FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
Commission File No. 0-26912
Vodavi Technology, Inc.
-----------------------
(Exact name of registrant as specified in its charter)
Delaware 86-0789350
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8300 E. Raintree Drive, Scottsdale, Arizona 85260
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(Address of principal executive offices) (Zip Code)
(602) 443-6000
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(Registrant's telephone number, including area code)
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
----- -----
The number of shares outstanding of registrant's Common Stock, $.001 par value
per share, as of July 31, 1996 was 4,342,238.
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VODAVI TECHNOLOGY, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1996
TABLE OF CONTENTS
Page #
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 1996
and December 31, 1995. 3
Consolidated Statements of Operations - Three and Six
Month Periods Ended June 30, 1996 and 1995. 4
Consolidated Statements of Cash Flows - Six Month Periods
Ended June 30, 1996 and 1995. 5
Notes to Consolidated Financial Statements. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
PART II. OTHER INFORMATION 11
SIGNATURES 12
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
VODAVI TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
In thousands
June 30, December 31,
1996 1995
---- ----
(Unaudited)
CURRENT ASSETS:
Cash $ 587 $ 1,944
Accounts Receivable, net 9,543 6,427
Inventory, net 5,530 8,546
Prepaids 700 802
------- -------
16,360 17,719
PROPERTY AND EQUIPMENT, net 2,130 1,731
GOODWILL, net 6,892 7,089
OTHER LONG-TERM ASSETS, net 937 931
------- -------
$26,319 $27,470
======= =======
CURRENT LIABILITIES:
Notes Payable $ 6,843 $ 0
Accounts Payable 3,149 3,625
Accrued Liabilities 2,144 2,151
------- -------
12,136 5,776
------- -------
LONG-TERM DEBT 303 7,884
STOCKHOLDERS' EQUITY:
Preferred Stock - -
Common Stock 4 4
Additional Paid-In Capital 12,308 12,308
Retained Earnings 1,568 1,498
------- -------
13,880 13,810
------- -------
$26,319 $27,470
======= =======
The accompanying notes are an integral part of these consolidated balance
sheets.
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VODAVI TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
In thousands, except share amounts
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUE, net $ 11,900 $ 9,692 $ 22,256 $ 20,872
COST OF GOODS SOLD 7,913 6,727 14,836 14,665
---------- ---------- ---------- ----------
GROSS MARGIN 3,987 2,965 7,420 6,207
OPERATING EXPENSES
Engineering and product development 535 398 1,035 838
Selling, general and administrative 2,891 1,892 5,667 3,838
---------- ---------- ---------- ----------
OPERATING INCOME 561 675 718 1,531
INTEREST EXPENSE 207 264 442 519
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 354 411 276 1,012
PROVISION FOR INCOME TAXES 185 167 206 409
---------- ---------- ---------- ----------
NET INCOME $ 169 $ 244 $ 70 $ 603
========== ========== ========== ----------
NET INCOME PER SHARE $ 0.04 $ 0.11 $ 0.02 $ 0.27
========== ========== ========== ==========
WEIGHTED AVERAGE SHARES
OUTSTANDING 4,532,523 2,266,660 4,532,523 2,266,660
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
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VODAVI TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands
(Unaudited)
Six months ended June 30,
-------------------------
1996 1995
---- ----
OPERATING ACTIVITIES:
Net Income $ 70 $ 603
Adjustments:
Depreciation and amortization 504 211
Rent levelization 35 11
Changes in working capital:
Accounts receivable (3,115) (646)
Inventory 3,015 (1,077)
Prepaid expenses 101 (229)
Other long term assets (55) (25)
Accounts payable (475) 1,581
Accrued liabilities (50) 82
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NET CASH FLOWS-OPERATING ACTIVITIES 30 511
-------- --------
INVESTING ACTIVITIES:
Purchase of fixed assets (331) (444)
-------- --------
NET CASH FLOWS-INVESTING ACTIVITIES (331) (444)
-------- --------
FINANCING ACTIVITIES:
Capital lease payments 15
Borrowings from GE Capital 18,223 21,223
Payments to GE Capital (19,264) (20,989)
-------- --------
NET CASH FLOWS-FINANCING ACTIVITIES (1,056) 234
-------- --------
INCREASE (DECREASE) IN CASH (1,357) 301
CASH, beginning of period 1,944 1,454
-------- --------
CASH, end of period $ 587 $ 1,755
======== ========
The accompanying notes are an integral part of these consolidated statements.
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VODAVI TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED
JUNE 30, 1996
(a) Vodavi Technology, Inc. (the Company) is a Delaware corporation formed in
1994. In April 1994, the Company, through its wholly owned subsidiary, Vodavi
Communications Systems, Inc. (VCS), acquired the operating assets of the Vodavi
Communications Systems Division (the Vodavi Division) of Executone Information
Systems, Inc. VCS designs, develops, produces and distributes business
communications systems and related telecommunications products. In July 1995,
the Company, through its wholly owned subsidiary Arizona Repair Services, Inc.
(ARSI), acquired the operating assets of GoldStar Products Company, Ltd., which
provides repair services on telecommunications products, from LG Electronics
USA. In October 1995, the Company completed an initial public offering of its
common stock. Concurrently with the completion of its initial public offering,
the Company acquired Enhanced Systems, Inc. (Enhanced), a Georgia-based provider
of voice processing software.
(b) The accompanying unaudited consolidated financial statements have been
prepared by the Company without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. These financial statements reflect all
adjustments (consisting of normal recurring accruals and adjustments) which are,
in the opinion of management, necessary to fairly state the financial position
as of June 30, 1996 and the operating results and cash flows for the periods
presented. Operating results for the interim periods presented are not
necessarily indicative of the operating results that may be expected for the
entire year. These financial statements should be read in conjunction with the
Company's December 31, 1995 financial statements and accompanying notes thereto.
(c) Net income per share for the periods ended June 30, 1995 and 1996 was
determined by dividing net income by the weighted average number of common and
common equivalent shares outstanding. The weighted average number of common
equivalent shares outstanding assumes the exercise of all outstanding options
and the corresponding repurchase of shares using the treasury stock method as of
the beginning of each period presented.
(d) Effective January 1, 1996, the Company adopted the provisions of Statement
of Financial Accounting Standards (SFAS) No. 121, Accounting for Impairment of
Long-Lived Assets and for Long-Lived Assets to be disposed of. SFAS No. 121
requires the Company to review long-lived assets for impairment whenever events
or circumstances indicate that the carrying amount of such assets may not be
recoverable. At June 30, 1996, the Company believes that its long-lived assets
are recoverable. The company's judgment of the recoverability of its long-lived
assets is based on its estimates of future cash flows.
Included in the Company's estimated future cash flows is revenue from the sale
of the Company's Voice Activated Dialing (VAD) systems under the terms of a
contract with GTE Mobilnet. The Company is currently installing its first VAD
system for GTE Mobilnet. GTE Mobilnet has informed the Company that this first
system will be undergoing user testing through October 1996 and that the results
of this testing period will influence the timing of any additional
installations. If the Company's estimates of future revenue under the terms of
this contract are adversely affected by events related to this testing period,
the Company may be required to recognize an impairment loss related to the
goodwill recorded in connection with its acquisition of Enhanced (approximately
$4.3 million at June 30, 1996).
The Company has chosen the disclosure method of accounting under SFAS No. 123,
Accounting for Stock Based Compensation. This standard will require the Company
to make additional pro forma disclosures in its annual report for fiscal 1996.
6
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Basis of Presentation
In July 1995, the Company acquired the operating assets of ARSI and in October
1995 the Company acquired Enhanced. The operating results for the periods ended
June 30, 1996 include the operations of the acquired companies while the
operating results for the periods ended June 30, 1995 do not.
Results of Operations
Three Months Ended June 30, 1996 and 1995:
The following table summarizes the operating results of the Company as a
percentage of revenue for the periods indicated.
Three Months Ended
June 30,:
---------
1996 1995
-------------- ------------
Revenue 100% 100%
Cost of goods sold 66% 69%
---- ----
Gross margin 34% 31%
Operating expenses:
Engineering and product development 5% 4%
Selling, general and administrative 24% 20%
---- ----
Operating income 5% 7%
Interest expense 2% 3%
---- ----
Pre-tax income 3% 4%
Income taxes 2% 2%
---- ----
Net income 1% 2%
==== ====
Revenue
Revenue was approximately $11.9 million in the second quarter of 1996, an
increase of $2.2 million, or 22.8%, over the second quarter of 1995. Revenue
from the core customer premise equipment business (consisting primarily of key
telephone systems and commercial grade telephones) increased approximately $1.5
million, while revenue provided by ARSI and Enhanced was approximately $700,000.
Gross Margin
Gross margins increased to approximately 33.5% of revenue in the second quarter
of 1996 as compared with 30.6% in the second quarter of 1995. The increased
gross margin percentage reflects improvements from the acquisitions of ARSI and
Enhanced. The acquisition of ARSI has internalized amounts previously paid to
third parties for the costs associated with repairing equipment sold by the
Company and the acquisition of Enhanced internalizes margins previously paid to
Enhanced as a separate company for products purchased and sold by VCS. In
addition, given the nature of the products sold by Enhanced, the gross margins
earned by Enhanced on sales of its products to third parties have traditionally
been significantly higher than those earned on sales by VCS.
Engineering and Product Development
Expenditures related to engineering and product development during the second
quarter of 1996 increased approximately $137,000 over the second quarter of
1995, primarily as a result of the acquisition of Enhanced.
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Selling, General and Administrative
Selling, general and administrative expenses were approximately $2.9 million for
the second quarter of 1996, an increase of approximately $1.0 million, or 52.8%,
over the second quarter of 1995. The increase can be attributed primarily to the
acquisitions of ARSI and Enhanced. Included in this increase is approximately
$125,000 of additional goodwill amortization related to these acquisitions.
Interest Expense
Interest expense was approximately $207,000 in the second quarter of 1996, a
decrease of $57,000, or 21.6%, over the second quarter of 1995. The decrease is
attributable to a decrease in borrowings as a result of reduced inventories.
Income Taxes
The provision for income taxes in the second quarter of 1996 reflects the impact
of certain non-deductible expenses (primarily goodwill related to the Enhanced
acquisition) which did not impact the second quarter of 1995. Such
non-deductible expenses will be approximately $125,000 per quarter.
Six Months Ended June 30, 1996
The following table summarizes the operating results of the Company as a
percentage of sales for the periods indicated.
Six Months Ended
June 30,:
1996 1995
------------ ------------
Revenue 100% 100%
Cost of goods sold 67% 70%
---- ----
Gross margin 33% 30%
Operating Expenses:
Engineering and product development 5% 4%
Selling, general and administrative 25% 18%
---- ----
Operating income 3% 8%
Interest expense 2% 3%
---- ----
Pre-tax income 1% 5%
Income taxes 1% 2%
---- ----
Net income 0% 3%
==== ====
Revenue
Revenue was approximately $22.3 million for the first six months of 1996, an
increase of $1.4 million, or 6.6%, over the first six months of 1995. Revenue
from the core customer premise equipment business (consisting primarily of key
telephone systems and commercial grade telephones) increased approximately
$200,000, while revenue provided by ARSI and Enhanced was approximately $1.2
million.
Gross Margin
Gross margins increased to approximately 33.3% of revenue for the first six
months of 1996 as compared with 29.7% in the first six months of 1995. The
increased gross margin percentage reflects improvements from the acquisitions of
ARSI and Enhanced. The acquisition of ARSI has internalized amounts previously
paid to third parties for the costs associated with repairing equipment sold by
the Company and the acquisition of Enhanced internalizes margins previously paid
to Enhanced as a separate company for products purchased and sold by VCS. In
addition, given the nature of the products sold by Enhanced, the gross margins
earned by Enhanced on sales of its products to third parties have traditionally
been significantly higher than those earned on sales by VCS.
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Engineering and Product Development
Expenditures related to engineering and product development during the first six
months of 1996 increased approximately $197,000 over the first six months of
1995, primarily as a result of the acquisition of Enhanced.
Selling, General and Administrative
Selling, general and administrative expenses were approximately $5.7 million for
the first six months of 1996, an increase of approximately $1.8 million, or
47.6%, over the first six months of 1995. The increase can be attributed
primarily to the acquisitions of ARSI and Enhanced. Included in this increase is
approximately $250,000 of additional goodwill amortization related to these
acquisitions.
Interest Expense
Interest expense was approximately $442,000 in the first six months of 1996, a
decrease of $77,000, or 14.8%, over the first six months of 1995. The decrease
is attributable to a decrease in borrowings as a result of reduced inventories.
Income Taxes
The provision for income taxes in the second quarter of 1996 reflects the impact
of certain non-deductible expenses (primarily goodwill related to the Enhanced
acquisition) which did not impact the second quarter of 1995. Such
non-deductible expenses will be approximately $125,000 per quarter.
Liquidity and Capital Resources
The Company, through its wholly owned subsidiary, VCS, acquired the operating
assets of the Vodavi Division in April 1994 for approximately $12.0 million. The
Company financed the acquisition with (i) $7.8 million in cash provided through
borrowings under a revolving credit facility; (ii) $3.0 million of proceeds from
the sale of common stock; and (iii) a promissory note to the seller in the
amount of $1.2 million, which was repaid in full in September 1995.
