trade names and service
marks, and (iv) all goodwill of Debtor;
(e) All deposit accounts, money, certificated securities (but
excluding securities of foreign Subsidiaries), uncertificated securities,
instruments and documents; and
(f) All proceeds of the foregoing (including, without limitation,
whatever is receivable or received when Collateral or proceeds is sold,
collected, exchanged, returned, substituted or otherwise disposed of, whether
such disposition is voluntary or involuntary, including rights to payment and
return premiums and insurance proceeds under insurance with respect to any
Collateral, and all rights to payment with respect to any cause of action
affecting or relating to the Collateral).
<PAGE> 8
ATTACHMENT 2
TO SECURITY AGREEMENT
DEBTOR PROFILE
1. The legal name of Debtor is and its the address of its chief executive
office is: JT Storage, Inc..
2. Debtor was incorporated on _____________, 19__ in the state of
Delaware. Since its incorporation Debtor has had the following legal
names (other than its current legal name):
<TABLE>
<CAPTION>
Date Debtor's Name
Prior Name Was Changed From Such Name
---------- --------------------------
<S> <C>
</TABLE>
3. Debtor does business under the following trade names:
<TABLE>
<CAPTION>
Trade Name Is This Name Registered? Registration No. Registration Date
---------- ------------------------ ---------------- -----------------
<S> <C> <C> <C>
</TABLE>
4. Since Debtor's incorporation the following companies have been merged
into Debtor (provide names, dates and brief description of
transactions):
5. The following assets of Debtor were acquired in a bulk sale or another
transaction not in the ordinary course of business of the seller
(provide description of collateral, date and description of
transaction, and name of seller):
<PAGE> 9
6. Debtor has the following places of business:
<TABLE>
<CAPTION>
Brief Description
Address Owner of Location of Assets and Value
------- ----------------- -------------------
<S> <C> <C>
</TABLE>
7. Debtor has assets at the following other locations that are not places
of business of Debtor:
<TABLE>
<CAPTION>
Brief Description
Address Owner of Location of Assets and Value
------- ----------------- -------------------
<S> <C> <C>
</TABLE>
8. The following locations listed in items 6 and 7 are public warehouses
issuing warehouse receipts:
<TABLE>
<CAPTION>
Brief Description
Address Owner of Location of Assets and Value
------- ----------------- -------------------
<S> <C> <C>
</TABLE>
9. Debtor had the following other locations within the past four months:
<TABLE>
<CAPTION>
Brief Description
Address Owner of Location of Assets and Value
------- ----------------- -------------------
<S> <C> <C>
</TABLE>
2-2
<PAGE> 10
10. Debtor imports assets from outside the United States through the
following ports of entry (list location by state and county):
11. The following Persons have possession of inventory of Debtor for the
purpose of processing or finishing it:
<TABLE>
<CAPTION>
Name and Address Processing Services Description of Inventory
---------------- ------------------- ------------------------
<S> <C> <C>
</TABLE>
12. Debtor is qualified to do business in the following states:
13. Does Debtor regularly receive letters of credit from customers to
secure payments of sums owed to Debtor? Yes ____. No____.
14. Debtor holds notes payable from the following persons:
<TABLE>
<CAPTION>
Name of Obligor Amount
--------------- ------
<S> <C>
</TABLE>
15. Does Debtor regularly have accounts receivable due from, or contracts
with, the United States government or any agency or department
thereof? Yes ______. No _______.
2-3
<PAGE> 11
If yes, indicate the percentage of Debtor's total outstanding accounts
receivable that are due from the United States government or such
agency or department: __________%
16. Does Debtor regularly receive advance deposits from customers for
goods not yet delivered to such customers? Yes ____. No ____.