In connection with the acquisition of the Vodavi Division, General Electric
Capital Corporation (GE Capital) provided debt financing in the form of a $12.0
million revolving line of credit. The line of credit extends through April 1997
and bears interest, payable monthly, at 4.5% over the 30-day commercial paper
rate (10.0% at June 30, 1996). Advances under the line of credit are based upon
the accounts receivable and inventories of VCS and are secured by substantially
all of the assets and all of the capital stock of VCS.
The revolving line of credit contains certain financial covenants and also
prohibits VCS from paying dividends to the Company without the consent of GE
Capital. At June 30, 1996, the Company was in violation of one financial
covenant related to the number of days outstanding for its receivables. As of
July 31, 1996, the Company was in full compliance with the loan agreement. There
can be no assurance, however, that the Company will continue to comply with such
covenants. At June 30, 1996, the Company had outstanding borrowings of
approximately $6.8 million under this facility and had approximately $700,000
available for additional borrowing based on its existing collateral.
The balance outstanding under the revolving line of credit with GE Capital has
been classified as current in the accompanying consolidated balance sheet as the
facility will expire in April 1997. The Company has initiated discussions with
GE Capital as well as new lenders for a new long term credit facility. The
Company believes that it will be able to secure adequate financing prior to the
expiration of its existing facility.
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In April 1996, the Company entered into a leasing facility with a third party
lender for capital expenditures. The facility provides the Company with access
to up to $400,000 at rates tied to treasury notes (approximately 9.0% at June
30, 1996). As of June 30, 1996, the Company has financed approximately $150,000
of capital assets under this facility.
In June 1995, the Company acquired from an affiliate of LG Electronics, Inc.
(LGE), a major stockholder of the Company, certain of the assets and liabilities
of a telecommunications equipment repair business located in Scottsdale,
Arizona. The purchase price was $250,000. The terms of the acquisition were
determined by negotiations between representatives of the Company and
representatives of LGE and its affiliates. The Company utilized a portion of the
proceeds from its initial public offering to fund the acquisition.
On October 6, 1995, the Company sold 1,488,083 shares of its common stock in an
initial public offering at $6.00 per share. The offering provided the Company
with approximately $7.8 million in net proceeds after deducting the
underwriter's discounts and other offering expenses. The proceeds were utilized
(i) to provide the $3.0 million cash portion of the purchase price to complete
the acquisition of Enhanced; (ii) to retire outstanding indebtedness of
approximately $3.1 million to LGE incurred in connection with inventory
purchases and the acquisition of the Company's telecommunications equipment
repair facility; and (iii) to reduce, by approximately $1.3 million, its
borrowings on its revolving credit facility.
In October 1995, Enhanced merged with a wholly owned subsidiary of the Company
in exchange for 666,662 shares of the Company's Common Stock and cash in the
amount of $3.0 million. The Company will issue to the former stockholders of
Enhanced up to an additional 250,000 shares of Common Stock in the event that
Enhanced meets certain sales criteria during the period beginning April 1, 1995
and ending April 12, 1997.
As of June 30, 1996, the Company had commitments in connection with its new
product developments. Such commitments aggregate approximately $400,000 and are
payable through June 30, 1997.
The Company believes that its working capital and credit facilities
will be sufficient to finance its internal growth for the foreseeable future.
The Company is currently in negotiations with its existing lender as well as new
lenders and is confident that it will be able to extend its existing facility or
obtain new financing on terms no less favorable than it currently has. The
Company also intends to continue to explore acquisition opportunities as they
arise and may be required to seek additional financing in the future to meet
such opportunities.
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PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
On March 11, 1996, Syntellect Technology Corp. ("Syntellect") filed suit against
the Company, Enhanced, and Sharon Dominguez d/b/a Crosstalk Communications,
alleging infringement of six United States patents held by Syntellect.
Syntellect is suing for an unspecified amount of damages and injunctive relief.
The Company has conducted a preliminary investigation of the claimed
infringements and has filed an answer to the complaint.
Item 2. CHANGES IN SECURITIES
Not applicable.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's 1996 Annual Meeting of Stockholders was held on
May 24, 1996. The following nominees were elected to the
Company's Board of Directors, to serve until their successors
are elected or have been qualified, or until their earlier
resignation or removal:
Nominee Votes in Favor Withheld
------- -------------- --------
Steven A. Sherman 4,106,335 19,829
Glenn R. Fitchet 4,115,499 10,665
Nam K. Woo 4,115,208 10,956
Gilbert H. Engels 4,115,499 10,665
Stephen A McConnell 4,115,208 10,956
The following items were voted upon by the Company's
stockholders:
a) Proposal to amend and restate the Company's Stock Option
Plan.
Votes in Favor Opposed Abstained Broker Non-Vote
-------------- ------- --------- ---------------
3,093,319 52,400 30,250 0
b) Proposal to ratify the appointment of Arthur Andersen LLP
as the independent auditors of the Company for the fiscal
year ending December 31, 1996.
Votes in Favor Opposed Abstained Broker Non-Vote
-------------- ------- --------- ---------------
4,116,352 9,665 147 0
Item 5. OTHER INFORMATION
Not applicable.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
10.9 Vodavi Technology, Inc. Amended and Restated 1994 Stock
Option Plan
10.21 Master Lease Agreement dated May 31, 1996, between
Matrix Funding Corporation and Vodavi Communications
Systems, Inc.
27.1 Financial Data Schedule
b) Reports on Form 8-K
Not applicable.
11
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SIGNATURES
Pursuant to the requirements 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.
Vodavi Technology, Inc.
Dated: August 13, 1996 /s/ Glenn R. Fitchet
--------------------
Glenn R. Fitchet
President and Chief Executive Officer
(Principal Executive Officer)
Dated: August 13, 1996 /s/ Gregory K. Roeper
---------------------
Gregory K. Roeper
Vice President Finance and
Chief Financial Officer
(Principal Financial and Accounting Officer)
12
Exhibit 10.9
VODAVI TECHNOLOGY, INC.
AMENDED AND RESTATED 1994 STOCK OPTION PLAN
(As amended through February 26, 1996)
ARTICLE I
General
1.1 Purpose of Plan; Term
(a) Adoption. On December 29, 1994, the Board of Directors
(the "Board") of Vodavi Technology, Inc., a Delaware corporation (the
"Company"), adopted a stock option plan to be known as the Vodavi Technology,
Inc. Stock Option Plan (the "Original Plan"). The Original Plan was subsequently
approved the stockholders of the Company on July 12, 1995. On February 26, 1996,
the Board adopted this amended and restated stock option plan whereby the
Automatic Grant Program was added, additional shares of Stock were authorized to
be issued, and certain other technical changes were made. The amended and
restated plan shall be known as the Vodavi Technology, Inc. 1994 Stock Option
Plan and shall be referred to as the "Plan" herein.
(b) Defined Terms. All initially capitalized terms used hereby
shall have the meaning set forth in Article V hereto.
(c) General Purpose. The Plan shall be divided into two
programs: the Discretionary Grant Program and the Automatic Grant Program.
(i) Discretionary Grant Program. The purpose of the
Discretionary Grant Program is to further the interests of the Company and its
stockholders by encouraging key persons associated with the Company (or Parent
or Subsidiary Corporations) to acquire shares of the Company's Stock, thereby
acquiring a proprietary interest in its business and an increased personal
interest in its continued success and progress. Such purpose shall be
accomplished by providing for the discretionary granting of options to acquire
the Company's Stock ("Discretionary Options"), the direct granting of the
Company's Stock ("Stock Awards"), the granting of stock appreciation rights
("SARs"), or the granting of other cash awards ("Cash Awards") (Stock Awards,
SARs and Cash Awards shall be collectively referred to herein as "Discretionary
Awards").
(ii) Automatic Grant Program. The purpose of the
Automatic Grant Program is to promote the interests of the Company by providing
non-employee members of the Company's Board of Directors (the "Board") the
opportunity to acquire a proprietary interest, or otherwise increase their
proprietary interest, in the Company and to thereby have an increased personal
interest in its continued success and progress. Such purpose shall be
accomplished by providing for the automatic grant of options to acquire the
Company's Stock ("Automatic Options").
(d) Character of Options. Discretionary Options granted under
this Plan to employees of the Company (or Parent or Subsidiary Corporations)
that are intended to qualify as an "incentive stock option" as defined in Code
section 422 ("Incentive Stock Option") will be specified in the applicable stock
option agreement. All other Options granted under this Plan will be nonqualified
options.
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(e) Rule 16b-3 Plan. If the Company becomes subject to the
reporting requirements of the Securities Exchange Act of 1934, the Plan is
thereafter intended to comply with all applicable conditions of Rule 16b-3 (and
all subsequent revisions thereof) promulgated under the 1934 Act. In such
instance, to the extent any provision of the Plan or action by a Plan
Administrator fails to so comply, it shall be deemed null and void, to the
extent permitted by law and deemed advisable by such Plan Administrator. In
addition, the Board may amend the Plan from time to time as it deems necessary
in order to meet the requirements of any amendments to Rule 16b-3 without the
consent of the shareholders of the Company.
(f) Duration of Plan. The term of the Plan is 10 years
commencing on the date of adoption of the Original Plan by the Board as
specified in Section 1.1(a) hereof. No Option or Award shall be granted under
the Plan unless granted within 10 years of the adoption of the Original Plan by
the Board, but Options or Awards outstanding on that date shall not be
terminated or otherwise affected by virtue of the Plan's expiration.
1.2 Stock and Maximum Number of Shares Subject to Plan.
(a) Description of Stock and Maximum Shares Allocated. The
shares of stock subject to the provisions of the Plan and issuable upon the
grant of Stock Awards or upon the exercise of SARs or Options granted under the
Plan are shares of the Company's common stock, $.001 par value per share (the
"Stock"), which may be either unissued or treasury shares. The Company may not
issue more than 850,000 shares of Stock pursuant to the Plan, unless the Plan is
amended as provided in Section 1.3 or the maximum number of shares subject to
the Plan is adjusted as provided in Section 4.1.
(b) Calculation of Available Shares. The number of shares of
Stock available under the Plan shall be reduced: (i) by any shares of Stock
issued (including any shares of Stock withheld for tax withholding requirements)
upon exercise of an Option and (ii) by any shares of Stock issued (including any
shares of Stock withheld for tax withholding requirements) upon the grant of a
Stock Award or the exercise of an SAR.
(c) Restoration of Unpurchased Shares. If an Option or SAR
expires or terminates for any reason prior to its exercise in full and before
the term of the Plan expires, the shares of Stock subject to, but not issued
under, such Option or SAR shall, without further action or by or on behalf of
the Company, again be available under the Plan.
1.3 Approval; Amendments.
(a) Approval by Stockholders. This amended and restated Plan
shall be submitted to the stockholders of the Company for their approval at a
regular or special meeting to be held within 12 months after the adoption of the
Plan by the Board. Stockholder approval shall be evidenced by the affirmative
vote of the holders of a majority of the shares of the Company's Common Stock
present in person or by proxy and voting at the meeting. The date such
stockholder approval has been obtained shall be referred to herein as the
"Effective Date." If not approved by the stockholders, the Original Plan shall
continue in effect. Any Discretionary Options or Awards outstanding prior the
adoption by the Board of the amended and restated Plan shall remain valid and
unchanged.
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(b) Commencement of Programs. The Automatic Grant Program will
not be effective until the Effective Date. The Discretionary Grant Program is
effective immediately, but if the Plan is not approved by the stockholders
within 12 months after its adoption by the Board, any Discretionary Options or
Awards issued after the date of the adoption of the amended and restated Plan
shall remain valid and unchanged only to the extent that such Discretionary
Options or Awards contain terms such that they could have been issued under the
Original Plan. To the extent that such Discretionary Options or Awards could not
have been issued under the Original Plan, such Discretionary Options and Awards
will automatically terminate and be forfeited to the same extent and with the
same effect as though the amended and restated Plan had never been adopted.
(c) Amendments to Plan. The Board may, without action on the
part of the Company's stockholders, make such amendments to, changes in and
additions to the Plan as it may, from time to time, deem necessary or
appropriate and in the best interests of the Company; provided, the Board may
not, without the consent of the applicable Optionholder, take any action which
disqualifies any Discretionary Option previously granted under the Plan for
treatment as an Incentive Stock Option or which adversely affects or impairs the
rights of the Optionholder of any Discretionary Option outstanding under the
Plan, and further provided that, except as provided in Article IV hereof, the
Board may not, without the approval of the Company's stockholders, (i) increase
the aggregate number of shares of Stock subject to the Plan, (ii) reduce the
exercise price at which Discretionary Options may be granted or the exercise
price at which any outstanding Discretionary Option may be exercised, (iii)
extend the term of the Plan, (iv) change the class of persons eligible to
receive Discretionary Options or Discretionary Awards under the Plan, or (v)
materially increase the benefits accruing to participants under the Plan. In
addition, the provisions set forth in Article III hereof shall not be amended
more than once every six months other than to comport with changes in the Code,
the Employee Retirement Income Security Act, or the rules thereunder.
Notwithstanding the foregoing, Discretionary Options or Discretionary Awards may
be granted under this Plan to purchase shares of Stock in excess of the number
of shares then available for issuance under the Plan if (A) an amendment to
increase the maximum number of shares issuable under the Plan is adopted by the
Board prior to the initial grant of any such Option or Award and within one year
thereafter such amendment is approved by the Company's stockholders and (B) each
such Discretionary Option or Discretionary Award granted does not become
exercisable or vested, in whole or in part, at any time prior to the obtaining
of such stockholder approval.
ARTICLE II
Discretionary Grant Program
2.1 Participants; Administration.
(a) Eligibility and Participation. Discretionary Options and
Discretionary Awards may be granted only to persons ("Eligible Persons") who at
the time of grant are (i) key personnel (including officers and directors) of
the Company or Parent or Subsidiary Corporations, or (ii) consultants or
independent contractors who provide valuable services to the Company or Parent
or Subsidiary Corporations; provided that (1) if a Senior Committee exists, the
members of that Senior Committee shall be ineligible, during their tenure on the
Senior Committee, to be granted Discretionary Options or Discretionary Awards
under the Plan or to be granted or awarded equity securities of the Company
pursuant to any other plan of the Company or its affiliates except pursuant to
the Automatic Grant Program or as otherwise allowed by Rule 16b-3(c)(2)(i)
promulgated under the 1934 Act, and (2) Incentive Stock Options may only be
granted to key personnel of the Company (and its Parent or Subsidiary
Corporation)
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who are also employees of the Company (or its Parent or Subsidiary Corporation),
and (3) the maximum number of shares of stock with respect to which Options or
SARs may be granted to any employee during the term of the Plan shall not exceed
50 percent of the shares of stock covered by the Plan. A Plan Administrator
shall have full authority to determine which Eligible Persons in its
administered group are to receive Discretionary Option grants under the Plan,
the number of shares to be covered by each such grant, whether or not the
granted Discretionary Option is to be an Incentive Stock Option, the time or
times at which each such Discretionary Option is to become exercisable, and the
maximum term for which the Discretionary Option is to be outstanding. A Plan
Administrator shall also have full authority to determine which Eligible Persons
in such group are to receive Discretionary Awards under the Discretionary Grant
Program and the conditions relating to such Discretionary Award.
(b) General Administration. The Eligible Persons under the
Discretionary Grant Program shall be divided into two groups and there shall be
a separate administrator for each group. One group will be comprised of Eligible
Persons that are Affiliates. For purposes of this Plan, the term "Affiliates"
shall mean all "officers" (as that term is defined in Rule 16a-1(f) promulgated
under the 1934 Act) and directors of the Company and all persons who own ten
percent or more of the Company's issued and outstanding equity securities.
Initially, the power to administer the Discretionary Grant Program with respect
to Eligible Persons that are Affiliates shall be vested with the Board. At any
time, however, the Board may vest the power to administer the Discretionary
Grant Program with respect to Persons that are Affiliates exclusively with a
committee (the "Senior Committee") comprised of two or more Disinterested
Directors which are appointed by the Board. The administration of all Eligible
Persons that are not Affiliates ("Non-Affiliates") shall be vested exclusively
with the Board. The Board, however, may at any time appoint a committee (the
"Employee Committee") of two or more persons who are members of the Board and
delegate to such Employee Committee the power to administer the Discretionary
Grant Program with respect to the Non-Affiliates. In addition, the Board may
establish an additional committee or committees of persons who are members of
the Board and delegate to such other committee or committees the power to
administer all or a portion of the Discretionary Grant program with respect to
all or a portion of the Eligible Persons. Members of the Senior Committee,
Employee Committee or any other committee allowed hereunder shall serve for such
period of time as the Board may determine and shall be subject to removal by the
Board at any time. The Board may at any time terminate all or a portion of the
functions of the Senior Committee, the Employee Committee, or any other
committee allowed hereunder and reassume all or a portion of powers and
authority previously delegated to such committee. The Board in its discretion
may also require the members of the Senior Committee, the Employee Committee or
any other committee allowed hereunder to be "outside directors" as that term is
defined in any applicable regulations promulgated under Code section 162(m).
(c) Plan Administrators. The Board, the Employee Committee,
Senior Committee, and/or any other committee allowed hereunder, whichever is
applicable, shall be each referred to herein as a "Plan Administrator." Each
Plan Administrator shall have the authority and discretion, with respect to its
administered group, to select which Eligible Persons shall participate in the
Discretionary Grant Program, to grant Discretionary Options or Discretionary
Awards under the Discretionary Grant Program, to establish such rules and
regulations as they may deem appropriate with respect to the proper
administration of the Discretionary Grant Program and to make such
determinations under, and issue such interpretations of, the Discretionary Grant
Program and any outstanding Discretionary Option or Discretionary Award as they
may deem necessary or advisable. Unless otherwise required by law or specified
by the Board with respect to any committee, decisions among the members of a
Plan Administrator shall be by majority vote. Decisions of a Plan Administrator
shall be final and binding on
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all parties who have an interest in the Discretionary Grant Program or any
outstanding Discretionary Option or Discretionary Award.
(d) Guidelines for Participation. In designating and selecting
Eligible Persons for participation in the Discretionary Grant Program, a Plan
Administrator shall consult with and give consideration to the recommendations
and criticisms submitted by appropriate managerial and executive officers of the
Company. A Plan Administrator also shall take into account the duties and
responsibilities of the Eligible Persons, their past, present and potential
contributions to the success of the Company and such other factors as a Plan
Administrator shall deem relevant in connection with accomplishing the purpose
of the Plan.
2.2 Terms and Conditions of Discretionary Options
(a) Allotment of Shares. A Plan Administrator shall determine
the number of shares of Stock to be optioned from time to time and the number of
shares to be optioned to any Eligible Person (the "Optioned Shares"). The grant
of a Discretionary Option to a person shall neither entitle such person to, nor
disqualify such person from, participation in any other grant of Options or
Stock Awards under this Plan or any other stock option plan of the Company.
(b) Exercise Price. Upon the grant of any Discretionary
Option, a Plan Administrator shall specify the option price per share. If the
Discretionary Option is intended to qualify as an Incentive Stock Option under
the Code, the option price per share may not be less than 100 percent of the
fair market value per share of the stock on the date the Discretionary Option is
granted (110 percent if the Discretionary Option is granted to a stockholder who
at the time the Discretionary Option is granted owns or is deemed to own stock
possessing more than 10 percent of the total combined voting power of all
classes of stock of the Company or of any Parent or Subsidiary Corporation). The
determination of the fair market value of the Stock shall be made in accordance
with the valuation provisions of Section 4.5 hereof.
(c) Individual Stock Option Agreements. Discretionary Options
granted under the Plan shall be evidenced by option agreements in such form and
content as a Plan Administrator from time to time approves, which agreements
shall substantially comply with and be subject to the terms of the Plan,
including the terms and conditions of this Section 2.2. As determined by a Plan
Administrator, each option agreement shall state (i) the total number of shares
to which it pertains, (ii) the exercise price for the shares covered by the
Option, (iii) the time at which the Options vest and become exercisable and (iv)
the Option's scheduled expiration date. The option agreements may contain such
other provisions or conditions as a Plan Administrator deems necessary or
appropriate to effectuate the sense and purpose of the Plan, including covenants
by the Optionholder not to compete and remedies for the Company in the event of
the breach of any such covenant.
(d) Option Period. No Discretionary Option granted under the
Plan that is intended to be an Incentive Stock Option shall be exercisable for a
period in excess of 10 years from the date of its grant (five years if the
Discretionary Option is granted to a shareholder who at the time the
Discretionary Option is granted owns or is deemed to own stock possessing more
than 10 percent of the total combined voting power of all classes of stock of
the Company or of any Parent or any Subsidiary Corporation), subject to earlier
termination in the event of termination of employment, retirement or death of
the Optionholder. A Discretionary Option may be exercised in full or in part at
any time or from time to time
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during the term of the Discretionary Option or provide for its exercise in
stated installments at stated times during the Option's term.
(e) Vesting; Limitations. The time at which Options may be
exercised with respect to an Optionholder shall be in the discretion of that
Optionholder's Plan Administrator. Notwithstanding the foregoing, to the extent
a Discretionary Option is intended to qualify as an Incentive Stock Option, the
aggregate fair market value (determined as of the respective date or dates of
grant) of the Stock for which one or more Options granted to any person under
this Plan (or any other option plan of the Company or its Parent or Subsidiary
Corporations) may for the first time become exercisable as Incentive Stock
Options during any one calendar year shall not exceed the sum of $100,000
(referred to herein as the "$100,000 Limitation"). To the extent that any person
holds two or more Options which become exercisable for the first time in the
same calendar year, the foregoing limitation on the exercisability as an
Incentive Stock Option shall be applied on the basis of the order in which such
Options are granted.
(f) No Fractional Shares. Options shall be exercisable only
for whole shares; no fractional shares will be issuable upon exercise of any
Discretionary Option granted under the Plan.
(g) Method of Exercise. To exercise a Discretionary Option, an
Optionholder (or in the case of an exercise after an Optionholder's death, such
Optionholder's executor, administrator, heir or legatee, as the case may be)
must take the following action:
(i) execute and deliver to the Company a written
notice of exercise signed in writing by the person exercising the Discretionary
Option specifying the number of shares of Stock with respect to which the
Discretionary Option is being exercised;
(ii) pay the aggregate Option Price in one of the
alternate forms as set forth in Section 2.2(h) below; and
(iii) furnish appropriate documentation that the
person or persons exercising the Discretionary Option (if other than the
Optionholder) has the right to exercise such Option.
As soon as practical after the Exercise Date, the Company will mail or deliver
to or on behalf of the Optionholder (or any other person or persons exercising
this Discretionary Option under the Plan) a certificate or certificates
representing the Stock acquired upon exercise of the Discretionary Option.
(h) Payment Price. The aggregate Option Price shall be payable
in one of the alternative forms specified below:
(i) Full payment in cash or check made payable to the
Company's order; or
(ii) Full payment in shares of Stock held for the
requisite period necessary to avoid a charge to the Company's reported earnings
and valued at fair market value on the Exercise Date (as determined in
accordance with Section 4.5 hereof); or
(iii) If a cashless exercise program has been
implemented by the Board, full payment through a sale and remittance procedure
pursuant to which the Optionholder (A) shall provide irrevocable written
instructions to a designated brokerage firm to effect the immediate sale of the
Optioned
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Shares to be purchased and remit to the Company, out of the sale proceeds
available on the settlement date, sufficient funds to cover the aggregate
exercise price payable for the Optioned Shares to be purchased and (B) shall
concurrently provide written directives to the Company to deliver the
certificates for the Optioned Shares to be purchased directly to such brokerage
firm in order to complete the sale transaction.
(i) Rights of a Stockholder. An Optionholder shall not have
any of the rights of a stockholder with respect to Optioned Shares until such
individual shall have exercised the Option and paid the Option Price for the
Optioned Shares. No adjustment will be made for dividends or other rights for
which the record date is prior to the date such stock certificate is issued.
(j) Repurchase Right. The Plan Administrator may, in its sole
discretion, set forth other terms and conditions upon which the Company (or its
assigns) shall have the right to repurchase shares of Stock acquired by an
Optionholder pursuant to a Discretionary Option. Any repurchase right of the
Company shall be exercisable by the Company (or its assignees) upon such terms
and conditions as the Plan Administrator may specify in the Stock Repurchase
Agreement evidencing such right. The Plan Administrator may also in its
discretion establish as a term and condition of one or more Discretionary
Options granted under the Plan that the Company shall have a right of first
refusal with respect to any proposed sale or other disposition by the
Optionholder of any shares of Stock issued upon the exercise of such
Discretionary Options. Any such right of first refusal shall be exercisable by
the Company (or its assigns) in accordance with the terms and conditions set
forth in the Stock Repurchase Agreement.
(k) Termination of Service. If any Optionholder ceases to be
in Service to the Company for a reason other than permanent disability or death,
such Optionholder must, within 90 days after the date of termination of such
Service, but in no event after the Option's stated expiration date, exercise
some or all of the Discretionary Options that the Optionholder was entitled to
exercise on the date the Optionholder's Service terminated; provided, that if
the Optionholder is discharged for Cause or commits acts detrimental to the
Company's interests after the Service of the Optionholder has been terminated,
then the Option will thereafter be void for all purposes. "Cause" shall mean a
termination of Service based upon a finding by the applicable Plan Administrator
that the Optionholder: (i) has committed a felony involving dishonesty, fraud,
theft or embezzlement; (ii) after written notice from the Company has repeatedly
failed or refused, in a material respect, to follow reasonable policies or
directives established by the Company; (iii) after written notice from the
Company, has willfully and persistently failed to attend to material duties or
obligations; (iv) has performed an act or failed to act, which, if he were
prosecuted and convicted, would constitute a theft of money or property of the
Company; or (v) has misrepresented or concealed a material fact for purposes of
securing employment with the Company. If any Optionholder ceases to be in
Service to the Company by reason of permanent disability within the meaning of
section 22(e)(3) of the Code (as determined by the applicable Plan
Administrator), the Optionholder will have 12 months after the date of
termination of Service, but in no event after the stated expiration date of the
Optionholder's Discretionary Options, to exercise Discretionary Options that the
Optionholder was entitled to exercise on the date the Optionholder's Service
terminated as a result of the disability.
(l) Death of Optionholder. If an Optionholder dies while in
the Company's Service, any Discretionary Options that the Optionholder was
entitled to exercise on the date of death will be exercisable within six months
after such date or until the stated expiration date of the Optionholder's
Option, whichever occurs first, by the person or persons ("successors") to whom
the Optionholder's rights pass under a will or by the laws of descent and
distribution. As soon as practicable after receipt by the Company of such notice
and of payment in full of the Option Price, a certificate or certificates
representing
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the Optioned Shares shall be registered in the name or names specified by the
successors in the written notice of exercise and shall be delivered to the
successors.