17. Debtor's federal employer identification number is:__________________
18. Debtor's assets are subject to the following security interest of
Persons other than the Secured Party:
<TABLE>
<CAPTION>
Assets Name of Secured Party
------ ---------------------
<S> <C>
</TABLE>
19. The following tax assessments are currently outstanding and unpaid:
<TABLE>
<CAPTION>
Assessing Amount and Description
--------- ----------------------
<S> <C>
</TABLE>
20. Debtor has directly or indirectly guaranteed the following obligations
of third parties:
<TABLE>
<CAPTION>
Secured Party Amount Debtor
------------- ------
<S> <C> <C>
</TABLE>
21. Debtor owns the following material intellectual property rights
(including patents, trademarks and copyrights, whether or not
registered):
2-4
<PAGE> 12
22. The following is a list of all software or other copyrighted material
which is licensed to third parties and generates accounts receivable:
23. Debtor has the following subsidiaries (list jurisdiction and date of
incorporation, federal employer identification number, type and value
of assets):
2-5
<PAGE> 13
ATTACHMENT 3
TO SECURITY AGREEMENT
NOTICE OF SECURITY INTEREST
IN
DEPOSIT ACCOUNT
February __, 1996
[Name of Depositary Bank]
[Address of Depositary Bank]
__________________________________
__________________________________
JT Storage, Inc. ("Debtor") and Atari Corporation ("Secured Party"),
under that certain Security Agreement dated as of February __, 1996, executed
by Debtor in favor of Secured Party, hereby notify you that Debtor has granted
to Secured Party a security interest in all deposit accounts maintained by
Debtor with you including, without limitation, the deposit accounts described
below:
<TABLE>
<CAPTION>
Account Number Depositor's Name Account Type
-------------------------- -------------------------- -----------------------------
<S> <C> <C>
</TABLE>
Debtor and Secured Party authorize you to continue to allow Debtor to make
deposits to, draw checks upon and otherwise withdraw funds from such deposit
accounts (the "Deposit Accounts") without the consent of Secured Party until
Secured Party shall instruct you otherwise.
Debtor has authorized Secured Party to inform you when an Event of
Default has occurred and is continuing and at such time instruct you to cease
to permit any further payments or withdrawals from the Deposit Accounts by
Debtor and/or to pay any or all amounts in the Deposit Accounts to Secured
Party. Debtor authorizes
<PAGE> 14
and directs you to comply with all such instructions received by you from
Secured Party without further inquiry on your part and hereby agrees to
indemnify and hold harmless you and your officers, directors and employees from
and for any compliance by you with such instructions.
JT STORAGE, INC.
By:
---------------------------------
Name:
Title:
ATARI CORPORATION
By:
---------------------------------
Name:
Title:
3-2
<PAGE> 15
ACKNOWLEDGMENT AND AGREEMENT
OF DEPOSITARY BANK
The undersigned depositary bank hereby acknowledges receipt of the
above notice and agrees with Debtor and Secured Party to comply with any
instruction it may receive from Secured Party in accordance therewith. The
undersigned confirms to Secured Party that the information set forth above
regarding the Deposit Accounts is accurate, that such Deposit Accounts are
currently open and that the undersigned has no prior notice of any other
security interest, lien or interest in such Deposit Accounts.
---------------------------------------
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
<PAGE> 1
EXHIBIT 22.1
SUBSIDIARIES OF THE COMPANY
<TABLE>
<CAPTION>
NAME JURISDICTION
---------------------------------------------------------- ------------
<S> <C>
Atari (Benelux) B.V....................................... Holland
Atari Corp. (U.K.) Ltd.................................... England
Atari Computer Corporation................................ Nevada
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 26,941,000
<SECURITIES> 21,649,000
<RECEIVABLES> 6,689,000
<ALLOWANCES> 4,221,000
<INVENTORY> 10,934,000
<CURRENT-ASSETS> 65,126,000
<PP&E> 1,724,000
<DEPRECIATION> 1,053,000
<TOTAL-ASSETS> 77,569,000
<CURRENT-LIABILITIES> 10,042,000
<BONDS> 42,354,000
0
0
<COMMON> 637,000
<OTHER-SE> 24,536,000
<TOTAL-LIABILITY-AND-EQUITY> 77,569,000
<SALES> 14,626,000
<TOTAL-REVENUES> 14,626,000
<CGS> 44,234,000
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 24,057,000
<LOSS-PROVISION> 5,078,000
<INTEREST-EXPENSE> 2,309,000
<INCOME-PRETAX> (50,158,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (50,158,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 582,000
<CHANGES> 0
<NET-INCOME> (49,576,000)
<EPS-PRIMARY> (0.78)
<EPS-DILUTED> (0.78)
</TABLE>