(m) Other Plan Provisions Still Applicable. If a Discretionary
Option is exercised upon the termination of Service or death of an Optionholder
under this Section 2.2, the other provisions of the Plan will continue to apply
to such exercise, including the requirement that the Optionholder or its
successor may be required to enter into a Stock Repurchase Agreement.
(n) Definition of "Service". For purposes of this Plan, unless
it is evidenced otherwise in the option agreement with the Optionholder, the
Optionholder is deemed to be in "Service" to the Company so long as such
individual renders continuous services on a periodic basis to the Company (or to
any Parent or Subsidiary Corporation) in the capacity of an employee, director,
or an independent consultant or advisor. In the discretion of the applicable
Plan Administrator, an Optionholder will be considered to be rendering
continuous services to the Company even if the type of services change, e.g.,
from employee to independent consultant. The Optionholder will be considered to
be an employee for so long as such individual remains in the employ of the
Company or one or more of its Parent or Subsidiary Corporations.
2.3 Terms and Conditions of Stock Awards
(a) Eligibility. All Eligible Persons shall be eligible to
receive Stock Awards. The Plan Administrator of each administered group shall
determine the number of shares of Stock to be awarded from time to time to any
Eligible Person in such group. Except as provided otherwise in this Plan, the
grant of a Stock Award to a person (a "Grantee") shall neither entitle such
person to, nor disqualify such person from participation in, any other grant of
options or awards by the Company, whether under this Plan or under any other
stock option or award plan of the Company.
(b) Award for Services Rendered. Stock Awards shall be granted
in recognition of an Eligible Person's services to the Company. The grantee of
any such Stock Award shall not be required to pay any consideration to the
Company upon receipt of such Stock Award, except as may be required to satisfy
any applicable corporate law, employment tax and/or income tax withholding
requirements.
(c) Conditions to Award. All Stock Awards shall be subject to
such terms, conditions, restrictions, or limitations as the applicable Plan
Administrator deems appropriate, including, by way of illustration but not by
way of limitation, restrictions on transferability, requirements of continued
employment, individual performance or the financial performance of the Company,
or payment by the recipient of any applicable employment or withholding taxes.
Such Plan Administrator may modify or accelerate the termination of the
restrictions applicable to any Stock Award under the circumstances as it deems
appropriate.
(d) Award Agreements. A Plan Administrator may require as a
condition to a Stock Award that the recipient of such Stock Award enter into an
award agreement in such form and content as that Plan Administrator from time to
time approves.
2.4 Terms and Conditions of SARs
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(a) Eligibility. All Eligible Persons shall be eligible to
receive SARs. The Plan Administrator of each administered group shall determine
the SARs to be awarded from time to time to any Eligible Person in such group.
The grant of an SAR to a person shall neither entitle such person to, nor
disqualify such person from participation in, any other grant of options or
awards by the Company, whether under this Plan or under any other stock option
or award plan of the Company.
(b) Award of SARs. Concurrently with or subsequent to the
grant of any Discretionary Option to purchase one or more shares of Stock, the
Plan Administrator may award to the Optionholder with respect to each share of
Stock underlying the Discretionary Option, a related SAR permitting the
Optionholder to be paid any appreciation on that Stock in lieu of exercising the
Option. In addition, a Plan Administrator may award to any Eligible Person an
SAR permitting the Eligible Person to be paid the appreciation on a designated
number of shares of the Stock, whether or not such Shares are actually issued.
(c) Conditions to SAR. All SARs shall be subject to such
terms, conditions, restrictions or limitations as the applicable Plan
Administrator deems appropriate, including, by way of illustration but not by
way of limitation, restrictions on transferability, requirements of continued
employment, individual performance, financial performance of the Company, or
payment by the recipient of any applicable employment or withholding taxes. Such
Plan Administrator may modify or accelerate the termination of the restrictions
applicable to any SAR under the circumstances as it deems appropriate.
(d) SAR Agreements. A Plan Administrator may require as a
condition to the grant of an SAR that the recipient of such SAR enter into an
SAR agreement in such form and content as that Plan Administrator from time to
time approves.
(e) Exercise. An Eligible Person who has been granted a SAR
may exercise such SAR subject to the conditions specified in the SAR agreement
by the Plan Administrator.
(f) Amount of Payment. The amount of payment to which the
grantee of an SAR shall be entitled upon the exercise of each SAR shall be equal
to the amount, if any, by which the fair market value of the specified shares of
Stock on the exercise date exceeds the fair market value of the specified shares
of Stock on the date the Discretionary Option related to the SAR was granted or
became effective, or, if the SAR is not related to any Option, on the date the
SAR was granted or became effective.
(g) Form of Payment. The SAR may be paid in either cash or
Stock, as determined in the discretion of the applicable Plan Administrator and
set forth in the SAR agreement. If the payment is in Stock, the number of shares
to be paid to the participant shall be determined by dividing the amount of the
payment determined pursuant to Section 2.4(f) by the fair market value of a
share of Stock on the exercise date of such SAR. As soon as practical after
exercise, the Company shall deliver to the SAR grantee a certificate or
certificates for such shares of Stock.
(h) Termination of Employment; Death. Sections 2.2(k) and (l),
applicable to Options, shall apply equally to SARs.
2.5 Other Cash Awards
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(a) In General. The Plan Administrator of each administered
group shall have the discretion to make other awards of cash to Eligible Persons
in such group ("Cash Awards"). Such Cash Awards may relate to existing Options
or to the appreciation in the value of the Stock or other Company securities.
(b) Conditions to Award. All Cash Awards shall be subject to
such terms, conditions, restrictions or limitations as the applicable Plan
Administrator deems appropriate, and such Plan Administrator may require as a
condition to such Cash Award that the recipient of such Cash Award enter into an
award agreement in such form and content as the Plan Administrator from time to
time approves.
ARTICLE III
Automatic Grant Program
3.1 Eligible Directors under the Automatic Grant Program. The Automatic
Grant Program shall commence as of the date set forth in Section 1.3(b) hereof.
The persons eligible to participate in the Automatic Grant Program shall be
limited to non-employee Board members ("Eligible Directors"). Persons who are
eligible under the Automatic Grant Program may also be eligible to receive
Discretionary Options or Discretionary Awards under the Discretionary Grant
Program or option grants or direct stock issuances under other plans of the
Company.
3.2 Terms and Conditions of Automatic Option Grants.
(a) Amount and Date of Grant. During the term of this Plan,
grants of Automatic Options shall be made to each Eligible Director
("Optionholder") as follows:
(i) Annual Grants. Each year on the Annual Grant Date
an Automatic Option to acquire 5,000 shares of Stock shall be granted to each
Eligible Director for so long as there are shares of Stock available under
Section 1.2 hereof. The "Annual Grant Date" shall be the date of the Company's
annual stockholders meeting commencing as of the next annual meeting occurring
after the Effective Date. Any Person that was granted an Automatic Option under
Section 3.2(a)(ii) hereof within 90 days of an Annual Grant Date shall be
ineligible to receive an Automatic Option Grant pursuant to this Section
3.2(a)(i) on such Annual Grant Date.
(ii) Initial New Director Grants. On the Initial
Grant Date, every new member of the Board who is an Eligible Director and has
not previously received an Automatic Option grant under this Section 3.2(a)(ii)
shall be granted an Automatic Option to acquire 5,000 shares of Stock for so
long as there are shares of Stock available under Section 1.2 hereof. The
"Initial Grant Date" shall be the date that an Eligible Director is first
appointed or elected to the Board. Any Eligible Director that was granted an
Automatic Option on the Effective Date pursuant to Section 3.2(a)(iii) shall be
ineligible to receive an Automatic Option grant pursuant to this Section
3.2(a)(ii).
(iii) Initial Existing Director Grants. On the
commencement date of the Automatic Grant Program, each Eligible Director shall
be granted an Automatic Option to acquire 5,000 shares of Stock.
(b) Exercise Price. The exercise price per share of Stock (the
"Optioned Shares") subject to each Automatic Option grant shall be equal to 100
percent of the fair market value per share of
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the Stock on the date the Automatic Option was granted as determined in
accordance with the valuation provisions of Section 4.5 hereof (the "Option
Price").
(c) Vesting. Each Automatic Option grant shall vest and become
exercisable on the first anniversary of the date of such grant; provided that
Automatic Options granted pursuant to Sections 3.2(a)(i) or (iii) shall vest and
become exercisable on the earlier of (i) the first anniversary of the date of
such grant or (ii) the day prior to the next regularly held annual meeting of
the Company's stockholders. Each Automatic Option shall only vest and become
exercisable if the Optionholder has not ceased serving as a Board member as of
such vesting date.
(d) Method of Exercise. In order to exercise an Automatic
Option with respect to any vested Optioned Shares, an Optionholder (or in the
case of an exercise after an Optionholder's death, such Optionholder's executor,
administrator, heir or legatee, as the case may be) must take the following
action:
(i) execute and deliver to the Company a written
notice of exercise signed in writing by the person exercising the Automatic
Option specifying the number of shares of Stock with respect to which the
Automatic Option is being exercised;
(ii) pay the aggregate Option Price in one of the
alternate forms as set forth in Section 3.2(e) below; and
(iii) furnish appropriate documentation that the
person or persons exercising the Automatic Option (if other than the
Optionholder) has the right to exercise such Option.
As soon as practicable after the Exercise Date, the Company shall mail or
deliver to or on behalf of the Optionholder (or any other person or persons
exercising the Automatic Option in accordance herewith) a certificate or
certificates representing the Stock for which the Automatic Option has been
exercised in accordance with the provisions of this Plan. In no event may any
Automatic Option be exercised for any fractional shares.
(e) Payment Price. The aggregate Option Price shall be payable
in one of the alternative forms specified below:
(i) full payment in cash or check made payable to the
Company's order; or
(ii) full payment in shares of Stock held for the
requisite period necessary to avoid a charge to the Company's reported earnings
and valued at fair market value on the Exercise Date (as determined in
accordance with Section 4.5 hereof); or
(iii) if a cashless exercise program has been
implemented by the Board, full payment through a sale and remittance procedure
pursuant to which the Optionholder (A) shall provide irrevocable written
instructions to a designated brokerage firm to effect the immediate sale of the
Optioned Shares to be purchased and remit to the Company, out of the sale
proceeds available on the settlement date, sufficient funds to cover the
aggregate exercise price payable for the Optioned Shares to be purchased and (B)
shall concurrently provide written directives to the Company to deliver the
certificates for the Optioned Shares to be purchased directly to such brokerage
firm in order to complete the sale transaction.
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(f) Term of Option. Each Automatic Option shall expire on the
tenth anniversary of the date on which an Automatic Option grant was made
("Expiration Date"). Except as provided in Article IV hereof, should an
Optionholder's service as a Board member cease prior to the Expiration Date for
any reason while an Automatic Option remains outstanding and unexercised, then
the Automatic Option term shall immediately terminate and the Automatic Option
shall cease to be outstanding in accordance with the following provisions:
(i) The Automatic Option shall immediately terminate
and cease to be outstanding for any shares of Stock which were not vested at the
time of the Optionholder's cessation of Board service.
(ii) Should an Optionholder cease, for any reason
other than death, to serve as a member of the Board, then the Optionholder shall
have 90 days measured from the date of such cessation of Board service in which
to exercise the Options which vested prior to the time of such cessation of
Board service. In no event, however, may any Automatic Option be exercised after
the Expiration Date of such Option.
(iii) Should an Optionholder die while serving as a
Board member or within 90 days after cessation of Board service, then the
personal representative of the Optionholder's estate (or the person or persons
to whom the Automatic Option is transferred pursuant to the Optionholder's will
or in accordance with the laws of descent and distribution) shall have a 90 day
period measured from the date of the Optionholder's cessation of Board service
in which to exercise the Options which vested prior to the time of such
cessation of Board service. In no event, however, may any Automatic Option be
exercised after the Expiration Date of such Option.
(g) Rights of a Stockholder. An Optionholder shall not have
any of the rights of a stockholder with respect to Optioned Shares until such
individual shall have exercised the Option and paid the Option Price for the
Optioned Shares. No adjustment will be made for dividends or other rights for
which the record date is prior to the date such stock certificate is issued.
ARTICLE IV
Miscellaneous
4.1 Capital Adjustments. The aggregate number of shares of Stock
subject to the Plan, the number of shares of Stock covered by outstanding
Options and Awards, the number of shares of Stock covered by unissued Automatic
Options, and the price per share stated in all outstanding Options and Awards
shall be proportionately adjusted for any increase or decrease in the number of
outstanding shares of Stock of the Company resulting from a subdivision or
consolidation of shares or any other capital adjustment or the payment of a
stock dividend or any other increase or decrease in the number of such shares
effected without the Company's receipt of consideration therefor in money,
services or property.
4.2 Mergers, Etc. If the Company is the surviving corporation in any
merger or consolidation (not including a Corporate Transaction), any Option or
Award granted under the Plan shall pertain to and apply to the securities to
which a holder of the number of shares of Stock subject to the Option or Award
would have been entitled prior to the merger or consolidation. Except as
provided in Section 4.3 hereof, a dissolution or liquidation of the Company
shall cause every Option or Award outstanding hereunder to terminate.
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4.3 Corporate Transaction. In the event of stockholder approval of a
Corporate Transaction, (a) all unvested Automatic Options shall automatically
accelerate and immediately vest so that each outstanding Option shall, one week
prior to the specified effective date for the Corporate Transaction, become
fully exercisable for all of the Optioned Shares and (b) the Plan Administrator
shall have the discretion and authority, exercisable at any time, to provide for
the automatic acceleration of one or more of the outstanding Discretionary
Options or Discretionary Awards granted by it under the Plan. Upon the
consummation of the Corporate Transaction, all Options shall, to the extent not
previously exercised, terminate and cease to be outstanding.
4.4 Change in Control.
(a) Automatic Grant Program. In the event of a Change in
Control, all unvested Automatic Options shall automatically accelerate and
immediately vest so that each outstanding Automatic Option shall, immediately
prior to the effective date of such Change in Control, become fully exercisable
for all of the Optioned Shares. Thereafter, each Automatic Option shall remain
exercisable until the Expiration Date of such Option.
(b) Discretionary Grant Program. In the event of a Change in
Control, a Plan Administrator shall have the discretion and authority,
exercisable at any time, whether before or after the Change in Control, to
provide for the automatic acceleration of one or more outstanding Discretionary
Options or Discretionary Awards granted by it under the Plan upon the occurrence
of such Change in Control. A Plan Administrator may also impose limitations upon
the automatic acceleration of such Options or Awards to the extent it deems
appropriate. Any Options or Awards accelerated upon a Change in Control will
remain fully exercisable until the expiration or sooner termination of the
Option term.
(c) Incentive Stock Option Limits. The exercisability of any
Discretionary Options which are intended to qualify as Incentive Stock Options
and which are accelerated by the Plan Administrator in connection with a pending
Corporation Transaction or Change in Control shall, except as otherwise provided
in the discretion of the Plan Administrator and the Optionholder, remain subject
to the $100,000 Limitation and vest as quickly as possible without violating the
$100,000 Limitation.
4.5 Calculation of Fair Market Value of Stock. The fair market value of
a share of Stock on any relevant date shall be determined in accordance with the
following provisions:
(a) If the Stock is not at the time listed or admitted to
trading on any stock exchange but is traded in the over-the-counter market, the
fair market value shall be the mean between the highest bid and lowest asked
prices (or, if such information is available, the closing selling price) per
share of Stock on the date in question in the over-the-counter market, as such
prices are reported by the National Association of Securities Dealers through
its Nasdaq system or any successor system. If there are no reported bid and
asked prices (or closing selling price) for the Stock on the date in question,
then the mean between the highest bid price and lowest asked price (or the
closing selling price) on the last preceding date for which such quotations
exist shall be determinative of fair market value.
(b) If the Stock is at the time listed or admitted to trading
on any stock exchange, then the fair market value shall be the closing selling
price per share of Stock on the date in question on the stock exchange
determined by the Board to be the primary market for the Stock, as such price is
officially quoted in the composite tape of transactions on such exchange. If
there is no reported sale of Stock on
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such exchange on the date in question, then the fair market value shall be the
closing selling price on the exchange on the last preceding date for which such
quotation exists.
(c) If the Stock at the time is neither listed nor admitted to
trading on any stock exchange nor traded in the over-the-counter market, then
the fair market value shall be determined by the Board after taking into account
such factors as the Board shall deem appropriate, including one or more
independent professional appraisals.
4.6 Use of Proceeds. The proceeds received by the Company from the sale
of Stock pursuant to the exercise of Options or Awards hereunder, if any, shall
be used for general corporate purposes.
4.7 Cancellation of Options. Each Plan Administrator shall have the
authority to effect, at any time and from time to time, with the consent of the
affected Optionholders, the cancellation of any or all outstanding Discretionary
Options granted under the Plan by that Plan Administrator and to grant in
substitution therefore new Discretionary Options under the Plan covering the
same or different numbers of shares of Stock as long as such new Discretionary
Options have an exercise price per share of Stock no less than the minimum
exercise price as set forth in Section 2.2(b) hereof on the new grant date.
4.8 Regulatory Approvals. The implementation of the Plan, the granting
of any Option or Award hereunder, and the issuance of Stock upon the exercise of
any such Option or Award shall be subject to the procurement by the Company of
all approvals and permits required by regulatory authorities having jurisdiction
over the Plan, the Options or Awards granted under it and the Stock issued
pursuant to it.
4.9 Indemnification. In addition to such other rights of
indemnification as they may have, the members of a Plan Administrator shall be
indemnified and held harmless by the Company, to the extent permitted under
applicable law, for, from and against all costs and expenses reasonably incurred
by them in connection with any action, legal proceeding to which any member
thereof may be a party by reason of any action taken, failure to act under or in
connection with the Plan or any rights granted thereunder and against all
amounts paid by them in settlement thereof or paid by them in satisfaction of a
judgment of any such action, suit or proceeding, except a judgment based upon a
finding of bad faith.
4.10 Plan Not Exclusive. This Plan is not intended to be the exclusive
means by which the Company may issue options or warrants to acquire its Stock,
stock awards or any other type of award. To the extent permitted by applicable
law, any such other option, warrants or awards may be issued by the Company
other than pursuant to this Plan without shareholder approval.
4.11 Company Rights. The grants of Options shall in no way affect the
right of the Company to adjust, reclassify, reorganize or otherwise change its
capital or business structure or to merge, consolidate, dissolve, liquidate or
sell or transfer all or any part of its business or assets.
4.12 Assignment. The right to acquire Stock or other assets under the
Plan may not be assigned, encumbered or otherwise transferred by any
Optionholder except as specifically provided herein. No Option or Award granted
under the Plan or any of the rights and privileges conferred thereby shall be
assignable or transferable by an Optionholder or grantee other than by will or
the laws of descent and distribution, and such Option or Award shall be
exercisable during the Optionholder's or grantee's lifetime only by the
Optionholder or grantee. Notwithstanding the foregoing, any Options or Awards
granted
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pursuant to the Discretionary Grant Program may be assigned, encumbered or
otherwise transferred by the Optionholder or grantee if specifically allowed by
the Plan Administrator upon the grant of such Option or Award. The provisions of
the Plan shall inure to the benefit of, and be binding upon, the Company and its
successors or assigns, and the Optionholders, the legal representatives of their
respective estates, their respective heirs or legatees and their permitted
assignees.
4.13 Securities Restrictions
(a) Legend on Certificates. All certificates representing
shares of Stock issued under the Plan shall be endorsed with a legend reading as
follows:
The shares of Common Stock evidenced by this
certificate have been issued to the registered owner
in reliance upon written representations that these
shares have been purchased solely for investment.
These shares may not be sold, transferred or assigned
unless in the opinion of the Company and its legal
counsel such sale, transfer or assignment will not be
in violation of the Securities Act of 1933, as
amended, and the rules and regulations thereunder.
(b) Private Offering for Investment Only. The Options and
Awards are and shall be made available only to a limited number of present and
future key executives, directors and employees who have knowledge of the
Company's financial condition, management and its affairs. The Plan is not
intended to provide additional capital for the Company, but to encourage
ownership of Stock among the Company's key personnel. By the act of accepting an
Option or Award, each grantee agrees (i) that, any shares of Stock acquired will
be solely for investment not with any intention to resell or redistribute those
shares and (ii) such intention will be confirmed by an appropriate certificate
at the time the Stock is acquired if requested by the Company. The neglect or
failure to execute such a certificate, however, shall not limit or negate the
foregoing agreement.
(c) Registration Statement. If a Registration Statement
covering the shares of Stock issuable under the Plan as filed under the
Securities Exchange Act of 1933, as amended, and as declared effective by the
Securities Exchange Commission, the provisions of Sections 4.14(a) and (b) shall
terminate during the period of time that such Registration Statement, as
periodically amended, remains effective.
4.14 Tax Withholding.
(a) General. The Company's obligation to deliver Stock under
the Plan shall be subject to the satisfaction of all applicable federal, state
and local income tax withholding requirements.
(b) Shares to Pay for Withholding. The Board may, in its
discretion and in accordance with the provisions of this Section 4.15(b) and
such supplemental rules as it may from time to time adopt (including the
applicable safe-harbor provisions of SEC Rule 16b-3), provide any or all
Optionholders or Grantees with the right to use shares of Stock in satisfaction
of all or part of the federal, state and local income tax liabilities incurred
by such Optionholders or Grantees in connection with the receipt of Stock
("Taxes"). Such right may be provided to any such Optionholder or Grantee in
either or both of the following formats:
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(i) Stock Withholding. An Optionholder or Grantee may
be provided with the election, which may be subject to approval by the Plan
Administrator, to have the Company withhold, from the Stock otherwise issuable,
a portion of those shares of Stock with an aggregate fair market value equal to
the percentage of the applicable Taxes (not to exceed 100 percent) designated by
the Optionholder or Grantee.
(ii) Stock Delivery. The Board may, in its
discretion, provide the Optionholder or Grantee with the election to deliver to
the Company, at the time the Option is exercised or Stock is awarded, one or
more shares of Stock previously acquired by such individual (other than pursuant
to the transaction triggering the Taxes) with an aggregate fair market value
equal to the percentage of the taxes incurred in connection with such Option
exercise or Stock Award (not to exceed 100 percent) designated by the
Optionholder or Grantee.
4.15 Governing Law. The Plan shall be governed by and all questions
hereunder shall be determined in accordance with the laws of the State of
Arizona.
ARTICLE V
Definitions
The following capitalized terms used in this Plan shall have the
meaning described below:
"Affiliates" shall mean all "executive officers" (as that term is
defined in Rule 16a-1(f) promulgated under the 1934 Act) and directors of the
Company and all persons who own ten percent or more of the Company's issued and
outstanding Stock.
"Annual Grant Date" shall mean the date of the Company's annual
stockholder meeting.
"Automatic Grant Program" shall mean that program set forth in Article
III of this Agreement pursuant to which non-employee members of the Board are
automatically granted Options upon certain events.
"Automatic Option Grant" shall mean those automatic option grants made
on the Annual Grant Date, on the Initial Grant Date, and on the Effective Date.
"Automatic Options" shall mean those Options granted pursuant to the
Automatic Grant Program.
"Awards" shall mean the Discretionary Awards and the Automatic Awards.
"Board" shall mean the Board of Directors of the Company.
"Cash Award" shall mean an award to be paid in cash and granted under
Section 2.5 hereunder.
"Change in Control" shall mean and include the following transactions
or situations:
(i) A sale, transfer, or other disposition by the Company
through a single transaction or a series of transactions of securities of the
Company representing 30 percent or more of the combined voting power of the
Company's then outstanding securities to any "Unrelated Person" or "Unrelated
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Persons" acting in concert with one another. For purposes of this Section, the
term "Person" shall mean and include any individual, partnership, joint venture,
association, trust corporation, or other entity (including a "group" as referred
to in Section 13(d)(3) of the 1934 Act). For purposes of this Section, the term
"Unrelated Person" shall mean and include any Person other than the Company, a
wholly-owned subsidiary of the Company, or an employee benefit plan of the
Company.
(ii) A sale, transfer, or other disposition through a single
transaction or a series of transactions of all or substantially all of the
assets of the Company to an Unrelated Person or Unrelated Persons acting in
concert with one another.
(iii) A change in the ownership of the Company through a
single transaction or a series of transactions such that any Unrelated Person or
Unrelated Persons acting in concert with one another become the "Beneficial
Owner," directly or indirectly, of securities of the Company representing at
least 30 percent of the combined voting power of the Company's then outstanding
securities. For purposes of this Section, the term "Beneficial Owner" shall have
the same meaning as given to that term in Rule 13d-3 promulgated under the Act,
provided that any pledgee of voting securities is not deemed to be the
Beneficial Owner thereof prior to its acquisition of voting rights with respect
to such securities.
(iv) Any consolidation or merger of the Company with or into
an Unrelated Person, unless immediately after the consolidation or merger the
holders of the common stock of the Company immediately prior to the
consolidation or merger are the Beneficial Owners of securities of the surviving
corporation representing at least 50 percent of the combined voting power of the
surviving corporation's then outstanding securities.
(v) During any period of two years, individuals who, at the
beginning of such period, constituted the Board of Directors of the Company
cease, for any reason, to constitute at least a majority thereof, unless the
election or nomination for election of each new director was approved by the
vote of at least two-thirds of the directors then still in office who were
directors at the beginning of such period.
(vi) A change in control of the Company of a nature that would
be required to be reported in response to item 6(e) of Schedule 14A of
Regulation 14A promulgated under the 1934 Act, or any successor regulation of
similar import, regardless of whether the Company is subject to such reporting
requirement.
Notwithstanding any provision hereof to the contrary, the filing of a
proceeding for the reorganization of the Company under Chapter 11 of the General
Bankruptcy Code or any successor or other statute of similar import shall not be
deemed to be a Change of Control for purposes of this Plan.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Company" shall mean Vodavi Technology, Inc., a Delaware corporation.
"Corporate Transaction" shall mean (a) a merger or consolidation in
which the Company is not the surviving entity, except for a transaction the
principal purposes of which is to change the state in which the Company is
incorporated; (b) the sale, transfer of or other disposition of all or
substantially all of the assets of the Company and complete liquidation or
dissolution of the Company, or (c) any reverse merger in which the Company is
the surviving entity but in which the securities possessing more than 50 percent
17
<PAGE>
of the total combined voting power of the Company's outstanding securities are
transferred to a person or persons different from those who held such securities
immediately prior to such merger.
"Discretionary Award" shall mean a Stock Award, SAR or Cash Award under
the Discretionary Grant Program.
"Discretionary Grant Program" shall mean the program described in
Article II of this Agreement pursuant to which certain Eligible Persons are
granted Options or Awards in the discretion of the Plan Administrator.
"Discretionary Options" shall mean options granted under the
Discretionary Grant Program.
"Disinterested Directors" shall mean those Directors who satisfy the
definition of "Disinterested Person" under Rule 16b-3(c)(2)(i) promulgated under
the 1934 Act.
"Effective Date" shall mean the date that the Plan has been approved by
the stockholders as required by Section 1.3(a) hereof.
"Eligible Directors" shall mean, with respect to the Automatic Grant
Program, those persons who are non-employee Board members.
"Eligible Persons" shall mean, with respect to the Discretionary Grant
Program, those persons who, at the time that the Discretionary Option or
Discretionary Award is granted, are (i) key personnel (including officers and
directors) of the Company or Parent or Subsidiary Corporations, or (ii)
consultants or independent contractors who provide valuable services to the
Company or Parent or Subsidiary Corporations; provided that if a Senior
Committee is formed pursuant to Section 2.1(b) hereof, the members of that
Committee shall not be included as "Eligible Persons" under the Discretionary
Grant Program during their tenure on the Senior Committee.
"Employee Committee" shall mean that committee appointed by the Board
to administer the Plan with respect to the Non-Affiliates and comprised of one
or more persons who are members of the Board.
"Exercise Date" shall be the date on which written notice of the
exercise of an Option is delivered to the Company in accordance with the
requirements of the Plan.
"Expiration Date" shall be the 10-year anniversary of the date on which
an Automatic Option Grant was made.
"Grantee" shall mean an Eligible Person or Eligible Director that has
received an Award.
"Incentive Stock Option" shall mean a Discretionary Option that is
intended to qualify as an "inventive stock option" under Code section 422.
"Initial Grant Date" shall mean the date that an Eligible Director is
first appointed or elected to the Board.
"Non-Affiliates" shall mean all persons who are not Affiliates.
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<PAGE>
"$100,000 Limitation" shall mean the limitation in which the aggregate
fair market value (determined as of the respective date or dates of grant) of
the Stock for which one or more Options granted to any person under this Plan
(or any other option plan of the Company or any Parent or Subsidiary
Corporation) may for the first time be exercisable as Incentive Stock Options
during any one calendar year shall not exceed the sum of $100,000.
"Optionholder" shall mean an Eligible Person or Eligible Director to
whom Options have been granted.
"Optioned Shares" shall be those shares of Stock to be optioned from
time to time to any Eligible Person or Eligible Directors.
"Option Price" shall mean the option price per share as specified by
the Plan Administrator or by the terms of the Plan.
"Options" shall mean options granted under the Plan to acquire Stock.
"Parent Corporation" shall mean any corporation in the unbroken chain
of corporations ending with the employer corporation, where, at each link of the
chain, the corporation and the link above owns at least 50 percent of the
combined total voting power of all classes of the stock in the corporation in
the link below.
"Plan" shall mean this stock option plan for Vodavi Technology, Inc.
"Plan Administrator" shall mean (a) either the Board, the Senior
Committee, or any other committee, whichever is applicable, with respect to the
administration of the Discretionary Grant Program as it relates to Affiliates
and (b) either the Board, the Employee Committee, or any other committee,
whichever is applicable, with respect to the administration of the Discretionary
Grant Program as it relates to Non-Affiliates.
"SAR" shall mean stock appreciation rights granted pursuant to Section
2.4 hereof.
"Senior Committee" shall mean that committee appointed by the Board to
administer the Discretionary Grant Program with respect to the Affiliates and
comprised of two or more Disinterested Directors.
"Service" shall have the meaning set forth in Section 2.2(n) hereof.
"Stock" shall mean shares of the Company's common stock, $.001 par
value per share, which may be unissued or treasury shares, as the Board may from
time to time determine.
"Stock Awards" shall mean Stock directly granted under the
Discretionary Grant Program.
"Subsidiary Corporation" shall mean any corporation in the unbroken
chain of corporations starting with the employer corporation, where, at each
link of the chain, the corporation and the link above owns at least 50 percent
of the combined voting power of all classes of stock in the corporation below.
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EXECUTED as of the 26TH day of February, 1996.
Vodavi Technology, Inc.
By: /s/ Glenn R. Fitchet
-----------------------
Name: Glenn R. Fitchet
-----------------------
Its: President
-----------------------
ATTESTED BY:
/s/ Kent R. Burgess
- ------------------------
Secretary
20
M A T R I X
F U N D I N G C O R P O R A T I O N
6925 Union Park Center, Suite 250
Midvale, Utah 84047
LEASE NO. R0551
MASTER LEASE AGREEMENT
This agreement (the "Agreement") is made this 13th day of May, 1996 between
MATRIX FUNDING CORPORATION, with its principal office at 6925 Union Park Center,
Suite 250, Midvale, Utah 84047, (the "Lessor"), and VODAVI COMMUNICATIONS
SYSTEMS, INC., with its principal office at 8300 E. Raintree Drive, Scottsdale,
AZ 85260, (the "Lessee").
1. LEASE:
Lessor agrees to lease to Lessee, and Lessee agrees to lease from
Lessor, the equipment and property (collectively, "Equipment") described in any
Equipment Schedule executed and delivered by Lessor and Lessee in connection
with this Agreement. Each Equipment Schedule shall incorporate the terms and
conditions of this Agreement and constitute a separate lease. In the event of
conflict between the provisions of this Agreement and any Equipment Schedule,
the provisions of the Equipment Schedule shall govern. Each Equipment Schedule
shall constitute a separate lease.
2. ADDITIONAL DEFINITIONS:
(a) "Acceptance Date" means, as to the Equipment designated on any
Equipment Schedule, the earliest to occur of (i) the date Lessee accepts the
Equipment as set forth in any certificate of acceptance or delivery signed by
the Lessee (the "Acceptance Certificate"), or (ii) the date which is determined
by the manufacturer or vendor of the Equipment to be the date of installation of
such Equipment.
(b) "Commencement Date" means, as to the Equipment designated on any
Equipment Schedule, where the Acceptance Date for such Equipment Schedule falls
on the first day of a calendar quarter, that date, and, in any other case, the
first day of the calendar quarter following the calendar quarter in which such
Acceptance Date falls.
3. TERM OF LEASE:
The term of this Agreement, as to all Equipment designated on any
Equipment Schedule, shall commence on the Acceptance Date for such Equipment,
and shall continue for an "Initial Period" ending that number of months from the
applicable Commencement Date as specified in such Equipment Schedule.
Thereafter, Lessee shall have options to purchase or return the Equipment or to
extend the Lease as provided in Section 19.(k) of this Agreement.
4. RENT AND PAYMENT:
As to any Equipment leased hereunder, the "Monthly Rental" payable by
Lessee to Lessor shall be as set forth in the applicable Equipment Schedule. The
Monthly Rental shall begin on the Commencement Date and shall be due and payable
by Lessee in advance on the first day of each month throughout the Initial
Period. If the Acceptance Date does not fall on the first day of a calendar
quarter, then the first rental payment shall be calculated by multiplying the
number of days
<PAGE>
from and including the Acceptance Date to the Commencement Date by a daily
rental equal to one thirtieth (1/30) of the Monthly Rental, and shall be due and
payable on the Acceptance Date. Lessee shall pay all rentals hereunder to
Lessor, its successors or assigns, at Lessor's address set forth above (or as
otherwise directed in writing by Lessor, its successors or assigns), whether or
not Lessee has received any notice that such payment is due. LESSEE SHALL NOT
ABATE, SET OFF, OR DEDUCT ANY AMOUNT OR DAMAGES FROM OR REDUCE ANY RENTAL FOR
ANY REASON WITHOUT THE PRIOR WRITTEN CONSENT OF LESSOR, ITS SUCCESSORS OR
ASSIGNS.
Late charges on any past due payments, taxes or other charges hereunder
shall accrue at the rate of 1 1/2% per month (or if such rate shall exceed the
maximum rate allowed by law, then at the highest rate that is permitted to be
charged on liquidated amounts after judgment) beginning with the date that such
amount was due and continuing until the amount is paid. If late charges are
assessed by a lending institution due to any late payment, Lessee agrees to pay
such late charges or to reimburse Lessor for their payment. Lessee agrees to
make payment for any late charges promptly upon demand by Lessor.
5. TAXES:
Lessee shall pay to Lessor an amount equal to all taxes paid, payable
or required to be collected by Lessor, however designated, which are levied or
based on the Monthly Rental or on the possession, use, operation, lease, rental,
sale, purchase, control or value of the Equipment, including, without
limitation, registration and license fees and assessments, state and local
privilege or excise taxes, sales and use taxes, personal and other property
taxes, and taxes or charges based on gross revenue, but excluding taxes based on
Lessor's net income. Lessor shall invoice Lessee for all such taxes in advance
of their payment due date, and Lessee shall promptly remit to Lessor all such
taxes and charges upon receipt of such invoice from Lessor. Lessee shall pay all
penalties and interest resulting from its failure to timely remit such taxes to
Lessor when invoiced by Lessor. Lessor shall file all required sales and use tax
and personal property tax returns and reports concerning the Equipment with all
applicable governmental agencies.
6. USE; ALTERATIONS AND ATTACHMENTS:
(a) After Lessee receives and inspects any Equipment and is satisfied
that the Equipment is satisfactory, Lessee shall execute and deliver to Lessor
an Acceptance Certificate in a form provided by Lessor; provided, however, that
Lessee's failure to execute and deliver an Acceptance Certificate for any
Equipment shall not affect the validity of this Agreement with respect to the
Equipment.
(b) Lessee shall be entitled to unlimited usage of the Equipment during
the Initial Period or any renewal periods approved by Lessor in writing.
(c) Lessee shall at all times keep the Equipment in its sole possession
and control. The Equipment shall not be moved from the location stated in the
Equipment Schedule without the prior written consent of Lessor.
(d) Lessee shall cause the Equipment to be installed, used, operated
and, at the termination of this Agreement as to each Equipment Schedule, removed
(i) in accordance with any applicable manufacturer's manuals or instructions;
(ii) by competent and duly qualified personnel only; and (iii) in accordance
with applicable governmental regulations, if any.
(e) Lessee may not make alterations in or add attachments to the
Equipment without first obtaining the written consent of Lessor. Any such
alterations or attachments shall be made at Lessee's expense and shall not
interfere with the normal and satisfactory operation or maintenance of the
Equipment. The manufacturer may incorporate engineering changes or make
temporary alterations to the Equipment upon request of Lessee. Unless Lessor
shall otherwise agree in writing, all such alterations and attachments shall be
and become the property of Lessor or, at the option of Lessor, shall be removed
by Lessee at the termination of this Agreement as to such Equipment and the
Equipment restored at Lessee's expense to its original condition, reasonable
wear and tear only excepted.
(f) Lessee acknowledges that the Equipment is and shall remain personal
property during the term of this Agreement. Lessee shall not permit the
Equipment to become an accession to other goods or a fixture to, or part of, any
real
2
<PAGE>
property. If the Equipment becomes an accession to other goods, Lessee shall
provide to Lessor signed waivers in form acceptable to Lessor.
(g) In the event the Equipment includes software (including all
documentation, later versions, updates, modifications; herein "Software"), the
following shall apply: (i) Lessee shall possess and use the Software in
accordance with the terms and conditions of any license agreement ("License")
entered into with the owner/vendor of such Software (at Lessor's request, Lessee
shall provide a complete copy of the License to Lessor); (ii) as due
consideration for Lessor's payment of the Software price and for providing the
Software to Lessee at a lease rate (as opposed to a debt rate), Lessee agrees
that Lessor is leasing (and not financing) the Software to Lessee; (iii) except
as otherwise specifically provided herein, the Software shall be deemed
Equipment for all purposes under this Agreement.
(h) Lessee shall comply with all applicable laws, regulations and
orders relating to the Equipment and this Agreement.
(i) The Equipment is leased solely for commercial or business purposes.
7. MAINTENANCE AND REPAIRS; RETURN OF EQUIPMENT:
(a) During the continuance of this Agreement, at its expense, and in
accordance with all manufacturer maintenance specifications, Lessee (i) shall
keep the Equipment in good repair, working order and condition; (ii) shall make
all necessary adjustments, repairs and replacements; (iii) shall furnish all
required parts, mechanisms, devices and servicing; and (iv) shall not use or
permit the Equipment to be used for any purpose for which, in the opinion of the
manufacturer, the Equipment is not designed or reasonably suitable. Such parts,
mechanisms and devices shall immediately become a part of the Equipment for all
purposes hereunder. If the manufacturer does not provide maintenance
specifications, Lessee shall perform all maintenance in accordance with industry
standards for like equipment.
(b) During the continuance of this Agreement and at its own expense,
Lessee shall enter into and maintain in force a contract with the manufacturer
or other qualified maintenance organization for maintenance of each item of
Equipment. Such contract as to each item shall commence upon the Acceptance
Date. Lessee shall furnish Lessor with a copy of such contract upon demand.
(c) At the termination of this Agreement and at its expense, Lessee
shall return the Equipment to Lessor at the location within the Continental
United States designated by Lessor. Upon such return, the Equipment shall be in
the same operating order, repair, condition and appearance as on the Acceptance
Date, excepting reasonable wear and tear from proper use thereof including all
engineering changes theretofore prescribed by the manufacturer. Lessee shall
provide maintenance qualification letters and/or arrange for and pay all costs
which are necessary for the manufacturer to accept the Equipment under contract
maintenance at its then standard rates.
(d) At the termination of any Schedule, Lessee shall, at its expense,
return the Software to Lessor at the location within the Continental United
States designated by the Lessor. Upon such return, Lessee shall also (i) delete
from its systems all Software then installed, (ii) destroy all copies or
duplicates of the Software which were not returned to Lessor, and (iii) cease
using the Software altogether. Upon its receipt from Lessee, Lessor shall be
responsible to return the Software to the owner/vendor or destroy the Software
so that Lessee shall not be in breach of any software license.
8. OWNERSHIP AND INSPECTION:
(a) The Equipment shall at all times remain the property of Lessor or
its assigns. By this Agreement, Lessee acquires no ownership rights in the
Equipment. Lessor may affix (or require Lessee to affix) tags, decals or plates
to the Equipment indicating Lessor's ownership, and Lessee shall not permit
their removal or concealment.
(b) LESSEE SHALL KEEP THE EQUIPMENT AND LESSEE'S INTEREST UNDER THIS
AGREEMENT FREE AND CLEAR OF ALL LIENS AND ENCUMBRANCES, EXCEPT THOSE PERMITTED
IN WRITING BY LESSOR OR ITS ASSIGNS. 3
<PAGE>
(c) Lessor, its assigns and their agents shall have free access to the
Equipment at all reasonable times during normal business hours for the purpose
of inspecting the Equipment and for any other purpose contemplated in this
Agreement.
(d) Lessee shall immediately notify Lessor in writing of all details
concerning any damage or loss to the Equipment arising from the alleged or
apparent improper manufacture, functioning or operation of the Equipment.
9. WARRANTIES:
(a) LESSEE ACKNOWLEDGES THAT LESSOR HAS NOT MADE ANY REPRESENTATIONS OR
WARRANTIES OF ANY KIND, EXPRESS OR IMPLIED, WITH RESPECT TO THE EQUIPMENT,
INCLUDING, WITHOUT LIMITATION, WARRANTIES RELATING TO ANY OF THE FOLLOWING: (i)
THE DESCRIPTION, CONDITION, DESIGN, QUALITY OR PERFORMANCE OF THE EQUIPMENT;
(ii) ITS MERCHANTABILITY OR FITNESS OR SUITABILITY FOR A PARTICULAR PURPOSE
WHETHER OR NOT DISCLOSED TO LESSOR; AND (iii) DELIVERY OF THE EQUIPMENT FREE OF
THE RIGHTFUL CLAIM OF ANY PERSON BY WAY OF INFRINGEMENT OR THE LIKE. LESSOR
EXPRESSLY DISCLAIMS ALL SUCH WARRANTIES. LESSOR SHALL HAVE NO LIABILITY TO
LESSEE FOR ANY CLAIM, LOSS OR DAMAGE OF ANY KIND OR NATURE WHATSOEVER, INCLUDING
SPECIAL OR CONSEQUENTIAL DAMAGES.
(b) Lessor assigns to Lessee all assignable warranties on the
Equipment, as described in Lessor's purchase contract, which assignment shall be
effective only (i) during the Initial Period and any renewal periods approved by
Lessor in writing, and (ii) so long as no uncured Event of Default exists.
10. NET LEASE; LESSEE'S OBLIGATIONS ABSOLUTE AND UNCONDITIONAL:
This Agreement is a "net lease" and, as between Lessor and Lessee,
Lessee shall be responsible for all costs, expenses and claims of every nature
whatsoever arising out of or in connection with or related to this Agreement or
the Equipment (such as, but not limited to, transportation in and out, packing,
installation and deinstallation, shipping and other such charges).
Lessee agrees that its Monthly Rental and other obligations hereunder
shall be irrevocable, independent, absolute and unconditional and shall not be
subject to any abatement, reduction, recoupment, defense, offset or counterclaim
otherwise available to Lessee against Lessor; nor, except as otherwise expressly
provided herein or as agreed to by Lessor in writing, shall this Agreement
terminate for any reason whatsoever prior to the end of the Initial Period.
11. ASSIGNMENT:
(a) LESSEE MAY NOT ASSIGN THIS AGREEMENT OR ANY OF ITS RIGHTS HEREUNDER
OR SUBLEASE THE EQUIPMENT WITHOUT THE PRIOR WRITTEN CONSENT OF LESSOR, except
that Lessee may assign this Agreement or sublease the Equipment to any parent or
subsidiary corporation, or to a corporation which shall have acquired all or
substantially all of the property of Lessee by merger, consolidation or
purchase. NO PERMITTED ASSIGNMENT OR SUBLEASE SHALL RELIEVE LESSEE OF ANY OF ITS
OBLIGATIONS HEREUNDER.
(b) Lessor may sell and assign its rights and interests in any
Equipment and in any Equipment Schedule hereunder, to another party ("Lessor's
Assignee") either outright or as collateral security for loans. Upon notice of
any such assignment and instructions from Lessor, Lessee shall pay its Monthly
Rental and perform its other obligations hereunder to the Lessor's Assignee (or
to another party designated by Lessor's Assignee). Upon any such sale or
assignment, LESSEE'S OBLIGATIONS TO LESSOR'S ASSIGNEE UNDER THE ASSIGNED
EQUIPMENT SCHEDULE SHALL BE ABSOLUTE AND UNCONDITIONAL AND LESSEE WILL NOT
ASSERT AGAINST LESSOR'S
4
<PAGE>
ASSIGNEE ANY CLAIM, DEFENSE OR COUNTERCLAIMS WHICH LESSEE MIGHT HAVE AGAINST
LESSOR. Lessor's Assignee shall have all of the rights but none of the
obligations of Lessor under this Agreement. Notwithstanding any assignment by
Lessor, Lessor's Assignee shall not be deemed to have assumed or to be obligated
to perform any of the obligations of Lessor.
In connection with any assignment by Lessor of its interest in the
Equipment or this Agreement, Lessee acknowledges that the assignment will not
materially change the duty of or materially increase the burden or risk imposed
on Lessee; and Lessee waives its right, if any, to demand Lessor's Assignee to
comply with the provisions of Utah Uniform Commercial code - Leases, Section
70A-2a-303 (2) (as it now exists or hereafter modified) dealing with adequate
assurance and assumption requirements, among other things.
Upon any such assignment, Lessee agrees to execute (i) any document
reasonably requested by Lessor acknowledging such assignment and affirming to
Lessor's Assignee basic provisions of this Agreement and the Equipment Schedule,
and (ii) UCC-1 precautionary filings reasonably requested.
Only one executed counterpart of any Equipment Schedule shall be marked
"Original"; any other executed counterparts shall be marked "Duplicate Original"
or "Counterpart". No security interest in any Equipment Schedule may be created
through the transfer and possession of any counterpart other than the
"Original".
12. RISK OF LOSS ON LESSEE:
From and after the date that the Equipment is delivered to Lessee and
until the Equipment is returned to Lessor as provided in this Agreement, Lessee
shall bear all risk of loss, damage, theft or destruction to the Equipment,
howsoever caused. If any item of Equipment is rendered unusable as a result of
any physical damage to or destruction of the Equipment or if any item of
Equipment is lost or stolen, then:
(a) Lessee shall give Lessor immediate notice thereof, and this
Agreement as to such item shall continue in full force and effect without any
abatement of any Monthly Rental. Lessee shall determine and notify Lessor,
within fifteen (15) days after the date of occurrence of such damage or
destruction, whether such item of Equipment can be repaired.
(b) If Lessee determines that such item of Equipment can be repaired,
Lessee shall cause such item of Equipment to be promptly repaired.
(c) If Lessee determines that the item of Equipment cannot be repaired
or if the item of Equipment is lost or stolen, then at Lessor's option, Lessee
shall either (i) at its expense promptly replace such item of Equipment with
like equipment having a comparable or greater value and convey title to such
replacement to Lessor free and clear of all liens and encumbrances, whereupon
this Lease shall continue in full force and effect as though such loss, damage,
theft or destruction had not occurred; or (ii) pay Lessor an amount equal to the
Casualty Loss Value of the item of Equipment determined under any Casualty Loss
Schedule attached to the Equipment Schedule, or if none is attached, then an
amount equal to the replacement cost of such item of Equipment.
All proceeds of insurance received by Lessor or Lessee under any
insurance policy shall be applied toward the cost of any such repair or
replacement.
13. INSURANCE:
During the continuance of this Agreement as to each Equipment Schedule,
Lessee, at its expense, shall keep in effect (a) an all risk casualty insurance
policy covering the Equipment designated in such Equipment Schedule that
includes, without limitation, coverage against extended coverage risks,
vandalism, theft and malicious mischief, for amounts not less than the Casualty
Loss Value of the item of Equipment determined under any Casualty Loss Schedule
attached to the Equipment Schedule, or if none is attached, then for amounts not
less than the replacement cost of each item of Equipment, with Lessor and its
assigns designated as insureds and loss payees under such policy; and (b) a
comprehensive general liability policy in amounts acceptable to Lessor and that
designates Lessor and its assigns as co-insureds. All such insurance
5
<PAGE>
policies shall be with licensed insurance companies acceptable to Lessor; shall
prohibit cancellation or modification thereof without at least thirty (30) days
prior written notice to Lessor; and shall provide that as to Lessor, its
successors and assigns, the insurance shall not be invalidated by any act,
omission or neglect of Lessee. Lessee shall be responsible for paying any
deductibles on such policies. Lessee shall furnish to Lessor a certificate of
insurance or other evidence satisfactory to Lessor that insurance coverage is in
effect; provided, however, that Lessor shall be under no duty either to
ascertain the existence of or to examine such insurance policy or to advise
Lessee in the event such insurance coverage shall not comply with the
requirements hereof. Lessee shall give Lessor prompt notice of any damage to, or
loss of, any of the Equipment, or any part thereof, or any personal injury or
property damage occasioned by the use of the Equipment.
14. INDEMNIFICATION:
Except for the gross negligence or willful misconduct of Lessor or as
otherwise provided herein, Lessee shall indemnify Lessor against and hold Lessor
harmless of and from any and all claims, (including without limitation, claims
involving strict or absolute liability), actions, suits, proceedings, costs,
expenses (including a reasonable attorney's fee incurred by Lessor either in
enforcing this indemnity or in defending against such claims), damages and
liabilities at law or in equity, arising out of, connected with or resulting
from this Agreement or the Equipment, including, without limitation the
delivery, possession, use, operation, condition, lease, return, storage or
disposition thereof. For purposes of this paragraph, the term "Lessor" shall
include Lessor, its successors and assigns, shareholders, directors, officers,
representatives and agents, and the provisions of this paragraph shall survive
expiration of this Agreement with respect to events occurring prior thereto.
15. EVENTS OF DEFAULT:
The occurrence of any one or more of the following events (each an
"Event of Default") shall constitute a default under this Agreement:
(a) Lessee fails to pay any Monthly Rental when the same becomes due
and such failure shall continue uncured for ten (10) days after written notice
thereof is given to Lessee;
(b) Except as expressly provided herein, Lessee attempts to, or does,
remove, sell, assign, transfer, encumber, sublet or part with possession of any
one or more items of the Equipment, or any interest under this Agreement, except
as expressly permitted herein.
(c) Through the act or omission of Lessee, any item of Equipment is
subject to any levy, seizure, attachment, assignment or execution; or Lessee
abandons any item of Equipment;
(d) Lessee fails to observe or perform any of the other obligations
required to be observed or performed by Lessee hereunder and such failure shall
continue uncured for ten (10) days after written notice thereof is given to
Lessee.
(e) Lessee's representations and warranties made in this Agreement or
in connection herewith shall be false or misleading in any material respect.
(f) Lessee ceases doing business as a going concern, makes an
assignment for the benefit of creditors, is insolvent, admits in writing its
inability to pay its financial obligations as they become due, files a voluntary
petition in bankruptcy, is adjudicated a bankrupt or an insolvent, files a
petition seeking for itself any reorganization, arrangement, composition,
readjustment, liquidation, dissolution or similar arrangement under any present
or future statute, law or regulation or files an answer admitting the material
allegations of a petition filed against it in any such proceeding, consents to
or acquiesces in the appointment of a trustee, receiver or liquidator of it or
of all or any substantial part of its assets or properties, or if it or its
shareholders shall take any action looking to its dissolution or liquidation.
(g) Within thirty (30) days after the commencement of any proceedings
against Lessee seeking reorganization, arrangement, readjustment, liquidation,
dissolution or similar relief under any present or future statute, law or
regulation, such proceedings shall not have been dismissed, or if within thirty
(30) days after the appointment without Lessee's consent
6
<PAGE>
or acquiescence of any trustee, receiver or liquidator of it or of all or any
substantial part of its assets and properties, such appointment shall not be
vacated.
16. REMEDIES:
Upon the occurrence of any Event of Default, Lessor shall have the
option, with or without giving notice to Lessee, to do any one or more of the
following:
(a) Lessor may enforce this Agreement according to its terms;
(b) Lessor may advance funds on Lessee's behalf to cure the Event of
Default, whereupon Lessee shall immediately reimburse Lessor therefor, together
with late charges accrued thereon;
(c) Lessor may refuse to deliver the Equipment to Lessee;
(d) By notice to Lessee, Lessor may terminate this Agreement as to any
or all Equipment Schedules;
(e) Lessee shall remain fully liable for and shall pay Lessor for (i)
all sums due and payable under the Equipment Schedule for all periods up to and
including the date on which Lessor has declared this Agreement to be in default;
(ii) all costs and expenses incurred by Lessor on account of such default,
including, but not limited to, all court costs and reasonable attorneys' fees;
and (iii) all reasonable damages as provided by law (collectively "Lessor's
Damages").
(f) Whether or not this Lease is terminated as to any or all Equipment
Schedules, Lessor may (i) take possession of any or all of the Equipment listed
on any or all Equipment Schedules, wherever situated, and for such purpose,
Lessor may enter upon any Lessee's premises without any court order and without
liability for so doing (Lessee hereby waives any action for trespass or damages
by reason of such entry or taking possession); (ii) without removal, render the
Equipment unusable and dispose of the same on Lessee's premises; or (iii) cause
Lessee (and Lessee hereby agrees) to assemble the Equipment and either make it
available to Lessor at a place designated by Lessor or return it to Lessor as
provided in this Agreement.
(g) Lessor may sue for and recover all rents and other payments that
accrue after the occurrence of the Event of Default, as the same become due; or
Lessor may recover from Lessee, as liquidated damages ("Liquidated Damages") for
loss of a bargain and not as a penalty, an amount equal to the present value of
all unpaid Rentals required to be paid by Lessee during the Initial Period or
any renewal period then in effect, discounted at the rate of five percent (5%)
per annum, which payment shall become immediately due and payable;
(h) If Lessee breaches any of its obligations under Section 7(d) of
this Agreement, Lessee shall be liable to Lessor for additional damages in an
amount not less than the original cost paid by Lessor for the Software, and at
Lessor's option, Lessor shall be entitled to injunctive relief.
(i) Lessor may sell, dispose of, hold, use or lease any Equipment as
Lessor in its sole discretion may determine without any duty, except as provided
below, to account to Lessee. Lessor may purchase at any such sale, and Lessor
shall not be obligated to give preference to the sale, lease or other
disposition of the Equipment over the sale, lease or other disposition of
similar equipment owned or leased by or through Lessor.
If Lessee shall have paid to Lessor all of the Liquidated Damages, then
Lessor shall pay to Lessee, promptly after receipt thereof, all rentals or
proceeds received from (a) the reletting of the Equipment during the remainder
of the Initial Period or any renewal periods then in effect (after deduction of
an amount equal to all Lessor's Damages); or (b) any sale of the Equipment
occurring during the remainder of the Initial Period or any renewal periods then
in effect less an amount equal to the estimated fair market value of the
Equipment at the end of the Initial Period or renewal period then in effect
(after deduction of an amount equal to all Lessor's Damages), said amount never
to exceed the amount of the Liquidated Damages paid by Lessee. Any remaining
amounts from reletting or sale shall be retained by Lessor.
7
<PAGE>
Lessor may exercise any and all rights and remedies available at law or
in equity, including those available under the Uniform Commercial Code
(including the section thereof dealing with Leases) as enacted in Utah or in any
state in which the Equipment is located or other applicable law.
The rights and remedies afforded Lessor hereunder shall not be deemed
to be exclusive, but shall be in addition to any rights or remedies provided by
law. Lessor's failure promptly to enforce any right hereunder shall not operate
as a waiver of such right, and Lessor's waiver of any default shall not
constitute a waiver of any subsequent or other default. Lessor may accept late
payments or partial payments of amounts due under this Agreement and may delay
enforcing any of Lessor's rights hereunder without losing or waiving any of
Lessor's rights under this Agreement.
17. TAX INDEMNITY:
This Agreement is entered into on the basis that Lessor shall be the
owner of the Equipment for federal and state income tax purposes and entitled to
such deductions, credits and other benefits as are provided an owner of personal
property, including but not limited to (i) the maximum Modified Accelerated Cost
Recovery System deductions ("depreciation") for the MACRS Property Class life
under the Internal Revenue Code of 1986 ("Code"); and (ii) interest deductions
in the full amount of any interest paid or accrued with respect to any loan made
to or assumed by Lessor or its assigns to finance the purchase of the Equipment
(collectively referred to herein as the "Tax Benefits").
If, with respect to any item of Equipment, Lessor or its assigns shall
not have or shall lose the right to claim all or any portion of the Tax Benefits
or if all or any portion of the Tax Benefits shall be disallowed or recaptured
(hereinafter referred to as "Tax Benefit Loss") due to the acts or omission of
Lessee, then the following provisions shall be applicable:
(a) Subject to the exceptions set forth below, Lessee shall, within
thirty (30) days after written notice from Lessor that a Tax Benefit Loss has
occurred, pay to Lessor at Lessor's option, either a lump-sum payment or an
increase to the remaining monthly payments due under the Equipment Schedule in
an amount which, after taking into account the effects of interest, penalties
and additional taxes payable by Lessor as a result of the Tax Benefit Loss and
the receipt of payment hereunder, will cause Lessor's net effective after-tax
return over the term of the Equipment Schedule to equal the net effective
after-tax return which would have been available if Lessor had been entitled to
the utilization of all the Tax Benefits.
(b) For purposes hereof a Tax Benefit Loss shall occur upon the
earliest of (i) the payment by Lessor to the Internal Revenue Service or the
applicable state revenue office of the tax increase resulting from such Tax
Benefit Loss, or (ii) the adjustment of the tax return of Lessor to reflect such
Tax Benefit Loss.
(c) Notwithstanding the foregoing, Lessor shall not be entitled to a
payment hereunder on account of any Tax Benefit Loss directly attributable to
any of the following: (i) any act on the part of Lessor which causes a Tax
Benefit Loss; (ii) the failure of Lessor to have sufficient taxable income or
tax liability to utilize such Tax Benefits; or (iii) the happening of any other
event with respect to Lessor (such as disqualifying change in Lessor's business
or characterization of Lessor as a personal holding company) which causes a Tax
Benefit Loss.
(d) This Section is expressly made for the benefit of, and shall be
enforceable, by Lessor, any person, firm, corporation or other entity to which
Lessor transfers title to all or a portion of the Equipment and their successors
and assigns (collectively, the "Owner"). For purposes hereof, the term "Owner"
shall include an affiliated group (within the meaning of the Code) of which a
person or entity is a member for any year in which a consolidated income tax
return is filed for such affiliated group. Lessee shall indemnify and hold
harmless any such Owner from any Tax Benefit Loss on the same terms and to the
same extent as it would have indemnified Lessor and held Lessor harmless as if
said Owner were the Lessor hereunder. All of Lessor's rights and privileges
arising from the indemnities contained herein shall survive the expiration or
other termination of this Lease.
18. COVENANT OF QUIET POSSESSION:
Lessor agrees that so long as no Event of Default has occurred and is
continuing, Lessee shall be entitled to quietly
8
<PAGE>
possess the Equipment subject to and in accordance with the terms and conditions
of this Agreement.
19. GENERAL:
(a) Integration. All schedules or riders to this Agreement; Equipment
Schedules executed hereunder; schedules or riders attached to Equipment
Schedules; other documents referred to in Equipment Schedules and Acceptance
Certificates, whether they are signed before, on or after the date of this
Agreement, are incorporated into this Agreement by this reference. Such
documents appertaining to any Equipment Schedule and this Agreement constitute
the entire agreement between the parties with respect to the items of Equipment
listed on such Equipment Schedule.
(b) Modification. This Agreement may not be amended or modified except
by a writing signed by a duly authorized representative of each party, but no
such amendment or modification needs further consideration to be binding.
Notwithstanding the foregoing, Lessee authorizes Lessor to amend any Equipment
Schedule to identify more accurately the Equipment (including, without
limitation, supplying serial numbers or other identifying data), and such
amendment shall be binding on Lessor and Lessee unless Lessee objects thereto
within 15 days after receiving notice of the amendment from Lessor.
(c) Interpretation. The provisions of this Agreement shall be deemed to
be independent and severable. The invalidity or partial invalidity of any one
provision or portion of this Agreement under the laws of any jurisdiction shall
not affect the validity or enforceability of any other provisions of this
Agreement. The captions and headings set forth herein are for convenience of
reference only and shall not define or limit any of the terms hereof.
(d) Notices. Notices hereunder shall be in writing and addressed to the
other party at the address herein or such other address provided by notice
hereunder and shall be effective (i) upon the next business day, if sent by
guaranteed overnight express service (such as federal express); (ii) on the same
day, if personally delivered; or (iii) three days after mailing, if sent by
certified or registered U.S. mail, postage prepaid and addressed to the other
party.
(e) Governing Law. This Lease shall be governed by and shall be
interpreted pursuant to the laws of the State of Utah.
(f) Binding Effect. The provisions of this Agreement shall inure to the
benefit of and shall bind Lessor and Lessee and their respective permitted
successors and assigns.
(g) Financing Statements. Lessee shall sign and deliver to Lessor one
or more financing statements, supplements thereto and other instruments in order
to establish, perfect, extend and/or enforce the parties' interests in the
Equipment and under this Agreement. Lessee shall pay all costs of filing such
statements. A photocopy of this Agreement shall be sufficient as, and may be
filed as, an original financing statement. If Lessee defaults hereunder, then
Lessor shall automatically be constituted as Lessee's attorney-in-fact for the
purpose of carrying out the provisions of this paragraph.
(h) Opinion of Counsel. Upon request, Lessee shall provide to Lessor an
opinion of its counsel as to Lessee's legal standing, the authorization and
execution of this Agreement and other documents, the enforceability of this
Agreement against Lessee, and other matters reasonably requested.
(i) Audited Financial Statements. Upon request, Lessee shall provide to
Lessor a copy of its annual audited financial statements.
(j) Provisional Security Interest. In the event a court of competent
jurisdiction or other governing authority shall determine that this Agreement is
not a "true lease" or that Lessor (or its assigns) does not hold legal title to
or is not the owner of the Equipment, then this Agreement shall be deemed to be
a security agreement with Lessee, as debtor, having granted to Lessor, as
secured party, a security interest in the Equipment effective the date of this
Agreement; and Lessor shall have all of the rights, privileges and remedies of a
secured party under the Utah Uniform Commercial Code.
9
<PAGE>
(k) Lessee's Options at End of Initial Period. At the end of the
Initial Period of any Equipment Schedule, or upon any expiration of any renewal
or extension thereof as provided for in option (2) herein or otherwise, Lessee
shall, provided at least one hundred eighty (180) days prior written notice is
received by Lessor from Lessee via certified mail, do one of the following: (1)
purchase the Equipment for a mutually agreeable price, (2) extend the Lease for
twelve (12) additional months at the rate specified on the respective Equipment
Schedule, or (3) return the Equipment to Lessor at Lessee's expense to a
destination within the continental United States specified by Lessor and
terminate the Equipment Schedule; provided, however, that for option (3) to
apply, all accrued but unpaid late charges, interest, taxes, penalties, and any
and all other sums due and owing under the Equipment Schedule must first be paid
in full, the provisions of Sections 6(d) and (e) and 7(c) and (d) hereof must be
specifically complied with, and Lessee must enter into a new Equipment Schedule
with Lessor to lease Equipment which replaces the Equipment listed on the old
Equipment Schedule. With respect to options (1) and (3), each party shall have
the right in its absolute and sole discretion to accept or reject any terms of
purchase or of any new Equipment Schedule, as applicable. In the event Lessor
and Lessee have not agreed to either option (1) or (3) by the end of the Initial
Period or any renewal or extension period then effect, or if Lessee fails to
give written notice of its option via certified mail at least one hundred eighty
(180) days prior to the termination of the Initial Period or any renewal or
extension period then in effect, then option (2) shall apply at the end of the
Initial Period or any renewal or extension period then in effect.
IN WITNESS WHEREOF, Lessor and Lessee have executed this Agreement on
the day and year first above written.
LESSOR:
MATRIX FUNDING CORPORATION
BY: ________________________________
TITLE: _____________________________
LESSEE:
VODAVI COMMUNICATIONS SYSTEMS, INC.
BY: ________________________________
TITLE: _____________________________
10
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This exhibit shall not be deemed filed for purposes of Section 11 of the
Securities Act of 1933 and Section 18 of the Securities Exchange Act of
1934, or otherwise subject to the liability of such sections, nor shall it
be deemed a part of any other filing which incorporates this report by
reference, unless such other filing expressly incorporates this Exhibit by
reference.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 587
<SECURITIES> 0
<RECEIVABLES> 9,721
<ALLOWANCES> 178
<INVENTORY> 5,530
<CURRENT-ASSETS> 16,360
<PP&E> 2,589
<DEPRECIATION> 460
<TOTAL-ASSETS> 26,319
<CURRENT-LIABILITIES> 12,136
<BONDS> 0
0
0
<COMMON> 4
<OTHER-SE> 13,876
<TOTAL-LIABILITY-AND-EQUITY> 26,319
<SALES> 22,256
<TOTAL-REVENUES> 22,256
<CGS> 14,836
<TOTAL-COSTS> 14,836
<OTHER-EXPENSES> 6,702
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 442
<INCOME-PRETAX> 276
<INCOME-TAX> 206
<INCOME-CONTINUING> 70
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 70
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
